Tags: recession | retirees

Fixing the Safety Net: Benefit Cuts, Tax Hikes Ahead

By    |   Wednesday, 13 May 2009 02:22 PM

Stunned by the latest report on looming shortfalls in the Social Security and Medicare trust funds, members of Congress are considering cutting benefits for wealthy Americans.

Politicians now expected Social Security to go broke by 2037, four years earlier than estimated, and Medicare to be insolvent by 2017, two years earlier.

Benefit cuts via “means-testing” has been kicked around for years. In effect, if you can afford your retirement on private savings, no entitlement payments for you, even if you put into the system for decades.

Here’s the rub: Who is wealthy? By one calculation, it would mean anyone making more than $60,000 a year would be cut off from Social Security.

That would be the necessary level at which to cut benefits, according to Dean Baker, co-director of the Center for Economic Policy and Research.

“Such inconsistencies pervade the arguments of those wanting to cut Social Security benefits,” Baker writes in The American Prospect.

“Those who care about logic would note that the loss of more than $10 trillion dollars of wealth in the housing crash and stock market plunge would be an argument against cutting Social Security benefits for retirees and near retirees.”

Michael Lind of the New American Foundation says that, at worst, the Social Security shortfall is only a minor cause of the total budget deficit.

“The anti-Social Security lobby always presents the ‘unfunded liabilities’ of ‘entitlements’ in scary dollar terms, rather than as percentage points of GDP,” Lind notes.

He says that over the next 75 years, the Social Security shortfall should only be around 1 percent of total U.S. GDP projected for the same time frame — and could be easily eliminated altogether.

Nevertheless, if benefits are not cut to some, then somebody somewhere has to pay more to keep the system in the black. That means taxes. Officials hinted as much when the reports were released this week.

"The sooner we come together to make the difficult but achievable changes needed to strengthen the solvency of Medicare and Social Security, the more time we'll give the American people to plan and to adjust, and the sooner we'll be able to ensure that these vital programs will be as important for generations to come as they are today," said Treasury Secretary Timothy Geithner, one of trustees of the two programs, at a news conference.

It's simple math: As millions of baby boomers retire, far fewer of their kids join the system.

Had the Bush tax cuts been made permanent, Lind argues, they would have created a 75-year shortfall between three and six times greater than Social Security may face.

In Lind’s view, that means you tax the people who do have money, i.e., the “rich.”

What is less clear, of course, is how many “rich” will be left to pay for rising trillions in entitlements, and how low “rich” will be redefined to fit the new economic reality we face.

Taxpayers are going to get hit at the state level, too. Just as private companies are struggling to finance their workers’ retirement healthcare costs, states and municipalities face the same problem.

The solution will undoubtedly include higher local taxes.

Deloitte Consulting estimates that public pension systems owe employees about $1 trillion in current and future healthcare costs.

Deloitte figures that as medical expenses jump higher, those costs will siphon off growing amounts of state budgets. The money states use to pay retirees’ health benefits, which can include full coverage until they die, comes straight out of annual state budgets.

With the cost of healthcare rising, and states’ revenue dwindling, the math isn’t good. Last year,

employer health insurance premiums soared 5 percent, Fortune magazine reports.

Alex Pollock, resident fellow at the American Enterprise Institute, tells Moneynews.com the essential problem is that states use “Wimpy” finance theory in funding their retirees’ benefits.

“If you recall Popeye’s friend Wimpy, he said, ‘I’ll gladly pay you Tuesday for a hamburger today,’” Pollock explains.

“That’s how all these things are set up. Somehow you will pay in the future for promises that are made today.”

Unless health care costs fall sharply in coming years or a monstrous economic boom fills states’ coffers beyond belief, citizens can look forward to paying higher taxes and seeing their services cut as money is diverted to pay for the retirees’ healthcare.

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Stunned by the latest report on looming shortfalls in the Social Security and Medicare trust funds, members of Congress are considering cutting benefits for wealthy Americans.Politicians now expected Social Security to go broke by 2037, four years earlier than estimated,...
Wednesday, 13 May 2009 02:22 PM
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