Entitlement Reform – Part II

How to Preserve Social Security and Medicare

In Entitlement Reform – Part I, I laid out all the gory details about entitlement spending and mentioned that a solution could be implemented to preserve these benefits for everyone.  Retired seniors currently receiving Social Security and Medicare would see no change in their benefits and would not be impacted by the solutions I’ll discuss.  That’s the good news, the bad news is that someone is going to have to pay for years of “kicking the can down the road” and that someone is everyone else who isn’t retired and currently on Social Security and Medicare.  I guess we all knew the day would come when someone would say that’s it’s time to pay the piper.  Of course we were all hoping that day would come after we were long gone.  Don’t worry; the pain won’t be that bad as long as we address it now and not later.

Now, before getting into the details of how to fix our most important social programs, ask yourself this important question – Is the amount withdrawn from your paycheck for Social Security and Medicare a tax?  At first blush, the obvious answer is Yes.  In fact, if you asked 100 working individuals if Social Security and Medicare is a tax, I bet everyone would agree that any amount taken out of my paycheck without an option to “opt out” is clearly a tax.  Finally, someone would say, everyone, including the IRS, calls it a payroll tax so it’s clearly a tax.  All valid points, but I’m here to tell you that this really isn’t a true tax.

If you look at the formal definition, it states that a tax is considered a mandatory assessment by a government to support specific facilities or services.  Although I could spend this entire article talking about the wasteful use of these funds for various facilities or services that we don’t need, I’ll take the high road for now and keep this issue for a later discussion.  Back to the topic of payroll taxes, the payment of this money, particularly by individuals, is a direct pre-payment for health care in the form of Medicare and a contribution towards a retirement annuity in the form of Social Security.  As for employers, the portion they pay on an employee’s behalf is definitely a tax.  Why am I making the distinction between the amounts paid by an employee versus an employer?  The answer is simple.  The money an employee pays for Social Security and Medicare is something they will directly benefit from.  This is not true for the employer as they are paying money into a system to fund someone else’s benefit.    

Now I know you’re probably saying that all money you pay in the form of payroll taxes doesn’t directly go into an individual account with your name on it.  And although that’s true, since in its current form it’s a pay as you go system where the money you pay today is for the benefit of current retirees, the promise from the government is that you will get some form of benefit from both of these programs.  Of course that’s the real concern.  Even though all of us can rest assured that benefits will be paid, the amount we will get is anybody’s guess especially when you look at the growing deficit of Social Security and Medicare (see below graph) over the next 50+ years.  If this graph doesn’t substantiate that we have a real problem that’s needs to be addressed I don’t know what will, but I digress.

Medicare_&_Social_Security_Deficits_ChartThe good news is that there is a solution to easily resolve this problem.  The bad news is that no one is going to like it.  And that’s the way it usually works.  When a problem the size of maintaining the long-term sustainability of Social Security and Medicare gets continually ignored by Congress and the White House, you eventually get to a point that the solution isn’t very palatable.  Sure there are other solutions to solve this problem.  For example, current seniors could pick up a portion of the tab if the annual CPI calculation was adjusted to reduce annual Social Security increases.  Other solutions include taxing 100% of Social Security income instead of the current max of 85%, raising the annual premiums for Medicare Part B or increasing deductibles and co-pays at a higher rate.   Of course, there isn’t a senior around that wouldn’t make their displeasure known with a vote against any politician that was in favor of such a change.  And that in a nutshell is the issue.  Everyone knows there’s a problem, but no one wants to pay for it.

So how do we address all these issues and implement a palatable solution?  I think I have the answer and I’ll share it with you in Part III, the final installment of this three-part article.

Ron Hawks

Ron is a personal finance author, advisor and speaker. For more information about Ron and his highly acclaimed current book Climbing The Financial Mountain:  Wealth Building Strategies for Every Stage in Life go to http://climbingthefinancialmountain.com where you’ll also find access to free financial tools and resources. 


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