Last week Social Security and Medicare trustees released a chilling report that documented the dire financial straits of the programs they oversee. According to the trustees, Social Security will start taking in less money than it sends out in 2016 and by 2037 the fund will go bust, four years earlier than anticipated. Also, Medicare’s hospital fund is already running a deficit and is now in danger of going bust by 2017.
Social Security and Medicare are two of the largest federal government programs. Social Security provides an array of services for disabilities, child insurance, and most importantly, a supplemental income to retiring Americans. Medicare helps to cover hospital costs and medical costs for senior citizens, including a generous prescription drug benefit that the Bush administration added to the program in 2004. The point of these two programs was to prevent seniors from falling into poverty when they were no longer working.
Solutions to these programs have been advocated before by think tanks and task forces. However, Congress has long delayed looking into reforming these programs because of the unpopularity such moves would cause.
This brief will explain the current fiscal status of these programs and why they are in dire straits, proposed changes to these programs, and political impact the dire status of these programs could have in the near future.
Background
Social Security originated back in 1933 as one of Franklin D. Roosevelt’s proposals to fix the economy in the Great Depression. The idea was that if older workers could be encouraged to leave the workforce that it would open up some jobs for younger workers. Over time, benefits in Social Security were expanded to all workers, as domestics and agricultural workers were excluded from initial versions of Social Security, and then began to encompass other goals such as child insurance, which gave money to families if a parent died before a child reached adult years. Critics allege that in expanding the Social Security program to more benefits that its finances have been put in jeopardy.
Medicare was part of Lyndon Johnson’s “Great Society” reforms and was created in 1965 to assist senior citizens with medical costs. Elderly Americans often have trouble on a limited income, and even with the income provided to them by Social Security, to purchase medical services. As a result, the Medicare programs helps to reduce hospital costs and other medical expenses by senior citizens and attempts to reduce burdens they will face in later years. When the Bush administration added a prescription drug benefit to the program it already put Medicare’s finances under further strain. However, the current problem facing Medicare is that its fund for hospital costs is depleting faster than other parts of the program.
Much of the money that comes into Social Security and Medicare comes from payroll taxes that are shared by employees and employers. Medicare gets 85% of its funding from these payroll taxes, which are 12.4% of workers wages. With the economic recession leading to job losses across the country, the government is not collecting as many payroll taxes as it was when economic growth was high. This has contributed to Social Security’s surplus shrinking from $454 billion to $157 billion and pushing up the date when that program will go bust.
Another strain on these programs is the retiring baby boomers. Some of this generation are beginning to retire and many will become eligible for Medicare in 2011. As the baby boom generation retires in larger numbers, there are fewer workers to pay into each of these programs, leading to drain on their finances and imperiling their existence without reform.
Reform Proposals
In the 2000 election there was a large debate between George W. Bush and Al Gore about how to handle Social Security reform. Al Gore’s proposal was to use the Clinton budget surplus to put in a “lockbox” for Social Security (which was captured in a Saturday Night Live sketch). George W. Bush advocated the Republican position that privatization, which would allow workers the option of investing some of their Social Security funds in the stock market for a greater return, was the best way to save Social Security. It would take until his second term for Bush to try a Bush towards reforming Social Security, one that drained much of the political capital he gained in his election over John Kerry, but he failed to create changes to the system. With the recent downturn in the economy, it is no surprise that the Republicans are remaining mute about privatizing the Social Security system.
An Obama proposal to fix both Medicare and Social Security’s finances is that the payroll tax could be increased on workers and employers from the current rate of 12.4% to 14.4%. This would provide more funding to both programs and ensure more solvency. However, raising taxes in an economic recession is a dicey prospect, and one that is most likely not going to be popular with voters. Another problem with this is that it creates a bigger burden on those who are working and does not create a problem for those who are not, an argument that big government opponents love to use against large programs.
A further idea to reform Social Security is to raise the cap on taxable wages. Only the first $106,000 of a person’s income is subject to taxes for Social Security. This means that Bill Gates, despite his immense wealth, only has to pay Social Security taxes on a very small portion of his income. While advocates of this reform do not suggest making a person’s entire income eligible for Social Security taxation, there are proposals to raise this cap to $200,000 and beyond. However, rich Americans have a large lobby on Capitol Hill and due to their contributions to political candidates are heard over the voices of others. For this reason, it will be hard to push a large increase in the cap to save Social Security.
Another controversial reform, but one that has gotten the most play by task forces over the last several decades, is to raise the retirement age. Critics of the current Social Security model argue that when it was devised, Americans did not live as long as they do now and people are living off of Social Security for several decades as opposed to the predicted ten years or less when the program was initially devised. Raising the retirement age is most controversial among senior groups like the AARP who argue that their members have worked their expected number of years and are now ready to cash in on government benefits that they paid into. Due to the fact that seniors vote more than any other demographic group, a politician who advocates raising the retirement age is bound to face immense opposition and have his or her election prospects placed in jeopardy.
Political Impact
While the recent announcement of the fiscal situation of Social Security and Medicare may not surprise Americans, what is surprising is that Congress has still failed to act. This is not the first time Congress and the American public have been informed of the problems confronting these programs, and yet we still have little in the form of action over the last two decades to create reform. There is a tale, though, that back in 1998 Newt Gingrich and Bill Clinton were going to fashion a reform of Social Security, a plan that was thwarted by Lewinskygate.
Many of the problems facing Congress are that they do not want to antagonize the special interests that have a lot at stake in the reform of government programs. Politicians are scared of seniors, unions, business people, etc. and this has let to a freeze over reforms these programs desperately need. However, if these programs go bust at their expected date, it is likely that the party that is in charge will be blamed for allowing them to collapse on its watch. The sad part is that instead of adequately fixing the programs then, Congress will turn to finger pointing and the blame game.
If a political party can find a way to push for reform against special interests there might be significant gain because of their willingness to attack a problem. However, they may face the prospect of being unpopular in the short-term, only being able to claim benefits in the long-term. For this reason, it is unlikely that we will see significant reform now because the Republican Party is already on the ropes and the Democrats do not feel like putting themselves in a position for losing seats in 2010. Also, they do not feel like pushing through new legislative packages while Nancy Pelosi is under fire over the waterboarding issue.