Social Security and Medicare Entitlements

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SOCIAL SECURITY AND MEDICARE ENTITLEMENTS

We must begin with the stark fact that both of these programs are bankrupt. The unfunded liability (promised benefits minus expected revenues) of Social Security is $17.5 trillion and the unfunded liability of Medicare is $89 trillion. Without fundamental changes soon, we will see massive cuts in future benefits. For example, by 2037, Social Security benefits will have to be cut by about one-quarter. The difference could be made up by tapping general revenues (as some—mostly Democrats—propose), but that would require tax increases so massive as to destroy the economy.

Social Security

A way out can be glimpsed in the fact that Social Security provides only a two percent (2%) rate of return to workers (and even that abysmal rate is going to fall in the future). If we can raise the rate of return by prudent investment in wealth-producing assets, we can continue to meet the promises made to existing and future retirees.
I would support proposals to allow willing workers to invest some part of their FICA taxes into “personal savings accounts,” which would be invested in equities and bonds paying a higher rate of return than the government now pays. These accounts would belong to the individual, and the nest egg accumulated over the years would be sufficient to pay better retirement benefits, and even leave something to bequeath at death.
Those approaching retirement now (say 55 and older) and those on Social Security Survivors and Disability would continue as they are, but younger workers would have a choice.

As the personal accounts grow, they will eventually replace the current system under which today’s workers pay benefits to those already retired. The Congressional Budget Office has examined one variant of this proposal, and concluded that it would make Social Security solvent for good, and would begin to produce substantial surpluses after about 50 years. This proposal has the added advantage of providing a pool of investment capital that will be needed in the future to compensate for a declining work force, if our productivity is to continue to grow.

The personal investment accounts are the primary reform that needs to be adopted, but there are some less drastic changes that need to be considered. These include further indexing of the retirement age as life expectancy increases, and changes in the indexing of Social Security benefits from a wage base to a price base.

We also need honest accounting for these entitlement programs, by bringing them “on budget,” where their financial health can have an immediate impact on other spending and taxing decisions by our elected leaders.

Medicare

The problems of Medicare are hopelessly embroiled in the current “debate” over health care reform, and it is at least possible that Congress will destroy the remnants of our private health care system by converting it into an expanded Medicare-like system. Still, we can hope, and try to think clearly about what needs to be done for Medicare in the event the “reform” fails. As noted above, Medicare is in deficit to the tune of $89 trillion, so something must be done.

The first thing is to move away from a system where no one has any idea of what medical services for the elderly actually cost. As someone said, medical care is the only service in the world where we have no idea what it costs, even when we get a bill. Health care for the elderly, as well as for the rest of us, needs to be driven by what their individual needs are. And no one knows better what their needs are than they do themselves—certainly not some government bureaucrat.

As with Social Security reform, no changes would affect those within ten years of the age of eligibility (65). But for younger workers (those reaching eligibility in 2021), I would support proposals to use the Medicare contributions they have made to purchase health care plans from a list of approved private health care providers.

Under this plan, each recipient would have about $11,000 a year to use as he or she saw fit. If the basic plan chosen is more expensive than that, the individual could make up the difference; similarly, if its cost is lower, leftover funds could be used to purchase long-term care insurance or could be deposited in a Medical Savings Account, to be used to meet routine care, co-pays, and deductible not covered by the chosen plan.

I would also propose a plan to support states like Texas to participate in a pilot project to run their own Medicare program independent of the federal government. If successful, then more states will follow that lead. If we can move more power and authority to the states then we will lessen the dependence on federal programs, which are replete with waste, fraud and abuse of the current Medicare program.