Medicare Part B Means-Tested Premium Adjustment

You may recall that the Medicare Part B premiums are means-tested. The adjustments based on 2006 income tax returns have just been published to recipients. The regular premium has been increased to $96.40. For any recipient with income over $82,000, the premium is increased. The amount of the increase depends on the amount of income. The additional monthly premium for 2008 will range from $25.80 to $142, for a maximum cost of $238.40. I does not matter how much social security you receive, the up-charge in premium is based solely on your 2006 income. It does not matter that you paid into the system for your working life (or at least the life of Medicare), the implied promise of equal treatment has been broken. Furthermore, it is my understanding that the income limits are not adjusted for increases in the cost of living, although the premiums are. This will affect more and more people as time goes by.

This is a portent of possible changes to the old age portion of the social security program. That program is already subject to means testing via the tax on a portion of social security payments. Some politicians are talking about a more explicit means-test, reduction of benefits depending on other income.

We need to let our Congressional representatives know that these changes are unacceptable. The best way to save the program for future generations and avoid putting more money into the hands of the politicians is private accounts.

Save Social Security.

What's a Voter to Do?

As the political season heats up, it's time for those of us interested in the issue of Social Security reform to take a look at the current crop of presidential candidates. Of course, at the same time, we cannot take our eyes off the Congressmen and women. Even when we had a president willing to look at private accounts, e.g., Presidents Clinton and Bush, the Congress remained adamantly opposed. Think it has anything to do with the power to buy our votes that the ability to manipulate the present system provides? Or perhaps, it is the pot of money which is spent "off the books." that makes them so reluctant to take any meaningful action.

So what is being proposed? Let's start with two of the front runners. Barack Obama and John Edwards have expressed a willingness to raise or eliminate the cap on wages. That would be an enormous increase in the amount of taxes collected without a commensurate assurance that the money would actually be available to pay benefits.

"Eliminating the cap on payroll taxes would be, by far, the biggest tax hike in U.S. history: more than $1.3 trillion in new taxes over the first 10 years alone. As bad as that would be in the aggregate, it would be even worse for individual workers. A worker earning $103,000 per year would pay $1,240 more in taxes each year." http://www.socialsecurity.org/

Unfortunately, none of the other candidates has been willing to make any specific proposal. So much for profiles in courage.

Save Social Security Now

Voices of the People

I was in a group of senior citizen's today discussing the work of Milton Friedman. Today's topic was the Federal budget deficit / debt. Almost 50% of the $9 trillion debt is attributable to "intragovernmental" transfers of which the largest portion is related to Social Security.

At a point, the question was raised as to how to solve the Social Security pending shortfall. The first suggestion was to raise the tax on wages by 2%. A second suggestion was to raise the retirement age. The burden of both of these ideas would fall on young people. Note: few in the room currently pay taxes on wages because most are retired and receiving Social Security payments. It's always easier to let the other guy pay for something.

In fairness, a few suggested cutting benefits.

The shortfall will have to be paid by either an increase in taxes or a cut in benefits or both. However, creation of truly funded personal retirement accounts would mean that on an on going basis the system would become funded and there would be on additional shortfall.

Let's Save Social Security now.

Treasury Issues Second Issue Brief

The Department of Treasury has issued the second of three briefs on the issue of Social Security. You can access it at treas.gov/press/releases/reports/treasssissuebriefno2.pdf.

Save Social Security

Social Security Announces 2008 COLAs

The Social Security Administration has released information about increases in the benefits payable to recipients in 2008. Benefits will be adjusted for the cost of living by 2.3% beginning January 1, 2008.

"Retirees are going to feel a disconnect this year between the COLA increase and the reality of the inflation they face," said Mark Zandi, chief economist at Moody's Economy.com. "If this calculation were done in another three months, it would be measurably higher."
Advocates for the elderly said the small increase highlighted the need to revamp the cost-of-living adjustment to better reflect prices paid by retired people, including the money they spend on health care.

Does it really make a lot of sense to increase benefits even more than they are presently being increased considering the precarious state of the system's finances? Congress might decide change the COLI calculation for seniors in order to buy some more votes next year but that would be imprudent.

Save Social Security

Young People Take Action

Are you a young worker, perhaps one just entering the workforce? If so, the Social Security issue is of great importance in your life. You have many years to prepare for retirement. You may think now that (1) it's so far away, you will think about it some other time, or (2) that you cannot afford to save now. Well, retirement will come sooner than you think. Even if you cannot save much, save something. Get into the habit. You'll be surprised at how quickly it adds up. Then, think about the wisdom of having private accounts in Social Security; either add on accounts as Congressman Rahm Emmanuel proposes, or a private account funded with your social security taxes, as proposed by some others. Right now you and your employer put a total of 12.4% of your wages into the social security system, plus the funds that go toward medicare. That's a lot of money in anybody's savings regime. Think what that could grow to if it were invested in a conservative mix of stocks and bonds. Even if only your own direct taxes (6.2%) were invested and earned as little as an average of 4% a year (far below the historical average), you would be able to purchase an annuity far in excess of what you can expect to receive from social security.

Save Social Security

US Treasury Issues First of a Series of Briefs on Social Security

Secretary Paulson has issued the first of a series of briefs about Social Security. The first is intended to describe the nature of the problem. It tells how we got here and discusses options for remedying the system's shortfall. You can link to it at www.treas.gov/press/release/hp572.htm.

The key points in the brief are as follows:

• Social Security faces a shortfall over the indefinite future of $13.6 trillion in present-value terms, an amount equal to 3.5 percent of future taxable payrolls. Looking at the gap over a shorter horizon provides only limited information on the financial status of the program.
• Social Security can be made permanently solvent only by reducing the present value of scheduled benefits and/or increasing the present value of scheduled tax revenues. Other changes to the program might be desirable, but only these can restore solvency permanently.
• Delaying changes to Social Security reduces the number of cohorts over which the burden of reform can be spread. Not taking action is thus unfair to future generations. This is a significant cost of delay.
• By itself, faster economic growth will not solve Social Security's financial imbalance - realistically, there is no way to 'grow out of the problem.'

See page 1 of the linked brief.

The $13.6 trillion dollar shortfall comes from the fact that those who retired in the earliest years of the program received far more than they contributed. As a consequence, in my opinion, the shortfall should be met from general tax revenues and not put on the backs of current and future workers.

Save Social Security

Rahm Emanuel (Rep. Ill. Dem.) Supports Supplemental Accounts Linked to Social Security

Rahm Emanuel, chairman of the House Democratic Caucus, has apparently seen the wisdom of individual retirement savings accounts which are supplemental to Social Security. I, for one, applaud his conversion to this position.

In a Commentary article in the Wall Street Journal on September, 13, 2007, Mr. Emanuel called for voluntary personal savings accounts funded by a minimum 1% of compensation from each of the employee and employer. Under the proposal, employers would be required to establish the accounts, subject to the ability of employees to opt out. At least the initial 1% would be made on a tax deductible basis. He would also allow greater voluntary contributions. He is proposing that the accounts be invested in low cost funds similar to those used by the Federal Employees Thrift Plan.

I know that these ideas were proposed by others over the past couple of years, but as Ronald Reagan used to say, I don't care who gets the credit as long as the job gets done.

Mr. Emanuel sees his proposal as a start on finding long-term solutions to Social Security's funding issues. He acknowledges that finding sustained commitment to fiscal discipline and bipartisanship may be hard to come by in a presidential election year but he says"...while Americans wait for long-term answers on Social Security, we should act now to give them more ways to start building retirement savings of their own".

I agree. This is a good start.

Save Social Security.

Senator Clinton on Social Security

The following was posted by FreedomWorks. We need a plan to save Social Security not unrealistic promises to do nothing and not an increase in the payroll tax for young workers.



September 5, 2007 HILLARY CLINTON TO INCREASE TAXES TO PAY FOR SOCIAL SECURITY DISASTER?

FreedomWorks responds to Sen. Clinton's recent comments.For more information, call Adam Brandon at (202) 942-7698 or visit http://www.freedomworks.orgWashington, D.C. --

Democratic presidential candidate Hillary Clinton said today that she would not cut Social Security benefits, raise the retirement age, or allow personal accounts for workers. This leaves only one option: Clinton intends to raise taxes on hard-working Americans in order to pay for the $11.4 trillion in unfunded liabilities.Clinton has a history of inconsistency on the issue. The New York Times reported today that she said, "We need to get back to the fiscal responsibility of the 1990’s when we weren’t raiding the social security trust fund." But in March of this year, she voted against a bill that would have barred the government from pulling money from the fund. And despite voting to allow the government to continue to dip into the Social Security trust fund, Clinton has criticized businesses for not fully funding their pension plans and other obligations to workers. Businesses should fully fund their employees’ 401k plans, but we are confused as to why Senator Clinton, as an elected official with direct access to the Social Security money, refuses to live up to any such obligation herself. Clearly, Clinton recognizes that Social Security’s $11.4 trillion unfunded liability is a problem, but her implicit endorsement of raising taxes to pay for it isn’t the answer. FreedomWorks President Matt Kibbe stated, "Senator Clinton is eager to get her hands on more taxpayer dollars and to continue spending these dollars not on Social Security, but on her plans for HillaryCare and bigger government. Until she can show that she will stop raiding the current Social Security trust fund, taxpayers should not trust her with more of their hard-earned money."

What Do You Want to Know about Social Security Reform?

As the editor of this blog, it occurs to me that there may be many questions about Social Security reform. Why do we need it anyway? Isn't the present system working perfectly well? What can be done to make the system better? If you have been following this blog, you know that I believe reform of Social Security is essential. The sooner we start, the less costly it will be.

Following is a list of questions about which you may want additional information. I will summarize the responses to this blog and let you know what others are thinking about.

Do you want to know what happens to the taxes paid in by employees and employers?

Do you know that there has been a surplus accumulating since 1983? Do you want to know how those funds are handled by the federal government?

Are you concerned about what is likely to happen to those persons currently receiving Social Security with or without reform?

You know that most workers pay into the system from each paycheck. Do you know how that money is returned to them? Do you know what happens to the funds paid in by or on behalf of single people if they die before reaching Social Security age? Do you know that under the current system, workers subsidize non working spouses? (That may be a perfiectly acceptable social goal but is it economically justified?) Do you know that working spouses who earn less than the Social Security wage limit and who are married to a high wage earner actually do not receive a benefit based on their own taxes?

Are you concerned that if personal retirement accounts were instituted, people would invest foolishly and wind up with no retirement income? Do you have suggestions for avoiding that consequence?

Let me know what concerns you about the current system. Let me know why you think we need not make any changes, if that is your opinion.

Do You Have an Ownership Interest in Social Security?

Many people think that Social Security is guaranteed. They think they have an ownership right to amounts they have paid into the system in the form of taxes over their working lives. That assumption is not correct.

The United States Supreme Court in Helvering v. Davis decided in 1937 said, "The proceeds of both the employee and employer are taxes to be paid into the Treasury like any other internal revenue generally, and are not earmarked in any way." Generally, people believe that Social Security is the third rail of politics, as they say, and that the politicians would never dare to reduce or eliminate benefits. Well, the fact of the matter is that they have done just that. In 1983, Congress cut back benefits for all workers by extending the age at which one may begin to receive full benefits. At the same time, Social Security benefits were subjected to income taxation.

As I mentioned in a previous post, since passage of the Medicare Modernization Act which gave us the Medicare drug program, premiums for Medicare Part B are subject to a means test. This means that retirees with income above a certain amount must pay a higher premium. Some may say that only affects the wealthy. Well, even if that were relevant, the amount of income is not adjusted for increases in the cost of living. Consequently, as time goes on more and more people will have to pay the higher premium.

This system is broken and needs an overhaul. Write your Congressman. Let him or her know that your vote is not for sale.

Save Social Security.

American Academy of Actuaries

In January 2007, the American Academy of Actuaries ("AAA") published a Public Policy Monograph entitled "Social Security Reform Options". The Monograph may be viewed at www.actuary.org/briefings/medicare_June07.asp. It is a generally very thoughtful review of the suggestions for reform of the system. I would, however, like to make a couple of comments to which I would welcome feedback.

Beginning on page 9, the AAA details changes which could be made within the current structure. First, they opine that a combination of tax changes (read increases) and benefit changes (read cuts) could be enacted in order to share the cost of reform between workers and beneficiaries. Not mentioned is the fact that current beneficiaries have already seen both an increase in the tax burden during their working lives and a decrease in the benefit due delay in the full retirement age, taxation of the benefits for some participants and means-testing of the Medicare Part B premiums, again for some workers. Next, in discussing any increase in taxes, they recognize that such an increase would result in loans to the Treasury and therefore would increase the amount of bonds to be redeemed ultimately. That seems to me to be an exacerbation of the problem. Since Social Security funds are currently loaned to Treasury, the repayment burden when the bonds are redeemed to pay benefits is part of the current crisis. Finally, as part of the solution, AAA indicates that some suggest that the cap on wages subject to FICA could be removed. However, those people then question the "appropriateness" of the government providing very high retirement benefits to workers with the highest incomes. Come now, either the program is an earned benefit as many taxpayers perceive or it is a welfare program. In actuality it is both. However, to increase taxation on higher paid workers without a concomitant increase in benefits would further increase the welfare nature of the program. Not a very politically palatable idea.

On page 15, AAA discusses a double-deck benefit formula. They indicate that the proponents of this idea believe it would allow elected official greater flexibility to make decisions about the balance between social adequacy and individual equity. The problem with this idea is that elected officials already use the Social Security system to buy our votes with our money. Why would we want to enhance this ability?

AAA begins its discussion of individual accounts on page 20. On page 21, AAA discusses an earned right to Social Security. They state "[b]y making workers owners of their [individual] accounts, individual account plans would likely strengthen workers' perception that they have an earned right to their Social Security benefits". In reality, they would make the perception a reality. Currently, Social Security is not a right as has been made clear by the Supreme Court in several cases. Individual accounts, however, would be property of the individual in the manner of 401(k) accounts or IRAs. AAA raises concerns that workers with individual accounts with a guaranteed minimum benefit might be tempted to make risky investments. Most proposals for individual accounts, recommend limited investment options, similar to the Federal Employees' Thrift Savings Plan ("TSP"). AAA worries that administrative costs would be very high, particularly if the program were voluntary. Costs in private individual account plans such as 401(k) plans and in the TSP are modest due to economies of scale. It is reasonable to think the same would occur in individual accounts under Social Security. AAA is concerned that workers could run out of money during their or their spouse's lifetime. This could be managed by providing the benefit be paid in the form of an annuity to the extent of existing Social Security program benefits with the balance paid as the individual would choose.. Finally, AAA is concerned that due to inertia not enough workers would participate if the accounts were voluntary. Private individual account plans which are governed by ERISA now permit employers to mandate a contribution, subject to an individual's right to opt out. A similar rule could be adopted here. Social Security is already coercive so this minimum level of coercion in the new program should not cause political problems.

AAA is concerned about financing the transition. While it will be expensive, the transition costs can be paid from general revenue as the underfunding will be. Just as the first generation to receive Social Security benefits did not contribute to the program but was paid from the contributions of those then working so the transition costs can be paid from general revenue. At least this time the source of the funds would be all taxpayers and not just workers. That seems a bit more equitable.

Finally, AAA is concerned that the legislators, in order to please the public, could be persuaded to permit distributions from the accounts during the working life. This should be limited to purchases of life insurance and disability insurance during the build-up period for the accounts. Distributions during the working life are not available now, there is no reason to change this. The program, as long as we must participate in Social Security, should not permit distributions during the working life.

Dick Armey's Op Ed in the Manchester Union Leader

Dick Armey has written an OP Ed piece published in the Manchester Union Leader on July 25, 2007. I have inserted it below.

Dick Armey: NH can make retirement security a part of the Presidential debate
By DICK ARMEYCommentary

REFORMING retirement security in America is the greatest political opportunity -- and responsibility -- of our generation. Yet the topic of Social Security and Medicare is shockingly absent from Presidential hustings.
Simply ignoring the problem does not mean it is going away. Thomas Saving, a trustee of the Social Security and Medicare programs, estimates a breathtaking $83.6 trillion unfunded liability in the two entitlements, which is a tremendous gap between promised obligations and what the government will actually collect in payroll taxes.
Serious reforms of these broken government programs based on personal ownership have fallen victim to Republicans who don't dare and Democrats who don't care. Washington simply will not take the issue of retirement security seriously, until the American people force them to do so.
After all of the political demagoguery and tactical missteps of last year's failed debate, what do the American people actually think about their retirement security under Social Security and Medicare? New survey data released by McLaughlin and Associates found that nearly nine in 10 likely voters are concerned about "catastrophic problems with Social Security and Medicare in the future that could directly affect the quality of [their] retirement." These findings transcended party lines.
The core problem is not merely one of solvency. We could balance the books tomorrow by drastically slashing benefits and raising taxes. Paying more and getting less is considered a "bipartisan fix," but such painful solutions only temporarily solve the government's problem and do nothing to improve the retirement security of Americans. Such a fix will force younger workers to pay a double penalty of higher taxes during their working life, only to receive less of a benefit in retirement.
The McLaughlin survey makes it clear that voters want entitlement reform to be a major part of the national conversation during the 2008 presidential campaign. Ninety-six percent of voters said it is important that "a candidate for President in 2008 concentrates on the present and future problems with Social Security and Medicare by discussing and demonstrating a realistic plan to provide retirement security for current and future retirees."
Voters also want elected officials to take a broad look at the problem, with a strong super-majority of 84 percent of voters agreeing that a national retirement security program should include provisions for health care, as well as income.
Voters are not afraid of change, with seven in 10 approving of "changing our current retirement system so that their payroll taxes are placed in a secure account that they own and control and are allowed to grow until they retire when they can withdraw the funds as they need for income and health care expenses."
It is time to give American workers the chance to create and fund protected retirement accounts that they can own, control and pass on to their children. The government would provide the structure and appropriate safeguards, but the individuals would have control over their own retirement destiny.
Outside of government, there is an ownership revolution, with bankrupt defined-benefit pension plans being replaced with individually owned defined-contribution retirement plans, which are portable, interest-earning and secure. Let us also be clear that leaving federally sponsored entitlement plans should be optional; individuals would simply be given the choice between federal or personal control.
This is where the voters of New Hampshire have a special responsibility. If primary voters demand action on entitlements, politicians will respond. On June 6, when asked by activists from Students for Saving Social Security whether he would support giving people more control over their retirement accounts, Mayor Rudy Giuliani responded, "I'm going to tell you my overall philosophy that applies to Social Security, health care, jobs, school choice: It's your money. You should have as much control over it as I can give you. You can do a better job with your money than the mess in Washington. When we give you more control over Social Security, we move forward."
Sen. John McCain and Gov. Mitt Romney have made similar public statements in support of personal accounts, but the issue is unfortunately not mentioned on the issue pages of their respective campaign Web sites. Social Security is also conspicuously absent from the issue pages of the leading Democratic candidates.
I believe that pocketbook voters in New Hampshire -- Democrats, Republicans and independents -- are looking for a political entrepreneur willing to break convention by offering a serious, adult policy solution to the federal government's failing retirement programs. If voters build the political stage for real change, will the next President have the wisdom to step up?
Dick Armey, U.S. House majority leader from 1995 to 2002, is chairman of FreedomWorks Foundation.

An Interesting Website

You might be interested in reviewing the ideas at http://www.americaislistening.com. This website proposes a method for saving they system which would use the entire 7.65% FICA and Medicare tax paid by the individual to fund private retirement accounts.

What about Disabilty and Death Benefits?

The current system provides disability payments to workers who become disabled and unable to work prior to retirement age. It also provides a death benefit of $225. Under some proposals for reform, disability benefits would continue to be provided through the trust fund. Death benefits would be provided through the ability to transfer one's retirement account to beneficiaries at death.

Another proposal would direct a portion of the funds allocated to the personal retirement account in the early working years to be used for the purchase of long-term disability insurance. This is relatively inexpensive insurance. Once an individual account was large enough to provide a secure source of funds to the worker and his/her family, the amount set aside could be eliminated and the funds used solely to fund the account. Likewise, life insurance could be purchased during the early working years.

Let's Save Social Security.

Are Most People Smart Enough to Invest Their Own Money?

I am a strong advocate of voluntary personal retirement accounts. I believe that in the long run such accounts will (1) solve the funding problem, and (2) provide a greater benefit than is available under the current system. This has been demonstrated in numerous studies. I refer you to Social Security: The Inherent Contradiction by Peter J. Ferrara or the updated version, New Deal for Social Security by Ferrara and Michael Tanner. Even at relatively low rates of return, workers in all income categories are projected to have greater retirement benefits than they will have under the current system. Another interesting paper is "Social Security versus Private Retirement Accounts: A Historical Analysis" published in the Federal Bank of St. Louis Review in March/April 2005.

Even if they accept that personal retirement accounts are theoretically able to pay greater benefits many people worry that individuals would make poor investment choices either because they lack investment education and experience or because they would make risky choices. This risk could be managed by limiting the investment options to a small number of conservatively-managed mutual funds similar to those offered by the Federal Employees Thrift Plan.

In future postings, I will address the issues of spousal benefits in case of the death of the earner and disability concerns.

Private Accounts

AARP, in the May issue of the Bulletin, http://www.aarp.org/bulletin/socialsec/sssaveit.html, provided an Editorial and an article entitled "Keeping It Afloat." by Thomas N. Bethell. The editorial favorably referred to the 1983 compromise in the US Congress which led to the current status of the program. The article proposed 8 ways to keep the system afloat. Of the 8, five would increase the amount paid into the system, primarily by working taxpayers. The proposals were to (1) raise the ceiling on the amount of payroll subject to the earnings tax; (2) raise the payroll tax rate; (3) raise the retirement age from 67 to 70; (4) preserve the limited estate tax and dedicate it to social security; and (5) increase taxation of benefits. The other 3 are (1) adjust the COLA to reflect the true rate of inflation; (2) invest part of the social security trust und in securities; and (3) reduce benefits for future retirees.

In 1983, Congress enacted provisions intended to fix the problem for at least the following 75 years - note that is long past the time any of them would be affected or their seats at risk. The problem is, it id not work. My concern is that any proposed solution which puts more money into the hands of the Congress will not solve the problem but will only provide more money for them to buy our votes.

A reasonable solution would be to permit taxpayers on a voluntary basis to direct that their share of social security tax payments be directed into personal retirement accounts. That money would accumulate during their working lives and become a personal asset upon retirement. It would be paid out as an annuity and, at the election, of the employee, any amount in excess of the amount needed to purchase an annuity equal to social security, could become part of the individual's estate.

Let's think about this.

Save Social Security

This is the first post on this blog. I intend to post occasional information and opinion regarding the need to reform Social Security and, in particular, the need to add personal retirement accounts to the mix. Social Security was a wonderful program when it was established during the 1930's. It did exactly what President Roosevelt intended it to do. It kept senior citizens from (1) falling into abject poverty and (2) kept them out of the work force so that younger folks could find work. Even so, it did not solve the fiscal crisis in the country at that time - the Depression. Only the Second World War solved those problems.

Subsequent changes to Social Security have made it financially unsound and impossible to sustain. There are any number of proposals offered to solve the financial problem. Most of them involve taking even move money from the pockets of workers and transferring it to people of retirement age (of which I am one). Why should I object to that you may ask? The reason is simple equity and common sense. Equity demands that we not make unreasonable burdenson demands on the younger worker and common sense tells us that at some point, the golden goose will rebel.

Let's think outside the box and try to come up with solutions to address this problem.