Give Donald Trump credit for making his political career unique in many ways, to be sure. But one difference, in particular, has become a theme in his presidency: Trump keeps his promises. For the most part, Republicans have hailed Trump as a rare president who honors his campaign pledges. However, Trump’s new budget will frustrate the conservative contingent in the GOP for his refusal to address an oncoming crisis in entitlement programs, even the less-complicated unfunded mandates in Social Security.
But has Trump come up with a way around his pledge?
On Wednesday, OMB director Mick Mulvaney told CNBC’s John Harwood that Trump refused to budge on entitlement reform despite his demonstration of the stakes involved. Harwood told Mulvaney that a source within the White House remarked to him that the proposal “looks a lot more like a Mick Mulvaney budget than a Donald Trump budget,” but Mulvaney pointed out that one of the big differences was on Social Security specifically. His team had gone through Trump’s campaign pledges on shrinking government in some areas while boosting it in others – notably national security – without adding to the deficit.
“I laid to him the options that Mick Mulvaney would put on a piece of paper,” the OMB director told Harwood, “and he looked at one and said, "What is that?" And I said, "Well, that's a change to part of Social Security." He said, "No. No." He said, "I told people I wouldn't change that when I ran. And I'm not going to change that. Take that off the list." Mulvaney also insisted later in the interview that Trump has opposed changes to Medicare as well as Social Security, again sticking to his promises while campaigning as a populist to protect existing retirement systems.
So far, the new Trump administration has maintained a consistent position on entitlement reform: no. As Mulvaney rolled out the toplines for the budget in February, he emphasized the distance between the White House and conservatives on Capitol Hill on the issue. House Speaker Paul Ryan insisted that entitlement reform would be necessary to deliver on Trump’s promises to bring the budget into balance, but Sean Spicer told the White House press corps that Trump would “keep his word to the American people.”
So, entitlement reform, as such, is dead for now. But a new trial balloon in the tax-reform debate might open a back door to dealing with Social Security.
The Associated Press reported on Monday that the White House had scrapped its campaign proposals for tax reform and was “going back to the drawing board” to put together a new package of ideas. Among the new ideas was “a drastic cut to the payroll tax,” the traditional funding mechanism for Social Security. Rather than go forward with the original border-adjustment tax, which threatened to touch off a large dispute with the World Trade Organization (WTO), it would change into a VAT instead, while eliminating the labor-expense deduction.
The additional revenues would allow for the elimination of the payroll tax, boost worker take-home pay, and theoretically stimulate economic growth. “This approach would give a worker earning $60,000 a year an additional $3,720 in take-home pay,” the Associated Press notes, but it would also “involve changing the funding mechanism for Social Security.” It also funds Medicare, in part, so its elimination would require the restructuring of both programs, despite the promises from Trump on keeping both intact, at least in the short run.
It’s not the first time that the payroll tax has been targeted as a means of economic stimulus. In 2010, then-president Barack Obama lowered the individual contribution from 6.2 percent to 4.2 percent to boost the recovery from the Great Recession. Results were at best mixed; while GDP reverted to a positive 2.5 percent in 2010 from -2.8 percent in 2009, according to data from the Bureau of Economic Analysis, those results were mainly driven by a 12.9 percent increase in gross private domestic investment.
Personal consumption expenditures only grew 1.9 percent in 2009 and did not cross to annual growth of 3 percent or more until 2015. The temporary reduction ended in 2012 without having shown any significant or specific boost to the recovery, perhaps in part because the employer contributions remained at their previous levels. The only change accomplished was an acceleration of an existing trend to deficit spending in Social Security.
Alarms have already sounded in some quarters over this idea. “This proposal is a Trojan horse,” Nancy Altman of the activist group Social Security Works told Los Angeles Times liberal columnist Michael Hiltzik, who added that “it smells like a back-door way of cutting Social Security benefits.”
At conservative outlet Newsmax, Brenton Smith agreed, warning that such a move would fully transform Social Security into a welfare program. “What happens when we actually run Social Security like welfare? First,” Smith points out, “the people who are not eligible will demand access to benefits,” including those who have opted out of contributions. The requirement for contributions also provides a natural limit on benefit payouts Smith points out, that would get eclipsed instead by political decisions driven by voter demands. That may already be true to some extent with Social Security and Medicare, but Smith’s warning of a Katy-bar-the-door environment in the absence of system limits is worth noting.
If this idea is indeed a back-door method to get to Social Security reform without forcing Trump to break his campaign pledge, it seems more problematic than it’s worth. Tax reform has better potential for economic stimulus by focusing on simplification and flattening of individual and corporate income tax codes, the latter of which will also boost efforts to keep American firms from relocating outside the US for tax benefits. Entitlement reform needs to be tackled head-on rather than obliquely, especially if the effort risks turning contribution-based entitlements entirely into general-fund welfare programs.
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