Regardless of the outcome in Iowa, Social Security loses.
None of the candidates offer ideas that can’t be distilled down to rewarding current voters at the expense of future voters. This approach is the cause of Social Security’s problems and is not the solution.
Voters on the other hand have high expectations. In early January AARP released a study that said, “nearly eight in ten Iowa caucus voters, across party lines and across age groups, agree that having a plan for Social Security is a basic threshold for presidential leadership.” Wow, are these voters in for a disappointment.
The GOP field is led currently by Donald Trump and Senator Ted Cruz. You may love these candidates for many reasons. Social Security isn’t one of them. Neither of these candidates even lists Social Security as an issue on their campaign websites.
If they have a plan, Google cannot find it. Trump believes that reform is not necessary, and offers ideas that match billions of dollars of solutions with trillions of dollars of problems.
Senator Cruz has suggested allowing younger workers to keep a portion of their payroll taxes which might cost as much as $30 trillion according to the Social Security Administration.
Republicans’ primary weapon in reform is to reduce benefit levels of future retirees. There is, of course, no substantive difference between legislated reductions of benefits and those reductions caused by insolvency. So the GOP’s solution to the financial problems in the system is to convince younger workers to accept them.
The worst of these ideas is setting the annual adjustment of benefits based on Chained-CPI. These policy options would affect retirees progressively as they age. Not surprisingly, as people age, they become more dependent upon Social Security. So this idea cuts benefits increasingly on those who increasingly depend upon benefits.
Democrats are willing to tax high-wage earners. That means that they are willing to throw money at the problem.
This approach is OK with supporters because it is largely someone else’s money. The problem is, of course, that much of the incremental revenue is going to current beneficiaries rather than to shoring-up the system’s long-term financial picture.
Bernie Sanders, probably the most visible politician on the issue of Social Security, promises that his plan will “extend the solvency of Social Security for the next 50 years.” His website even points to an assessment of his proposal by the Social Security Administration. That analysis suggests that Sanders’ plan would extend solvency of Social Security by 49 years.
What he is not telling you is that his statement is based on the most optimistic forecast of a fairly optimistic economy, and includes revenue from 2016 and 2017 that would be collected prior to his term as president.
The larger problem is that the description of his proposal on the website does not actually match the plan that the Social Security Administration scored. His website says that he would pay for his proposal by “lifting the cap on taxable income above $250,000.” The site links to a proposal that does substantially more.
The plan would:
- Phase out the cap entirely because the $250,000 is a fixed threshold.
- Create a separate 6.2-percent tax on investment income
- End the relationship between contribution and benefit
The problem is that inflation will drive people into the higher tax bracket. That may not seem like a problem to us, but it will be.
To illustrate the problem, in 1983 the government applied a tax to Social Security benefits for those people with substantial outside income. At the time, $25,000 was a substantial outside income for a retiree. In fact, it affected about 5 percent of beneficiaries. Today these rules can affect people whose outside income still qualifies for food stamps.
Sanders’ arguments cannot escape economic gravity. Every dollar of incremental benefits comes at the projected expense of a future retiree.
For nearly eight of ten Iowa caucus voters, this election will be a disappointment. For ten out of ten Americans, it will be a bust.