Everyone knows that major cuts in entitlements, primarily to Medicare, are necessary, but few understand just how much higher tax rates would have to rise to fund them if no cuts are made, says Bruce Bartlett, an economist who served under President Reagan and George W. Bush. Optimistically calculated, taxes would have to rise by 61 percent, Bartlett writes in a column for The New York Times.
News stories stating that Social Security and Medicare funds are going broke soon are misleading, Bartlett writes.
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“What really matters for the viability of both Social Security and Medicare is their aggregate costs relative to the economy’s ability to pay them. In this regard, it is best to look at spending as a share of the gross domestic product, especially in the long run,” he argues.
Taken that way, one can figure out just how much the economy would need to grow to avoid tax hikes or, conversely, how high taxes would rise if the economy stay flat.
Bartlett says that the “long term” Social Security deficit implies an increase in income tax revenues to stay solvent. Add in Medicare benefits, and the income taxes collected would need to go from 6.2 percent of GDP to 10 percent.
“In other words, whatever amount you paid on your federal income tax return this year would need to be 61 percent more, now and forever, to pay all the Social Security and Medicare benefits that have been promised over and above the payroll tax,” he writes. “What’s worse, these numbers may be conservative.”
Of course, there is already written into the law a major cut in Medicare fees, a 29.4 percent cut on Jan. 1, 2012. But the fund’s actuaries are running their numbers on the presumption that no politicians will let this happen.
“But what if President Obama and House Speaker John Boehner agreed, as part of negotiations on raising the debt limit, to let the this cut in Medicare fees take effect as current law requires?” Bartlett explains. “That would cut Medicare’s costs very substantially over current policy – something Mr. Boehner has demanded as a price to prevent the Treasury from defaulting on the debt.”
House Minority Leader Nancy Pelosi, D-Calif., says that Democrats are ready to talk about changes to Medicare, although not as drastic a restructure as put forth under the plan introduced by Rep. Paul Ryan, R-Wis., which would substitute government payments for care for a set annual payment of premiums to private insurers.
“When we’re talking about Medicare, we are open to many (changes),” Pelosi said in an interview with Bloomberg News.
“We are listening to every suggestion. But one suggestion we are not open to is the abolishment of Medicare. That is what the Republicans have put forth in their budget. We do not support that.”
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