PoliFiLogic.com

My personal view of Social Security and Medicare is simply this: “entitlements” are promises made by the government that should never be broken. People pay taxes all their working lives to pay for them. You can bet your sweet bippy that when my time comes, I’m collecting, and I’ll fight anyone who tries to stop me. I paid plenty, and expect to collect my fair share.

If you’re a shallow-thinker you might interpret the last five sentences to mean that I don’t want the government to do anything about social security or medicare. If so, you’d be mistaken. I want the government to honor its promises, but I also want it to stop making promises it can no longer afford.

All the hoopla about healthcare brings renewed focus on deficits and debt. Healthcare will become the fourth entitlement, alongside Social Security, Medicare and Medicaid. We are very close to the day when Medicare and Social Security appear likely to cause financial collapse. Adding another entitlement will simply hasten that day.

Social Security and Medicare are “pay as you go” programs, meaning that money paid to recipients comes, for the most part, from taxes paid by non-recipients. As it currently stands, amounts collected exceed amounts paid out. The Social Security Administration created a trust fund to hold the excess and invest it in US Treasuries. This means that a portion of the government’s accumulated deficits has been financed by the trust fund.

Problems arise when tax collections fall short of payments. When that happens, the trustees expect to go to the Treasury Department and redeem Treasuries for cash. The Treasury Department has no money, due to deficit spending, and will be forced to borrow it. This increase in debt is likely to cause those who buy Treasuries to either demand very high interest rates or stop buying altogether. In either case, the economic effect would be terrible. Borrowing to pay debt is unwise, but the inability to borrow can be disastrous for any nation (think Greece).

According to reports issued by the Trustees of Social Security and Medicare, Medicare will run out of money in 2017, while Social Security will remain solvent for thirty years (until 2038). Those dates are when the trust fund runs out of Treasuries to redeem. But, according to those same studies, Medicare will need to start redeeming Treasuries as soon as 2011 and Social Security as soon as 2017. I’ve read other studies that put the date for Social Security as early as 2013, so may be facing financial Armageddon very soon.

Much is said about the upcoming drain on these two programs caused by “baby boomers”. This is truly a concern, but what about forty or fifty years from now when future generations start drawing from these programs? Will they be solvent then? Who among us believes that Social Security and Medicare will be able to honor their promises when children born today reach retirement age? We need to solve these problems now, while there’s still time.

The solution seems simple – stop them. There, that was easy, wasn’t it? Allow me to explain. While the American people were promised certain benefits, those promises don’t extend to the unborn. They also shouldn’t extend to those who haven’t yet paid FICA or Medicare taxes. Therein lies the path to the eventual elimination of Social Security and Medicare.

Starting now we should stop funding the trust and divert FICA and Medicare taxes into retirement and Health Savings Accounts (HSA) for anyone under the age of twenty five. Taxes that would otherwise be paid by that group should be used to fund structured, asset allocated investment accounts. The accounts should be unmanaged, meaning that contibutors can’t direct investments. As a person ages, the asset allocation could, at predertimined times, shift to be more conservative, such that, upon retirement, investments would be in bonds and insured certificates of deposit. The HSA accounts, along with supplemental insurance, should be able to handle medical care, while retirement accounts could be used to purchase annuities that guarantee income for life, along with inflation protection and survivor’s benefits. Since the accounts are held for the benefit of the contributor, they could pass to his/her heirs upon death. In this way, widows and orphaned children would benefit.

This program would, in forty years, solve a problem that has been over seventy years in the making. It would also provide the economy with a great deal of liquidity, which is the lubricant that makes business run. Interest rates would be lower and jobs more plentiful.

I realize markets sometimes crash, but I believe the risk of the government failing to honor these programs is far greater. Properly allocated investments, particularly those that shift with age, should reduce the risk of loss. Market declines might cause people to postpone retirement, but this is exactly what some are being forced to do today.

Two major issues remain. First, we must fund the existing programs until they expire. We still have a few years before “baby boomers” reach retirement age in great numbers, so there’s time. There’s no easy way to do this except to increase FICA and Medicare taxes. If we act today, we can create sufficient funding to ensure Medicare and Social Security are viable for forty more years. These amounts are calculable, and not likely to require major tax increases since we’re adding only twelve years to Social Security and thirty three years to Medicare. A modest increase in FICA and Medicare taxes should suffice. Additionally, we might consider eliminating the salary limit for Social Security as is the case for Medicare.

I never suggest tax increases without an offset. The US has the third highest corporate tax rate in the world. This is a major reason why many new businesses locate overseas. The best way, in my opinion, to offset tax increases for Medicare and FICA is to cut corporate income taxes. This will reduce prices while increasing economic activity and employment. Though some believe otherwise, corporations pay no tax – we pay it.

The second issue is that a program like the one I describe is probably unconstitutional. Government has no power to force people to help themselves through forced savings. In my opinion, the same applies to healthcare – forcing people to buy it is not a government right. However, if Franklin Roosevelt could get around constitutional issues to establish Social Security, I’m confident a program as helpful as the one I describe can be made constitutional, as well.