U.S. Markets open in 3 hrs 59 mins

Republicans and Social Security: 4 Facts You Need to Know

Sean Williams, The Motley Fool

Social Security is unquestionably the nation's most important social program, with more than three out of five current retired workers leaning on it to account for at least half of their monthly income. Yet, this crucial program is on shaky ground, with the latest annual report from the Social Security Board of Trustees painting a grim intermediate- and long-term picture for the program.

According to the report, Social Security is facing an inflection point this year. For the first time since 1982, aggregate expenditures, which almost entirely includes benefits, but also takes into account administrative expenses and Railroad Retirement exchange contributions, will exceed revenue generated. Although the net cash outflow is only estimated at $1.7 billion, which is relative peanuts when compared to the $2.89 trillion currently in asset reserves, it's a conclusive sign that the existing payout schedule isn't sustainable.

A person tightly holding a Social Security card in their hand.

Image source: Getty Images.

Things begin to get really dicey in 2020 and beyond. Beginning at the turn of the decade, ongoing demographic shifts (e.g., boomers retiring, increased longevity, and growing income inequality) are expected to cause the net cash outflow to balloon. By 2034, following 16 years of outflows, the $2.89 trillion in excess cash is expected to be completely gone. Should this happen, Social Security would survive, but payouts to then-current and future retirees could be cut by up to 21%. That's not a pleasant forecast given the noted reliance of seniors on the program.

What you should know about the GOP and Social Security

Who's to blame for this mess? Well, some Americans would point their fingers specifically at Republicans in Congress. While they absolutely do take some of the blame, the inaction by Republicans and Democrats on Capitol Hill makes them equally culpable in exacerbating Social Security's problems.

When it comes to Republicans and Social Security, here are the four things you absolutely need to know.

A surprised senior man tightly gripping his piggy bank while outstretched hands reach for it.

Image source: Getty Images.

1. Republicans aren't going to take away Social Security

Without beating around the bush, the Republican Party is often associated as being the party of the well-to-do -- and the rich typically aren't reliant in any way on Social Security income. There's, therefore, been a long-running belief that Republicans would aim to do away with Social Security sometime in the future. This is nothing more than another in a long line of pervasive Social Security myths.

Both Democrat and Republican lawmakers on Capitol Hill have an understanding of the importance that Social Security plays in keeping some 22 million people currently receiving benefits above the federal poverty line. Though both parties may have suggested tweaking how revenue is generated for the program, neither party would remove or replace any of the three funding sources: the payroll tax on earned income, the taxation of benefits, and interest income on the program's asset reserves.

In other words, no Republican is going to advocate scraping Social Security. And even if they did, the idea would have no chance of gaining traction in Congress.

A fanned pile of hundred dollar bills lying atop fanned Treasury bonds.

Image source: Getty Images.

2. They haven't taken a dime from the Social Security program that isn't accounted for

Another misconception is that the Republican Party stole money from the Social Security Trust and used it to fund wars. More specifically, Ronald Reagan, George H.W. Bush, and George W. Bush have come under intense scrutiny for borrowing from Social Security and "not putting the money back."

However, the truth of the matter is that Congress has been able to "borrow" Social Security's excess cash (i.e., asset reserves) for five decades, and it's happened under every single president over that stretch. In fact, the Social Security Administration (SSA) is required by law to purchase special-issue bonds and certificates of indebtedness with this excess cash. Please note the emphasis on "required by law" that I've added above. The federal government isn't simply going to sit on this excess cash it borrows from Social Security. It's spending this cash on various line items, which may be wars and the defense budget, as well as education, healthcare, and pretty much any other expenditure you can think of.

This setup is actually a win-win for both parties. The federal government has a relatively liquid source of borrowing with the Social Security Trust, and the Trust is able to generate significant annual income from the interest it earns on its loans. Last year, $85.1 billion of the $996.6 billion that was generated by the program came from interest income.

Most important, every cent that's been borrowed is fully accounted for in the SSA's investment holdings. In other words, if Congress were to "pay the money back," Social Security wouldn't be any better off. In fact, without interest income, it would be considerably worse off.

A senior woman buying groceries at the checkout counter.

Image source: Getty Images.

3. Republicans very much dislike the current COLA measurement

You should understand that the Republican Party (like the Democrats) doesn't like the current inflationary tether, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

The biggest issue Republicans have with the CPI-W is that it doesn't do a very good job of measuring the inflation that seniors are facing, thereby resulting in an inaccurate cost-of-living adjustment (COLA) each year. That's because, as the name implies, the CPI-W tracks the spending habits of urban and clerical workers, who in nearly all instances aren't receiving a Social Security check. Essentially, seniors' annual raise is tied to the spending habits of non-seniors, and that doesn't sit well with anyone in Congress.

In particular, Republicans would like to replace the CPI-W with the Chained CPI. The Chained CPI takes into account the idea of substitution bias, which involves trading down from a pricier good or service to something less expensive if prices go up. For example, if the price of ground beef rises 40%, you might buy pork or chicken instead. The CPI-W does not take into account substitution bias.

Although substitution bias does take into account a real-life purchasing strategy of consumers, the consensus view among pundits is that it would result in lower annual COLAs more years than not, relative to the CPI-W.

Scissors cutting through a $100 bill.

Image source: Getty Images.

4. They aim to fix Social Security through long-term expenditure cuts

Finally, Republicans do want to fix Social Security, but they are at the opposite side of the spectrum from Democrats on how to do that. Whereas Democrats prefer raising revenue to make up for an expected $13.2 trillion cash shortfall between 2034 and 2092, Republicans want to reduce the program's long-term expenditures.

How, you ask? As noted, they'd implement the Chained CPI, which would result in lower annual COLAs, and thereby reduce the amount of expenditures heading to beneficiaries over the long run.

Republicans are also big proponents of raising the full retirement age, or the age at which you become eligible for your full retirement benefit. Currently, set to peak at age 67 for those born in 2022 or later, Republicans would like to see this gradually increased to as high as age 70. This would require retired workers to either wait longer to receive their full payout, or to accept a steeper monthly reduction if claiming early. Either way, it reduces the lifetime benefits paid out by Social Security, and thereby saves the program money.

Some Republicans, including Donald Trump, have called for a form of means-testing, which would reduce or eliminate Social Security benefit payments for those folks or couples who are wealthy.

In sum, the Republican Party isn't going to do away with Social Security, and they haven't stolen a dime from the Trust. However, they are culpable (with Democrats) for the program's problems, and would aim to reduce lifetime benefit payouts to resolve the long-term funding crisis.

More From The Motley Fool

The Motley Fool has a disclosure policy.