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Elizabeth Warren on Social Security: 6 Things You Should Know

The Motley Fool logo The Motley Fool 6/13/2019 Sean Williams

a man holding a guitar: Elizabeth Warren delivering remarks to a crowd. © Elizabeth Warren Senate webpage Elizabeth Warren delivering remarks to a crowd. In less than 17 months, Americans will head to the polls to determine who'll lead our great country for the next four years. Regardless of who that person is, he or she will have quite the task in tackling America's pressing problems. Perhaps none of those problems is more pressing than Social Security's imminent cash shortfall.

According to the newest report from the Social Security Board of Trustees, the program is set for big changes beginning in 2020. Next year, the Trustees estimate that the program will expend more than it collects for the first time since 1982. With each passing year after 2020, this projected net-cash outflow is expected to increase, leading to the eventual depletion of the $2.9 trillion in asset reserves that've been built up since inception by 2035. Although there's essentially no chance of Social Security going bankrupt, a pretty substantial benefit cut of up to 23% could await future retirees if nothing is done by lawmakers.

Here's how Elizabeth Warren would handle Social Security's cash crisis

Because Social Security is such an important topic for our retired workforce -- 62% of today's retired workers lean on their monthly payout for at least half of their income -- it only makes sense to understand how the leading candidates for the presidency of the United States intend to deal with the program. Having already examined what Sen. Bernie Sanders (I-Vermont), former Vice President Joe Biden, and current President Trump have to say, let's now turn our attention to how Sen. Elizabeth Warren (D-Mass.) would handle the task if given the job.

1. Warren opposes any measure that reduces Social Security benefits

To begin with, understand that Sen. Warren would vehemently oppose any measure that would result in Social Security benefit reductions. This means Warren has spoken out against President Trump's federal proposals to modestly trim Social Security Disability outlays, and is against the core Republican fix for Social Security.

For those unaware, Democrats traditionally favor resolving Social Security's cash crunch by raising additional revenue, whereas the GOP prefers long-term benefit reductions. The core Republican proposal involves gradually raising the full retirement age to as high as age 70, up from an expected peak of age 67 in 2022 for those folks born in 1960 or later. Raising the full retirement age -- i.e., the age at which you become eligible to receive your full monthly payout -- would require future retirees to either wait longer to receive their full payout, or to accept a steeper monthly reduction if claiming early. Either way, it means a reduced lifetime payout from the program, and Warren strongly opposes such an idea.

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2. She is markedly against the idea of privatization

In addition to opposing Social Security cuts, Warren is also unequivocally against the idea of a partial privatization of the program.

Privatization involves setting aside a portion of a worker's earnings into a separate account that they would manage (i.e., invest). Presumably, this account would protect workers from making excessively risky investment decisions, with the federal government sort of vetting the investment options available to the public. The idea of privatization is that would place some of the onus of retirement on workers, while removing some of that responsibility from the federal government.

While privatization was made popular by former President George W. Bush in the mid-2000's, it never gained much traction in Congress. The biggest issues being that 1) the American public, as a whole, doesn't know very much about investing, which would make handing over the keys particularly precarious for lower-income workers, and 2) it didn't resolve the cash crunch. In fact, moving earnings that would have gone to the payroll tax into a separate account could have actually made the near-term outlook for Social Security even worse.

3. Warren wants program benefits expanded

Sen. Warren isn't satisfied with simply fixing Social Security such that no benefit cuts are necessary. Instead, she believes that benefits for the program need to be further expanded to support lifetime low-income and disabled workers.

In September, Warren, along with Bernie Sanders, announced the creation of the Expand Social Security Caucus, which featured the support of more than a dozen senators and in excess of 130 members of the House at its creation. Said Warren in the press release announcing the Caucus's creation:

"Social Security is a lifeline for seniors and Americans with disabilities. We won't let it be cut by one cent -- and instead we will fight to expand it. The rich and powerful have rigged our economy to make themselves richer, while working families face a massive retirement crisis. If this government really works for the people, it should protect and expand Social Security."

a man holding a box of donuts: A surprised senior couple examining their prescription medicine costs. © Getty Images A surprised senior couple examining their prescription medicine costs.

4. The Massachusetts senator favors the CPI-E as the program's inflationary tether

One of the ways Warren would expand Social Security benefits is by replacing the program's inflationary tether, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W, which has been the annual cost-of-living adjustment (COLA) measure since 1975, is inherently flawed since it tracks the spending habits of urban and clerical workers who, in many instances, aren't even receiving a Social Security benefit, and spend their money very differently than seniors. This results in COLAs that don't match up well with the inflation that seniors are actually contending with.

The solution, according to Warren, is to switch the program's inflationary measure to the Consumer Price Index for the Elderly (CPI-E). As the name implies, the CPI-E would track the spending habits of households with persons aged 62 and over. This should give a more accurate representation of the medical care and housing inflation that retired workers are facing, thereby resulting in a more accurate COLA. Over significant amounts of time, these modestly higher COLAs would result in a higher monthly payout for senior citizens.

5. She wants the payroll tax cap raised

Arguably the quickest and most efficient Social Security fix in Warren's eyes is to raise the payroll tax earnings cap.

In 2019, all earned income (wages and salary, but not investment income) between $0.01 and $132,900 is subject to a 12.4% payroll tax. Since more than nine out of 10 workers won't make more than $132,900 this year, it means that a majority of working Americans are paying into Social Security on every dollar they earn. Meanwhile, earned income above and beyond $132,900 is exempted from the payroll tax, thereby allowing the wealthy to hang onto more of their income. In 2016, $1.2 trillion in earned income was exempted from the payroll tax.

According to Warren, this cap should be increased such that well-to-do workers are paying more into the program. Creating a doughnut hole between $132,900 and $250,000, where earned income would remain exempt, and then reinstituting the payroll tax on all earned income above $250,000, would raise a substantial amount of added revenue that could push out the program's asset reserve depletion date by decades.

a close up of a newspaper: Two Social Security cards lying atop a W2 tax form. © Getty Images Two Social Security cards lying atop a W2 tax form.

6. Warren supports increasing the minimum wage

Last, but not least, Warren has argued in favor of increasing the federal minimum wage from its current figure of $7.25 an hour. The federal minimum wage has remained static for 10 years, all while the prices of most goods and services have continued to rise.

In 2013, following then-President Barack Obama's call to raise the federal minimum wage to $9 an hour, Warren backed such a move. "Raising the minimum wage means we have workers paying more in to support the Social Security system," said Warren, courtesy of Mother Jones. Warren is correct in that if earned income were to increase, either through a federal minimum wage increase, or simple economic growth, the program would be generating more in payroll tax revenue. 

And that, folks, is everything you need to know about Elizabeth Warren and her approach to fixing Social Security.

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