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Mark Miller: Remaking Retirement

What the Election May Mean for Social Security

The next administration will face key policy questions related to the program's long-term solvency, says contributor Mark Miller.

Retirement may not be the biggest issue on the ballot in November, but make no mistake--critical policy decisions affecting older Americans will face the next administration and Congress.

Morningstar is publishing a series of articles in the next few weeks examining how different election outcomes may affect the finances of American households. In this article, we consider how the election could impact the future of Social Security; I'll also be writing soon about how the election might impact Medicare and health insurance for retirees.

On Social Security, the next Congress and administration will face several key policy questions. At the top of the list is restoring the program's long-term solvency, which already was eroding before the pandemic and may see some acceleration somewhat due to the economic downturn.

Democrats would like to see Social Security play a bigger role ensuring retirement security than it does today by expanding benefits as part of a solvency fix. Meanwhile, Republicans in Congress are on record supporting benefit cuts. And President Trump has stirred up worries about the financial health of the program with his deferral of collections of the Federal Insurance Contributions Act, or FICA--better known as the payroll tax--that funds Social Security.

Restoring Solvency
Before the pandemic, the Social Security trustees predicted that the program's combined retirement and disability trust funds would be emptied in 2035 because of long-term shifts in the ratio of workers to beneficiaries; at that point, current revenue would be sufficient to pay only 80% of benefits. The pandemic likely will move that date up, according to Stephen C. Goss, the chief actuary of the Social Security Administration. He discussed Social Security's outlook during a recent American Academy of Actuaries panel discussion. Goss said pandemic-induced job loss, coupled with a 15% reduction in wages and payroll taxes might move the trust fund exhaustion date forward by a year.

"But that is predicated on the notion that there won't be a substantial second wave [of COVID-19 infections] this fall and a substantial closure of the economy," he noted. "This is yet to be determined, so we will see."

Restoring solvency will require making choices between higher revenue, reduced benefits, or some mix of the two, he added.

"The choice before Congress and the American people is really rather simple," Goss said. "We're going to have to increase the revenue by about one third or reduce the scheduled benefits by about one fourth, or some combination of the two."

There's one wild card question in any forecast of Social Security's finances: What happens to Social Security if we eliminate its funding source?

President Trump signed a presidential memorandum in August ordering the deferral of FICA revenue through year-end, and he also said that he would push for termination of the tax if he wins a second term. It's not at all clear that he could push this through Congress, but some experts think that the IRS code might permit him to defer FICA collections for an additional year.

What would that mean for Social Security's financial outlook? If FICA were not replaced with something else, the program would run out of money very quickly.

Goss was asked to analyze this "what if" question by four Democratic senators. This kind of actuarial opinion letter is a very routine task for the actuary's office--but this one was an eye-opener: It concluded that the Disability Insurance trust fund would be drained next year, and the Old Age and Survivors trust fund would be emptied in 2023.

In the political back and forth over FICA, the Trump administration has stated that any deferred FICA revenue would be replaced by general revenue funds. But that suggests a transfer of more than $1 trillion annually--a tall order for a Congress already grappling with the demands of economic support for a flagging economy.

It also would mark a turning point in Social Security's funding structure. The program has always been funded mainly by FICA. (It also receives relatively small amounts of revenue from taxes on benefits and interest on trust fund bonds.) Self-funding has been one of the program's political strengths, as it gives workers and beneficiaries a sense of ownership--as per this oft-quoted 1941 quip from President Franklin Roosevelt:

"We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren't a matter of economics, they're straight politics."

Some Republicans have not given up on the idea of converting Social Security into a system of personal saving accounts--an anchoring idea of the reforms proposed by President George W. Bush. The plan was a political and policy flop, but some on the right continue to push it, including the Heritage Foundation.

Are Benefits Adequate?
While Social Security's solvency is job number one for Congress and the administration, I would like to see policymakers address the role of Social Security in the broader context of retirement security. Are current Social Security benefits adequate? Should they be increased or reduced?

The numbers add up to a compelling argument for making benefits more robust.

A worker retiring this year at age 62 who earned $53,500 would receive about 30% of her salary in benefits--$16,300 a year--Social Security Administration data shows. And that replacement rate will fall in the years ahead as the full retirement age continues its upward drift to 67.

Some have argued that Social Security need not achieve higher income replacement rates, since it was always envisioned as just one leg of the "three-legged stool" of retirement security--the other two being pensions and savings. However, there's no evidence that Social Security was designed with this in mind--no meaningful system of defined-benefit pensions or retirement savings existed when the program began.

And as things stand today, the savings and pension legs of the alleged stool look a bit wobbly.

The share of private-sector workers covered by pensions has been falling for years. And retirement savings have accumulated almost exclusively among affluent households with access to workplace retirement plans and the means to make contributions. A recent Morningstar compilation of 401(k) statistics for 2019 revealed:

  • 56% of all workers participated in a workplace retirement plan of any kind.
  • 43% participated in a defined-contribution plan.
  • 21% participated in a pension plan last year.
  • The average account balance at Vanguard was $106,478.

Political Choices
Most Democrats are on the record supporting expansion as part of a broader fix to Social Security's solvency. During the party's presidential primary, a review of candidate positions by the Center for Retirement Research at Boston College revealed no candidates on record supporting benefit cuts. Among the Democrats, several backed an across-the-board increase in benefits, while others backed targeted increases for lower-income beneficiaries and a more generous annual cost-of-living adjustment.

And in the House of Representatives, most lawmakers have signed on as co-sponsors of the Social Security 2100 Act, which proposes an across-the-board benefit increase equal to about 2% of the average benefit (about $30 per month)--a more generous annual cost-of-living adjustment formula that's more sensitive to medical inflation and other costs disproportionately affecting older adults. The bill would also increase the special minimum benefit paid to low-income retirees. (Currently, Social Security has a special minimum benefit, but its value has disappeared relative to standard benefits because its value is pegged to consumer inflation rather than being indexed to wage growth, which generally rises more quickly.)

Joe Biden's Social Security plan calls for restoring long-range solvency by lifting the cap on wages subject to FICA taxes. He explicitly opposes privatization, and he favors a boost in payments to the oldest beneficiaries and establishing an effective minimum benefit. Biden also proposes to protect widows and widowers from steep benefit cuts, since many couples see total household benefits cut in half following the death of a spouse.

The Trump campaign has no specific Social Security proposal, and the Republican Party declined to put forth a policy platform document this year.

But the GOP's history on reform proposals has been clear. Most include calls for a  stingier cost-of-living adjustment and means-testing of benefits. But the centerpiece usually is a gradual increase in the full retirement age--the age when you can qualify to receive your full benefit. Retirement ages already are rising gradually to 67 from 65 under changes enacted in 1983. Some GOP proposals have called for gradually raising the full retirement age to 69 or 70. The idea usually is argued with the point that "we're all living longer," so it makes sense to push the date back to avoid expanding total coverage.

But such a move would be inequitable to low-income workers and workers of color, who on average earn less, have lower life expectancy, and tend to work in physically demanding occupations that become more difficult to continue at older ages.

Mark Miller is a journalist and author who writes about trends in retirement and aging. He is a columnist for Reuters and also contributes to WealthManagement.com and AARP The Magazine. He publishes a weekly newsletter on news and trends in the field at Retirement Revised. The views expressed in this column do not necessarily reflect the views of Morningstar.