Entitlements

Because of interconnections and the fact that they relate to personal finance, the entitlements system needs to be reformed in conjunction with tax reform. (D.C. does not ordinarily handle such major things in tandem.) Realistically, if the strongest armed forces in the world will be maintained, we cannot make the finances work long-term without making some reduction to Social Security or Medicare spending (or both). The attached article shows how each generation has received substantially more from Medicare and Social Security than it has input. With the exception of the highest earners, everyone has profited and is expected to profit. The lower a person’s income, the better is that person’s return on investment.

Urban Institute Social Security and Medicare Lifetime Benefits and Taxes (PDF)

Medicare: An American Academy of Actuaries’ April 2019 article is titled “Medicare’s Financial Condition: Beyond Actuarial Balance.” Well said. Solution: reasonably reduce Medicare spending — largely by creating incentive for patients to control costs and making the initial Medicare eligibility date the Social Security normal retirement date. (Obamacare or Medicaid can be used to bridge any gap period between actual retirement age and Medicare eligibility.)  The Medicare Part A deductible should be replaced with 15 percent coinsurance. Part B premiums should be cut by half (i.e. 50 percent). However, patients should pay a reasonable additional amount of the cost of Part B services (i.e. 40 percent instead of the roughly 20 percent they now pay). All of part D should be eliminated except for catastrophic coverage (under which, generally, 95 percent of costs in excess of $6,350 paid by the consumer for a year are paid by Medicare), and drug companies should lose significant patent rights (i.e., a 50 percent reduction in patent term) if they sell their product in the U.S. for more than they sell it for abroad. (Art Gardner, an Atlanta patent attorney, deserves credit for the notion of the patent rights reduction solution). The U.S. has the highest drug prices in the world, and we subsidize the rest of the world. FORTUNE Cost of Drugs (PDF). Medicare should cover only health needs.

Social Security: Currently, Social Security revenue from its taxes is exceeded by Social Security outflows for benefits and, in the future, the tax revenues are never expected to exceed the benefit outflows. The retirement age should be gradually pushed back, as explained below. Benefit formulas need to be reexamined in light of changes in American society. In all cases, the annual cost of living adjustment (COLA) should be slightly adjusted to be more in line with seniors’ spending habits. Allen Buckley generally opposes means testing because higher income retirees virtually always paid much more in taxes than the rest of the population while working. However, based on the analysis in the following article (including generational unfairness), he believes benefit freezes (i.e., no more COLAs) should be made to benefits of retirees who do not need Social Security benefits. Social Security Article Nov 2009 (PDF) Article Social Security Denies an Easy Fix (PDF)

Both Medicare and Social Security: Since life expectancies have been increasing, gradually move the normal retirement age for both programs to 70 and adjust it every decade after 2039 for changing life expectancy, so that benefits are paid over a constant percentage of life expectancy, as calculated at age 65. The changes for both should take place over several years (i.e. 6, in ½ year increments), beginning with age 67½ for people born after 1959. Corresponding changes to early retirement age and late retirement age (for Social Security) should also exist. Changing the tax system in the manner outlined above would eliminate the Medicare and Social Security “trust funds.” In reality, these funds are a fallacy, as the surpluses have been loaned to the federal government. Given their investments (Treasury bills), the names are misleading. They would be unlawful with respect to a private sector employee benefit plan. The Financial Sanity Act is a bill that, if enacted, would gradually move the Social Security normal retirement age and Medicare retirement age to 70 (as noted above), and then adjust them every decade for changes in life expectancy. It would also slightly reduce the Social Security COLA and eliminate tax subsidies for health insurance that is not high deductible insurance, while providing that the deductible can be eliminated if co-insurance (to be paid by the patient) is at least 50 percent at all times until the annual high deductible plan limit is reached.  The Financial Sanity Act Bill (PDF)Summary of the Financial Sanity Act (PDF)

Other Entitlements: Entitlements other than Medicare and Social Security should generally be slightly reduced, while eliminating The Ditch. What is The Ditch? It’s an area of income where lower income persons have a higher standard of living than middle income persons, because of the entitlements and refundable tax credits they receive (that middle income persons largely don’t receive). It is summarized in the attached graph relating to a family of four.

As the family’s income increases beyond approximately $29,000, standard of living decreases unless and until income exceeds $50,000. Is this a good thing?

The current system discourages many to make more money, and unfairly and illogically skews market results.  Concerning these non-retirement entitlements, Eugene Steuerle, former deputy assistant secretary of the Treasury, noted in a February 18, 2015 article that while the incomes of the richest 20 percent of Americans (the top quintile) grew from 20 to 30 times the incomes of the poorest Americans (in the bottom quintile) from 1979 to 2011, the ratio of income after entitlements and taxes (and tax credits, etc.) are taken into account has remained relatively flat (going from 5½:1 in 1979 to 6:1 in 2011.)  This is so even though the tax burden of the wealthy has diminished.  So, transfer of wealth through the entitlements and tax systems has increased.

Day-to-day entitlements outside Social Security and Medicare should be changed so The Ditch is eliminated, through a “cafeteria plan” type approach, whereby lower income persons and households can pick the benefits they need from food, housing, and utilities. A possibility that I would support is provided by the green line in the below chart (for a family of four):

Medicaid: Much more control and more financial burden should be transferred to the states. (The above chart does not consider Medicaid, as its eligibility is determined by the individual states.)

In the entitlements and tax reform process, let’s acknowledge that single parent households generally are not, for the parent, child and society, as good as a two-parent homes. The reforms should discourage single parenthood. (Charities can help anyone they wish to help.) An April 5, 2016 article by Gene Steuerle (of the liberal-leaning Urban Institute) provides: “There is an ongoing debate about how much a marriage penalty actually affects decisions to wed, but there is little doubt that avoiding marriage is THE tax shelter for low- and moderate-income individuals.” A March 9, 2020 Wall Street Journal article entitled “Marriage is becoming More Like a Luxury Good in U.S.” provides: “They said they wanted to get married but are holding off because Ms. Dlouhy is enrolled in a publicly funded program that pays for her to earn a nursing license.  Combining their income could jeopardize that assistance, she said, as well as her state health-insurance subsidies.”  This policy must be reversed!

The middle class has been losing ground in recent years. It’s a problem. Basically, over the years, the tax burden on the wealthy has diminished and the entitlements given to lower income people have increased. We need to have a reasonably progressive tax system. While The Ditch needs to be eliminated, taking action to restore the two-parent families (as noted above) should only help the situation (and changes should discourage single parenthood).