Donald Trump’s presidential win left American voters with many questions such as whether he intends to do anything to fix the Social Security system, which is currently scheduled to run out of money in 2034 by some estimates. Trump had stated that he does have a plan to fix this system, but it doesn’t involve higher FICA taxes, raising the retirement age or a reduction in Social Security benefits. Trump’s plan goes in a fundamentally different direction than most experts expected, and many say that it’s not much of a plan.
The Current Dilemma
At the most basic level, Social Security is being heavily taxed because its recipients are living longer. When the system was passed into law in 1935, it set a claiming age of 65 even though the average lifespan at the time was just 59.9 for men and 63.9 for women. During the Great Depression, the average lifespan was under 65, and each recipient was supported by the FICA withholding from 16 workers. Now the average lifespan is 84 or 85 years, and each recipient is supported by the wages from only two workers. The system was not originally designed to carry this financial burden, and for this reason, Social Security will become unable to meet its financial obligations in the year 2034 unless further funding is appropriated. While a complete cessation of Social Security payments isn't in the cards, a reduction of about 21% is. (For more, see: A Social Security Reality Check.)
Trump’s approach to solving this dilemma is very simple: economic growth. He believes that his economic policies will allow the economy to increase its annual rate of growth from the 1% to 2% that it has grown at over the past few years to 3% to 5%. Trump’s plan is to create millions of new jobs from economic growth, which will result in millions of new workers paying into the system and replenishing its funds.
However, this means that Trump has no intention of directly addressing the Social Security shortfall in his first term as President, and critics maintain that it could take a long time for FICA revenue to increase as a result of his economic plan. But it is likely that Trump will be successful in getting at least a large part of his economic policies passed through Congress, as both the House and the Senate are now controlled by Republicans. Getting legislation passed that would directly address the Social Security shortfall would likely be much more difficult. (For more, see: What Will Social Security Look Like When You Retire?)
There have been some short-term tweaks to the system that have provided some relief. The Social Security wage base was recently raised to $127,000 from $118,500, which will generate an additional $1,054 of income into the system for every taxpayer with wages that are at least equal to the higher amount. But there have also been some cost-of-living adjustments (COLA) that have increased the amount of benefits being paid out, although the most recent COLA adjustment was only one-third of one percentage point. The year before there was no adjustment at all, because the COLA is based upon the rate of inflation, which has been near zero for a long time now.
More recently, The Hill reported that the Trump team is relying on a report from the Heritage Foundation as it develops a plan for cuts to federal spending. While the official Trump policy towards Social Security has not yet been announced the foundation's report recommended cuts of $10.5 trillion over 10 years, including 8% from Social Security. As the new administration establishes itself in Washington, future retirees may want to pay close attention to announcements along these lines.
The Bottom Line
Trump’s growth-focused plan to replenish the Social Security system by creating millions of new jobs may or may not work in the long run. Critics maintain that if his plan doesn’t work, we won’t find out until years from now, when it may cost a great deal more to fix the system. But Trump may not be able to make any other changes to the system during his term with a Republican controlled Congress. And any federal spending cuts he intends to make are not yet defined. The Social Security shortfall is not an easy issue to deal with, regardless of the approach that is taken. (For more, see: Why the Current Social Security Cost-of-Living Index is Hurting Retirees.)