How to Save Social Security While Reducing the Deficit
Last week, Rep. Mark Walker (R-NC), Chair of the House Republican Study Committee, warned that if lawmakers do not deal with the depletion of Social Security trust funds, “the program will not exist in 12 years.” Despite such warnings, plus a large impending budget deficit due to the recent tax cuts and a newly proposed $4.4 trillion budget, Republicans have been proposing ineffective entitlement reforms that fail to address the Social Security crisis.
Last month, Paul Ryan proposed charging wealthier seniors higher Medicare premiums and dissolvingthe Independent Payment Advisory Board (IPAB), a bloated Medicare cost-cutting organization that has failed in its mission. While both measures could slightly offset burgeoning expenditures, a far more effective measure would be to remove the maximum annual taxable amount for retirement and disability insurance. If it were removed, and benefit calculations remained the same, Social Security trust funds would remain solvent for over 60 years. This would drastically reduce the deficit as well.
Medicare accounts for 3.6 percent of GDP, as of 2016. The main part, Part A, which provides uniform hospital coverage for anyone 65 or older, regardless of income, is funded through a payroll tax of 2.9 percent, half paid by the employer and half by the employee. The smaller parts of Medicare, Parts B (medical coverage) and D (prescription drug coverage), derive around 75 percent of their funding from property and business taxes; the rest comes mostly from premiums based on beneficiaries’ incomes.
Ryan’s plan to increase the Part B premiums for wealthier households would barely make a dent in the deficit, since premiums only cover 23 percent of Part B revenue and 13 percent of Part D. Some economists are recommending an increase in the general Medicare payroll tax. But any effectual increase would render the most recent income tax cuts for the middle-class pointless. The focus needs to be placed on retirement insurance benefits.
Retirement insurance benefits, formally known as Old Age and Survivors Insurance (OASI), are the biggest drain on entitlement spending. They account for 4.3 percent of GDP, as of 2017. OASI is funded through a 6.2 percent payroll tax on both employees and employers. But, in contrast to Medicare, there is a taxable income limit. Anyone at least 62 years old can receive pensions, regardless of income, as long as he or she has earned a minimum of 40 Social Security credits, equating to 10 years of earned income. Earned income is income generated through wages or salaries. It does not include investment income, which is generated through passive business activities, such as interest, dividends, and stocks.
The benefits a person receives at retirement are based on average indexed monthly earnings (AIME): The earned annual incomes of up to 35 of the person’s highest earning years are averaged, adjusted for inflation, and divided by 12, in order to calculate a monthly earnings average. Then, AIME is incorporated into a formula that determines monthly benefits for retirement. The higher the AIME, the more benefits received. In order to qualify for the max monthly benefit of $2,687, individuals retiring at 65 must have earned an annual income at or above the maximum taxable amount for every single year of their career, up to 35 years. This number is $128,400 in 2018. (A list of historical maximums can be found here.)
Most households in the highest quintile income bracket, which in 2015 included those making $202,366 or more, qualify for the maximum amount of $2,687 in monthly retirement benefits. Historically, enough of their AIME amount has come from earned income. Not only are higher earners, including millionaires and billionaires, only taxed on the yearly income-based limit, but they also needlessly receive these benefits after retirement.
It is vitally important to remove this yearly income-based tax limit. Imposing a 6.2 percent payroll tax on the full income of those that earn above the limit might seem unjust, given that they won’t see increased benefits. But it would help balance the budget and guarantee the continued existence of Social Security for the low- and middle-income households that actually need it.
Alexander Chaconas is an advocate for Young Voices and a journalist residing in Arlington, Virginia. He writes about criminal justice reform, entitlement reform, and culture. Follow him on Twitter @alex_chaconas.