Donald Trump’s presidency has no doubt been unlike anything we’ve ever seen before in American history. However, Trump is by nature a businessman, with zero political or military experience-which is a historic first for an American President.
As we have all been watching in shock and awe from the sidelines, Trump hasn’t quite been approaching the issues in the fashion of his predecessors, and he has remained crystal clear regarding one issue in particular: Social Security is off-limits.
Social Security’s Judgement Day is in the Horizon
As I’m sure you’ve heard in dinner table conversations through the media that social security is nearing the danger zone. A 2018 report from from the Social Security Board of Trustees has projected that the program will pay out more benefits this year than it will collect in revenue.
Right now, we are referring to a net cash outflow of $1.7 billion, which is minute in comparison to the $2.9 trillion in asset reserves, and this outflow is expected to keep growing with each passing year after 2019. In fact, by 2034, Social Security’s excess cash is expected to be fully depleted, which would then lead to a 21% reduction in benefits across-the-board for existing and future recipients. They are expecting this major cut in benefits to preserve payout through 2092, without needing to any further cuts of benefits. That’s assuming the universe is still intact by 2092, which isn’t exactly guaranteed. Nonetheless, this 21% reduction will be a huge blow to 62% of elderly workers who rely on social security benefits for 50% or more of their monthly income.
The American Public, who has continuously paid in taxes to social security expecting to get it back in their golden years, along with members of Congress, would prefer a solution that directly addresses the impending Social Security Crisis. However, President Trump has been advocating a more indirect approach to the issue. Rather than making amendments to the current program, Trump has long advocated that the growing US economy is the best way to address the Social Security funding issue.
Exactly how would Trump’s solution help salvage Social Security?
Lets first take a quick look at how money is generated for Social Security.
- A 12.4% payroll tax on earned income (up to $128,400 as of 2018)
- Interest income earned on its asset reserves.
- The taxation of Social Security Benefits when they are doled out
When the program asset reserves are depleted in 2034, interest income is expected to disappear as well, leaving just the payroll tax along with the taxation of benefits as the continuous sources of income for Social Security. Out of these two sources, the payroll tax is the behemoth. Last year alone, the payroll tax was responsible for $873.6 billion of the $996.6 billion collected.
Could Donald Trump Save Social Security?
Where President Trumps idea comes into play would be mostly on the payroll tax side. If he could institute policies that would aid in stimulating the US economy, which in turn would improve wages and income while also improving productivity, then it is likely we would see a coinciding increase in the amount of payroll taxes collected.
However, the Trustees have also included Trump’s tax reform law, the Tax Cuts and Jobs Act, into their 2018 Social Security projections. Although it is possible that the trustees projections will be disproven in the near term.
Recent data confirms that US gross domestic product (GDP) has grown by 4.1% during the second quarter, with represents the fastest growth pace since 2014. Furthermore, while wage growth has remained minimal, when you view it over the intermediate term, it also has grown at its fastest pace in nine years during the first quarter. This was mostly due to businesses reveling in significantly lower corporate income tax rates, with some of this newfound extra capital being passed along to employees through bonuses and increased wages.
So the gist of this is that a better than expected GDP growth along with modest wage improvement could lead to a higher amount of payroll tax collection in 2018. Being that the Trustees only forecast a $4.5 billion increase in aggregate income relative to last year, this is based on the intermediate cost model.
True, it is possible that the federal tax brackets could have adverse effects on the income from the taxation of benefits, however it also is not implausible that the currently projected $1.7 billion net cash outflow of 2018, or $0.2 billion estimated outflow in 2019, could in actuality turn into an inflow due to higher-than-expected payroll tax collection, pushing Social Security’s tipping point out further than expected, and actually extending benefits for a longer period.