A Republican privatization of Social Security is a real possibility

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Social Security was among the most important issues heading into the 2016 election. Yet, interestingly enough, it wasn't paid very much attention during the debates, which is surprising when you consider that 61% of current retired beneficiaries count on Social Security to provide at least half of their monthly income.

The reason Social Security is causing such concern among retirees and working Americans is an expected budgetary shortfall in the program that's being caused by the retirement of baby boomers from the workforce and the relatively steady lengthening of life expectancies since the mid-1960s. According to the Social Security Board of Trustees, the Old-Age, Survivors, and Disability Insurance Trust is slated to exhaust its more than $2.8 trillion in spare cash by 2034. Should Congress fail to find a way to generate more revenue, cut benefits, or enact some combination of the two, the Trustees report estimates that a 21% across-the-board benefit cut would be needed to sustain Social Security through the year 2090. For those aforementioned reliant seniors, a 21% cut in their benefits is a terrifying reality.

During his campaign, President-elect Donald Trump offered one simple solution to the American public: that he would leave Social Security alone. Trump opined that it was the duty of congressional leaders to fulfill their promise to retired workers of a steady monthly benefit check.

Instead of directly tackling Social Security's well-known budgetary shortfall, Trump's tactics involve indirectly fixing its issues. His economic proposals, which include cutting and reforming individual and corporate income tax codes, repealing and replacing the Affordable Care Act, promoting domestic oil and natural gas production, and investing $1 trillion in infrastructure over the next decade are believed to increase the rate of U.S. GDP growth. Ultimately, boosting GDP could put more income in the pockets of the American worker and increase payroll tax revenue in the process. Whether it'll work remains to be seen.

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25 Social Security facts & figures you need to see
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25 Social Security facts & figures you need to see

1. 60.66 million

As of the September 2016 snapshot from the Social Security Administration (SSA), 60.66 million people were receiving monthly benefits, two-thirds of whom are retired workers. A little more than 6 million survivors of deceased workers and 10.6 million disabled persons were also receiving monthly benefits.

(Caroline Purser via Getty Images)

2. 5.44 million

Social Security's beneficiary base is increasing rapidly due to the ongoing retirement of baby boomers, which is expected to last until about 2030. As such, 5.44 million people were newly awarded Social Security benefits in 2015. 

(ImagesBazaar via Getty Images)

3. $1,300

It's important to understand that Social Security isn't an entitlement, though the requirements for a guaranteed benefit are not too high. You need 40 lifetime work credits to qualify for Social Security benefits, and a maximum of four credits can be earned annually. In 2017, one work credit is equal to $1,300 in wages. Simply earn $5,200 in 2017 and you'll have maxed out your work credits for the year. Do that 10 times and you'll be guaranteed benefits when you retire.

4. 96%

Based on statistics from the SSA, nearly all working Americans (96%) are covered by survivors insurance protection. Though Social Security is primarily designed to provide financial protection for retired workers, it does provide benefits for the spouses, children, and in rarer cases parents of deceased workers.

5. 90%

To add to the above statistic, the SSA also points out that 90% of the American workforce is covered in case of long-term disability. Since nearly 70% of all private sector workers have no long-term disability insurance, it's good knowing that Social Security has their back.

6. 55%

An interesting figure from the SSA is that 55% of beneficiaries are women. Social Security income is of particular importance to women since 1) they tend to live about five years longer than men, on average, and 2) they're often the caregivers that take care of the kids or sick family members, thus their lifetime earnings are often lower than their male counterparts'. Social Security income can be critical to ensuring a healthy financial foundation for women come retirement.

7. 32%

According to an analysis conducted by the Center on Budget and Policy Priorities (CBPP), Social Security income has reduced what would be a 40.5% poverty rate for seniors without this added income to just 8.5%. While the CBPP's analysis can't factor in external variables such as how much extra seniors would have saved prior to retiring if Social Security wasn't available, it's clear as day that Social Security is critical to keeping seniors on solid financial footing. 

8. 81%

Based on data from the SSA, 81% of all benefits paid out by the Old-Age, Survivors, and Disability Insurance Trust (OASDI) are heading to seniors ages 62 and up. Just 5% go to children under the age of 18, and another 14% to adults between the ages of 18 and 61.

9. 61%

Statistics from the SSA in 2016 show that 61% of seniors rely on Social Security to provide at least half of their monthly income. For elderly couples this figure was 48%, while 71% of unmarried elderly persons lean heavily on the program for at least half of their monthly income.

10. $920.2 billion

The SSA's data showed that $920.2 billion was collected from three revenue channels in 2015. A majority of this revenue came from payroll taxes (86.4%), while interest earned on the OASDI's spare cash (10.1%) and the taxation of benefits (3.4%) comprised the remainder.

11. 12.4%

Payroll taxes comprise the lion's share of revenue collection for Social Security. This tax totals 12.4% of wages (up to a certain point, which is discussed below) and it's typically split down the middle between you and your employer, with each paying 6.2%. If you happen to be self-employed, you're on the line for the entire 12.4% tax.

12. $127,200

There is, however, a cap on how much a person can be taxed by the SSA via the payroll tax. All earned income in 2017 between $1 and $127,200 is subject to the 12.4% payroll tax. Any wages beyond that point are free and clear of being taxed by the SSA.

13. $1,351.70

The September 2016 snapshot shows that the average retired worker is bringing home $1,351.70 per month, or $16,220 over the course of a year. Annual benefit increases are tied to the inflation rate as measured by the Consumer Price Index for Urban Wage Earners and Clericals Workers, or the CPI-W. 

14. 0.3%

Speaking of inflation, Social Security beneficiaries are getting a 0.3% cost-of-living adjustment (COLA) in 2017, the smallest increase on record. Social Security's COLA has been dragged down in recent years by weaker energy and food costs, which are sizable components of the CPI-W.

15. 33 out of 35 years

One of the more saddening facts and figures about Social Security is that its COLA has been lower than medical cost inflation in 33 of the past 35 years. The CPI-W factors in a number of varied expenses, but medical costs are a much smaller portion of workers' average expenditures. Seniors spend double what urban wage earners and clerical workers do on medical costs as a percentage of their annual expenditures.

16. $2,687

Social Security benefits are capped at $2,687 per month, which makes sense given that payroll taxes have an annual cap as well. The monthly benefit cap is usually adjusted year-to-year based on inflation. Only a small fraction of Americans have a shot at reaching this maximum payout, as you'll see in the next figure.

17. 60%

Based on data from 2013, as assembled by the Centers for Retirement Research at Boston College, 60% of retirees sign up for benefits before reaching their full retirement age (FRA). A person's FRA is when they become eligible to receive 100% of their FRA benefit. By signing up early, retirees are taking a cut in benefits from their FRA benefit of up to 25% to 30%.

19. 2.8-to-1

As of 2015, the worker-to-beneficiary ratio stood at 2.8 workers for every one beneficiary. In about two decades, this ratio is forecast to drop to 2.1-to-1. In simpler terms, baby boomers are retiring in increasing numbers, and there simply aren't enough new workers to take their place and maintain the worker-to-beneficiary ratio at its current level. This leads to the next point...

20. The year 2020

Based on the latest report from the Social Security Board of Trustees, by 2020 the cash inflow into the OASDI is slated to turn into a cash outflow. In other words, what's expected to be close to $2.9 trillion in spare cash will begin dwindling in 2020.

21. The year 2034

Perhaps the scariest finding of the Trustees' report is that Social Security's spare cash is expected to be exhausted by the year 2034. Assuming Congress passes no new laws affecting Social Security, the Trustees predict that an across-the-board benefits cut of up to 21% may be needed to sustain payouts through the year 2090.

22. 2.66%

Findings from the Board of Trustees report also showed that the actuarial deficit in 2016 was 2.66% for the program. In easier-to-understand terms, a 2.66% increase to the payroll tax would be expected to alleviate all funding concerns through the year 2090. This would mean an increase to 7.53% if you're employed by someone else, or 15.06% if you're self-employed.

23. 56%

It's a fact that gets overlooked by many seniors, but Social Security income may be taxable. Individuals earning more than $25,000 annually and joint filers with income over $32,000 could have a percentage of their Social Security benefits taxed. Not to mention 13 states also tax Social Security benefits.

24. 51%

According to Gallup, 51% of polled Americans in 2015 believed Social Security won't be there for them when they retire. Luckily, this is blatantly false. Social Security is essentially incapable of going bankrupt because it'll always be collecting payroll tax revenue from the workforce. Benefits may indeed need to be cut, but the program will be there for many generations to come.

25. 28%

Finally, a survey conducted by MassMutual Financial Group in 2015 found that just 28% of the more than 1,500 respondents who took its quiz received a passing grade and correctly answered at least 7 out of 10 multiple choice or true/false questions. Only 1 respondent out of more than 1,500 got all 10 questions correct. It's a stark reminder of just how little Americans know about Social Security.

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Could Republicans privatize Social Security?

However, what can't be ignored are the clear ties Trump and members of his cabinet have had to the idea of privatizing Social Security, even if those ties are many, many years old.

Privatizing Social Security involves setting aside a portion of your lifetime benefits, or all of your lifetime benefits, in a special account that you'd be able to control. Right now, Social Security's more than $2.8 trillion in spare cash is almost entirely invested in special issues bonds for Trusts. These bonds have yields ranging from 1.375% to north of 5%, albeit the Federal Reserve's multi-year stretch of record low interest rates has been weighing down the yields of new bond issuances. In other words, Social Security's spare cash is earning very low returns. Privatizing Social Security would allow workers the option of investing their benefits however they see fit, perhaps even generating a greater return in the process.

In 2000, when Trump released his book The America We Deserve, he described his vision of privatizing Social Security. Here's an excerpt from his book:

The solution to the Great Social Security crisis couldn't be more obvious. Allow every American to dedicate some portion of their payroll taxes to a personal Social Security account that they could own and invest in stocks and bonds. Federal guidelines would make sure that your money is diversified, that it is invested in sound mutual funds or bonds, and not in emu ranches. The national savings rate would soar and billions of dollars would be cycled from savings, to productive assets, to retirement money. And unlike the previous systems, the assets in this retirement account could be left to one's heirs, used to start a business, or anything else one desires.

Vice president-elect Mike Pence had a similar vision. When George W. Bush was in the Oval Office, Pence, in 2005, called for an even larger privatization of Social Security than Bush.

Wait, there's more

But that's far from the end of it.

In November, Trump appointed former Dallas mayor Tom Leppert as his Social Security advisor. What's interesting about Leppert is that he, too, once offered a plan to privatize Social Security and Medicare. As reported by CNN Money, here's what Leppert had to say in 2012 while running for the Senate:

I will never shy away from any issue, even the so-called 'third-rail' of entitlement reform. Talk to any young person today, and they will tell you Social Security and Medicare won't be there for their generation. To preserve these vital programs, we first and foremost must not change anything for those ages 55 and older. These folks rely on their benefits and we've made a promise to them. But for younger workers, we need to provide Medicare subsidies for the purchase of certified private plans, raise the retirement age, encourage greater retirement savings, and launch an initiative of Personal Retirement Accounts to allow every American, not just the wealthy, to save and invest toward their retirement. Make no mistake—if we don't act now, these programs will go bankrupt. The simple fact in this debate is that people who oppose reform are the ones who want to destroy our entitlement system.

Rep. Mick Mulvaney (R-S.C.), Trump's appointee as the director of the White House Office of Budget and Management, can be added to the list as well. Mulvaney will have the critical task of making sure Trump's budget adds up, and as a staunch fiscal conservative, he's known in the Senate for trimming the fat.

Back in 2011, Mulvaney introduced the BOLT Act (Balancing Our Obligations for the Long Term Act), which looked to place caps on congressional spending and balance the budget. One of the numerous actions listed in the BOLT Act was authorizing the reconciliation of long-term savings in Social Security, potentially tightening the program's belt.

What's more, nonpartisan website InsideGov notes that Mulvaney favors at least a partial privatization of Social Security.

In other words, the incoming president, vice president, Social Security advisor to the president, and director of the White House OBM all once suggested that privatizing Social Security was a good idea. The privatization, or partial privatization, of Social Security has to be considered a genuine possibility at this point.

Privatizing could create headaches, too

There are certainly no shortage of reasons why privatizing Social Security shouldn't be explored.

As noted above, it would give working Americans an opportunity to net greater returns, such as by investing in the stock market, which has historically averaged a return of about 7% annually, inclusive of dividend reinvestment. Additionally, privatizing Social Security reduces government oversight and responsibility over workers' earned benefits, and it could actually be good for the financial system by injecting capital into the stock market.

But privatizing Social Security to any degree could still create headaches.

For example, if working Americans don't have a good grasp of how to invest, they could wind up making poor decisions and lose their retirement income. Likewise, lower-income workers may be willing to take undue risks with their retirement benefits in order to boost their nest egg. This could lead to a crippling scenario if they lose a good chunk of their money.

An even more perturbing issue is that privatizing Social Security to any degree doesn't resolve the Social Security budgetary shortfall. It could reduce some of administrative expenses of running Social Security, which are already very low, but it does nothing to add revenue into the program.

It's unclear if Trump will hold true to his campaign promise and leave Social Security alone. Only time will give us that answer. But given who Trump has surrounded himself with, the door to a partial privatization of Social Security appears to be open.

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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