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6 Ways Republicans Could Cut Social Security Benefits

Sean Williams, The Motley Fool

Social Security is arguably the most important social program in this country. Each month, more than 42 million retired workers receives a monthly stipend from the Social Security Administration, and more than three out of five of those elderly beneficiaries relies on this payment to comprise at least half of their income. Without Social Security, the Center on Budget and Policy Priorities has estimated that millions of additional seniors would be living below the federal poverty line.

But this critical program isn't on solid financial footing. According to the latest annual report from the Social Security Board of Trustees, the program will begin paying out more in benefits than it collects in revenue by 2022, which is mostly a result of lengthening life expectancies and the ongoing retirement of baby boomers. By 2034, the roughly $3 trillion in asset reserves held by the trust will be completely gone, leading to what the trustees project will be a cut in benefits for existing and future retirees of up to 23%.  

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How to close a $12.5 trillion budget shortfall in Social Security?

At the heart of Social Security's issues is an estimated $12.5 trillion budget shortfall, based on the current payout schedule, between 2034 and 2091. Lawmakers in Washington essentially have three ways to fix this problem:

  1. Raise additional revenue, which is what the Democrats would prefer to do.
  2. Cut benefits through cost reductions, which is what Republicans would prefer.
  3. Find a middle ground, which would involve a combination of both.

Naturally, a combination of both parties' solutions would be the smartest for Social Security over the long run -- but it's also the least likely considering that neither can agree on much when it comes to America's most important social program.

This leaves two choices: Raise revenue or cut benefits. Since the GOP currently has control of the legislative branch of the government, reducing Social Security benefits isn't necessarily out of the question. In fact, with tax reform working its way through Capitol Hill, reforming so-called entitlements like Social Security, Medicare, and Medicaid, might very well be needed by the GOP to pay for the massive tax cuts being passed along to corporations and individual taxpayers.

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Six ways the GOP could (in theory) cut Social Security benefits

Now here's the thing with cutting Social Security benefits: it's never done directly. These are mandatory programs, and therefore they need to continue being funded. However, that doesn't mean new laws can't be passed to reduce what the government owes to beneficiaries over the long term. Here are six ways Republicans could, in theory, cut Social Security payments to recipients over the course of many years.

1. Raise the full retirement age

If there were a go-to favorite solution of the GOP, it would be raising the full retirement age. Your full retirement age, which is determined by your birth year, is the age where you become eligible to receive your full retirement benefit. It's currently on schedule to max out at 67 years in 2022 for those born in 1960 or later. Republicans would like to see this gradually increased to ages 68, 69, or even 70 for future generations of workers.

Why? First, it would take into account increased longevity. People are living longer than ever, and Social Security was never designed to provide payouts for two decades, or longer. Second, it would require that seniors either wait longer to receive their full payment, or enroll earlier and accept a steeper permanent reduction in their lifetime payout. Either way, it means less paid out to beneficiaries, which saves the program money over time.

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2. Switch the inflationary tether to the Chained CPI

Another really common idea among members of the GOP on Capitol Hill is that of switching the inflationary tether of Social Security's cost-of-living adjustment. Currently, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is used to determine what, if any, "raise" beneficiaries will receive from one year to the next. The GOP would like to replace this measure with the Chained CPI.

The big difference between the Chained CPI and other inflationary measures like the CPI-W is its incorporation of substitution bias. For example, if the price of a good or service increases in price, the Chained CPI assumes that some consumers will trade down to cheaper, but similar, goods and services. Though this is a real-world behavior, it would result in smaller annual cost-of-living adjustments for Social Security beneficiaries.

3. Means-test for benefits

In an effort to not be portrayed as the party of the rich, Republicans might turn to an idea proposed on the campaign trail by Donald Trump: means-testing for benefits. This would involve setting an annual income threshold that would serve as a line in the sand to determine if seniors would receive a reduced Social Security payout, or perhaps none at all.

How would this work? Let's hypothetically say that the GOP passed an amendment to the existing Social Security laws allowing for means-testing to kick in at $80,000, and to phase out completely at $120,000. In theory, folks earning between $80,000 and $120,000 would receive a reduced portion of their benefit since they, presumably, aren't reliant on their Social Security payout to make ends meet. If they earn more than $120,000, they would forfeit their benefit for that year. It would effectively be a means to remove or reduce payouts to the wealthy during retirement.

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4. Progressively link longevity to benefits

One of the more intriguing ideas to have been introduced in recent years is that of indexing the full retirement age to longevity. At the moment, the full retirement age is determined almost whimsically by legislation that was passed 34 years ago. The result is that life expectancies have increased at a much quicker rate than the full retirement age, leading to the program paying out seniors for upwards of two decades in some instances.

However, by indexing the full retirement age to life expectancies, we'd see the full retirement age increase in step with longevity. It would also allow the age at which delayed-retirement credits max out (currently age 70) to adjust up or down. This should encourage healthy seniors to work longer and wait to enroll, which would reduce the number of years that seniors are collectively receiving benefits. 

5. Consider a full or partial privatization of the program

Though it's an idea that was considerably more popular in the mid-2000s than it is now, there's always a slim possibility that Republicans could consider partially or fully privatizing Social Security -- in other words, apportioning a percentage of an individuals' Social Security payroll-tax contributions that they could invest on their own as they see fit.

Why privatize? Doing so partially or fully removes the economic burden of the government's need to take care of seniors later in life. The risk of such a move is that Americans' financial literacy is pretty poor, as evidenced by our saving habits. Seniors who make risky decisions and lose their money could be set up for big financial problems under such a scenario.

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6. Freeze the purchasing power of benefits for some, or all, beneficiaries

The least likely option, but one that has at least been on the table at some point in the past, is the idea of freezing the purchasing power of Social Security benefits. This is a fancy way of saying that cost-of-living adjustments would cease, "freezing" payouts from one year to the next.

Freezing benefits on the wealthy is one way the GOP could perhaps garner some favor with the public. Since the rich often receive the highest monthly payouts, freezing them for years to come should save the program money.

Freezing benefits on all recipients is an option, too. It would almost completely resolve the budget shortfall, but it would financially cripple a lot of beneficiaries in the process.

Will Republicans move forward with one, or more, of these cost-cutting initiatives? Only time will tell.

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