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Retirement Planning > Social Security

Republican alarmism threatens Social Security

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(Bloomberg View) — If you watched the last Republican presidential debate, you may have noticed the split on Social Security among the final four. Donald Trump vowed not to cut benefits. His three rivals would — by raising the retirement age, reducing payouts for wealthier people, diverting payroll taxes to private accounts or trimming cost-of-living increases.

Why the difference? While Trump attracts followers in almost every demographic group, his base skews toward older, non-college-educated, lower-income voters — people who are or will be getting most of their income from Social Security, in other words.

Pollsters for years have picked up differences of opinion among Republicans over entitlement benefits. Those without college degrees are more reluctant to support reducing them than those with a higher education. 

Trump’s rivals all support scaling back the federal benefits, to one well-disguised degree or another. Ted Cruz and John Kasich focus on the diversion of Social Security taxes to private accounts. Cruz and Marco Rubio favor raising the retirement age, and Rubio and Kasich have advocated means testing with reduced benefits for the better off. 

But none of the Republicans is on the right track completely.

Cruz, Rubio and Kasich get some of the solutions right, like means testing and raising the retirement age, but they are wrong to say Social Security is bust. Trump is wrong to say that he can manage any shortfall by reducing waste and abuse, and that he won’t cut benefits under any circumstance.

Social Security isn’t broke, but since 2010 has had a cash- flow problem, with expenses exceeding receipts. In 2015, the shortfall was about $84 billion, out of about $880 billion paid in benefits to 59 million people.

But it can draw from $2.7 trillion in Treasury bonds it acquired with the surfeit of payroll-tax receipts in the postwar decades. The interest on those government bonds will cover the shortfall until 2020, when the system must begin redeeming those bonds.

If nothing is done, Social Security trustees forecast the old-age fund will be depleted around 2035, at which point payroll taxes, now levied on the first $118,500 of income, will cover about three-fourths of benefits. 

There are only two ways to avoid this: either by raising taxes or reducing benefits. ”Anyone who tells you that Social Security can stay the way it is, is lying,” Rubio said at the debate. He’s right. But for him and other Republicans, including Trump, raising taxes is off the table.

Trump said he would “do everything within my power not to touch Social Security,” even for the wealthiest recipients. In his view, the U.S. has  ”a long time” — 22 years — before anything must be done. Not quite: The U.S. has about 18 years before the old-age trust fund is depleted. And waiting until then could harm that era’s retirees, since it will be too late for them to anticipate the shortfall and make lifestyle changes.

Trump claimed he would find any needed savings by ending fraud, waste and abuse. As the CNN moderator noted, that would save about $3 billion of the $150 billion shortfall. Trump’s nonsensical response: He would save money by making Japan, Saudi Arabia and other countries pay more of their own military bills.

Cruz, for his part, takes the alarmist route, saying “Social Security right now is careening towards insolvency.” He would allow workers to put some of their Social Security taxes into personal accounts, “like the 401(k), that you own, that you control, that you can pass on to your kids and grandkids.”

Problem is, private accounts would hasten Social Security’s demise. The program is “pay-as-you-go,” which means payroll taxes collected today cover benefits for retirees today. Decreasing the flow of money into the trust fund deprives current retirees of promised benefits. Bad investment choices or bear markets, moreover, could put a big dent in future retirees’ private accounts, forcing some to live below the poverty line.

But Cruz is right to suggest changing the inflation- adjustment formula “so it matches inflation instead of exceeding inflation.” It would reduce benefits, yet the existing consumer- price index overstates inflation for most households. It could be tweaked, such as by using the so-called chained CPI, which accounts for product substitutions, as when consumers buy more chicken when beef prices rise, for example.

So gradually raising the retirement age, tweaking the inflation formula and lowering benefits for the well-off seem like the right combination of fixes. Still, even if Congress did all that, it wouldn’t erase the shortfall.

Actuaries say the best way to close the remaining gap is to collect payroll taxes on up to $180,000 of income, rather than the current $118,500. That tax increase would hit high-income Americans, where most wage growth has been in the last decade. Many high earners also have corporate pensions and 401(k) retirement-savings accounts to supplement Social Security.

The Republican candidates are loath to propose anything like this, because it would be a tax increase on current workers. But without that kind of responsible fix now, the candidates’ predictions of a busted Social Security program may well become a self-fulfilling prophecy. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

See also:

2 Social Security changes and their effect on retirement income

What the loss of key Social Security strategies means for your clients


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