
As the monolith controlling most US healthcare dollars, Social Security and Medicare should be better understood.
Manhattan Institute summarized the situation succinctly in April 2023.
Long-term inflation causes economic pain across the board. The Social Security program’s trustees released a report that revised insolvency dates to a year earlier than previously forecasted, thanks in part to inflation. Proposed solutions to bolster program funding include raising the cap on earnings subject to Social Security taxes and raising the retirement age. Writing for National Review, MI’s Brian Riedl explores the growing deltas between Social Security and Medicare revenues and liabilities, then recommends a phased series of reforms to avoid the need for drastic future action.
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https://manhattan.institute/policy/health
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In nursing school, we were told Social Security would "run out" at the time we retired. It's the sort of real threat that was also remote, besides being impossible to change from the individual student nurse perspective.
Well, it's not so remote any more.
Independent Institute outlines the options.
https://blog.independent.org/2024/07/09/day-of-reckoning-for-social-security-draws-closer/
Day of Reckoning for Social Security Draws Closer
Tuesday, July 9, 2024In ten years, Americans counting on Social Security benefits for income will be in for a shock.
The shock will come because the trust fund that provides about one-fifth of the cash Social Security benefits receive will run out of money in 2033. Starting in 2034, under current law, Social Security will only have enough money to pay 79% of its promised benefits. Everyone who receives retirement benefit payments from Social Security in that year will see that income stream slashed.
That’s according to Social Security’s Trustees, who issued their 2024 report in May. When the Old Age and Survivors’ Insurance (OASI) trust fund is depleted, the agency can only pay benefits from the money it collects through its dedicated payroll taxes. Technically, because that’s what is written into the current law, those reduced benefits are also promised benefits.
None of this is really news. Social Security’s trustees have been telling this same basic story for much of the last decade. The only parts of the story that have changed are the projected timing for when the trust fund will run out of money and how big the benefit cuts will be when that happens. As we get closer to these projected events, the Trustee’s estimates of their timing and the size of the benefit cuts have firmed as they should. At ten years out in 2024, they are no longer long-term projections.
Costly Choices Lie Ahead
Social Security’s trustees have some ideas for keeping Social Security’s retirement benefits at their 2033 level. One of those ideas involves taking money from its Disability Insurance trust fund and using it to pay both retirement and disability benefits. Doing that would delay benefit cuts for two years, after which all these benefit payments would be cut by 17%. The cuts would then continue, growing slowly until they reach 27% in 2098.
Another option would be to increase the payroll taxes that fund Social Security benefits. Right now, that’s 12.4% of the wage and salary income earned by working Americans, and most see half that amount come straight out of their paychecks while employers pay the other half. To avoid cutting Social Security benefits, the Trustees estimate they would have to increase the total employee and employer payroll tax rate to 15.73%.
A third option would hinge on when those who receive Social Security benefits start getting them. They could keep everyone who is already receiving Social Security benefits as of 2023 from experiencing any cuts. Doing that, however, would mean bigger benefit cuts for everyone who starts receiving benefits after that year. If they take this approach, anyone who starts collecting benefits in 2024 or after would see their benefits cut by almost 25%.
They could also mix and match these options. No matter what, whatever happens will take an act of Congress.
Speaking of which, Congress has at least six new Social Security bills to consider. One way or another, Social Security reform is coming. Whether anyone likes it or not.
Craig Eyermann is a Research Fellow at the Independent Institute.
Taxes on social security? Taking disproportionately from the elderly?
Two free market economists, courtesy of The Hill, break down something only the federal government could mess up this badly.
Audio available at the link.
https://thehill.com/opinion/finance/4827384-social-security-benefits-tax/
How to fix, not cut, the Social Security benefits tax
Technically, this isn’t even a tax on benefits. We already impose a tax on additional income that Social Security beneficiaries earn while they collect Social Security checks. If Social Security is the only source of income, then individuals don’t pay any tax on it.
As a result of this tax and other penalties, seniors who continue to work often pay the country’s highest tax rates — much higher than the rates young people with the same income pay. That’s unfair and a punishment for those who work while they collect Social Security benefits.
On the other hand, as others have pointed out, completely eliminating the tax would cost the Treasury large revenue losses at a time when deficits are already exorbitant.
However, there is a way to reform some of the worst features of the tax at low cost.
Under current law, if one-half of Social Security payments plus other income exceeds $25,000, the individuals must pay income taxes on 50 cents of Social Security benefits for each additional dollar they earn.
Since they also must pay regular income taxes on that dollar, they have to effectively pay taxes on $1.50 for every $1 of earnings.
That means that the tax rate on an additional dollar of earnings is 50 percent higher than it would be for a young person with the very same income.
It gets worse.
Once the combined income threshold reaches $34,000, the tax on Social Security benefits rises to 85 percent for each additional dollar they earn. They must pay taxes on $1.85 for each dollar of earnings — 85 percent higher than it would be for a young person with the very same earnings.
For someone in the 15 percent bracket for ordinary income:
- The Social Security benefits tax potentially increases the tax rate on pension income and 401(k) and IRA withdrawals from 15 percent to 27.75 percent.
- It can raise the tax on capital gains and dividend income from zero to 12.75 percent.
- Even tax-exempt income can be taxed at a rate of 12.75 percent.
That’s right: Seniors are required to pay a tax on bonds that are supposed to be tax-free.
For most of the system’s history, there was no tax on Social Security benefits. But in 1983, Congress passed legislation to “save” Social Security, mainly with two large benefit cuts: raising the full retirement age and taxing benefits. The original Social Security benefits tax was structured so that it initially hit only very high-income seniors.
But here’s the catch: The benefits tax was intentionally not inflation-indexed. So, while the tax initially was paid by less than 10 percent of retirees, today it is paid by more than half. Unlike other parts of the tax code, inflation imposes an extra tax on most Social Security beneficiaries.
What makes things worse is that working seniors below the full retirement age can face astronomical marginal tax rates when the benefits tax is combined with another unjust “tax”: the Social Security earnings penalty.
This year, early retirees lose 50 cents of Social Security benefits for each dollar they earn beyond $22,320. That’s a 50 percent tax rate.
When income and payroll taxes are added in, senior workers can face a marginal tax rate that exceeds 80 percent — i.e., for every additional dollar they earn, they take home 20 cents.
Note that these high marginal tax rates only apply to middle-income seniors. Low-income seniors don’t earn enough. For high-income seniors, the marginal tax rates go away when benefits have been completely liquidated by the earnings penalty or when they have been “fully taxed” by the benefits tax.
Given our fiscal situation today, it’s likely to cost too much to fix all of these problems in the near future. However, abolishing the earnings penalty would probably be a revenue gainer for the government as seniors work more hours and they and their employers pay additional income and payroll taxes.
We could also eliminate those very high marginal tax rates by including a portion of the benefits in ordinary (taxable) income instead of the Rube Goldberg arrangement we have today. No longer would seniors be paying rates that are effectively 50 percent or 85 percent higher than what other workers pay.
This would also eliminate the stealth inflation tax imposed on seniors because tax rates on ordinary income (unlike the current Social Security benefit tax) are already inflation-indexed.
Seniors who want to continue to work, invest and contribute to the economy shouldn’t be so heavily penalized for doing so. And the government should never benefit from the inflation it causes at the expense of the elderly and the disabled.
John C. Goodman is president of the Goodman Institute for Public Policy Research. Stephen Moore is chief economist at FreedomWorks and co-founder of the Committee to Unleash Prosperity.