Lack of trust — Part II
Last month, I wrote about the disturbing state of Social Security and Medicare.
I noted that an additional, unbudgeted-for $416 billion must be paid out of this year’s federal budget in order to meet the needs of Social Security and Medicare beneficiaries this year.
Those programs are supposed to be funded each year out of the payroll taxes paid by every working American. Indeed, for some decades, such payroll taxes far exceeded the annual costs of the programs.
Now, however, between the rising costs of healthcare (thanks in part to the development of life-extending cures that cost a huge sum) and the rapidly retiring baby boomer generation, this (and future) years’ costs far exceed the revenues.
I explained last month that the excess revenues of past decades were spent on other needs of government at the time, and replaced with federal government IOUs to itself: Special interest-earning Treasury bonds — misleadingly labeled “Trust Funds” — that are now ostensibly being “cashed in” to cover current excess costs.
But the money to redeem those bonds comes out of current taxpayer revenues (and government deficit borrowing), putting a huge strain on future budgets and generations for years and years to come. (See my September column at www.TheBeaconNewspapers.com/a-lack-of-trust-fund if you want a fuller explanation.)
This month, I promised to address why we find ourselves in this situation, and what we can do about it.
In a nutshell, we find ourselves in this situation because most of our elected representatives in Congress like their jobs and want to be reelected.
With House incumbents up for reelection every two years and senators every six, the incentives are incredibly strong to please their constituents in the short run by lowering taxes and increasing spending whenever possible, thereby boosting the federal deficit and kicking the can of its repayment down the road to future Congresses and generations.
There does not seem to be any effective mechanism in our political system for holding those we elect currently accountable for the long-term damage their actions will inevitably bring about. Voters don’t think that way, and few campaign ads address the issue.
And even to the extent we occasionally “throw the bums out,” their replacements have exactly the same incentives to keep doing the same thing, and usually do.
There are many well-known ways to address the financial problems facing Social Security and Medicare. Here are a few of the ones that could — individually or together — solve the problems:
— Raise payroll tax rates by 2 or 3 percent. This would raise costs for all employers and reduce take-home pay for all workers, but would probably eliminate the estimated shortfall for both programs well into the future.
— Raise the level of income on which Social Security taxes are imposed (the “earnings cap”). The maximum income subject to the tax is currently $128,400, meaning high earners are not taxed on the balance of their incomes. This cap could be raised faster (it’s pegged to inflation) or eliminated. In the latter case, this alone would eliminate close to 90 percent of the Social Security shortfall.
— Raise the age at which people qualify for Social Security. On average, we are living longer, so perhaps it makes sense to retire later. Not only would people have more years of wages to live off of, they would pay additional payroll taxes and collect fewer benefits overall. This assumes, of course, that employers will be willing to keep or hire older adults, which is another issue…
— Change the Social Security cost-of-living-adjustment formula so beneficiaries receive lower increases with inflation.
To see a simulation of how these and other adjustments would affect the long-term financial health of Social Security, see bit.ly/SocialSecuritySimulator.
As you can see, each solution involves a certain amount of sacrifice from one group or another. My view is that it doesn’t seem fair to impose all the costs on any one constituency, and it isn’t fair to impose additional costs on current retirees, since they are no longer in a position to plan ahead to cope with the changes.
But I don’t see any reason why we can’t share the pain broadly among those of us still working and not on the verge of retirement.
Congress could, if its members chose, enact all of the above (and a number of other adjustments I haven’t described) in small amounts over time. It could gradually raise the payroll tax rate, earnings cap, and age of retirement, and reduce COLAs starting some years out in a way that protects current retirees.
Everyone would suffer a bit, but we would all be in this together, and the long-term health of our retirement programs would no longer be an issue.
If you agree this is a sensible solution, there’s only one way to bring it about. Talk to your elected representatives and let them know this is something you want, and that you won’t vote them out of office if they act accordingly.
The power is in your hands. Don’t forget to vote on November 6.