Personal Finance

The 2020 Election Won't Touch on Social Security Much, if at All, for 1 Reason

A Social Security card standing up on a table, with the name and number blurred out.

No, it's not your imagination. The election cycle does seem to be starting earlier and earlier as time goes on. Just weeks after the midterm elections wrapped up this past November, members of the Democratic Party were throwing their hats into the ring to declare themselves as candidates for the 2020 presidential election to be held in November 2020. Like earnings season with the stock market, campaign season simply doesn't stop anymore.

The 2020 election is bound to captivate the attention of the American public. There are a number of hot-button issues that President Trump, assuming he's the Republican nominee for president, and the eventual Democrat nominee will have to address. This includes healthcare reform, national and border security, economic growth, and likely our nation's growing national debt.

However, one issue that absolutely deserves to be center stage -- but is unlikely to receive any serious discussion during the presidential election -- is Social Security.

A Social Security card standing up on a table, with the name and number blurred out.

Image source: Getty Images.

Social Security isn't going bankrupt, but it's still in big trouble

On one hand, America's most important social program has done a bang-up job of providing a financial foundation for tens of millions of retired and disabled people. Each month, about 63 million benefit checks are disbursed, and more than 22 million of these recipients are lifted out of poverty as a result of their payout. This shows that America's social investment in its retired and disabled workforce is doing exactly what it was intended to do.

Then again, the foundation that Social Security provides is also showing signs of weakness. Last year, the program's asset reserves grew by the lowest amount in more than three decades. The Social Security Board of Trustees has forecast that a major inflection point is right around the corner, whereby the program will begin paying out more than it collects each year. These growing net cash outflows, brought about by ongoing demographic changes, are projected to deplete Social Security's nearly $2.9 trillion in asset reserves by 2034.

To be crystal clear, Social Security not having a dime left in its asset reserves doesn't mean the program is bankrupt or insolvent . Rather, it just means that the existing payout schedule isn't sustainable over the long run. The program's 12.4% payroll tax on earned income and the taxation of benefits over certain income thresholds are two recurring sources of revenue that ensure Social Security can't go bankrupt.

But in order to maintain payouts over the long term (defined as the next 75 years), the Trustees have estimated the need to reduce benefit checks up to 21% by 2034 . That's not a welcome outlook, given that more than 3 out of 5 retired workers currently rely on Social Security for at least half of their monthly income.

A visibly worried senior man looking out a window, with his chin resting on his balled fist.

Image source: Getty Images.

Fixing Social Security means someone always loses

Current and future retirees are clearly worried about this top social program, and they'd like the leading candidate from both major political parties to address how they'll go about strengthening Social Security for the long run. Unfortunately, neither the Republican nor Democrat presidential candidate is likely to discuss Social Security much, if at all, leading up to the 2020 elections for one simple reason: All solutions mean some group has to lose .

Make no mistake about it, there are quite a few solutions on the table in Capitol Hill that would work to raise additional tax revenue, reduce long-term expenditures, or take a middle-of-the-road approach, thereby eliminating the program's $13.2 trillion cash shortfall through 2092. But every solution presented means some individuals won't come out as winners.

As an example, one of the core proposals that Republican lawmakers would like to see implemented is a gradual increase to the full retirement age -- i.e., the age at which you become eligible to receive your full monthly benefit. Currently set to peak at age 67 for those born in 1960 or later, the GOP has called for a gradual increase up to age 70 for full retirement benefits in order to counteract increased longevity. Doing so would reduce lifetime benefits paid by the program by either coercing workers to wait longer to claim benefits, or to take an even steeper monthly reduction by claiming early. Although such a solution would protect current and soon-to-be-retired seniors, it would reduce the lifetime benefit potential of future generations of workers. President Trump understands this, and back in 2013 he urged the GOP to steer clear of the topic around election time .

President Trump delivering remarks at the Pentagon from behind the presidential podium.

President Trump delivering remarks at the Pentagon. Image source: Official White House Photo by Tia Dufour.

As for Democrats, they'd prefer to see the payroll tax earnings cap (currently $132,900 in 2019) increased or eliminated. Right now, any earned income (i.e., wages and salary paid to workers) above $132,900 is exempt from the 12.4% payroll tax. Over the past three-plus decades, the amount of earned income exempt from this crucial income generator for Social Security has quadrupled from around $300 billion to $1.2 trillion. Raising or eliminating this cap would instantly generate more revenue for the program. But, it would also not provide any extra benefits for the well-to-do during retirement, despite their added payroll tax contributions.

Put another way, amending Social Security could mean costing your political party precious votes come election time. The Republican core proposal negatively impacts working-age Americans, which could make reelection difficult for President Trump. Meanwhile, the Democrat proposal hurts the wealthy, who just happen to be important campaign donors and policy influencers.

No matter the resolution to Social Security's problems, someone will lose. And for that reason, Social Security has become a topic that only second-term presidents are likely to consider tackling.

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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.


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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