Personal Finance

The Best and Worst Aspect About Democrats' and Republicans' Plans to Fix Social Security

Dice next to a piece of paper that reads, Will Your Social Security Be Enough?

Social Security is arguably America's most important social program, with almost 62 million people a month (and growing) counting on a guaranteed stipend. While a majority of these folks are retired workers (42.4 million), the remainder are composed of the disabled and survivors of deceased workers. Of the retirees, better than three out of five rely on their monthly payout to account for at least half of their income.

Yet, in spite of keeping more than an estimated 22 million people out of poverty, according to an analysis by the Center on Budget and Policy Priorities, Social Security is walking on thin ice.

Dice next to a piece of paper that reads, Will Your Social Security Be Enough?

Image source: Getty Images.

Social Security is in trouble, and Congress is at an impasse

According to the latest annual report from the Social Security Board of Trustees, Social Security is just a few years away from big changes. By 2022, the program is expected to being paying out more in benefits than it's generating in revenue. And by 2034, its estimated $3 trillion in asset reserves will be completely gone . Should this excess cash be depleted, the Trustees have forecast that an across-the-board cut in benefits of up to 23% may be needed to sustain payouts through 2091. Given how reliant seniors are on their Social Security payout to make ends meet, a double-digit percentage cut to benefits probably sounds terrifying.

What might be even more terrifying is how little progress Democrats and Republicans have made in finding a middle ground to resolve Social Security's $12.5 trillion funding gap between 2034 and 2091. The last major overhaul of the program occurred roughly 35 years ago, and despite each party having a solid plan to fix Social Security, virtually no progress has been reached in finding common ground. The biggest issue is that Democrats and Republicans both have a plan that works , which makes it difficult for either party to back down.

Let's take a look at the best and worst aspect of each party's plan.

A scowling older man in a suit.

Image source: Getty Images.

How Democrats would fix Social Security

Democrats are primarily looking to resolve Social Security's funding issues by raising additional revenue. Their main means of doing so is by adjusting the maximum taxable earnings cap tied to Social Security's payroll tax.

In simple terms, Social Security imposes a 12.4% tax on earned income between $0.01 and $128,400, as of 2018. The reason no income above and beyond $128,400 is taxed is because there's also a maximum monthly payout of $2,788 that the Social Security Administration will pay out at full retirement age. Democrats want to either see this maximum taxable earnings cap completely removed, or would like it raised considerably. Doing so would require higher-income and wealthy working Americans to pay more without impacting the payroll-tax liability of more than 90% of working Americans.

The upside to the Democrats' core proposal is that it would completely eliminate the funding shortfall in Social Security, and it would take money from wealthier Americans who likely aren't going to be in any way reliant on Social Security. Taxing all, or at the very least most, income would put workers on a more level playing field.

However, the worst aspect of this plan is that it doesn't provide any commensurate benefits for higher-income individuals. For example, taxing $5 million in earned income, but still keeping the maximum monthly payout at $2,788 (as of 2018), doesn't make a lot of sense. Sure, the rich may be able to afford parting with more of their income, but the Democrats' plan would essentially punish their financial success.

A senior man working in a wood shop.

Image source: Getty Images.

How Republicans would fix Social Security

On the other hand, Republicans believe that cost reduction is the easiest way to resolving Social Security's long-term (75-year) funding gap. The GOP would do this by raising the full retirement age .

Your full retirement age, which is determined by your birth year, is the age at which the Social Security Administration deems you eligible to receive 100% of your retirement benefit. Back in 1983, the Reagan administration passed the last major overhaul of Social Security which, among other things, included a gradual increase to the full retirement age from 65 years to 67 years over a four-decade span. With that increase ongoing right now, folks born in or after 1960 will have a full retirement age of 67. The GOP would like to once again gradually raise this full retirement age to 68, 69, or even 70. Doing so would require that seniors either wait longer to receive their full benefit, thusly netting a full payout for fewer years, or accept a steeper monthly payout reduction by taking benefits early. Either way, the long-term costs of the program would be reduced.

The best aspect of the Republican plan is that it would take care of the long-term funding shortfall while also taking into account increased longevity. When Social Security was crafted in the mid-1930s, it wasn't expected to be a program that would provide a payout to seniors for two or more decades. Adjusting the retirement age for longevity would help to reduce some of the burdens tied to increased longevity.

On the flipside, raising the full retirement age is nothing more than a cut to future retirees' benefits. Adjusting the full retirement age higher is particularly worrisome for lower-income workers, or sicker seniors, who may not have the option of waiting to claim benefits. Such a move by the GOP would be viewed as an attack on lower-income Americans.

Truth be told, this writer believes both ideas are appealing and should be implemented to some extent. The question is, can lawmakers on Capitol Hill swallow their hubris and find common ground?

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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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