Trump May Have Little Choice but to Break His Social Security Promise

By Sean Williams Markets Fool.com

Social Security is a program that a majority of retired workers lean on each and every month in order to make ends meet. According to data from the Social Security Administration (SSA), 71% of unmarried elderly individuals rely on their Social Security benefits to account for at least half of their monthly income.

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However, this vital source of income for seniors could be in some pretty deep trouble if the 2016 report from the Social Security Board of Trustees is correct.

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Social Security is in big trouble

According to the Trustees report, Social Security is expected to reverse from a cash inflow (i.e., bringing in more in revenue than it pays out) to a cash outflow by the year 2020. This is as a result of more than 10,000 baby boomers entering retirement every day. By the year 2034, the Trustees predict that the more than $2.8 trillion in spare cash currently held by the Social Security Trust will be completely exhausted.

The silver lining here is that Social Security is not (and I repeat, is not) going bankrupt. The program is predominantly funded by the payroll tax, meaning that as long as Americans continue to work, Social Security will be able to receive revenue that can be disbursed out to retired workers, the disabled, and the survivors of deceased workers.

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But that doesn't mean the current level of benefits being paid is sustainable without added revenue for the program. The Trustees report has suggested that if Capitol Hill passes no additional Social Security legislation, and no new sources of revenue are created, an across-the-board benefits cut of up to 21% may be needed to sustain payments through the year 2090. That's a haircut that more than half of today's retired workers can ill afford to take.

Donald Trump's indirect solution to fix Social Security

So what's the solution? According to President Trump, the best way to fix Social Security is to leave it alone. Instead of directly altering the laws that govern Social Security, Trump's "fix' involves focusing on growing the U.S. economy at 3% or more per year.

Why the economy? As noted above, Social Security generated 86.4% of the $920.2 billion it brought in as revenue in 2015 from the payroll tax -- a 12.4% tax on earned income between $0.01 and $127,200 as of 2017. If Trump can find a way to reinvigorate U.S. economic growth and nominal wage growth, then the Social Security program should collect more via payroll taxes, thus whittling away some of Social Security's $11 trillion budgetary shortfall.

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Trump plans to accomplish this in a variety of ways. First, he's aiming to completely reform the U.S. individual and corporate income tax code. Reducing and simplifying the individual tax brackets, as well as lowering corporate income tax rates to 15% from 35%, is expected to put more money in the pockets of businesses and consumers. Remember, the U.S. is a consumption-driven economy, so putting more money into the hands of businesses and consumers could be a success.

Second, Trump has plans to push through a massive 10-year infrastructure plan that'll rebuild some of America's aging bridges, roads, and airports.Third, there's a major focus on renegotiating trade deals with foreign nations to reduce America's trade deficits with select countries.And finally, Trump plans to promote the domestic energy sector by loosening regulations and possibly opening federally leased land to exploration and drilling so as to reduce or eliminate our reliance as a country on foreign sources of oil.

Trump may have to break his Social Security promise

But can Trump really afford a wait-and-see approach when it comes to Social Security? Considering the team Trump has surrounded himself with in Washington, it's probably more likely that he'll eventually break his Social Security promise, at least to future retirees.

One of the contentions of the Trustees Report is that the longer Washington waits to enact change, the wider the actuarial deficit will grow. The actuarial deficit is the amount of additional payroll tax revenue needed to eliminate Social Security's funding shortfall. In 2016, the actuarial deficit was 2.66%, implying a need for a 2.66% increase in the payroll tax in order to stem Social Security's budgetary shortfall. Waiting to act could soon push this actuarial deficit north of 3%.

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Yet it's not just the math that could pressure Trump to act. It's the ideology of the people he's surrounded himself with.

For example, Budget Director Mick Mulvaney is an ardent fiscal hawk who, back in 2011, introduced the Balancing Our Obligations for the Long Term (BOLT) Act, which would have placed caps on congressional spending and required a balanced federal budget. In order to achieve that balance, Mulvaney had suggested that cuts may be needed in Social Security.

Social Security adviser Tom Leppert has also made calls for change. During a 2012 Senate run, Leppert called for Social Security to remain untouched for those aged 55 and older, but suggested a gamut of changes for current working Americans that included raising the retirement age, and initiating personal retirement savings accounts for all Americans. In other words, Leppert called for a partial privatization of Social Security. For those who may not recall, both Trump and VP Mike Pence at one time called for a partial privatization of Social Security as well.

Even Department of Housing and Urban Development head, and former presidential candidate, Ben Carson, would like to see big changes to Social Security to reduce retirees' dependence on the program. Carson suggested raising the retirement age during his campaign, and was open to the idea of means-testing wealthier individuals.

Trump could find the waters choppy if he tries to stay the course.

The most likely solution

If Donald Trump were to break his Social Security promise, the most likely solution would probably be an increase to the future full retirement age. Increasing the retirement age has long been the go-to Social Security fix for the Republican Party.

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Why adjust the full retirement age? To begin with, it'll have absolutely no bearing on current retirees, meaning that Trump could partially keep his pledge in place to ensure that today's retirees receive every penny that they're due.

An individual's full retirement age is determined by their birth year, and it's the point at which the SSA deems them eligible to receive 100% of their monthly benefit. Adjusting the full retirement age to, say, age 68, 69, or 70 would take into account increasing life expectancies, and it would also reduce the payouts for future generations of retirees (i.e., today's working-class Americans). Future retirees would be forced to either wait longer to receive 100% of their Social Security benefits or they'd have to be willing to accept a considerably larger lifetime reduction in benefits if they filed early for benefits.

The real question mark is whether raising the retirement age alone would take care of Social Security's issues. Most studies would suggest not, meaning more would likely need to be done.

Though it's far too early to suggest that Trump is going to cave to political peer pressure and make changes to Social Security, the table is certainly set for such an occurrence.

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