Fixing Social Security and Medicare While I’m At It
I’m about to kiss the third rail.
In the recent debate reality TV show episode featuring two incoherent old men challenging each other to a golf game both of the contestants fumbled around with the accusation that each would “destroy Social Security”. This is both true and false in each case. It is false in that neither of these men or their respective parties intends to do anything to address Social Security. Rather they intend to keep it going just as it is as both will be out of office and likely dead when the clock strikes midnight on the program.
That’s also the true part—they aren’t going to touch it. And that inaction will in fact meaningfully damage if not “destroy” Social Security from at least the standpoint of most observers.
Let me begin by saying that this is an exploration into a second-best-world type of solution. In a first-best world, there would be no forced redistribution of resources. We would still take care of the needy, but from the generosity of our own hearts and the fruits of our own labor. I’m working from the unfortunately true assumption that we are stuck for the time being in a world where we look to government as the solution to these type of problems. This is not ultimately just, fair, or economically desirable. And I mean all of that from the standpoint of the poor themselves as well as everyone else. My philosophy is one of Aesop not Sesame Street.
But since we have the mess we currently have, this is my attempt to make the best of it in a way that is sustainable and preferrable to the status quo.
Social Security
The program is in trouble. Here is a short primer to bring you up to speed on Social Security. Here is another covering both it and Medicare.
This is roughly a $25 trillion problem—the unfunded liability we face going forward.1 Medicare adds another roughly $53 trillion to the unfunded liability. These programs are the entirety of our unfunded obligations.
Reform to Social Security and Medicare is desperately needed. And that means reductions to both. “But I paid all that money in…” Yes, but your benefits have or will greatly exceed those contributions. Consider this from budget and entitlement program expert Brian Riedl as interviewed by Nick Gillespie:
Social Security benefits are designed to become substantially more generous each generation, even adjusted for inflation. On Medicare, it's even a bigger gap. The typical retiring couple today gets back triple what they paid into Medicare. And that's after you've adjusted in the net present value. So you can't say, “Oh, [it's because of] inflation and interest.” No, even adjusted for all that, you get triple. But there is this perception that there's a savings account for me in Washington that is just going to send me back by money.
The reality is seniors get back more than they paid in. The programs are becoming more generous every generation. And baby boomers today are the richest generation, the richest age group, in the richest country in the world in the richest time in history. As a matter of fact, retiree income over the last couple decades has grown four times faster than the income of workers paying the benefits. So, Social Security and Medicare right now largely redistribute money up the income ladder, not down. Yes, some seniors struggle and you can design reforms. And I've designed reforms that protect struggling seniors. But it's really absurd that seniors making $1 million a year after retirement are still getting generous benefits.
Social Security was never intended to be a retirement program. It was insurance against elderly poverty. And despite the lies you’ve been told by politicians, it is not and never has been “your” money. There is no account with your name on it with deposits held. There also is no legal entitlement despite the misnomer.
If we do nothing, by law there will be reductions once the programs become technically insolvent. For Social Security that date comes sometime around 2033. At that point without significant reform all benefits will be reduced by roughly 23% across the board.
So we need to do something, and here are my ideas.
While I cannot verify these changes will with certainty close the funding gap, I am quite confident they will since they are generally much more restrictive than most of the serious proposals out there. This is very much an approach to making Social Security the anti-poverty program it was always supposed to be.
No changes for ten years after this legislation passes.
Starting in ten years everyone starts drawing SS at 62 in the first year. For each of the next eight years the starting age for SS increases by one year until hitting age 70. This becomes the permanent SS starting point (FRA). This is an elimination of the ability to draw SS early at a lower payout amount or to delay for a higher payout.
Benefits would be an annual amount equal to 1.33x the then current poverty income level (which would be about $20,000 today) indexed to chained CPI—wage indexing of starting benefits would be eliminated. Everyone receiving SS benefits would receive the same amount. This makes SS a UBI for people of retirement age. Notably this is roughly equal to the current average SS benefit, though obviously an increase for many and a decrease for some. Sorry not sorry high-income people like myself.
SS benefits are to be fully recognized as taxable income.2
The payroll tax cap would be eliminated. Remember this is important for both fairness3 and fiscal prudence though not sufficient by itself.
Other than eligibility to collect SS if you or your spouse (defining spouse by the same current rules) contributed at all to SS, the spousal benefit would be eliminated as these changes make it meaningless. To be clear either spouse contributing at all makes both eligible.
Notice that this would be a significant reduction for many upper middle class and wealthier people. That is the point. It would also be an increase to many lower middle class and poorer individuals. That is also the point. From what I read, this reform, creating this flat, minimum benefit, would actually increase the benefits for over a third of recipients.
Notably I propose no increase in the payroll tax rate.
Regarding SSDI, we should break the disability program free from Social Security and address it separately. This program has its own issues including introducing bad incentives into the economy, but sustainability isn’t one of them. Still, we’ll have to save it another day.
Medicare
Fund the patient, not the system.
The law has a five-year waiting period before taking affect.
Program eligibility will continue to begin at age 65.
Benefits are in the form of an annual cash voucher. Recipients must use at least half of the voucher to purchase medical care insurance (with a wide pool of eligibility by type and style with no geographic, state-boundary limits). The remainder of the voucher can be used however the recipient wishes including purchasing additional medical care and/or insurance coverage, but it is otherwise cash to be used at their discretion.
Coverage can certainly be purchased outside of these amounts as well.
Any of this coverage could extend beyond an annual term.
Catastrophic coverage alone can be sufficient to fulfill the spending-on-medical-care-insurance requirement.
This is the primary initiation of market incentives—asking consumers to seek competitive solutions that match their needs rather than a one-size-fits-all model of elderly health care.
The size of the voucher is initially equal to the then current Medicare expenditure (the amount the government pays at the point of the legislation passing ) ex ante this legislation.4 My rough approximation is that this figure today is about $13,150 based on Romina Boccia’s analysis.
Thereafter, the voucher increases by the rate of inflation as measured by chain-weighted CPI. This is the source of long-term sustainability (savings) for Medicare along with bringing additional discipline to the system as it is not simply assumed that medical care price levels must grow at a rate exceeding the general price level.
The voucher is to be fully recognized as taxable income.
As should be obvious, there is no longer any Medicare connection to Social Security benefits.
Suffice it to say this will require market-based help and a lot more personal responsibility—something we need throughout our health care system anyway.
There is a complete myth of magical thinking regarding Medicare whereby having the government intimately involved somehow better serves people medically. Medicare is ONLY a funding mechanism for medical care. Anything else it is doing that might be dressed up as guiding medical practice is simply a mirage for this actual ultimate purpose. Yes, bringing costs down is a way to offer better medicine—offer, not provide much less give since you cannot make people go to the doctor. But even that presumes the government can bring about the result of better medicine. It cannot. Only a well-functioning free market can “deliver the goods” increasing supply—both quantity and quality.
“So You’re Saying There’s a Chance” versus “Never Tell Me The Odds”
At first blush I thought that sadly there was no chance in hell any of this could pass. However, two things give me hope. First, we absolutely have to do something, or something will be done. The history lesson of America usually and humanity often is that people won’t until they have to, and at that point they actually step up.
Second, listening to a recent Cato symposium on Social Security reform led me to see how many of these proposals are being considered beyond the cloister of free-market idealists like myself (Panel IV in particular).
To paraphrase Ben Franklin: I give you a solution, if you can accept it.
This doesn’t include the roughly $16 trillion increase in budget interest costs.
By making the benefit fully taxable in both solutions, I am effectively not taxing it for low-income recipients while obviously taxing it away some for high-income recipients—those in the middle are somewhere in between of course. This presumes we haven’t fixed the current awful income-based tax system with a much more desirable consumption-based tax system.
Here I am channeling a bit of Rawlsian “Original Position” thinking when defining fairness. It is fair in that we are talking about social insurance that we all could potentially be the beneficiaries of. If we were to look at fairness in a more strict property-rights-taxation-theft framework, this would be a decrease in fairness.
This is one of many devil-in-the-details where we will have to have good government to calculate this figure without politicization (overly-generous politicians spending today tomorrow’s money). Fortunately, this seems pretty surmountable if the legislation properly defines who and how this figure is calculated.