Big changes are afoot in Washington. Having unsuccessfully navigated healthcare reform efforts during the spring and summer, Republicans have officially passed their tax reform bill and given President Trump his first major legislative win since taking office.
The thesis of the new tax law involves cutting the individual and corporate income-tax rates, as well as simplifying the U.S. tax code. Republicans believe that corporations having more money will lead to steady hiring, increased expansion and reinvestment, and higher wages for workers. And since consumption makes up around 70% of U.S. GDP, consumers having more discretionary income is viewed as a long-term positive for the economy.
Continue Reading Below
Republican tax overhaul could bring big cuts
However, tax cuts come at a price. In order to put more money in the pockets of individual taxpayers and corporate America, new revenue has to be created, or cuts have to be made. For instance, the final version of the tax act eliminates the individual mandate tied to the Affordable Care Act (which you know better as "Obamacare"). This mandate is what requires people to buy health insurance or face a penalty come tax time for being uninsured. With the individual mandate gone, fewer people will choose to buy insurance, saving the federal government an estimated $338 billion over the next 10 years.
Still, according to the Joint Committee on Taxation, the GOP tax law could add around $1.5 trillion to the federal deficit over the next decade. Additional cuts beyond just the individual mandate may be necessary if GDP growth fails to match expectations, and mandatory spending programs like Social Security, Medicare, and Medicaid may be on the radar for the GOP.
Social Security and Medicare might be fair game
First off, relax. As noted, these are mandatory programs, and as such they have to be funded by the federal government. There's no going "cold turkey" here in order to save trillions of dollars.
But there had been concerns that if the tax bill were passed without adequate deficit-reduction measures in place, the PAYGO rule, short for "pay as you go," would be triggered. This rule requires that tax cuts, as well as increases in entitlement and mandatory spending categories, be covered by tax increases and/or cuts in mandatory spending. In plainer English, it would allow for reductions in funding to mandatory programs, including up to a $25 billion cut to Medicare in 2018. Thankfully, a stopgap spending package passed in Congress this week will spare Medicare from cuts next year.
But that doesn't mean these programs are off the radar by any means.
Now I know what you're probably thinking: Would the GOP pass a tax bill that could lead to Social Security benefits and Medicare funding being cut down the road? If you've paid close attention to the way the party prefers to deal with Social Security's impending $12.5 trillion budget shortfall between 2034 and 2091, then the answer is yes.
The GOP prefers to cut benefits as a means of fixing Social Security
The two most common Republican-proposed solutions to resolving Social Security's issues involve a cut to benefits.
To begin with, Republicans want to shift the inflationary tether to Social Security's cost-of-living adjustment away from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), and to the Chained CPI. Though both indexes measure inflation similarly, the Chained CPI factors in substitution bias (the act of trading down to a cheaper good or service when another good or service becomes more expensive). While the index does take into account a real-world consumer practice, its use would also result in smaller cost-of-living adjustments each year for Social Security recipients. That would impact current and future retirees.
The GOP would also like to increase the full retirement age (the age when a person becomes eligible for 100% of their retirement benefit) from 67, where it'll cap out in 2022, to 68, 69, or even 70. Raising the full retirement age would protect the benefits of those who are already retired, but it would essentially be a cut for future generations of retirees. They would either need to wait longer to receive their full benefit, thus receiving fewer years of payouts, or accept a steeper reduction in their monthly payout by claiming early.
This new survey suggests Republican politicians are out of touch with their constituents
Even though the solutions offered by the GOP would likely resolve Social Security's shortfall, they aren't too popular, according to a national survey conducted by The Senior Citizens League (TSCL).
In polling older voters across the U.S., TSCL found that only 25% were in favor of raising the full retirement age from 67 to 69. Mind you, these elderly folks wouldn't be impacted by this move either way. Three-quarters of the respondents just genuinely don't like the idea of working Americans having to wait longer to collect a full retirement benefit.
On the other hand, TSCL asked the same group of survey respondents how they felt about increasing revenue for the Social Security program by eliminating the maximum taxable earnings cap tied to the payroll tax. Currently, earned income between $0.01 and $127,200 (as of 2017) is taxed at 12.4% by Social Security's payroll tax, with income above this amount exempt. In total, 73% of respondents were in favor of completely removing this cap, which would also likely resolve the program's funding issues over the next 75 years.
A bipartisan approach makes the most sense
Despite these survey results, the GOP ideas do address a real issue: Social Security's longevity problem. Seniors are able to receive a payment for a longer period of time, which is putting pressure on the program. If seniors are healthier than previous generations, they should presumably work a bit longer before receiving full retirement benefits.
Yet, approaching a fix unilaterally seems to be the bigger problem. Relying solely on full retirement-age increases would put future generations of workers at a big disadvantage. Meanwhile, raising payroll taxes on the wealthy provides no added retirement benefits for the well-to-do. But combining the core ideas of both parties -- a tax hike on high earners and increasing the full retirement for future retirees -- would be a middle-ground solution that would likely work well to keep everyone as happy as possible, and put Social Security on more solid footing for years to come.
When drafting a Social Security fix, lawmakers in Congress would be well served to listen to their constituents a bit more.
The $16,122 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.