Trump’s fix already shows signs of fraying

Sean Williams, The Motley Fool
Published 7:00 a.m. ET April 18, 2019


If you’re planning on relying solely on your social security check for retirement, you may want to reconsider. Here’s why.

Whether you realize it or not, there’s a very good possibility that you’re going to rely on Social Security (in some capacity) when you retire. An April 2018 Gallup poll found that 84% of nonretirees expect to lean on their Social Security income to some degree to make ends meets. That compares with the 90% of current retirees polled by Gallup who say they count on their monthly benefit check to help pay their bills.

It’s a vital program that’s responsible for keeping tens of millions of Americans out of poverty. But it’s also a program that’s facing its biggest test since its inception more than eight decades ago.

Social Security’s $13.2 trillion problem

Put bluntly, Social Security is facing a cash crisis. The June 2018 Social Security Board of Trustees report forecast that the program would soon begin paying out more money than it’s collecting. Although this net cash outflow is sustainable for some time, thanks to the program’s $2.89 trillion in asset reserves, that excess capital won’t last forever. By 2034, Social Security’s asset reserves are projected to be exhausted, which would lead to what would be a 21% cut to benefits for then-current and future retirees, assuming Congress fails to act.

If there’s a bright side to this mess, it’s that Social Security is in absolutely no danger of going bankrupt. Even if there wasn’t a dime left in its asset reserves, the recurring revenue from the program’s 12.4% payroll tax and the taxation of some Social Security benefits would allow payouts to continue for eligible beneficiaries. But if something isn’t done to address the estimated $13.2 trillion cash shortfall the program faces between 2034 and 2092, the aforementioned benefit cut could be the result.

Traditionally, we’ve seen Social Security “fixes” take two shapes. The Democrats favor raising revenue by increasing taxes on the wealthy. Meanwhile, Republicans want to compensate for Americans’ increasing longevity by further raising the full retirement age, thereby reducing expenditures for the program. President Donald Trump hasn’t wanted anything to do with either of those options, however.

Trump proved forecasters wrong in 2018

Why, you ask? Namely because Trump sees direct solutions that amend Social Security as something akin to political suicide. The president understands that any fix is going to result in some group of people being in worse shape, financially, than they were before, and that might mean lost votes in a future election.

Instead, Trump has championed an indirect approach to Social Security’s cash shortfall. In particular, he believes that because the payroll tax accounted for almost 88% of the $996.6 billion collected by Social Security in 2017, increasing wages, lowering unemployment and encouraging consumers to spend will drive economic growth and push payroll tax collection higher.

In December 2017, Trump signed what’s so far his hallmark legislation, the Tax Cuts and Jobs Act, into law. The law permanently reduced the peak marginal corporate income tax rate to 21% from 35% and modestly lowered individual income tax rates (through Dec. 31, 2025). More important, it provided what looks to be a temporary spark for the U.S. economy, with businesses able to hang on to more of their earned income and a majority of taxpayers presumably having lower federal tax liability.

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Although we don’t have the official data from the 2019 Trustees report yet (it’s usually released in June or July), the program’s investment holdings – i.e., special-issue bonds and certificates of indebtedness purchased using the program’s net cash surpluses – from December 2017 to December 2018 rose by nearly $3.2 billion. While the 2018 Trustees report had been forecasting the first net cash outflow since 1982, Trump’s indirect solution appears to have proven the forecasters wrong.

President’s fix begins to unravel

Unfortunately, it looks as if Trump’s victory lap will be quite brief.

According to data from Social Security’s investment holdings as of the end of March 2019, the program had just under $2.89 trillion invested in various special-issue bonds. That’s down $9.03 billion over the past three months, with the bulk of the decline coming from the Old-Age and Survivors Insurance Trust, which is responsible for paying out benefits to retired workers and survivors of deceased workers. In other words, it looks as if Social Security’s long-feared inflection point has arrived, and for the first time since 1982, more money is being paid out by the program than it’s taking in. 

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The problem with Trump’s indirect Social Security solution is that fiscal policy moves tend to only have short-term impacts on the economy. Cutting corporate tax rates and providing a potential bump in take-home pay for some individual taxpayers may have been a boon in 2018, but those GDP-lifting effects are unlikely to carry over into 2019.

Furthermore, no matter what sort of fiscal or monetary measures are passed by the federal government or the central bank, respectively, contractions and recessions are an inevitable part of the economic cycle. For Trump’s Social Security fix to work, the U.S. economy would have to produce sustained above-average GDP growth over an extremely long period of time. This simply isn’t feasible or realistic, which is why his plan is already faltering.

Stabilizing Social Security for the long term requires a direct approach. More important, it will require lawmakers from both parties to work together, because the votes needed for such a bill to pass the Senate won’t be there without some bipartisan cooperation. The only question is, how long will lawmakers wait before really tackling Social Security reform?

The Motley Fool has a disclosure policy.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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