Recently Congressman Steve Scalise was asked about the GOP plan for Social Security and Medicare. He defended the GOP position for making both entitlement programs solvent. This is important because within the next fifteen years both programs will run out of money and essentially be broke. Something needs to be done now.
The problem is that no good solution exists. So, the best we can do is find the solution that is least bad.
We are in this position because both programs are pay-as-you-go. That means the people who are working now, pay the benefits for those collecting. Then when the working people reach retirement, their benefits are paid by the next generation of workers. (Some have mentioned the
name Charles Ponzi when discussing this arrangement.)
The system seemed to work well since its inception in 1935. At that time, the tax rate was 2%. The worker paid 1% and the employer paid the other 1%. Workers retired at 65. The average life expectancy was 67, so the average worker collected benefits for about two years.
Eventually, Social Security covered more than the elderly. The disabled were added. Gradually the payouts increased. Then the tax rate was raised to 3% in 1950 and 5% by 1978. Today the tax is 12.4%.
Medicare was started in 1965 and is facing a similar financial fate. The Medicare tax is 2.9%. It’s higher if a worker earns over $200,000 annually.
Demographics and longer life expectancy are the problems. Baby Boomers are a sizable portion of the population. They began retiring in 2011. By 2028 all sixty million still living will have retired. And they are living longer, meaning they collect Social Security benefits for ten to twenty years.
Some much longer.
There is also a smaller portion of the population working due to lower birth rates in subsequent generations. In 1935 there were seven workers for each person collecting. Today there are less than three. That means something must be done or the system will be unable to meet its
One choice is to raise the tax rate. But since the rate is already 12.4%, how much higher can it go? Besides, households already feel over-taxed, especially when they add up their current payment for Federal Income Tax, Social Security Tax, Medicare Tax, State Income Tax, property taxes, sales taxes and miscellaneous government fees.
Another choice would be to lift the earnings limit. Social Security tax is applied up to wages of $147,000. About 90% of workers earn less than that. Medicare has no limit on income. Why not remove the Social Security limit and collect the tax on all wages?
Some argue that is not fair. With Social Security, each worker is essentially buying an annuity. That means he receives a fixed amount (adjusted for inflation) every year from the time of retirement until death. Since there is a maximum monthly benefit that can be received, shouldn’t
there be a maximum tax paid in?
Some studies say that this action would be a huge tax increase and lead to all the typical problems associated with a huge tax increase. Disposal income falls which tends to slow economic growth. Higher taxes for the business portion would reduce capital formation which also slows growth.
The least bad solution may be to raise the retirement age, gradually to 70 and maybe even 72. That would increase taxes coming in and reduce benefits going out. If a worker wanted to retire earlier, they would simply have to create enough personal wealth to sustain themselves until Social
Security kicked in.
No matter what happens, current recipients would not be affected. Also, people nearing retirement age in the next five to ten years would not be affected. Younger people, who are living much longer, would plan to be income-earning until their early seventies. Then retire and perhaps live another 20 years or more, as advancements in medical science will that
Forget the rhetoric you are hearing about the GOP wanting to destroy Social Security and Medicare. Quite the opposite, the GOP is trying to save them.
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