According to the latest Trustees Report, the unfunded liability in Social Security and Medicare is $163 trillion – almost 7 times the size of our entire economy. An unfunded liability is the difference between benefits already provided by current law and the future tax revenues expected to pay for those benefits.
In a sound retirement system, we would have $163 trillion in the bank, drawing interest. In fact, nothing is being saved. Instead, payroll tax dollars are being spent the very day they come in the door.
To avert financial disaster for our children and grandchildren we need to reform these elderly entitlement programs. Yet reform efforts are easily demagogued by opponents unless they contain real benefits for the current generation of retirees.
Fortunately, there are reforms that would benefit today’s seniors, even as we prepare to save the system for tomorrow’s retirees. Here are a few problems that need to be solved, and should have been solved long ago.
Problem: Robbery by Red Tape
Acting Social Security commissioner Kilolo Kijakazi admits that Seniors face extraordinary delays when they try to contact SS by phone. When they finally get through, the advice is often incorrect. When seniors claim benefits by acting on that bad advice, often they are not allowed to correct the mistakes. But if Social Security makes a mistake and overpays, it demands its money back. If the senior can’t pay, Social Security stops sending monthly checks.
Poor administration by Social Security personnel is undoubtedly a major reason why:
- The typical retiree is leaving $182,370 (in present-value terms) on the table by claiming benefits too soon.
- 13,000 plus widow(er)s collectively have lost $130 million in Social Security benefits because of mistakes in claiming spousal benefits. (Estimate of Social Security’s own Inspector General.)
- Married couples also lose thousands of dollars because they make mistakes in claiming spousal benefits.
The answer: Let Social Security be managed like an efficient private pension fund.
Problem: Penalties for Working
The Social Security earnings limit for people who have not yet reached the normal retirement age is $21,240. Above that limit, beneficiaries lose $1 in benefits for every $2 of earnings. During the year of their normal retirement age, they lose $1 in benefits for every $2 of earnings above $56,520.
When this tax on earnings is added to income, payroll, and Social Security benefit taxes, middle-income seniors can face a 90% marginal tax rate.
The answer: abolish the earnings test.
Problem: Taxation by Inflation
Although Social Security benefits are indexed for inflation, the tax on those benefits is not. This means every Social Security recipient pays higher taxes when there is inflation – even though they may have no increase in real income.
Treasury Inflation Indexed Securities, or TIPS bonds, work like this: if there is 6% inflation, you get an additional 6% interest payment. Yet even though the extra interest keeps you whole, you still have to pay taxes on it.
The answer: index the tax code so that seniors are not taxed on inflationary gains.
Problem: No Health Savings Accounts for Seniors
Seniors are not allowed to contribute to HSAs, once they become eligible for Medicare. This denies them a right young people have: the ability to manage some of their own health care dollars.
The answer: Let seniors have access to Roth HSAs – with after tax deposits and tax-free withdrawals
Problem: Limited Open Enrollment in Medicare Advantage
Like the practice in the individual market exchanges, the relationship between buyer and seller in Medicare Advantage is asymmetric. Buyers must choose a plan (and the plan’s network) during a 6-week period. They have an additional chance to change plans afterwards, but beyond that point they are stuck with their choice until the next open enrollment opportunity. Sellers, on the other hand, can change their network at any time during the year.
The answer: Continuous open enrollment.
Problem: Inadequate Right of Return
Medicare Advantage enrollees can always return traditional Medicare. But if more than a year has passed, they are no longer able to enroll in a medigap plan and pay premiums unrelated to their health condition in many states.
The answer: Let beneficiaries return to traditional Medicare without penalty.