Monday, February 18, 2008

The Rhetoric on Social Security and Medicare

Ironically, most of the rhetoric on both sides is true. Cuts in Social Security or Medicare would have a big impact on the quality of life of seniors, many of whom may not be able to get a job to supplement their "entitlements."

On the other hand, it is demonstrably true that Social Security payments have increased faster than the salaries for several key segments of the economy. In particular, the current system increases Social Security payments at a rate faster than inflation through the existing COLAs.

Increasing taxes is not a "free" solution either, for reasons that have been beaten to death in previous postings.

The last time I participated in one of the Concord Coalition's sessions as a participant (rather than an organizer), we were able to reach a compromise on Social Security within our "working group." Our compromise was to limit COLAs to the rate of inflation, increase the retirement age, and lift the ceiling on payroll taxes. This was some years ago, so the cost estimates we used are probably well out of date today.

We also laid waste to most agricultural subsidies and made specific cuts to the DOD. I can't remember if we ended up raising the gas tax, but I remember that it was fiercely debated in our group.

One of the more counterintuitive suggestions for dealing with a portion of the growth in Medicare is reducing the role of private insurance companies in providing Medicare. Obviously, this does not resolve the problem, but it would apparently result in a significant cost savings.

Here's a pretty good estimate of the impacts of some of the different proposals for adjusting Social Security (not including privatization):
CBO Report on Social Security

I haven't seen any solid Social Security privatization proposals that don't involve either screwing over current taxpayers or adding hundreds of billions to the national debt.

When Social Security was put into place, the elderly were the poorest age group. That is no longer the case. This disconnect is leading to some young people to challenge Social Security more than they have in the past. For example:
Curious Cat Blog entry

(I'm not endorsing the viewpoint in this blog. I'm pointing out that it is a viewpoint that is becoming more prevalent among young people.)

Here is a similar CBO Report on Medicare and Medicaid.

Social Security was not defined as a welfare program, but it was structured as an income transfer program. A strict means-test could be considered a recognition of what the Social Security program has always been. It has never been an investment fund, so it doesn't make sense to compare "returns" to those available from an investment fund.

Something will have to be done to deal with outstanding obligations. As I see it, the proposals amount to a combination of one or more of the following:

  1. Disavow the outstanding obligations altogether. (This is a fairly radical Libertarian proposal. I don't think that even "mainstream" Libertarians have bought into this one.)

  2. Increase payroll taxes, either by a straight increase in the tax rate or by lifting the cap on total "contributions" over the course of the year. (Doesn't "contributions" sound a lot better than "taxes?")

  3. Restrict growth in outlays by adjusting the COLA formula. There have been several proposals for tweaking the formula in different ways.

  4. Limit the number of recipients, usually by means-testing.

  5. Limit the amount of time recipients receive benefits, usually by raising the retirement age.

  6. Charge it to the national credit card and let our grandkids worry about it. (Or charge it to the national credit card, then have a burst of inflation to reduce the real debt to a manageable level.)

Most of the solid proposals for eliminating the program are really cosmetic overlays for option 6. The ones that don't require a massive increase in debt involve an increase in taxes to support current recipients while requiring an increase in the same workers' contributions to their own retirement accounts.