A Simple Cure for Medicare and Social Security

Data Driven View Points - Editorial

A recent AP story in the Star Ledger of New Jersey, and other newspapers around the country warned that Social Security is “rushing toward insolvency.” Some will say, “Too bad!  Taxes are too high and we can’t afford it.” 

First, federal income tax rates are the lowest they have been in half a century.  [See http://bit.ly/HRfmwl].   More importantly, Social Security and Medicare aren't funded by income taxes.  These programs are funded by Federal Insurance Contributions Act (FICA) contributions, half of which are paid by employers. 

What does Medicare cost us personally?  If you make less than $110,100 you contribute 1.45% of your salary, or $725 if you make $50,000 a year.  Where can you find health insurance this cheap?  

Regarding insolvency, there is currently a cap of $1,596 per year on individual Medicare contributions. Folks making $1 million or more a year still contribute only this amount, which is a tiny fraction of their income.  In other words, the FICA premium structure is regressive.  The less money you make the more you feel the financial burden. To raise contribution rates or reduce benefits only intensifies the pain for middle and low wage earners.

A fair solution would be to keep the caps in place for employers, but eliminate the individual income caps on FICA contributions.  Let everyone contribute at the same flat rate. Conservative often praise the flat tax idea, why not start with a flat rate on FICA premiums for everyone.  Since this same regressive contribution structure is also true for Social Security, this simple, virtually painless step would probably raise enough money to fund both programs forever.

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The above editorial is based on the Associated Press Story that follows.  Please feel free to draft a similar letter to the editor if this article has run in your local news paper.

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Poor economy worsens Social Security's finances

By STEPHEN OHLEMACHER and RICARDO ALONSO-ZALDIVAR

Associated Press Published: 23 April 2012 04:09 PM

WASHINGTON (AP) -- High energy prices and an economy that has been slow to rebound are worsening Social Security's finances, shortening the life of the trust funds that support program by three years, the government said Monday.

Those trust funds will now run dry in 2033, according to a report issued by the trustees that oversee the massive retirement and disability program.

Medicare's hospital insurance fund is projected to run out of money in 2024, which is unchanged from last year. The trustees, however, said Medicare spending continues to rise.

Congress enacted a 2 percent cut in Medicare last year, which is the main reason the trust fund exhaustion date did not advance.

If the Social Security and Medicare funds ever become exhausted, the nation's two biggest benefit programs would collect only enough money in payroll taxes to pay partial benefits.

The trustees said in their annual report that Congress should address the programs as soon as possible, but no action is likely before the November election.

"Lawmakers should not delay addressing the long-run financial challenges facing Social Security and Medicare," the trustees wrote. "If they take action sooner rather than later, more options and more time will be available to phase in changes so that the public has adequate time to prepare."

Social Security's finances worsened in part because high energy prices suppressed wages, a trend the trustees see as continuing. The trustees said they expect workers to work fewer hours than previously projected, even after the economy recovers.

This year's cost-of-living-adjustment, or COLA, was also higher than expected. That was good news for seniors, who saw their benefits increase by 3.6 percent, but it drained more resources from Social Security.

The trustees project a 1.8 percent COLA for next year, though the actual amount won't be set until October.

Social Security is split into two funds - one for retirement and survivor benefits and one for disability. The retirement fund is projected to run out of money in 2035 while the disability fund is projected to run dry in 2016.

The trustees who oversee Social Security are urging Congress to shore up the disability system by reallocating money from the retirement program, just as lawmakers did in 1994.

Combined, the two funds will last until 2033. If they run dry, payroll taxes would cover about 75 percent of benefits.

"This year's trustees report contains troubling but not unexpected projections about Social Security's finances," said Social Security Commissioner Michael J. Astrue. "It once again emphasizes that Congress needs to act to ensure the long-term solvency of this important program, and needs to act within four years to avoid automatic cuts to people receiving disability benefits."

The trustees also warned that their own Medicare projections could be too rosy. Based on current law, they assume cuts in payments to doctors that Congress routinely waives will actually take place. They also assume President Barack Obama's health care law will squeeze the full amount of its $500 billion cuts from the program.

"Medicare's actual future costs are highly uncertain and are likely to exceed those shown ...in this report," the trustees said.

The trustees who oversee the programs are Astrue, Treasury Secretary Timothy Geithner , Labor SecretaryHilda Solis, Health and Human Services Secretary Kathleen Sebelius. There are also two public trustees, Charles Blahous and Robert Reischauer.

More than 56 million retirees, disabled workers, spouses and children receive Social Security. The average retirement benefit is $1,232 a month; the average monthly benefit for disabled workers is $1,111.

About 50 million people are covered by Medicare, the medical insurance program for older Americans.

Calling Social Security and Medicare the "twin pillars of retirement security in this country," Geithner said "it is critical that reforms are slowly phased-in over time so current beneficiaries are not affected and future beneficiaries do not experience precipitous changes."

Obama's health care law is supposed to trim Medicare expenses by $500 billion, extending the life of the program. But many Republicans doubt the savings will materialize.

On Social Security, Obama has not proposed any comprehensive plan to address the system.

Social Security is financed by a 6.2 percent tax on the first $110,100 in wages. It is paid by both employers and workers. Congress temporarily reduced the tax on workers to 4.2 percent for 2011 and 2012, though the program's finances are being made whole through increased government borrowing.

The Medicare tax rate is 1.45 percent on all wages, paid by both employees and workers.