Entitlement Entreaties
By Shawn Healy
This constitutes the ninth of ten installments of the Pass the Pundits series, a post dedicated to examining the solutions offered by Senators McCain and Obama to a looming entitlement program crisis in America. First, a bit of a backdrop on the current status of the federal programs under examination here, Social Security and Medicare, is warranted. I will address them separately, then dive into the policies offered by the two major party presidential candidates.
According to the non-partisan Concord Coalition, Social Security is on the cusp of financial crisis. Current revenues yield an annual surplus of $70 billion, but this will begin to decline as early as next year, and shift to a deficit by 2017. Initial deficits will be relatively minor (a projected $9 billion in 2017), but grow dramatically over the decade that follows. By 2030, the deficit is expected to reach $256 billion in inflation-adjusted dollars, and consume a growing share of our Gross Domestic Product, from 4.3 today to 6.1 percent 22 years from now.
Social Security is currently financed by a tax rate of 6.2 percent on an employee's wage paid by both the employee and the employer (12.4 percent combined). The Concord Coalition estimates that if the system as it currently stands is to maintain existing benefits levels and obligations to retirees, the combined rate will need to rise to roughly 17 percent, a net increase of nearly 50 percent.
A tax hike is certainly among the reform options on the table. Senator Obama is on the record as a proponent of one, yet remains vague as to what level of income it will apply. Currently, those making more than $102,500 annually do not pay Social Security taxes on an income above that level. While on the surface this may seem unfair, the reality is that Social Security is nothing more than a forced savings program. Benefits paid in retirement are based on contributions throughout one's career, and there is a cap for higher income earners. Asking them to pay more in taxes than they will receive in terms of benefits will change the very nature of the program as it will assume a more redistributional mold. Obama does not seek to lift the current ceiling, but would create a proverbial "donut hole" of sorts, taxing income once more at either the $200,000 or $250,000 threshold (he is on record for both). McCain, by comparison, shuns such a tax increase.
Moving from the revenue side of the equation to the benefit provision side, it is reasonable to ponder reduced benefits with the looming fiscal crisis on the horizon. This could take the form of lower monthly payments, a higher retirement age, or even a means-tested cut-off for higher income earners. However, both candidates are on the record for supporting the maintenance of current benefit provision levels moving forward. To speak otherwise would be to commit political suicide.
A third alternative is partial privatization of Social Security, a proposal pushed unsuccessfully by President Bush in 2005. This would allow current workers to divert a small portion of their current contributions into private accounts, while leaving the bulk of their money in the public system. The latter option would pull the legs from the table of the pay-as-you-go system that operates currently. The private accounts would likely have a mix of low-risk securities from predefined plans, but the details at this juncture are murky beyond this. The proponents hope that the funds in these accounts will grow at a faster pace than the Social Security Trust Fund as a whole, thus supplementing anticipated shortfalls in the latter. Obama has stated his unequivocal opposition to any such measure, while McCain has embraced it wholeheartedly. If elected, the Arizona senator pledges to reach across the aisle to make private Social Security accounts a reality.
We turn next to Medicare. The program, launched in 1965, contains two basic components: a managed care plan through which members receive virtually all of their services, and a fee-for-service plan that covers hospitals, supplementary insurance, and most recently, prescription drugs. As of 2005, the hospital insurance portion of the plan was no longer fully funded by existing revenues, so funds are currently extracted from the overall federal budget, further increasing deficit spending. The twin forces of rising health care costs and our aging population, not to mention the largest expansion of the program since its inception (prescription drug benefit in 2003), are the primary threats to a program with even more daunting obstacles that Social Security.
The candidates once more offer only general prescriptions (pardon my pun) to the Medicare crisis. Much of McCain's plan is rooted in his more comprehensive health care reforms (see earlier post, Health Care Conundrum), but he does promise to hold down costs associated with Medicare, to help seniors hedge against rising premiums, and to maintain or even improve the quality of care provided. He voted against the prescription drug benefit in 2003, and would limit its subsidies to more affluent seniors as a means of controlling costs.
Obama also rests his solutions in his even more expansive health care agenda, but pledges to reduce waste in the Medicare program and eliminate subsidies to the private Medicare Advantage program. He also promises to fix the "donut hole" in the presciption drug plan even though he proposes to create one with Social Security. Currently, the first $2,250 of prescription dug costs are subsidized, as are those greater than $5,100. The estimated 4 million seniors who fall within this "donut hole" are required to assume the entire cost burden of their prescription drugs. Obama also pledges to provide greater guidance for seniors in terms of what prescription drug plan best fits their needs. He anticipates that costs will fall through competition for seniors' loyalties.
Together, the two candidates should be commended for placing forth general solutions to problems in an area of politics perennially referred to as the "third rail." True, contrasts emerge, particularly on Social Security, yet both are committed to preserving these two bedrock retirement programs. Their differences on Medicare are more tied to their overall health care proposals than the specifics about the program. Both are committed to necessary action, whatever the form, for there are chips in our foundation at a time of great financial anxiety. Might Senator McCain or Obama be the President who finally works with both parties in Congress to find a permanent panacea to one of the tests of our time?
According to the non-partisan Concord Coalition, Social Security is on the cusp of financial crisis. Current revenues yield an annual surplus of $70 billion, but this will begin to decline as early as next year, and shift to a deficit by 2017. Initial deficits will be relatively minor (a projected $9 billion in 2017), but grow dramatically over the decade that follows. By 2030, the deficit is expected to reach $256 billion in inflation-adjusted dollars, and consume a growing share of our Gross Domestic Product, from 4.3 today to 6.1 percent 22 years from now.
Social Security is currently financed by a tax rate of 6.2 percent on an employee's wage paid by both the employee and the employer (12.4 percent combined). The Concord Coalition estimates that if the system as it currently stands is to maintain existing benefits levels and obligations to retirees, the combined rate will need to rise to roughly 17 percent, a net increase of nearly 50 percent.
A tax hike is certainly among the reform options on the table. Senator Obama is on the record as a proponent of one, yet remains vague as to what level of income it will apply. Currently, those making more than $102,500 annually do not pay Social Security taxes on an income above that level. While on the surface this may seem unfair, the reality is that Social Security is nothing more than a forced savings program. Benefits paid in retirement are based on contributions throughout one's career, and there is a cap for higher income earners. Asking them to pay more in taxes than they will receive in terms of benefits will change the very nature of the program as it will assume a more redistributional mold. Obama does not seek to lift the current ceiling, but would create a proverbial "donut hole" of sorts, taxing income once more at either the $200,000 or $250,000 threshold (he is on record for both). McCain, by comparison, shuns such a tax increase.
Moving from the revenue side of the equation to the benefit provision side, it is reasonable to ponder reduced benefits with the looming fiscal crisis on the horizon. This could take the form of lower monthly payments, a higher retirement age, or even a means-tested cut-off for higher income earners. However, both candidates are on the record for supporting the maintenance of current benefit provision levels moving forward. To speak otherwise would be to commit political suicide.
A third alternative is partial privatization of Social Security, a proposal pushed unsuccessfully by President Bush in 2005. This would allow current workers to divert a small portion of their current contributions into private accounts, while leaving the bulk of their money in the public system. The latter option would pull the legs from the table of the pay-as-you-go system that operates currently. The private accounts would likely have a mix of low-risk securities from predefined plans, but the details at this juncture are murky beyond this. The proponents hope that the funds in these accounts will grow at a faster pace than the Social Security Trust Fund as a whole, thus supplementing anticipated shortfalls in the latter. Obama has stated his unequivocal opposition to any such measure, while McCain has embraced it wholeheartedly. If elected, the Arizona senator pledges to reach across the aisle to make private Social Security accounts a reality.
We turn next to Medicare. The program, launched in 1965, contains two basic components: a managed care plan through which members receive virtually all of their services, and a fee-for-service plan that covers hospitals, supplementary insurance, and most recently, prescription drugs. As of 2005, the hospital insurance portion of the plan was no longer fully funded by existing revenues, so funds are currently extracted from the overall federal budget, further increasing deficit spending. The twin forces of rising health care costs and our aging population, not to mention the largest expansion of the program since its inception (prescription drug benefit in 2003), are the primary threats to a program with even more daunting obstacles that Social Security.
The candidates once more offer only general prescriptions (pardon my pun) to the Medicare crisis. Much of McCain's plan is rooted in his more comprehensive health care reforms (see earlier post, Health Care Conundrum), but he does promise to hold down costs associated with Medicare, to help seniors hedge against rising premiums, and to maintain or even improve the quality of care provided. He voted against the prescription drug benefit in 2003, and would limit its subsidies to more affluent seniors as a means of controlling costs.
Obama also rests his solutions in his even more expansive health care agenda, but pledges to reduce waste in the Medicare program and eliminate subsidies to the private Medicare Advantage program. He also promises to fix the "donut hole" in the presciption drug plan even though he proposes to create one with Social Security. Currently, the first $2,250 of prescription dug costs are subsidized, as are those greater than $5,100. The estimated 4 million seniors who fall within this "donut hole" are required to assume the entire cost burden of their prescription drugs. Obama also pledges to provide greater guidance for seniors in terms of what prescription drug plan best fits their needs. He anticipates that costs will fall through competition for seniors' loyalties.
Together, the two candidates should be commended for placing forth general solutions to problems in an area of politics perennially referred to as the "third rail." True, contrasts emerge, particularly on Social Security, yet both are committed to preserving these two bedrock retirement programs. Their differences on Medicare are more tied to their overall health care proposals than the specifics about the program. Both are committed to necessary action, whatever the form, for there are chips in our foundation at a time of great financial anxiety. Might Senator McCain or Obama be the President who finally works with both parties in Congress to find a permanent panacea to one of the tests of our time?
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