Trump's Social Security Plan Depends on Immigrants
Donald Trump and Hillary Clinton both say they oppose cutting Social Security. But that pledge is meaningless without a plan to address the program's coming shortfall. If you guessed that Clinton is the only candidate who has made a stab at a serious answer, you would, of course, be right. But we should give close scrutiny to Trump's supposed solution as well, even if it is a lot of fairy dust.
Here's the problem. Social Security has had a cash-flow shortage since 2015, when expenses first began to exceed tax receipts. Last year's gap was $84 billion, out of $880 billion paid in benefits to 59 million people. The shortfall will keep growing and will need to be covered out of the trust fund's $2.7 trillion surplus, now invested in U.S. Treasuries.
By 2034, when even the surplus is likely to be depleted, the program must depend on payroll taxes alone. At that point, if nothing changes, beneficiaries will get only about three-fourths of promised benefits.
Clinton would narrow this financing gap by raising the cap on income (now $118,500) subject to the payroll tax, thus making higher wage-earners pay more into the system. She might also consider taxing income now exempt from payroll taxes, such as earnings on investments.
Her plan is vague, and she compounds the challenge somewhat by calling for enhanced benefits for retirees living at or near the poverty level, especially women in their 80s and for caregivers who took time off from work. But most experts, including fiscal conservatives, agree that reforms making the well-off carry more of the load at least heads in the right direction.
Trump, by contrast, claims he could end Social Security's shortfall through huge income-tax cuts, which would stimulate growth and lead to new jobs and higher payroll-tax revenue. The economy would also grow faster, he says, once he repeals Obamacare and the Dodd-Frank financial reforms and renegotiates trade deals.
"If we are able to sustain growth rates in GDP that we had as a result of the Kennedy and Reagan tax reforms, we will be able to secure Social Security for the future," Trump wrote in the July/August issue of the AARP Bulletin.
It's true that fiscal problems of all sorts, including Social Security's, could be fixed with explosive gross domestic product growth. One rule of thumb says that a percentage point of additional GDP growth generates about $250 billion in new payroll taxes over a decade. Trump's accounting, however, doesn't add up.
First, his tax cuts and other policies would cause huge budget deficits, economists say. Combined with his plan to impose steep tariffs on Chinese imports and deport 11 million undocumented immigrants, he would likely trigger wage and price inflation, send unemployment zooming, cause the Federal Reserve to raise interest rates and plunge the economy into a deep recession. That's hardly a recipe for higher tax revenue.
Second, it isn't realistic to expect real economic growth to come close to the 5.3 percent average of President John F. Kennedy, or even the 3.5 percent of President Ronald Reagan. For the last decade, real GDP growth has been less than 3 percent. In President Barack Obama's seven years so far, it has been 1.5 percent.
To get Kennedy-era growth, the economy would have to expand more than three times as fast as it is now. The economic boom of the 1960s happened under a mix of conditions unlikely to recur, including postwar increases in population, consumer spending, home ownership and industrial production -- all while the U.S. was dominating a burst of international trade and Europe was bogged down with reconstruction.
Even to get Reagan-era growth rates of 3.5 percent, says Mark Zandi, chief economist at Moody's Analytics, the U.S. labor force would need to expand substantially. That's also unlikely, Zandi explained in an email exchange, because of demographic trends. (Zandi advised Republican John McCain's campaign in 2008 and has contributed to Clinton's effort this year.)
In the 1980s, baby boomers and women of all ages joined the workforce, pushing the labor-force participation rate up every year for a decade, ending at 66.5 percent. The rate is now down to 62.7 percent -- where it was in the 1970s before women had joined the workforce en masse -- because baby boomers are retiring and women are abandoning the labor force. A president can't just reverse those trends.
Well, that's not exactly true. The way to rapidly increase GDP and labor-force growth is through immigration, something Trump is, well, averse to. Studies show that immigrants spend more of their earnings and start up more small businesses than native-born Americans. Both of those indicators are good for jobs and growth.
The Congressional Budget Office estimated in 2013 that the unsuccessful immigration-reform bill, which would have legalized about eight million unauthorized immigrants and opened the door for about 10 million more, would have increased real GDP by 3.3 percent and led to the creation of six million new jobs by 2023.
So if Trump hopes to shore up Social Security with faster growth, the U.S. is going to have to grow faster. If the U.S. is to grow faster, it's going to need a bigger labor force. If he wins, Trump's quandary will be figuring out how to both protect Social Security and restrict immigration. But that's a detail he can think about tomorrow.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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