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Would the GOP Actually Cut Social Security Benefits?


There's arguably no program in the U.S. more important than Social Security when it comes to the financial well-being of retirees. More than 60% lean on their monthly stipend for at least half of their income, with about a third reliant on Social Security for at least 90% of what they bring home each month. Without this critical program, millions of seniors would probably be struggling to make ends meet.

But Social Security itself isn't exactly on solid footing. The 2017 report from the Social Security Board of Trustees estimates that by 2022 the program will begin paying out more in benefits than it's generating in revenue. This is a result of baby boomers who are leaving the workforce and pushing the worker-to-beneficiary ratio lower. It's also happening because of lengthening life expectancies. By 2034, the program's $3 trillion in asset reserves is forecast to be completely gone. Should Congress fail to stem the program's seemingly imminent decline, an across-the-board cut of up to 23% on current and future retirees' benefits may be needed to sustain payouts through 2091.

Scissors cutting through a hundred dollar bill.

Image source: Getty Images.

Most Americans aren't OK with the idea of cutting Social Security benefits. In fact, a Gallup poll in the summer of 2015 found that 51% of those surveyed preferred tax increases, compared with 37% who were OK with curbing benefits. But Republicans just might choose the path least traveled.

Could the GOP cut Social Security's funding?

There are two ways of approaching cuts to Social Security: direct and indirect. A direct cut would take funds directly from the program, whereas indirect cuts find ways to reduce the program's costs over the long term through subtle changes.

Believe it or not, we've witnessed GOP proposals recently that have called for direct cuts to Social Security, although they didn't have much momentum. For example, among the proposals unveiled in President Trump's 2018 federal budget in May was a $72 billion cut to Social Security's Disability Income (SSDI) program over the next 10 years. Though Budget Director Mick Mulvaney attempted to justify the president's proposed inclusion of a cut to SSDI on the grounds that most folks correlate retirement benefits to Social Security and not SSDI, it simply didn't fly.

President Trump addressing U.S. Department of Homeland Security employees.

Image source: U.S. Department of Homeland Security via Flickr.

Mulvaney himself has also been very open to the idea of cutting funding to mandatory programs like Social Security. In 2011, Mulvaney introduced the Balancing Our Obligations for the Long Term Act (also known as the BOLT Act), which would have placed caps on congressional spending and required a balanced budget. In other words, it would have opened the door to Social Security cuts, if deemed necessary.

Nevertheless, President Trump made it clear during his campaign that there would be no cuts to Social Security under his watch. This "promise," along with the expected negative reaction from the public, would probably kill any direct-cut proposal.

Indirect Social Security cuts could get a green light from Republicans

However, I believe indirect cuts are very much part of the GOP's long-term plans for Social Security.

There are two core GOP proposals -- one to fix Social Security's funding gap and one included in the House GOP tax reform bill -- designed to save the program money over the long run. And to be clear, by "save" I mean reduce payouts to beneficiaries.

A person filling out a Social Security benefits application form.

Image source: Getty Images.

One of the GOP's core proposals to fix Social Security is to raise the full retirement age -- the age where the SSA deems you eligible to receive 100% of your retirement benefit. Doing so would help counteract increased longevity, which is allowing seniors to receive a Social Security payment for decades when it was initially designed to support low-income workers for far less time. By 2022, the full retirement age will rise to 67 years, but the GOP has long favored pushing it to 68, 69, or even 70 years.

Should Republicans be successful in raising the full retirement age, it wouldn't affect those who are already retired, but it could negatively affect those who've yet to hit the age of Social Security eligibility. You see, claiming benefits at any point before your full retirement age means accepting a permanent reduction in your lifetime payout, whereas claiming after your full retirement age nets you more than 100% of your benefit. If the GOP requires seniors to wait extra years to receive 100% of their benefit, they'll either claim early and accept a permanent reduction, or wait longer to get their full benefit and be paid for fewer years in the process. In effect, it'd be a cut in benefits for many of today's working Americans. It would, however, resolve Social Security's funding issue over the next 75 years.

This is being discussed in the GOP tax bill right now

The second indirect way the GOP could cut Social Security's funding is by switching its inflationary tether away from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the Chained CPI.

Why the switch? The Chained CPI and CPI-W are very similar, save for one pretty big aspect: The Chained CPI takes into account substitution bias. This is the idea that as goods and services become more expensive, consumers will trade down to lesser costly items (i.e., substitute). The CPI-W doesn't take substitution bias into account; therefore, the GOP suggests that the Chained CPI would be a much better indicator of the inflation that consumers face.

A person holding a bag of produce in the checkout line at the grocery store.

Image source: Getty Images.

However, because the Chained CPI takes into account substitution, it's going to report inflation that grows at a slower pace than the CPI-W practically every year, since it assumes consumers trade down to cheaper goods and services. This would result in smaller cost-of-living adjustments (COLA) for Social Security, which means smaller annual raises for its beneficiaries. Smaller COLAs would allow the program to save money over the next decade and beyond.

One proposal in the recently passed House GOP tax bill (officially the Tax Cuts and Jobs Act) would switch to the Chained CPI beginning in 2024 as the inflationary tether for various tax provisions. Though it makes no mention of aligning Social Security benefits with the Chained CPI, it seems plausible that the GOP tax bill could open the door for such a move in the future.

Will the GOP cut funding to Social Security? While no one knows the answer with any certainty, it's reasonable to assume that if they had their chance to raise the full retirement age and switch its inflationary tether to the Chained CPI, they would.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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