This Trump Policy Could Positively Impact Social Security COLAs

By Markets Fool.com


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The clock is officially ticking for the nearly 60.7 million people who were receiving Social Security benefits as of September.

According to the Social Security Board of Trustees, in less than 18 years' time the Old-Age, Survivors, and Disability Insurance Trust is expected to completely exhaust its more than $2.8 trillion in spare cash. Because baby boomers are retiring in droves and life expectancies are rising, the current level of benefit payments appears unsustainable. The Trustees, which have altered their projected spare cash depletion date on a few occasions over the past decade, now suggest that a steep benefits cut of up to 21% could be needed across the board to sustain Social Security for generations to come.

On one hand, simply understanding that Social Security can't go bankrupt should be comforting. As long as payroll tax revenue is being collected, there will always be some degree of disbursement to seniors from the Social Security Administration. Then again, more than 60% of the 41 million retired workers expect their Social Security payments to amount to at least half of their monthly income. Cutting benefits for these folks probably isn't going to turn out well.


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Donald Trump's "plan" to fix Social Security

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However, the interesting thing about Trump is that he's taken a very hands-off approach to Social Security. During his campaign, Trump's only real proposal was to leave the program alone and ensure that seniors receive the benefits they were promised in the first place.

Instead of directly influencing Social Security, Trump is planning to work on external factors that he believes could positively impact the program. Chief among those are tax cuts for individual taxpayers and corporations. Trump aims to shrink the progressive income-tax schedule to just three brackets (12%, 25%, and 33%), effectively giving all Americans a tax break, and wants to lower the corporate income tax rate to 15% from 35%.

The thinking here is that if businesses have more cash, they'll be more prone to hire and expand; and if consumers have more cash they'll be more liable to spend it. Since the U.S. economy is predominantly driven by consumption, Trump's thesis is that faster GDP growth will lead to improved wages and more income, and thus an increase in payroll tax revenue collected.

It's a bold plan with a lot of question marks that will likely take many years to decipher. Of course, if Trump's plan doesn't ignite the GDP growth that he's claimed throughout his campaign, seniors won't be helped out one bit, and Social Security would be a few years closer to exhausting its spare cash.


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Here's how Donald Trump could inadvertently boost Social Security COLAs

But Donald Trump's numerous economic proposals could also have an ancillary benefit for Social Security recipients.

One of Trump's proposals involves focusing on America's energy independence. Trump has come out strongly in support of the oil, gas, and coal industries, vowing to use America's resources to create jobs and reduce foreign energy dependence. Most pundits suggest that a Trump presidency could be a very good thing for oil and gas companies, and it could lead to job creation within the industry, aiding in Trump's vision of boosting the U.S. GDP growth rate.

It could also be a good thing for West Texas Intermediate crude, too. If Trump is successful in curbing some of the regulations currently in place within the oil and gas industry, it's possible oil and natural gas prices begin climbing again. I say "possible" because the U.S. is just one of many players in the oil industry. Since crude prices tend to be cyclically tied to the health of the U.S. economy, a quicker growing U.S. economy could demand more oil, thus lifting crude prices.

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Why should seniors care about Trump's energy plan? Simple: it could positively impact their cost-of-living adjustment (COLA) if successful.

Social Security's COLA is adjusted annually to match the rate of inflation using the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. This is effectively the cost-of-living "raise" that seniors receive most years. However, in three of the past eight years seniors have received no COLA, and for 2017 they'll be receiving the smallest increase on record, just 0.3%.

To calculate inflation for Social Security, we would compare the average CPI-W reading from the third quarter of the previous year, which serves as a baseline, with the average CPI-W reading from the third quarter of the current year. If the price of goods and services has gone up as an aggregate, the current-year CPI-W will be higher; the percentage difference from one year to the next is what Social Security recipients will receive as a "raise," rounded to the nearest tenth of a percent. If the CPI-W drops year-over-year, as it has in three of the past eight years, then no raise is given and benefits remain the same as in the previous year.

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The CPI-W takes into account a host of goods and services in its pricing model, including housing expenses, medical care costs, apparel, education, entertainment, and energy expenses via transportation costs! During the years where COLA was 0%, and more recently 0.3%, weaker energy prices at the pump were the primary reason the CPI-W dropped from the previous year. Thus fuel prices played a key role in dragging down Social Security COLAs.

A Bureau of Labor Statistics comparison of the CPI-W and the Consumer Price Index for the Elderly (CPI-E) -- a measure that examines the price seniors ages 62 and up pay for a similar basket of goods and services -- from 2011 showed that 18.7% of the makeup of the CPI-W came from transportation expenditures. By comparison, transportation expenditures made up only 14.5% of the CPI-E's weighting. Thus, a rise in transportation costs, especially prices at the pump, could prove to be a positive for Social Security COLAs, even if transportation costs don't weigh into seniors' budgets as much as they do for the average worker.If Trump is successful in putting a floor under crude prices, then fuel prices could rise, increasing the inflation rate, ultimately allowing the CPI-W to yield a more substantive COLA for seniors in the coming years.

To be clear, there are a lot of "what if's" with this scenario. For instance, even with a presumably unified Congress and presidency, we don't know how successful Trump will be in deregulating the oil and gas industry. Trump made a few enemies within his own party during the election, and getting legislation through Congress could prove tougher than anticipated. But if Trump can create an energy revolution within the U.S., seniors could discover as an ancillary benefit that their COLAs could be far more respectable in the years to come.

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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.

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