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2 Reasons Congress Won't Fix Social Security Anytime Soon

Sean Williams, The Motley Fool

Each and every month, 62.5 million people receive a Social Security benefit. Most of these folks, around 70%, are aged beneficiaries -- and many of them are reliant on the program to provide at least half of their monthly income.

With so many retirees leaning on Social Security so heavily, you can imagine the angst and fear created by the latest Board of Trustees report, released in early June.

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Image source: Getty Images.

Trouble is brewing with America's most important social program

That report, which has been similar to those in years past, highlights the issues facing Social Security in the upcoming years and decades. It includes the ongoing retirement of baby boomers weighing down the worker-to-beneficiary ratio, increased longevity, and rising income inequality, to name a few things.

According to the trustees, the program is set to undergo a change in 2018 that it hasn't seen in 36 years: a net cash outflow. An estimated $1.7 billion more is expected to be paid in benefits than is collected in revenue in 2018. With each passing year, save for 2019, the intermediate-cost model projects that this net cash outflow will grow. By 2027, an estimated $169 billion more in benefits will be paid out than is collected in revenue.

As you can imagine, a widening deficit isn't sustainable. By 2034, according to the report, Social Security's $2.9 trillion in asset reserves, which were built up over the previous 35 years, will be completely exhausted. Once this cash is gone, the trustees have forecast the need for a benefits cut of up to 21% to maintain program solvency. Again, with more than three out of five current seniors counting on Social Security for at least half of their income, a 21% benefits cut could prove disastrous.

Here's why Congress continues to sweep Social Security's problems under the rug

Clearly, Social Security needs some TLC from lawmakers. Unfortunately, the chance that will happen anytime soon appears to be slim to none. And if you want to know why, look no further than these two culprits: hubris and fear.

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1. Political hubris is a big problem

Never underestimate the power of political hubris when it comes to a stalemate in Washington, D.C. The plain-as-day issue with Social Security is that Democrats and Republicans each believe they have the better long-term solution, and therefore neither party feels it has an incentive to find common ground with the opposition.

Democrats have long favored the idea of raising or eliminating the maximum taxable earnings cap associated with Social Security's 12.4% payroll tax on earned income. In 2018, all wage income up to $128,400 is subject to this payroll tax. That means that while more than 90% of working Americans are paying into Social Security with every dollar they earn, the wealthiest folks will have their wage income above $128,400 exempted from the payroll tax. And if you're wondering why this cap even exists in the first place, it's because there's a maximum monthly payout at full retirement age ($2,788 in 2018) associated with Social Security.

The resolution for Democrats would be for the wealthy to pay more, either by lifting this cap, or removing it entirely. In doing so, Social Security's projected cash shortfall of $13.2 trillion between 2034 and 2092 should be completely erased.

As for Republicans, they prefer to reduce the long-term expenditures of the program by raising the full retirement age, or the age at which you become eligible for your full retirement benefit, as determined by your birth year. The full retirement age is currently set to peak at 67 for those born in 1960 or later. The GOP would prefer this number be gradually increased to between age 68 and 70 to account for increased longevity.

By increasing the full retirement age, workers would either have to wait longer to receive their full payout, or would be accepting a steeper permanent reduction in monthly benefits if claiming early. Either way, it reduces the lifetime benefit that workers would receive, therefore eliminating the program's $13.2 trillion cash shortfall.

Two very different approaches that both work to solve the same problem. With no incentive to compromise, the American public suffers the consequences.

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2. The fear of being unseated

What politicians in Washington won't tell you is that they also avoid tackling Social Security because they worry about losing their elected seat in the House or Senate if they do so.

An unpublicized Social Security truth is that no matter what solution is implemented to buoy the program, someone is going to lose. If the Democrats can scrape together enough votes to lift or eliminate the maximum taxable cap, then the wealthy will lose out by paying more into the system without seeing an additional cent in benefits come retirement.

Meanwhile, if Republicans were to raise the full retirement age, then it's the future generations of working Americans who would suffer. While protecting existing retirees, a higher full retirement age would probably reduce the lifetime benefits of millennials and Generation Z.

There is no such thing as a solution without consequences -- and lawmakers on Capitol Hill fear that supporting and implementing such solutions could rile those Americans to vote them out of office. This is something that President Trump warned his own party about back in 2013 at the Conservative Political Action Conference. 

Ultimately, Congress can't keep punting Social Security's problems down the road forever. A fix will be needed; otherwise, the noted 21% across-the-board cut to benefits would adversely affect all beneficiaries.

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