Trump's Fiscal Policy Will Probably Save Social Security From This Dubious Milestone

Although it’s not often advertised, Social Security is facing some serious problems in the years ahead.

The latest trustees’ report from this past June finds that America’s most important social program was set to expend more than it collects in revenue for the first time in 36 years. Putting aside the $1.7 billion in projected net cash outflow, the bigger meaning here is that the existing payout schedule isn’t sustainable over the long run. Of course, Congress has known this was the case since 1985, yet virtually nothing has been done to slow or halt the inevitable.

Image source: Getty Images.

With the exception of 2019, this net cash outflow is expected to grow with each passing year as a result of ongoing demographic changes in the program. These changes include the retirement of baby boomers, increased longevity, growing income inequality, low fertility rates, and even congressional inaction. By the year 2034, it’s been estimated by the report that Social Security’s nearly $2.9 trillion in asset reserves will be no more. Should its asset reserves be completely exhausted, sweeping benefit reductions may be needed to preserve payouts for then-current and future generations of retirees.

All told, it’s a grim forecast for a social program that’s currently responsible for keeping more than 22 million people out of poverty.

The Tax Cuts and Jobs Act may have a positive near-term impact on Social Security

But there may be a bit of a silver lining in the very short term thanks to fiscal policy pushed by President Trump.

As noted, the trustees have forecast 2018 as the first year since 1982 where the program experiences a net cash outflow rather than a surplus. Although we won’t know whether this is the case until the next trustees’ report is released during the late spring or early summer, initial economic data would suggest that Social Security is likely to have run a surplus in 2018, rather than a deficit.

President Trump signing paperwork at his desk in the Oval Office. Image source: Official White House Photo by Shealah Craighead.

When producing its short-term forecast spanning the next 10 years, the trustees’ report makes the assumption under its intermediate range model of 2.4% average annual growth in U.S. GDP. However, GDP growth rates have been considerably faster through the first three quarters of 2018, with finalized growth of 2.2% in the first quarter, 4.2% in the second quarter, and 3.4% in the third quarter. Barring a truly disastrous fourth quarter, which seems exceptionally unlikely after Mastercard released data showing 5.1% retail sales growth between Nov. 1 and Dec. 24, excluding autos, U.S. GDP growth should easily top 2.4% in 2018. 

Why’s this meaningful? The simple answer is that it should lend to higher payroll tax collection from working Americans. Coupled with the lowest unemployment rate we’ve seen in about 49 years, more Americans working should mean solid wage growth and more money being collected by the 12.4% payroll tax on earned income of up to $128,400 in 2018 (and $132,900 in 2019).

However, the bulk of this near-term economic growth might be related to the passage of Trump’s highly touted Tax Cuts and Jobs Act in December 2017. This major overhaul of the U.S. tax code saw the peak marginal corporate income tax rate decline to 21% from 35%, and it lowered federal tax liability for most American workers between 2018 and 2025 (the individual tax changes sunset after Dec. 31, 2025). In plain English, it put more money in the pockets of consumers, which is often a good thing in the short term for a consumption-driven economy. It also gave corporations a means by which to increase wages and hire more workers.

The Tax Cuts and Jobs Act may very well be what’s responsible for this recent boost in GDP growth.

Image source: Getty Images.

It’s a temporary fix for a bigger problem

Then again, it’s important to recognize that Trump’s fiscal policy, which is designed to encourage corporate investment and expansion, job growth, and consumer spending, isn’t a long-term solution to Social Security’s woes. It could prevent the net cash outflow milestone from occurring in 2018 and/or 2019, but it’s unlikely to make a dent in the long-term outlook for the program.

Arguably the biggest issue with indirectly attacking Social Security’s shortcomings is the economic cycle. Expansions in the U.S. economy don’t go on forever, and recessions are inevitable. No matter what the Federal Reserve or Congress do to stimulate the U.S. economy, growth will, at some point, slow or turn negative. This ensures that the Tax Cuts and Jobs Act won’t have a meaningful impact on the estimated $13.2 trillion cash shortfall facing Social Security between 2034 and 2092.

If Social Security is to be reformed, we’re going to need to see (big gulp) bipartisan cooperation in Congress. With Democrats eager to raise additional revenue, and Republicans looking to trim long-term expenditures for future generations of workers, each party brings valuable and much-needed solutions to the table.

Even if Trump has indeed saved Social Security from its dubious net cash outflow milestone in 2018, he’s going to need to do a lot more to right the ship.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Mastercard. The Motley Fool has a disclosure policy.