A Fair Cut to Social Security

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Most economists agree that an honest, non-ideological strategy for solving the federal government’s debt problem must include a carefully crafted combination of spending cuts and tax increases. And these changes must be substantial enough to make a significant difference in the nation’s budget.

Social Security payments have been the largest single mandatory expenditure in the federal government’s annual budget since 1993, accounting for about 24% of total spending in 2013. The ongoing retirement of the Baby Boomer generation is constantly increasing this amount so some changes should be made to reduce the cost.

On the income side of the solution, I believe the fairest strategy is to increase the available revenue by raising the Social Security wage base. On the payment side, there are proposals to increase the age when people become eligible to begin collecting retirement benefits. I strongly oppose them because they would break a promise made to workers that have paid into the system for years. Furthermore, the mental health of a lot of people is based upon the hope they can retire at 62, the earliest age a person can begin receiving SSA retirement benefits.

But the Social Security Administration (SSA) pays out more than retirement benefits. They also issue disability benefits through the Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) programs. In order to receive these payments a person must be unable to work for at least 12 months or have a fatal disease. If they’ve previously worked and contributed to the Social Security system through payroll taxes, then they and their dependents are eligible for SSDI. If they didn’t, they are only eligible for SSI, which is typically a smaller check, and their countable assets cannot exceed $2,000. In other words, SSDI is a disability insurance program and SSI is welfare.

Disability Rules Should be Tightened

According to the SSA, in 2013 the payments to SSDI recipients totaled about $141 billion and SSI recipients received about another $53 billion. This is serious money, so tightening the eligibility requirements could produce significant savings, especially since SSI recipients are also categorically eligible for Medicaid.

Congress tightened the SSA’s disability rules in 1996 when it passed the Contract with America Advancement Act, which terminated benefits for SSDI and SSI recipients whose primary impairment was drug addiction, alcoholism, or both. This law also required the SSA to conduct regular reviews of each recipient’s medical condition, typically every three years, to verify they were still disabled.

But I think there are more self-induced medical conditions that should disqualify applicants for SSDI and SSI disability. For example, why should the taxpayers have to help support somebody whose medical problems are the result of obesity, chewing tobacco, or cigarette smoking?

I’m not suggesting that we should suddenly discontinue benefits for people like this who are already receiving payments without giving them a chance to change their behavior. The SSA already has a program called Ticket to Work that helps people to rejoin the work force, although participation is voluntary. But current recipients with self-induced disabilities which can be overcome should be required to participate in Ticket to Work. If they don’t want to participate, their benefits could be cut incrementally every year until they comply, or their checks could be stopped altogether.

A Fair Tax Increase To Help Reduce the U.S. Budget Deficit

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There are several ways the federal government’s growing debt can be reduced. None of them, however, can make a big enough difference on their own. Economic growth can reduce the relative size of the debt, but not enough to solve the problem soon enough. Cutting government spending can also reduce it, but if the cuts are too severe they will hurt the economy and could cripple essential government services. Likewise, tax increases could hurt the economy if they aren’t done right. This means an honest, non-ideological strategy for solving the debt problem must include a combination of carefully crafted spending cuts and tax increases.

Most of the Republican candidates in this fall’s Congressional elections can be faulted for failing to describe exactly how they’d cut government spending. But on the other side, most of the Democratic candidates are failing to identify sensible tax increases.

Taxes, of course, aren’t usually popular, so any increase has to be perceived as fair. Furthermore, it must generate enough revenue to make a difference without hurting business growth.

Limit Should Be Raised On Social Security Payroll Tax

A change to the limit on the Social Security payroll withholding tax fits this description. The revenue collected from this tax helps to fund the old age, survivors, and disability insurance payments which are administered by the Social Security Administration. Currently, every wage earner has 6.2% of their gross pay deducted from each paycheck for this tax, and their employer pays a matching amount. But the problem is that in 2014 this tax only applies to the first $117,000 of each employee’s earnings. This taxable portion, called the Social Security wage base, is adjusted annually to keep pace with inflation. But an explanation as to why the limit exists in the first place has never been fully explained by Congress.

Requiring high wage earners to pay more in Social Security taxes is fair. They wouldn’t necessarily have to pay 6.2% on all of their earnings because the wage base limit wouldn’t have to be eliminated altogether as long as it’s significantly increased above the current amount. And the percentage of tax paid on earnings in excess of the existing wage base limit could be lower than 6.2%. Also, requiring employers to match this new tax would be more liable to harm the economy, so their tax contribution for earnings in excess of the existing wage base limit could be waived or reduced. The point is that something could be worked out if our politicians were willing to address the issue.

Some might argue that forcing high wage earners to contribute more to Social Security is a form of unfair wealth redistribution, since they are less likely to need the benefits. But the existing rules, were only lower wager earners pay the payroll tax, have helped to create a regressive tax structure that hurts the middle class.  And just because somebody makes good money one year doesn’t mean it will happen every year. Besides that, a financially sound Social Security system is in the national interest and a responsibility that should be shared by every American.

A Meaningless Republican Campaign Slogan

dead republican elephantRepublican presidential and congressional candidates continue to use a campaign slogan that goes something like this: “We need to cut federal government spending to reduce the national debt in order to improve the economy.”  It sounds good, and certainly makes a nice sound bite, but it doesn’t really make any economic sense.

First of all, cutting government spending will slow down the economy and cause a recession,  or maybe even worse – if it’s done too quickly or severely. Secondly, there’s no direct correlation between the size of our national debt and the current health of the economy.

The enormous size of our growing national debt, of course, is a cause for concern for our future, when interest rates will inevitably be higher, significantly increasing the cost of payments on the debt. But for now the Federal Reserve is intent on maintaining historically low rates in order to stimulate the economy. This buys us some time. The size of the national debt will grow smaller in relative terms as the economy grows. But we still need to attack the problem by reducing or eliminating our budget deficits. Fortunately, we’re already moving in that direction, as the size of federal government budget deficits have been steadily decreasing for the last several years.

Improving Government Efficiency Cannot Eliminate Budget Deficits

Still, the national debt is at an all time high, so there’s a lot of work to be done on this. But the real issue is how to accomplish it. When Republican candidates say they’d reduce government spending, but don’t provide any specific details about how they’d do it, their promises are virtually meaningless. Many, for example, say that all we need to do is cut government waste, fraud, and abuse to solve the problem. It’s certainly a good idea to minimize these things, but their claims that this would significantly reduce government expenditures are ridiculous.

Federal budget cutting needs to be done in a rational manner, using incremental measures that don’t harm the economy. And it’s obvious to professional economists and anybody who objectively assesses the situation that the problem can’t be solved with spending cuts alone. There will have to be a combination of spending cuts and tax increases. The only recent attempt by Congressional Republicans to honestly deal with deficit reduction was the Tax Reform Act of 2014, introduced by Rep. Dave Camp (R-MI), former chairman of the House Ways and Means Committee. Most Republicans, however, exhibited little enthusiasm for Mr. Camp’s fair-minded proposals, and Camp is no longer in Congress.

U.S. federal spending FY2015
Identifying smart and fair proposals for federal spending cuts coupled with tax increases involves making difficult decisions – something many politicians try to avoid. Social Security, healthcare, and national defense are the nation’s biggest budget items. Cutting any of them is a difficult task. And raising taxes of any kind is always a difficult job. It will take real leaders to address the problem.

Politicians from both parties are guilty of failing to address the situation. But many Republicans are using the debt reduction issue as a pretense for pursuing their extreme ideological goals, like reducing funding for regulatory agencies, particularly those responsible for enforcing environmental laws, or cutting Social Security and Medicare. Other Republicans want to see an increased U.S. military presence around the globe, without talking about how much it would cost. They are making a difficult situation worse.

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