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Retire Better: Coming fixes to Social Security and Medicare are going to hurt

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Washington lawmakers are pretty good at a few things. They’re good at raising money for their next campaign. And they’re really, really good at avoiding difficult problems that might imperil their grip on power. 

This is why some of our biggest problems keep getting kicked down the road rather than confronted head on and solved. 

Nowhere is this more true than the increasingly perilous state of Social Security, Medicare and Medicaid. These are the undisputed Goliaths of the federal budget, projected to devour more than $2.5 trillion in fiscal year 2022, which begins on Oct. 1.

(For people who think that military spending is huge, consider that $2.5 trillion is three times more than the $715 billion that the Pentagon is slated to get. )

Social Security, Medicare and Medicaid are called “entitlements” because, well, you’re entitled to them. You pay taxes throughout your working life, and when you reach a certain age, the money begins flowing the other way. The politicians are always saying how sacrosanct this basic social contract is. But these programs are in trouble, and most lawmakers, in what I consider a vast dereliction of duty, aren’t doing anything about it.

What do I mean by trouble? The government admitted Monday that it can’t guarantee you’ll get all the Social Security money you’re entitled to in the future. All the money that’s been taken out of your paycheck for years, decades? You might not get it back during your so-called “golden years”.

Sorry.

What’s going on here? Social Security is now paying out more than it’s taking in. By 2034 its vaunted “Trust Fund” will go bone dry. What happens then? You’ll still get paid each month, based on whatever payroll taxes are collected. But the way it looks now, you’ll get just 78 cents in the dollar. If that were today, the average monthly Social Security benefit of $1,543 would be $1,203. 

A 22% cut? How’s that for sacrosanct? This is the part where people tell me “Don’t worry, Congress will eventually fix the problem.” Really? When was the last time lawmakers actually inflicted pain upon their constituents? Asked them to make a sacrifice? Because that’s the only way—the only way—Social Security can be preserved. 

Here are the most likely ways to extend Social Security’s solvency farther into the future. All involve some type of pain. Pick one or more: 

Raise the retirement age. The full retirement age is 66 if you were born from 1943 to 1954. It increases gradually if you were born from 1955 to 1960, until it reaches 67. For anyone born 1960 or later, full retirement benefits are payable at age 67. By raising by one month per year, the full retirement age would be 68 in a dozen years. That would ease the pressure on the system. The pain: It would delay full benefits for millions. 

Raise payroll taxes. Right now 6.2% of your income is taken out, and your employer also pays 6.2% (self-employed workers pay the entire 12.4%). One way to ensure that retirees get what they’re “entitled” to is to raise taxes on younger workers still paying into the system. But politicians who want to be re-elected aren’t going to raise taxes on average Americans. Even one key proposal by President Biden to raise this tax on people earning more than $400,000 has already been scrapped.

Raise—or eliminate — the cap on taxable wages. Right now, that 6.2% payroll tax is applicable on the first $142,800 you make. Anyone making more than that? Not a penny more. The cap creeps up a bit each year. But lifting it—which would unleash a gusher of cash into the Trust Fund? This idea has been around for decades, but politicians won’t act.

Medicare’s math is even worse. Its hospital insurance fund—which covers inpatient hospital care, skilled nursing facility care, home healthcare, and hospice care—will run out in 2026. Spending is accelerating because Americans are retiring in drives—some 10,000 baby boomers a day—and, as is the case with Social Security, there aren’t enough younger workers paying into the system to support them. Falling birthrates and an anti-immigration bias aren’t helping this imbalance. 

Meanwhile, some lawmakers continue to act like money grows on trees. I wrote earlier this week that Democrats want to add vision, hearing and dental benefits to Medicare. These are needed benefits obviously, but who pays? On top of this, President Biden has said he wants to lower Medicare’s eligibility age by a full five years, to 60. One powerful Democrat, Vermont Sen. Bernie Sanders, wants it even lower: age 55. 

And what about Medicaid—the state and federal program that provides health coverage for some 79 million low-income and disabled Americans? The federal government, which is trying to expand the program, picks up 90% of the cost, leaving the remaining 10% for states. 

Here’s a sad irony: The pandemic has made the need for healthcare more urgent than ever, but some state lawmakers—largely Republicans—say the pandemic has hurt tax revenues, making it hard to finance Medicaid expansion. There have been some calls to cut Medicaid spending, in fact—right when millions need it most.

These are your entitlements. But they’re in trouble. Politicians know what the honest answer is: pain will have to be inflicted on taxpayers. Higher taxes or reduced benefits (or both)? What’s it going to be?

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