Social Security is an indispensable resource for tens of millions of retired seniors. According to data from the Social Security Administration, more than 3 out of 5 of today's retirees lean on their monthly payout to provide at least half of their income. Without this guaranteed check, elderly poverty rates would almost certainly soar.
And yet, despite its importance, Social Security is facing what could arguably be described as its biggest challenge in eight decades.
Beginning in 2018, and continuing in each subsequent year, Social Security will expend more than it collects in revenue, per the latest annual Trustees report. Although these net cash outflows will start off relatively small, they're expected to pick up steam rapidly as demographic changes continue to work against the program. By 2034, it's projected that Social Security will have completely exhausted the nearly $2.9 trillion in net cash surpluses built up since inception. Should this happen, a benefit cut of up to 21% may await then-current and future retirees. It's not a promising forecast.
Image source: Getty Images.
Americans look to Washington for answers
As you can imagine, the American public is looking to lawmakers on Capitol Hill, including both President Trump and Vice President Mike Pence, to fix these issues and resolve Social Security's $13.2 trillion cash shortfall between 2034 and 2092.
President Trump has been very clear that he has no intention of directly altering Social Security or Medicare. That's because, without using these words, Trump believes altering Social Security in any way is political suicide. Since direct fixes to Social Security results in at least one group of folks ending up worse off than before, Trump opines that fixing the program could lead to election losses for the party that implements a solution.
Rather, Trump has tackled Social Security's shortcomings with the passage of the Tax Cuts and Jobs Act, or TCJA. The TCJA substantially reduced peak corporate income tax rates, and modestly minimized what most working Americans will owe in federal income tax. Since the U.S. economy is driven by consumption, the expectation by Trump is that it'll result in more job creation and higher wages -- both of which would lead to increased payroll tax collection. Given that payroll tax on earned income is the program's workhorse, a faster-growing economy may be able to improve the health of the Social Security program.
U.S. vice president Mike Pence. Image source: Official White House Photo by D. Myles Cullen.
Everything is on the table for Mike Pence
On other hand, while Vice President Pence has been supportive of President Trump's indirect approach since 2016, he's been far more willing to consider a broader gamut of solutions.
Back in 2010, when Pence was a House representative from the state of Indiana, CNN interviewed the man who'd be elected vice president six years later. Known for his fiscal conservatism while in the House, CNN asked Pence if he'd support making cuts to the Social Security program in order to resolve its looming cash shortfall. Pence's response was as follows:
I think everything has to be on the table... I'm an all-of-the-above guy. We need to look at everything on the menu.
In plainer terms, Pence does believe that cutting Social Security benefits is a solution worth considering. However, he was very clear in his interview with CNN at the time that no benefit cuts should affect anyone older than 40.
So, what was Vice President Pence referring to? More than likely he was alluding to the idea of reducing lifetime benefits paid by gradually increasing the full retirement age.
Your full retirement age is the age at which you become eligible to receive 100% of your retirement benefit, as determined by your birth year. Currently set to peak at age 67 by 2022 for those born in 1960 or later, some fiscally conservative Republicans have argued for a gradual increase in this full retirement age to as high as 70 to account for increased longevity. This would require millennials and Generation Z to make a choice: either wait longer to receive their full benefit or accept a steeper upfront monthly reduction for claiming early. Either way, it would result in less being paid in lifetime benefits to future generations of retired workers, thereby saving the program money, and potentially erasing the entirety of the $13.2 trillion shortfall.
Image source: Getty Images.
Little chance of a near-term resolution
But is everything really on the table for Pence and lawmakers on Capitol Hill? Probably not.
You see, solutions to resolve the looming Social Security crisis tend to be highly partisan. Republicans prefer reducing expenditures by raising the full retirement age, whereas Democrats want to raise additional revenue by increasing or removing the payroll tax earnings cap. Doing so would require wealthier workers to pay more into the system. Since both of these solutions would likely resolve the $13.2 trillion cash shortfall by themselves, neither party feels compelled to find common ground with their opposition.
Making matters worse, as described by President Trump, politicians fear the consequences of making a hard choice to fix the program. These lawmakers don't want to lose their elected seats, which means sweeping the problem under the rug, or punting it farther down the road.
As things stand now, there's virtually no chance of a near-term resolution to Social Security's imminent issues.
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