This Congressional Shake-Up Is Big News for Social Security

Each month, more than 62 million Americans count on Social Security as a guaranteed source of income.

This article originally appeared in the Motley Fool.

Nearly 70% of these beneficiaries are retired workers, and more than 3 out of 5 lean on their checks to account for at least half of their monthly income. This is why Social Security is often referred to as America's most important social program.

Social Security Is Less Than Two Decades Away From Big Problems

However, this program is on shaky ground. While it's in absolutely no danger of going bankrupt, thanks to the payroll tax on earned income, which supplies a steady stream of revenue to be disbursed to eligible beneficiaries, its current payout schedule is very much in doubt.

According to the Social Security Board of Trustees' 2017 report, Social Security is expected to begin paying out more in benefits than it's generating in revenue by 2022. Following an estimated 12 years of cash outflows, Social Security's asset reserves will be completely exhausted by 2034. Assuming Congress fails to generate new sources of revenue, an across-the-board reduction in benefits of up to 23% may be needed to sustain payouts through 2091. That's a terrifying outlook that could bring a lot of heavily reliant seniors below or near the federal poverty line.

Lawmakers Are At Opposite Ends Of The Spectrum

Lawmakers in Congress aren't oblivious to the fact that Social Security needs help. Both Democrats and Republicans have core solutions that they have regularly proposed to fix the problem. Of course, without getting any support from the opposing party, these solutions have failed to gain traction.

Democrats would prefer to raise or eliminate the maximum taxable earnings cap. The aforementioned 12.4% payroll tax responsible for keeping the program out of insolvency is applicable on earned income between $0.01 and $128,400, as of 2018. Any earned income above this amount is exempt from Social Security's payroll tax. Democrats want to adjust this so that well-to-do workers pay more into the program.

Meanwhile, the GOP proposes gradually increasing the full retirement age -- the age at which the Social Security Administration deems you eligible to receive 100% of your retirement benefit. With life expectancies increasing, raising the full retirement age to between 68 and 70 would require workers to either wait longer to receive 100% of their benefit, or accept a steeper permanent monthly payout reduction if they claim benefits early. Either way, it would save the program money over the long run.

Paul Ryan's Push For Change

With Republicans in control of the legislative branch of the federal government, at least for the time being, the possibility of Social Security reforms taking shape would appear heightened. In particular, House Speaker Paul Ryan (R-Wis.) had made Social Security and Medicare reform a priority entering the year.

Ryan has regularly opined that reductions were needed for both Social Security and Medicare in order to preserve them for future generations. These "cuts" would likely take shape as an increase in the full retirement age, which would reduce long-term expenditures, and a change in how inflation is accounted for.

Social Security's current inflationary tether is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Ryan and the GOP would prefer it be the chained CPI, which is the same inflationary measure that's now linked to the federal income-tax brackets. Unlike the CPI-W, the chained CPI takes substitution bias into account. This simply means that if a good or service becomes pricey, the index assumes that the consumer will trade down to a cheaper good or service. If the chained CPI were used to determine Social Security's annual cost-of-living adjustment, the "raises" received each year would almost assuredly be smaller, saving the program money over the long run.

This Congressional Shake-Up Is Big News

However, big news out of Capitol Hill this past week could certainly shake things up for Social Security. House Speaker Ryan announced that he would not seek re-election this November and would instead retire from Congress. Said Ryan to reporters, "I like to think I've done my part, my little part in history to set us on a better course."

Since the speaker of the House was the face of Social Security reform within the Republican Party, it seems all but assured that, at least prior to the November elections, any chance for an overhaul is pretty much dead.

Furthermore, President Trump has previously suggested that attempting to alter Social Security near an election period amounts to political suicide -- albeit not using those exact words. Yet, rumors in December surfaced suggesting that Trump, should he be elected to a second term, would seek to change Social Security shortly thereafter. While not guaranteed, it's looking increasingly unlikely that the GOP's core proposals of raising the full retirement age and tethering inflation to the chained CPI are off the table until at least late 2020, and would depend on the outcomes of the midterm and 2020 elections.

Keep in mind that this doesn't necessarily open the door for Democrats to pass reforms of their own on Social Security. The plain truth is that unless a supermajority is reached in the Senate (60 votes), no overhaul of the Social Security program is going to be possible. We need bipartisan cooperation, but any sort of agreement between both parties on a solution seems to be a long way off.

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