Monthly Archives: January 2016

Entitlement Reform – Part III

In Parts I and II, I outlined all the issues we have with Social Security and Medicare.  Although these issues are very real, I do believe there is a potential solution to save these very important programs for everyone.   Without further ado, let’s get to the specifics.

Although there are numerous ways to fix these plans, I tend to be in favor of a solution paid by the people who directly benefit from their viability.  To elaborate, current contributors to Social Security and Medicare should start paying more for these future benefits in the form of higher payroll taxes.  There’s that word again, taxes, but this wouldn’t be a true tax but more like a down payment for something that you will definitely need and use in your golden years which is why I prefer to use the word contribution.  In my plan, this additional contribution–I know I know just indulge me–should only be paid by the employee not the employer.  Why?  Like I said before, this payment made by an employer on your behalf has no benefit to them.  With that said, why should they pay more for something they don’t benefit from?  Besides, if you raise the amount paid by employers, it’s safe to assume they will greatly reduce their desire to hire more employees which is something that isn’t going to help a struggling job market.

So what are the specifics behind this solution?  Well, the first thing I’d do is increase the age to qualify for early Social Security benefits from 62 to 65 and full retirement from 67 to 70.  People are living and working longer so this change should be a no-brainer.  This change in eligibility, which would have a big impact on shoring up the system, would slowly be phased-in over the next 30 years giving future retirees ample time to plan accordingly.  In addition, and this is a big one, the Social Security rate paid by employees should be raised from 6.2% to 8%, a small portion of this money would be used to shore up the current system while the majority of this increase would translate into a higher payment for future recipients.  As for Medicare, the rate should be raised from 1.45% to 2% as the deficit to fill is bigger when it comes to Medicare hence the bigger percentage increase in contributions.  Just think of this additional contribution as a pre-payment for future healthcare when you need it most – in retirement.

Now before you hang me from the tallest tree, let me explain why this makes sense.  The real purpose behind the higher contribution for Social Security is a forced savings for a country that is horrible at setting aside money for their future.  Although there are some people who feel they’ve embraced self-responsibility and can save for their own future without being forced, the majority can’t.  In a recent survey, only 13% of respondents felt very confident they’ll have enough to retire comfortably.  The other 87% weren’t too sure if they’d have enough money to retire comfortably, or at all.  And if that doesn’t convince you, how about this latest survey from the Employment Benefit Research Institute indicating that 57% of workers have less than $25,000, excluding their homes, in retirement savings.  Based on these facts, it’s clear that people rely heavily on benefits like Social Security as this chart below indicates where these benefits represent over 60% of the total income received by recipients over the age of 65. 

soc_sec_importanceThe survey mentioned above clearly demonstrates that our immediate gratification society puts saving for retirement low on the priority list.  In order to help the majority of American’s have income in retirement they won’t outlive, increasing the amount they’ll receive in Social Security is the best way.  As I said in the previous sentence, this is an inflation adjusted benefit you can’t outlive, and if you’re married, the surviving spouse will receive the higher of the two payments for as long as they live.  And since most seniors depend on Social Security as their only lifeline from staying out of the poor house, let’s make this a bigger amount so they’ll have something that improves their odds of a better quality of life in retirement.  How dependent are people on these benefits you ask?  The Social Security Administration statistics indicate that 22% of couples and 47% of singles rely on Social Security benefits for 90% or more of their income. 

As for Medicare, this system is bursting at the seams and the long-term viability due to the unsustainable cost of healthcare is the biggest concern of all.  There’s no doubt we all need healthcare and the demands on Medicare are very high as the people that are in the system are either disabled or elderly.  That combination translates into a very expensive system that needs reform.  Much like Social Security, there are various ways to fix the cost of healthcare ranging from tort reform to improved competition by allowing people to purchase insurance across state lines to the European model of a single-payer system (i.e., socialized medicine).  All viable solutions but let’s keep it simple by asking the people who will use the system the most to pay for it.

I’m not suggesting that what I’ve proposed is the “end all be all” solution to fixing Social Security and Medicare.  As is the case with most solutions, some people like it some don’t.  And because no one can find that one “goldilocks” solution, nothing gets done as everyone sticks their head in the sand and hopes the problem will go away.  This approach just won’t work anymore.  It’s time for all of us to step up and resolve this problem.   Postponing a solution will only make the ultimate fix so painful that everyone will hate it.

Let me know what you think and please share any of your ideas on saving Social Security and Medicare.