President Joe Biden tweeted last week that he would be a “nightmare” for Republicans who dream of cutting Social Security and Medicare. With this statement, Biden showed that he is either shockingly ignorant of these two programs and any Republican reform efforts—or lack thereof—or is just another politician who washes his hands of what happens when the programs are out of office and hit impending hurdles.
I have no idea what it is. However, before expressing my hypothesis, it is worth reconsidering the problem more fully. Every time I write about Social Security and Medicare, newspapers get letters to the editor revealing how little the general public understands about entitlement spending and where it’s going. This misunderstanding is particularly acute and ominous in the case of Social Security.
It is important for people to realize the reality because no single issue will affect our financial future more than Social Security and Medicare. These two programs alone account for 45 percent of the federal budget. In addition to Medicaid, these programs The Drivers of our current and future debt. And to drive home the gravity of our predicament, remember that Medicare and Social Security together face a $116 trillion deficit over the next 30 years.
How Congress decides to deal with the deficit will have serious consequences for everything else in government or on the tax burden on Americans, whether they are rich or poor.
That’s why it’s worth trying to reach out to those who, for example, believe Congress shouldn’t reform entitlements because they’ve paid for and are entitled to every dollar. This claim is incorrect. Americans are indeed paying for some benefits, but not for themselves and not for what they will receive.
Consider Social Security. The program is funded by a payroll tax of 12.4 percent. Collected revenue does not belong to workers in the sense that paying taxes entitles us to Social Security in retirement. But these revenues do not go to our name account. Instead, they are used to pay current retirees. This is a pay-as-you-go system, not an investment account. Previously, adjustments were sometimes required.
Second, beneficiaries receive more than their taxes. The average Social Security retiree will receive $698,000 and pay only $625,000. This explains the bankruptcy of the program. It’s even worse for Medicare because the average beneficiary receives three times more than taxes pay for that program.
So, while no serious reformer wants to cut either program a dime more than necessary to make it safe and sustainable, workers and retirees upset about the changes will have no legal rebuttal no matter how much in payroll taxes they pay. The Supreme Court said as much in a judgment in 1960.
Voters can certainly throw people who want to touch Medicare and Social Security out of office. These political constraints have kept each Congress as far as possible from seriously reforming these programs—but that doesn’t mean the programs won’t be cut. Failure to reform them will, in fact, result in automatic termination of benefits.
Consider Social Security again. Right now, benefits paid come from payroll taxes as well as money borrowed by the Treasury. Why does the Treasury do this? That’s because Social Security has a trust fund with about $2.6 trillion in IOUs that it can redeem if payroll taxes don’t cover all the benefits. This has been happening since 2010.
These IOUs come from additional payroll taxes collected from past employees. That money was exchanged for pieces of Treasury bond-paper. The Treasury then spent these funds on whatever Congress directed: defense, highways, education, you name it. This is important for two reasons. First, until Congress changes the law, Social Security will seek and receive money from the Treasury as long as there are IOUs in the trust fund. Second, when the trust fund runs out of IOUs around 2033, Social Security benefits by law About one-fifth will be cut. Something similar will happen with Medicare, very soon.
Biden—who has spent half a century in the Beltway and knows how it works—unwittingly used the right word to describe his intention to block Medicare and Social Security reform. Without work, benefits will be cut with no chance of sheltering veterans who are poor. A nightmare for them.
Copyright 2023 CREATORS.COM.