Trump re-inherits Social Security's problems, and another chance to fix them

Donald Trump is re-inheriting a problem the country has faced for years, when he goes back to the White House next year: Social Security.

The system’s insolvency is like a slow moving train: People can see it coming, and there is plenty of time to stop it. But the closer it gets, the more difficult that will be.

Social Security’s retirement trust fund is on track to essentially run out of money to pay full benefits in 2033. The ways to fix the system are simple in concept – raise taxes, reduce benefits, or some combination of those two. Politicians have long recognized that, but they have viewed the options as unpopular and have avoided action.

“Members of Congress have lost their seats in the past for wanting to change Medicare or Social Security,” said Mary Johnson, an independent Social Security and Medicare policy analyst, describing potential changes to Social Security as “political dynamite.”

During his campaign, Trump proposed changes, albeit ones that would expedite the system’s insolvency. He suggested eliminating taxes on the Social Security payments people receive, which is problematic for the system, as portions of those taxes go back into its funding. That, along with proposed tariffs and deportations could also end up hurting the system, causing a 33 percent cut in benefits by 2035, according to the Committee for a Responsible Federal Budget. Social Security could become insolvent in just six years, because of such ideas, the group said.

“He loves pandering to the public over not having to pay taxes on Social Security anymore, but that is a long way from proposing substantial Social Security reform,” Johnson said.

Eliminating taxes on Social Security does indeed appear to be a popular concept with retirees, as such taxes can significantly cut into the money they receive, she said. However, without a way to offset that, such as increasing the earnings cap of Federal Insurance Contributions Act (FICA) – something that hasn’t been done since 1983 – the retirement trust could run dry sooner than expected. Over the next 10 years, Social Security taxes are estimated to bring $939 billion in revenues into the system, representing about 5 percent of the program’s funding through 2033, Johnson said.

Even so, adjustments to the taxation of Social Security benefits would be welcomed, she said, as the income threshold for taxation of it, unlike income tax brackets, hasn’t been changed since 1984. Currently, individuals with income up to $25,000 or couples with $32,000 per year may have to pay taxes on up to 85 percent of their Social Security benefits, she said. Changing those levels could make the tax fairer to low-income households, she said.

Despite the political risks of acting on Social Security fixes, surveys have shown that the public wants Congress to address it sooner rather than later, said Mary Beth Franklin, a former InvestmentNews contributing editor who specializes in Social Security.

“Something needs to be done within the next decade,” Franklin said. “There are so many moving pieces in Social Security. It’s hard to imagine tackling individual pieces without wider Social Security reform… You need leadership from the White House on significant legislation like this.”

Bipartisan support will be critical, even in a Republican-controlled Congress. That’s because a two-thirds vote of approval is necessary in the Senate for any legislation affecting Social Security funding, Johnson said.

The longer the delay in addressing the problem, the more difficult it will become, said Andrew Biggs, senior fellow at the American Enterprise Institute.

“With Social Security, more money has to go in, or less money has to go out. That’s just the math,” he said. “The drop-dead date for doing that would likely be in 2033.”

However, that would mean $350 billion in taxes, in today’s dollars, suddenly being needed to pay for full benefits in 2034, he said. Republicans could wait to act on tax increases, if they don’t want to cut Social Security benefits, but “that’s quite a bit of money,” he said.

Benefits recipients will fare much better with changes either way if they’re given as much time as possible to prepare, he said. An example is the increase in the full retirement age, something people were given enough notice about, he said.

“Right now, nobody complains about the retirement age being 67,” he said.

In the next few years, it's possible that a fiscal commission could be established in Congress, seated by members of both parties, given that both Republicans and Democrats are well aware of Social Security’s deficit, he said.

“Republicans will have to think hard about how they want to resolve these problems,” he said. “It’s difficult to be a party saying ‘we’re not going to reduce entitlement benefits,’ while also not increasing taxes.”