A Republican privatization of Social Security is a real possibility
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.
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.