During the next US president’s term, Social Security will reach an important milestone. In 2019, it will start paying out more in benefits than it takes in taxes and interest income. That does not mean benefits will need to be cut, at least not right away. Social Security has a stock of US Treasury bonds that’s expected to pay benefits for another 15 years. But in 2034 something has to happen—either benefits are cut, taxes increased, the government takes on more debt, or spending on other programs gets cut to fill the gap.
According to the Trustees Report from the Social Security Administration, there’s a cost to waiting.
Suppose on day one of the next presidency, the winner decides to fix Social Security. She (or he) could increase taxes by 2.58% or cut all benefits, including on current retirees, by 16%. With either tactic, or some combination of the two, odds are Social Security will be solvent for the next 75 years. If she (or he) does nothing and we wait until 2034, fixing Social Security would require increasing taxes by 3.58% or cutting benefits by 21%.
Putting Social Security on firm financial footing today also gives retirees peace of mind and allows them to plan their retirement income.
A responsible leader would have a plan and make Social Security a priority, but each plan falls short.
Trump’s plan for Social Security
Donald Trump has been vague on the details of what he plans to do. The Republican candidate has promised to not cut benefits or increase the retirement age. He also promises no new taxes. He claims his other economic programs will increase growth so much there needn’t be any change to Social Security.
Putting aside the question of whether higher growth is realistic, this strategy won’t work. Higher growth means higher wages, which means more tax revenues (which are good for the program), but because your Social Security benefit is based on your earnings, higher wages also mean bigger promises to future retirees.
The Urban Institute estimates that even a very ambitious 3.4% growth rate would not come close to filling Social Security’s funding gap. Someone—either taxpayers, beneficiaries, or both—must give something up.
Clinton’s plan for Social Security
Clinton offers a few more details. She promises to increase benefits to widows (whose benefits are cut when their spouse dies) and to caregivers who spend time out of the labor force (currently you must work 35 years to receive a decent benefit). She also promises to never increase the retirement age, and has committed to not cutting benefits by lowering cost-of-living increases.
How we’ll pay for this is unclear. Clinton says it will come from taxes on high earners. The 2016 Democratic platform offers a bit more detail. It advocates levying a 12.4% payroll tax on income over $250,000. It is worth noting this is a humungous marginal tax increase that may not leave room to pay for the other programs high earners are supposed to pay for.
Clinton’s website hints that investment income may also be taxed to pay for entitlements. Odds are it will not be enough to plug the current hole in the program, let alone a growing one. Even if we subjected all earned income, not just income above $250,000, to the payroll tax, we would only finance 56% of the projected shortfall.
The 2016 race has been different from other campaigns, for many reasons. Unlike previous elections, there was very little talk about the future of Social Security. As 2034 draws closer, the need for pragmatic solutions becomes ever more important. There’s always 2020.