President Obama and the Republicans in Congress have been and will continue to be engaged in a wrestling match over our national debt. Our national leaders have been wrongly tying entitlement reform to the national debt issue. The Republicans, in particular, seem to have conveniently forgotten what their patron saint, Ronald Reagan, said in a 1984 presidential debate in Louisville, Kentucky:
“Social Security has nothing to do with the budget…” ~ Ronald Reagan
Reagan was absolutely right. Social Security and Medicare are funded through a payroll tax. They are not a line item in the federal budget. In fact, for years presidential administrations of both parties have raided the Social Security fund and used the money to mask the actual size of the federal budget deficit, replacing the funds with IOU’s in the form of Treasury bonds.
As Obama and the Democrats and the Congressional Republicans have proposed entitlement reform, I’ve been struck by their apparent lack of understanding of the financial difficulties the average American faces. Here are a few examples:
*The financial advisory firm Hello-Wallet recently found that 1 in 4 households will withdraw some or all of their retirement funds to meet their current daily living expenses.
*AARP reports that for the first time in history people over 50 now have accumulated more credit card debt than those under 50.
*A 2010 report from the Center For Economic Policy and Research found that “Employment in physically demanding jobs or jobs with difficult working conditions is a major cause of early labor market exit among older workers…” This is an important factor to consider because physically demanding labor can result in the worker in their mid to late 50′s finding that they are no longer physically able to handle the demands of their job. Those workers may find themselves out of a job, physically unable to do many of the jobs that are out there, and too young to retire with full Social Security benefits. The earliest a person can retire is 62. If they retire at that age they receive a reduced benefit level for the rest of their life. Their benefit level does not increase when they reach the normal retirement age.
The common thread running through most of the ideas that both parties have put forth to save Social Security and Medicare is that they involve cutting benefits to beneficiaries. Raising the retirement age has widespread support on Capitol Hill, and that action certainly results in less benefits for retirees over the course of their lifetime. I’ll give some credit to President Obama. His Affordable Care Act, for instance, ended the whopping over-payments to Medicare Advantage plans, and specifically bars the board that has been given the duty of coming up with says to cut fraud and waste from Medicare from including in their recommendations to Congress any measures that would reduce benefits to beneficiaries. But Obama has endorsed using the Chained CPI formula for determining Cost Of Living Allowances for Social Security beneficiaries. The Chief Actuary of the Social Security Administration has determined that use of that formula would result in an annual cut of 0.3-percentage points for the average recipient. That works out to about $130 less per year for that average recipient. While that may not seem like much, that money could be very important to the retiree living on a fixed income and seeing more and more of their money eaten up by ever-increasing food, utility, fuel, and medication costs.
For their part, the Republicans have long had a goal of dismantling the social safety net, including Social Security and Medicare. They oppose any reform that involves bringing in more revenue. They have a laser-like focus on the meme that reducing spending in Social Security and Medicare as the only way to save those programs. And sadly, there are many Democrats who share that point of view. What Obama and Congress don’t want you to know is that legislation was introduced in the last session of Congress which the Congressional Budget Office found that, if enacted it would save Social Security for the next 75 years—the furthest into the future that the actuarial tables are able to project. It’s possible that Social Security and Medicare would be saved for years beyond that 75 year projection. That legislation, introduced by Senator Bernie Sanders (I) of Vermont, never advanced to the floor of the Senate for a vote. Obama did not press for Sanders’ bill to be passed. Democratic leaders in the House and Senate did nothing to advance the passage of the legislation, and the Republicans were adamantly opposed to it. With their actions President Obama and Congress proved that they are interested in paying lip-service to saving Social Security and Medicare; they are not really interested in doing what needs to be done to actually save them without hurting millions of Americans.
What that legislation introduced by Sen. Sanders would have done was eliminate the cap on Social Security taxes. That cap on Social Security taxes is set at $113,700 for 2013; meaning that the Social Security (FICA) taxes are taken out on the first $113,700 of a person’s salary or wages. Any wages or salary above that would not be taxed for Social Security. No matter how much your wages are, you only pay the FICA on the first $113,700 of your wages.
If Sanders’ legislation had been passed and signed into law both Social Security and Medicare would be saved, with no benefit cuts to beneficiaries. The Social Security tax is set at 7.65%. Of that, 1.45% of that rate provides the funding for Medicare. Here’s how the current system works for the person with $1-million in salary or wages. They pay the FICA tax on their first $113,700 or a total of $8698. Under Sanders’ proposal they would pay the FICA rate on their entire $1-million salary and would pay $76,500. That means the current system is saving that average millionaire $67,802 in FICA taxes each year. Their savings is more than 7-times the amount they pay.
A 2012 report by the Boston Consulting Group found that there are 5.1-million households reporting income over $1-million. That income may not be totally wages; there may be other sources of income such as property, stocks and bonds etc. which would be taxed at different rates and not subject to FICA. But for illustrative purposes, let’s say that of that group there are 1.5-million households with salary or wages of $1-million. How much money would they bring to Social Security and Medicare under Sanders’ legislation. Crunching the numbers shows that those 1.5-million millionaires would bring over $1.14-trillion annually to Social Security and Medicare.
This year Social Security will pay out $820-billion and Medicare is projected to pay out $523-billion with a grand total of $1.343-trillion. That money from those millionaires would nearly pay the total expenditure. In 2011 some 142,823,000 individual tax returns were filed with the IRS. That leaves about 141,323,000 to add their FICA payments. Clearly, eliminating the earnings cap would save Social Security and Medicare for many generations to come.
Think of the kind of country we could have if Sanders’ approach was adopted by President Obama and Congress. In his book, “Rebooting The American Dream” Thom Hartmann advocated that instead of raising the retirement age, we drop it to 55 and increase the benefits between 10 and 20-percent. That would allow people to retire and enjoy full benefits before their bodies break down instead of working until the day they die. Those retirees would be able to live modestly on Social Security instead of struggling to make ends meet. By dropping the retirement age we would create more job openings for younger workers; workers who would be able to pay off their student loans and spur the economy by buying houses, cars, and whatever grownup toys they desire.
Instead, we have an America where our president and Congress are united in their belief that the only way to save Social Security and Medicare is to enact measures that would reduce benefits to the people who have earned their benefits from those programs. They may differ in some approaches and share the same vision in others, but they’ve both turned a blind eye to the one approach the CBO has said would save both programs for far into the future without cutting benefits in any way.