Entitlements

Next up, entitlement programs

Posted on by j.giglio

With the so-called tax reform bill behind him, House Speaker Paul Ryan wants to reform and modernize the big three entitlement programs: Social Security, Medicare and Medicaid. It’s something that needs to happen, but it won’t be easy – especially in an election year.

The speaker is under pressure from conservative House members and deficit hawks, who supported the tax reform legislation that added a whopping $1.5 trillion to the national debt in exchange for a commitment to address entitlements and deal with debt and deficits.

Entitlement costs are rising as the population grows older and sicker. Even if you assume that cutting the corporate tax rate will unleash economic growth, the tax cuts are highly unlikely to pay for themselves. We cannot grow our way out of the looming entitlement crisis.

But the speaker’s plan to overhaul entitlement programs may run into the harsh political reality that not all Republicans are on board in an election year in which control of Congress is up for grabs.

Looking to preserve the GOP’s narrow Senate margin the Senate, Majority Leader Mitch McConnell has thrown cold water on the idea of entitlement reform. He would prefer to focus on the long-awaited infrastructure funding plan, which is more of a bipartisan exercise.

During his campaign, President Trump repeatedly promised not to cut Medicare, Medicaid, or Social Security. Of course Democrats say the Republicans plan to pay for the tax bill with cuts to entitlements and the social safety net.

There is no strong constituency for the tough budget cuts needed to limit the size of government or reduce the national debt.

Broadly speaking, entitlements are government financial benefits to which beneficiaries have a legal right. The most important examples of federal entitlement programs include Social Security, Medicare, and Medicaid, unemployment compensation and food stamps. And don’t forget agricultural support programs.

You can debate the merit of these programs, but one thing is clear: entitlements are expensive, and for a long time the cost has either been ignored or passed on to future generations.

Nearly half of all U.S. households benefit from at least one federal entitlement program. Entitlement spending today is about a tenth of U.S. gross domestic product, meaning one out of every ten dollars Americans earn goes to pay for Medicaid, Medicare, or Social Security. As the government struggles to pay for these programs, the number of recipients grows as people live longer thanks to advances in medical care.

This means they are drawing more benefits over their lifetimes than the funding systems were ever designed to generate. Since Americans are having fewer children, fewer workers are paying into the system. The Affordable Care Act also increased the number of people eligible for Medicaid.

According to the Center on Budget and Policy Priorities, about half the federal budget is spent on Social Security and health care programs like Medicare.

Another 16 percent goes to national defense and 6 percent to paying interest on the national debt. That does not leave much, especially as entitlement costs rise. If these programs are not fixed, they will consume the entire budget, leaving nothing to clean the environment, repair roads and bridges, and address countless other needs.

Nobody, including Speaker Ryan, is talking about actually cutting entitlement programs. The goal is to restrain increases and make the programs sustainable going forward. On a positive note, there are approaches that enable the U.S. to fix the programs while exempting current beneficiaries.

For example, consider containing health care costs by focusing more on preventative care and improved management of chronic conditions like obesity and diabetes. As for Social Security, consider gradually raising the full retirement age and eliminating the current payroll tax cap.

If these choices don’t seem palatable, it’s important to remember that the biggest threat to the big three programs is to continue down the path of least resistance and do nothing at all.

Originally Published: January 20, 2018

 

Make High Earners Save Social Security

Posted on by j.giglio

In these days of presidential interregnum, the American public has seen newspapers and digital media filled with discussions of tax cuts, increased military and infrastructure spending, economic growth proposals, regulatory relief, immigration reform, repealing Obamacare, reducing the national debt, keeping deficits on a short leash, draining the swamp of political and economic favoritism and other domestic traumas.

Social Security, however, has received little attention. How the new administration will accomplish all these promises without yielding to the temptation to cut programs like Social Security is an open question. President-elect Trump, who enjoyed the support of working class Americans, promised during the campaign not to cut Social Security. Speaker Paul Ryan said he has no plans to change Social Security, although he has been outspoken on the need for entitlement reform.

Funny how a politician can forget campaign promises after election day. Loyalty appears to be paramount for these folks until all of a sudden it isn’t. Politicians all too frequently forget, to put it in the cant language of the ‘hood, that a deal is a deal.

Social Security is a promise to all eligible Americans that they will not live in abject poverty if they become disabled or when they get old, but the Social Security 2015 Trust report finds that the fund has enough money to pay full benefits until 2034. After that it will collect only enough in taxes to pay 79 percent of benefits.

With the number of workers available to pay for Social Security benefits falling rapidly, there will inevitably be calls for benefit cuts, higher taxes or both. But there is a better way.

Social Securityis not an entitlement program; it is a “pay-as-you-go” system funded by the payroll tax. Companies and nearly 168 million working people pay into it to provide benefits to about 60 million retirees. Each generation pays for current retirees in return for a commitment that the next generation will do the same.

It is the backbone of retirement planning for millions of Americans. Almost a third of retirees receive practically all their retirement income from the system and about two thirds receive the majority of their retirement income from Social Security.

The top 100 CEOs, in contrast, have platinum pension plans. On average, their massive next eggs are large enough to generate about $253,000 in monthly retirement payments for the rest of their lives. Heaven for them, hell for the ordinary American worker.

Dealing with the coming Social Security funding crisis by raising the payroll tax places a significant burden on low-wage workers, especially when the Federal Reserve has kept interest rates so low that their saving accounts are yielding next to nothing, forcing baby boomers to work longer and retirees to rely even more on Social Security income.

An alternative that merits serious consideration is to increase the ceiling on annual wages subject to Social Security payroll taxes, which is currently at $118,500. All annual income above that amount is exempt from the tax, meaning that 94 percent of Americans pay Social Security tax on all their income but the wealthiest 6 percent do not.

Expanding the payroll tax to all earnings above $118,500 would wipe out funding issues. According to Social Security actuaries, it would keep the Trust solvent for the next 45 years.

Since Social Security began, the need for retirement income has risen as life expectancy has increased by 17 years. This is particularly true for top earners who need Social Security the least and whose jobs are less physically demanding than those of construction workers, janitors, etc.

Political leaders have time to decide how to address Social Security’s long-term funding problems. As they contemplate potential solutions, they should consider expanding the payroll tax to include all earnings. It’s a fair way to rescue the program from financial limbo and provide lasting stability without taking draconian measures that would harm tens of millions of hard-working Americans.

Originally Published: December 23, 2016