Article on Proposed Rule for Social Security and Medicare
A. Three Deficit and Debt Proposals
The concern with the federal budget deficits and the growing federal debt has brought forth three principal proposals: (1) the December 2010 proposal by the bipartisan National Commission on Fiscal Responsibility and Reform (the Deficit Commission Proposal); (2) the April 2011 Fiscal Year 2012 Budget Resolution, The Path to Prosperity, advanced by Congressman Paul Ryan, the Republican chairman of the House Committee on the Budget (the Ryan Proposal); and (3) the proposal of President Obama set out in a speech he gave at George Washington University on April 13, 2011 (the Obama Proposal). These proposals are sometimes referred to here as “the Three Proposals.”
B. Introduction to the Proposal Here for “Phasing-Out” Social Security and Medicare
As discussed below, the three main reasons for the long-term problem with budget deficits and debt are (1) Social Security, (2) Medicare, and (3) Medicaid. In this Article, I set forth a proposal for reforming Social Security and Medicare that none of the Three Proposals address: a “phase-out” of benefits. Under the phase-out proposed here, retirees with high incomes would (1) pay a portion (and in some cases, all) of the cost of Medicare insurance and (2) receive a reduced (and in some cases, no) Social Security payment. Thus, the impact this proposal has on Social Security and Medicare benefits is similar to the impact on the federal income tax of President Obama’s “Buffett Rule” and my article, Beyond the “Buffett Rule”: Making the Income Tax More Progressive.
The phase-out reforms proposed here are not even discussed in the Congressional Budget Office’s March 2011 publication Reducing the Deficit: Spending and Revenue Options. However, a March 2011 study on the means-testing of Social Security by the Center for Economic and Policy Research reports that “[m]ore than 90 percent of [Social Security] benefits go to individuals with non-Social Security incomes of less than $50,000 a year.” As indicated below, the phase-outs proposed here would begin at approximately $50,000 of non-Social Security income and, therefore, could be expected to result in savings of less than 10% of Social Security payments.
These reforms are consistent with the fundamental safety net principles underlying Medicare and Social Security, and if adopted, these proposals would be a positive step in putting Medicare and Social Security on a sustainable fiscal basis.
Before elaborating on these proposed reforms, Part II briefly discusses background information on deficits and debt and the harm they may cause to the economy. This Article next briefly outlines how the issues with Social Security and Medicare are addressed in the Deficit Commission Proposal (Part III), the Ryan Proposal (Part IV), and the Obama Proposal (Part V). This Article then (1) discusses the phase-out proposal for Social Security and Medicare (Part VI); (2) briefly touches on the political problem raised by this proposal (Part VII); (3) briefly addresses the economic argument that marginal tax increases (which these proposals arguably implement) have harmful incentive effects (Part VIII); and (4) provides a conclusion (Part IX).
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