Case Study 13.1: Reforming Social Security and Medicare Social Security is a fed
ID: 1105234 • Letter: C
Question
Case Study 13.1: Reforming Social Security and Medicare Social Security is a federal redistribution program established during the Great Depression that collects payroll taxes from current workers and their employers to pay pensions to current retirees. More than 47 million benefi - ciaries averaged about $1,070 per month from the program in 2010. For two-thirds of benefi ciaries, these checks account for more than half of their income. Benefi ts increase each year to keep up with infl ation as measured by the CPI. Medicare, established in 1965 to provide short-term medical care for the elderly, is an in-kind transfer program funded mostly by payroll taxes on current workers and their employers (benefi ciaries also pay a small amount). Medicare in 2010 helped pay medical expenses for about 40 million Americans age 65 and older plus about 7 million other people with disabilities. Medicare costs about $9,700 per benefi ciary in 2010 and is growing much faster than infl ation. Social Security and Medicare are credited with helping reduce poverty among the elderly from about 35 percent in 1960 to under 10 percent most recently—a poverty rate below other age groups. In the early 1980s, policy makers recognized the huge impact that baby boomers would have on such a pay-as-you-go program. As 76 million baby boomers begin retiring in 2011, Social Security costs and, especially, Medicare costs are set to explode. Reforms adopted in 1983 raised the payroll tax rate, increased the tax base by the rate of infl ation, gradually increased the retirement age from 65 to 67 by 2022, increased the penalty for early retirement, and offered incentives to delay retirement. These reforms are an attempt to make sure that revenues would exceed costs at least while baby boomers remain in the workforce. But these reforms are not enough to sustain the programs. Americans are living longer, fertility rates have declined, and health care costs are rising faster than infl ation. The 65-and-older population will nearly double by 2030 to 72 million people, or about 20 percent of the U.S. population. In 1940, there were 42 workers per retiree. Today, there are 3.3 workers per retiree. By 2030, only 2.1 workers will support each retiree. Based on current benefi ts levels, spending on Social Security and Medicare, now 8 percent relative to GDP and 32 percent of federal outlays, by 2030 will reach 12.5 percent relative to GDP and 50 percent of federal outlays. The huge sucking sound will be the federal defi cit arising mostly from Social Security and Medicare. The Congressional Budget Offi ce projects a 2030 defi cit of 9 percent relative to GDP. All these numbers spell trouble ahead. But you don’t have to look into the future to fi nd trouble. Because of the 2007–2009 recession, Social Security tax receipts declined as people lost jobs, and outlays increased as some of those out of work decided to retire early. As a result, in 2010 Social Security payouts exceeded pay-ins for the fi rst time in history. That wasn’t supposed to happen until 2016, and it put more pressure on the entire federal budget. Prior to 2010, Social Security pay-ins exceeded payouts. The idea was that this surplus would accumulate over time, so there would be funds available when baby boomers started to retire. But Congress never saved any of the surplus; instead they raked it off, put IOUs in the Social Security Trust Fund, then spent it. The Trust Fund is simply a box of government IOUs. Nothing’s there. What to do, what to do? Possible reforms include increasing taxes, reducing benefi ts, raising the eligibility age, using a more accurate index to calculate the annual cost-of-living increase in benefi ts (meaning smaller annual increases), reducing benefi ts to wealthy retirees (they are already taxed on up to 85 percent of Social Security income and pay up to three times more for one part of Medicare), and slowing the growth of Medicare costs. In summary, Social Security and Medicare helped reduce poverty among the elderly, but the programs grow more costly as the elderly population swells and as the fl ow of young people into the workforce slows. When Social Security was created in the 1930s, life expectancy was 60 years, so only a minority would ever reach 65 to get benefi ts. Now people live 20 years longer on average, and they collect benefi ts for most of those added years. Something has to give if these programs are to be available when you retire. President Obama and the Congress raised Medicare payroll taxes on high income households, but these higher revenues will fund health care reform more generally, not Medicare in particular. The health care measure also cuts Medicare funding by about $150 billion over ten years. Social Security and Medicare remain in big trouble. SOURCES: Susan Davis, “Public Faith in Social Security Drops,” Wall Street Journal, 20 July 2010; Ben Bernanke, “Long-Term Fiscal Challenges Facing the United States,” Testimony Before the Committee on the Budget, U.S. Senate, 18 January 2007, at http://www.federalreserve.gov/boarddocs/testimony/2007/20070118/default.htm; Mary Williams Walsh, “Social Security to See Payout Exceed Pay-In This Year,” New York Times, 24 March 2010; and “Status of the Social Security and Medicare Programs: A Summary of the 2009 Annual Report,” Social Security and Medicare Boards of Trustees, at http://www.ssa.gov/OACT/TRSUM/index.html. QUESTION 1. Why are the Social Security and Medicare programs headed for trouble? When will the trouble begin? What solutions have been proposed?
Explanation / Answer
Social security and Medicare programmes were created by federal govt. to help in providing fund for the retirees survival and elderly person in their medical treatment. The fund for these programmes are collected from payroll taxes paid by the current employees and their employers. But with the increasing prices of medical treatment and life expectancy of people, it has become impossible for the federal govt to bear vast expenses for a large number of population. So it is feared that if the beneficiaries of these pogrammes keep increasing at a faster rate compared to the population of payroll taxpayers for these pogrammes, than the social security and medicare programs might be under trouble.
It is estimated that by 2030, Total older population around 65 years & above will be 72 million accounting for 20% US population. With the increasing beneficiaries for these pogramms, the supporting workers population for these pogramms will be only 2.1% causing 9% budget deficit relative to the GDP. With the increasing rate of health care costs, longer life expectancy and baby boomers, the fund for social security and medicare pograme have been exploding which has resulted in budget deficit. Hence these pograms would be in trouble as federal govt would not be able to bear that much expenses.
Solutions like increased payroll taxes, increasing the tax base rate by the rate of inflation have been initiated by the govt to increase the fund recieved for these pogramm. Besides there is the plan to raise the retirement age of worlers from 62 to 67 by 2022 to limit the baby boomers population under check and as well as collecting he taxes for these pogrammes for a longer time. Federal govt has also proposed to heavily penalise the workers who retires from their jobs early and pay incentives who retires at a later age.