With the field of presidential candidates narrowing, it's a good time to take a look at where each of them stand on one of the crucial issues facing the nation: the future of Social Security.
Social Security is expected to be able to pay full benefits through 2033. After that, the federal government could only pay about 75% of promised benefits to retirees, their dependents and survivors — unless Congress acts before then.
“Lawmakers should address the financial challenges facing Social Security and Medicare as soon as possible,” the Social Security and Medicare Trustees said in their 2015 Annual Report. “Taking action sooner rather than later will permit consideration of a broader range of solutions and provide more time to phase in changes so the public has adequate time to prepare.”
Those solutions generally include raising taxes, cutting benefits (including raising the full retirement age) or a combination of the two.
Payroll taxes, Medicare premiums, taxes paid on Social Security benefits and interest on that money are all credited to the Social Security trust funds. The Old Age and Survivor (OASI) Trust Fund pays retirement and survivor benefits. The Disability Insurance (DI) Trust Fund pays disability benefits and the Health Insurance (HI) Trust Fund pays for inpatient hospital and related care.
Last fall, Congress narrowly prevented the exhaustion of the disability trust that was expected to run out of money in late 2016. It would have forced a 20% cut in disability benefits during a presidential election year.
To prevent the shortfall, the lawmakers agreed to allow the disability trust fund to borrow from the more financially stable retirement trust fund as it has done nearly a dozen times in the past. But the price of that accounting maneuver was the elimination of two key Social Security claiming strategies known as “file and suspend” and “claiming spousal benefits only.”
The claiming strategies had been on the Obama administration's hatchet list for several years. The imminent funding crisis of the disability trust fund provided it with the leverage it needed to get lawmakers to agree to eliminate them. The new rules, which take effect this year, were tucked into a crucial spending bill without warning or discussion. President Barack Obama signed the Bipartisan Budget Act of 2015 into law on Nov. 2.
In 2016, employers and employees each pay 7.65% of their pay up to $118,500 to finance Social Security and Medicare. Self-employed workers pay a combined rate of 15.3%. Those who earn more than $118,500 pay the 1.45% health insurance tax (2.9% for self-employed) on all wages in excess of that amount. Individuals with earnings over $200,000 and married couples with earnings over $250,000 also pay an additional 0.9% as mandated by the Affordable Care Act.
Democratic frontrunner Hillary Clinton and her challenger Senator Bernie Sanders of Vermont have both pledged to expand Social Security benefits to protect the most vulnerable beneficiaries by increasing taxes on the rich. Republican candidates tend to focus on reining in program costs.
“We have to look at different ways at trying to get more money into the trust fund,” Ms. Clinton said during a town hall meeting in February. “Raising the cap on the income that is subject to the Social Security tax is one way of doing it,” she said. “Another way of doing it is expanding the Social Security tax to investment income.”
Mr. Sanders, who called Social Security a great example of “democratic socialism,” suggested lifting the cap on taxable wages from the current $118,500 to $250,000 as a way of increasing retirement benefits for low-income workers and extending the life of the trust funds.
Republican juggernaut Donald Trump has yet to outline a specific plan, although he has said that Social Security is a deal between the government and American citizens and the federal government needs to uphold its end of the bargain. Instead of raising the full retirement age as some of the other GOP candidates have suggested, Mr. Trump said he would focus on the program's “tremendous waste, fraud and abuse” to rein in costs. He scoffed at the many centenarians currently receiving Social Security benefits, declaring: “They don't exist.”
Sen. Marco Rubio, from senior-centric Florida, said he opposes any benefit changes to current retirees like his mother, but he would be open to future changes such as raising the full retirement age for younger workers like himself.
Tea Party darling Sen. Ted Cruz of Texas said he would support a gradual increase in the full retirement age and a change in the way Social Security benefits are indexed to inflation “so that it matches inflation, rather than exceeding inflation.” Mr. Cruz also supports carving out a portion of payroll taxes to allow younger workers to invest in personal accounts.
Gov. John Kasich of Ohio pledges to lead a bipartisan effect to reform and preserve Social Security including possible changes to the retirement age and how inflation is calculated.
To keep tabs on where your candidate stands on the issue, go to the AARP's candidate watch
Takeastand.aarp.org.
Mary Beth Franklin is a certified financial planner.
