Social Security and Medicare should be debated
by Phil Burgess, Unabridged from the Life section of the Annapolis Capital, Sunday October 14, 2012
Unabridged from my Bonus Years column in the Lifestyle section of The Sunday Capital, Annapolis, Maryland
We are less than a month away from an election where issues affecting those in their bonus years hang in the balance. These include:
- tax reform – especially what is to be done about so-called “death taxes” and the taxation of capital gains and pensions, issues of great concern to retirees who are receiving payouts from pensions and investments to fund retirement living;
- spending priorities – especially the need to balance the budget to restore monetary stability so necessary for those living on fixed incomes; and another is,
- entitlement reforms – especially the reform of Social Security and Medicare to avoid insolvency that now threatens the two most important social programs for Americans in their bonus years.
The reality of the fiscal crisis facing entitlements is undeniable. Between now and 2030 the number of Americans age 65 or more will increase from 41 million to 71 million. This “age wave” will create even more financial pressure on a government already stressed by its own long-time mismanagement of the nation’s wealth. Unfortunately, the two contenders for the nation’s highest office have spent precious little time debating details of how they would fix these programs to meet these new demographic realities.
Studies by analysts at the US Government Accountability Office (known as GPO) and by private think tanks, such as Center for Policy Analysis, show that unfunded promises to later-life Americans for Social Security and Medicare total more than $100 trillion in today’s dollars – including:
- Social Security promises that total $17 trillion.
- Medicare Part A (hospital care) promises that total $36 trillion.
- Medicare Part B (medical visits) promises that total $37 trillion.
- Medicare Part D (prescription drugs) totaling $15 trillion.
To put this in perspective, total tax receipts and other revenue collected by the US government are anticipated to be about $3.0 trillion in 2013. That’s just three percent of the unfunded liabilities of Social Security and Medicare.
Here’s another perspective on unfunded promises: Selling all the companies listed on the New York Stock Exchange and the NASDAQ – from Apple and Wal-Mart to Boeing and IBM – would bring in about $20 trillion, still a far cry from the $100 trillion needed to fund the projected costs of Social Security and Medicare under current rules. In the words of David Walker, the Comptroller General of the US during the presidencies of Clinton and Bush, “The government’s Social Security guarantee is one huge unfunded promise.”
An ugly truth remains: Rules must be changed or promises broken – or, more likely, a combination of both – if we are to maintain the solvency of these bonus years programs. There will be less pain and fewer adjustments if we fix them sooner, as in the next few years. That’s why it’s important to debate the details of different approaches to reform in the 2012 election cycle.
Take Social Security, for example. These problems are fixable if we act soon. One option: Change the whole approach to Social Security by total or partial privatization. However, this approach, used very successfully in places like Chile and Australia, was rejected by Congress when it was proposed by President Bush, so take it off the list, at least for now.
That leaves reforming the current system, where there are two major approaches: Reduce benefits or increase payments into the Social Security fund – or a combination.
Solutions that involve reducing benefits include:
- Gradually increase the retirement age to 72 and then index to longevity.
- Reduce the COLA or cost-of-living adjustment.
- Redefine and reduce benefits for future retirees – e.g., those now below 55 years old.
- Use “progressive indexing” to reduce benefits for wealthier retirees.
Solutions that involve increasing revenues to the Social Security fund include:
- Raise the payroll tax now paid by workers and employers from the current 6.2 percent to, say, 6.7 percent.
- Remove altogether or at least increase the cap (now $106,000) on the amount of personal income that is subject to the Social Security tax.
- Tax Social Security benefits the same way we tax pension benefits.
- Include new state and local government workers in the Social Security system.
If you want to review the pros and cons of these various options and how much each would contribute to a solution, play the Social Security game found at www.BooterNation.com
Clearly, Social Security can be fixed, but political leaders must begin by recognizing the problem and then debating actual solutions or a process for finding solutions. Max DePree, a high-performing CEO and a keen observer of the dynamics of leadership, has written that the first job of a leader is to describe reality – the realities of what is to be fixed and then move on to establishing a vision and outlining clear reform objectives and strategies. Let’s hope this happens in the remaining three weeks of this election. A lot is at stake for those planning their bonus years.
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