GOP is right: Social security and Medicare must be saved

Op-ed views and opinions expressed are solely those of the author.

Recently Congressman Steve Scalise was asked about the GOP plan for Social Security and
Medicare. He defended the GOP position for making both entitlement programs solvent. This is
important because within the next fifteen years both programs will run out of money and
essentially be broke. Something needs to be done now.

The problem is that no good solution exists. So, the best we can do is find the solution that is
least bad.

We are in this position because both programs are pay-as-you-go. That means the people who
are working now, pay the benefits for those collecting. Then when the working people reach
retirement, their benefits are paid by the next generation of workers. (Some have mentioned the
name Charles Ponzi when discussing this arrangement.)

The system seemed to work well since its inception in 1935. At that time, the tax rate was 2%.
The worker paid 1% and the employer paid the other 1%. Workers retired at 65. The average life
expectancy was 67, so the average worker collected benefits for about two years.

Eventually, Social Security covered more than the elderly. The disabled were added. Gradually
the payouts increased. Then the tax rate was raised to 3% in 1950 and 5% by 1978. Today the
tax is 12.4%.

Medicare was started in 1965 and is facing a similar financial fate. The Medicare tax is 2.9%.
It’s higher if a worker earns over $200,000 annually.

Demographics and longer life expectancy are the problem. Baby Boomers are a large portion of
the population. They began retiring in 2011. By 2028 all 60 million still living will have retired.
And they are living longer, meaning they collect Social Security benefits for ten to twenty years.
Some much longer.

There is also a smaller portion of the population working due to lower birth rates in subsequent
generations. In 1935 there were seven workers for each person collecting. Today there are less
than three. That means something must be done or the system will be unable to meets its

One choice is to raise the tax rate. But since the rate is already 12.4%, how much higher can it
go? Besides I think households already feel over-taxed especially when the add up their current
payment for Federal Income Tax, Social Security Tax, Medicare Tax, State Income Tax,
property taxes, sales taxes and miscellaneous government fees.

Another choice would be to lift the earnings limit. Social Security tax is applied up to wages of
$147,000. About 90% of workers earn less than that. Medicare has no limit on income. Why not
remove the Social Security limit and collect the tax on all wages?

Some argue that is not fair. With Social Security, each worker is essentially buying an annuity.
That means he receives a fixed amount (adjusted for inflation) every year from the time of
retirement until death. Since there is a maximum monthly benefit that can be received, shouldn’t
there be a maximum tax paid in?

Some studies say that this action would be a huge tax increase and lead to all the typical
problems associated with a huge tax increase. Disposal income falls which tends to slow
economic growth. Higher taxes for the business portion would reduce capital formation which
also slows growth.

The least bad solution may be to raise the retirement age, gradually to 70 and maybe even 72.
That would increase taxes coming in and reduce benefits going out. If a worker wanted to retire
earlier, they would simply have to create enough personal wealth to sustain them until Social
Security kicked in.

No matter what happens, current recipients would not be affected. Also, people nearing
retirement age in the next five to ten years would not be affected. Younger people, who are
living much longer, would plan to be income-earning until their early 70s. Then retire and
perhaps live another 20 years or more, as advancements in medical science will that

Forget the rhetoric you are hearing about the GOP wanting to destroy Social Security and
Medicare. Quite the opposite, the GOP is trying to save them.


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