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SS and Medicare Proposal

Sorry for the length of this - it's a policy proposal I've been trying to get off the ground.  I'm not sure how it could be adapted to fit New Jersey, but it is something that impacts us all.


Proposal for
Funding Social Security
And Medicare

Goals of Proposal

1)    To put Social Security and Medicare on secure financial footing
2)    To spread the costs and benefits of the programs to all Americans in a fair manner
3)    To remove Social Security as a political issue in the future by creating a mechanism that automatically self-corrects future funding concerns

Method of Accomplishing Goals

1)    Make all income subject to Social Security and Medicare taxes
2)    Peg all Social Security and Medicare financial limits to inflation to provide the exact same benefits to all persons, present and future
3)    Impose a benefit limit on Social Security of $50,000 to prevent high income persons from bankrupting the system through unnecessarily high benefits
4)    Compensate those whose benefits are limited with income tax credits and higher personal IRA deductible limits.
5)    Raise the cap on Social Security taxation to $1 million
6)    Raise the tax rate on Medicare after Social Security is no longer being taxed to maintain a flat tax across the board on all income
7)    Open Medicare B to all Americans for voluntary full purchase price buy-in
8)    Provide tax incentives for employers who assist their employees in purchasing Medicare B coverage
9)    Deduct the cost of full purchase price buy-in through pre-tax payroll deduction

According to the SSTF manager’s report, Social Security faces an unfunded liability of $3.7 trillion through 2078.  This includes exhausting all SSTF assets currently held.  Negative cash flows would start in 2018.

Currently, SS payroll taxes are halted after income reaches $90,000 (automatically adjusted for inflation).  The SS portion of payroll taxes is currently 12.4% with the collection split between employee and employer.  Self-employed persons contribute the entire 12.4%.

According to the IRS “Tax Stats at a Glance” the top 10% of income earners in tax year 2002 made a minimum of $92,663.  This means that a full ten percent of the income-earning population received at least some of their income SS payroll-tax free.  This represents a 12.4% tax bonus for individuals in the top ten percent of income earners.

The same year, 168,608 individuals filed an income tax with earnings in excess of one million dollars.  This means that at least 91% of their income was not taxed for SS purposes.  With respect to only SS taxes, this represents $153,433,280,000 that was not taxed if no one earned more than one million dollars.  Imposing the full 12.4% tax on this amount would have yielded slightly more than 19 billion dollars in additional SSTF funds.

If that 19 billion dollars were matched every year and subjected to an interest rate of only 3 percent for ten years, the result would be $249.882 billion dollars.  If it were carried through to 2078, the result would be $5.33 trillion dollars, which exceeds the expected shortfall by 1.6 trillion dollars.  All SSTF projections are based on growth rates that exceed 3 percent return on assets, so the “real world” scenario should be even better than projected here.

Of course, if contributions were raised, the maximum benefit would be raised as well.  This could be limited by imposing a cap on the maximum benefit level.  In return for excess dollars paid into the SSTF that do not result in higher benefits, high earning taxpayers could earn additional tax credits towards their future Social Security earnings.

Currently, the maximum benefit for someone who has worked at least 35 years and retires at full retirement age is set at $1,825.  This represents about 25% of the maximum payroll tax paid into the system ($90k/12= $7,500, ($1,825/$7,500)x100 = 24.33%).  Under the current system, the maximum SS benefit for $1 million would be approximately $250,000, or slightly more than $20,000 per month.

Obviously, no one needs a safety net that pays $20,000 per month (which is more than 20% of US households make all year).  Limiting the benefit to $50,000 per year ($4,166 per month) would eliminate 4/5 of that liability while still providing a true safety net.  

Only those who make in excess of $200,000 would see a curtailment of their maximum SS benefit.  This means only 2.4 million earners would be effected, which represents only 2.6% of all income earners.  Of these, fully 1.9 million earn less than $500,000, with the average being slightly more than $287,000.  This means the average curtailment in benefit would be only approximately $21,000 per year (compared to receiving $50,000 per year).

The maximum SS benefit of $50,000 would ordinarily be subjected to 25% income tax.  For each $50,000 of income above the $200,000 level where an earner pays SS tax but receives no increase in benefits, a tax credit of 1% could be instituted.  A person who had earned a million dollars in one year would then have a total of twenty tax credits and could reduce their effective tax rate on their benefits to only 5%.  

Tax credits could be accrued on a year to year basis and used as the recipient sees fit until the income tax on benefits reaches 2%.  This maintains a fair system where everyone pays some tax, but allows high income earners to recoup some of the money they paid into the system yet will not get back out of it.  It would allow a reduction of income tax of up to $11,500 for maximum benefit recipients per year.  The effect would be a higher de facto maximum benefit for those who qualify without taking extra money out of the SSTF.  Plus, they are receiving at least $30,000 worth of SS benefits they would not receive otherwise.  Over 35 years, this would be an additional $1,050,000 in benefits per person.

Tax credits not used due to death can be passed along to one’s spouse.  This ensures that survivors will still benefit from the extra tax paid into the system.  At the death of the surviving spouse, any additional tax credits can be distributed to survivors with income of less than $1 million to shield part of their SS benefits from taxation at a 2 to 1.5 reduction in credits.  Tax credits could also be distributed to any person named by the deceased that is collecting disability payments with no reduction in credits.

In addition, those who see their payments exceed the maximum benefit level would also be eligible for additional tax-free contributions to personally owned IRAs.  The amount eligible for this credit would be equal to one-half of the amount paid in additional taxes.

To allow SSTF assets to build, only those subjected to the increased tax would be eligible for the future increased benefits.  

When SSTF managers agree the most likely case for SS funding will provide more than adequate funding for the program for 75 years, the SS tax will automatically be reduced two percent.  One percent will be redirected as Medicare tax and one percent will be eliminated.  If it drops to only 50 years of solvency, the two percent will be added back to the tax.  If it rises to 100 years, it will be reduced another two percent in a like manner.

The result of the plan thus far would be:
1)    Beginning this year, the ceiling on SS taxes would be raised to one million dollars.
2)    This would result in an addition increase in SSTF assets of 19 billion dollars (approx.)
3)    No additional benefits would be paid out until those who have paid the additional tax are eligible to receive benefits.
4)    By 2018 (when the current projects expect a shortfall), this annual boost of 19 billion dollars, compounded at 3%, would result in a net gain in assets of $363 billion dollars.  This is a gain of 10% in total SSTF assets.
5)    Current projections place the total assets of the SSTF as growing only $170 billion by 2013.  The proposed program would add an additional $223 billion to the fund by that time.  

In addition, the IRA deduction should be raised to $5,000 in order to promote personal responsibility in planning for retirement.  To prevent “bracket-creep” this level should be pegged to inflation for automatic adjustment.

These projections are also based on no increase in the number of people who earn a million dollars per year.  Allowing for a growth in the number of people earning a million dollars per year would create an even bigger growth rate for the SSTF.

These projections also do not include those persons earning between $90,000 and $1 million.  Although these people would see their taxes increase, and cause an increase in SSTF revenues, they would regain all of their additional taxes as benefits.  Thus the net gain on this group is zero.

This system remains regressive in that it rewards people with incomes in excess of $1 million with a 12.4 percent tax cut.  For the year 2002, this would have given 159,977 people a tax break for which no one else in the country could possibly become eligible.  These individuals accounted for a total AGI of $475.8 billion dollars.  Under the proposed plan, $159 million of that would be taxed at full payroll rates.  $475.6 billion, however, would remain untaxed by SS taxes.

Currently, that whole income is subjected to 2.9% Medicare tax.  By raising the Medicare tax to take the place of the SS tax at the one million dollar AGI level, another 12.4% would be collected on this amount.  That results in an additional $58.9 billion for Medicare.  This would be a 32.5% increase in Medicare funding.  While this will not fully fund the program in the future, it does provide a step in the right direction.  

The most unfair part of Medicare is that people who don’t have insurance, but do work, must still pay for someone else to have medical care.  

Medicare is split into Part A (which covers hospitalization), Part B (which covers doctor’s bills and other regular medical expenses), and the new Part D (which covers prescription costs).  Part B is currently funded 75% from the general revenue fund and the remaining cost is charged to beneficiaries as a monthly insurance premium.

The current monthly premium for Medicare B is $66.60 per month.  There is also a $100 per person deductible per calendar year.  Beneficiaries have the choice to have a government operated plan or to participate in Medicare B plans offered by private insurance companies in their area.

Medicare B supplements can be purchased through HMOs at varying prices.  

Medicare B premiums are automatically adjusted by law to meet funding requirements.

Estimates by CBS news show that approximately 82 million Americans have been without insurance at some point in the last two years.

At $66.00 per month, the annual cost of basic Medicare B is $792 per person.  Weekly cost is less than $16.

The primary rule of insurance is that larger groups allow risk to be spread more evenly.  One reason why Medicare expenses are so high is that only the elderly and infirm - those most likely to need care - are covered.  Opening Medicare B to a larger, generally healthier group, would expand the risk group and lower the general risk.  This should result in a lower cost per person.

Proposal: Allow all Americans to buy into Medicare B at full cost.  Full cost is currently $264 per month or $3,168 per year.  It could easily be collected through a payroll deduction of only $61 per week.  As the costs of the program go down, that cost could be reduced.

Care would be taken to limit the exposure of current recipients to higher costs.  The cost of the program would be figured first as it is currently done.  Then it will be figured with the entire group.  Seniors would be guaranteed the lower of the two premiums.  Thus, the program could potentially lower their cost, but never raise it.  As is currently done, the cost of the premiums would be calculated to keep the program revenue neutral.  Rather than projecting for an entire year, however, the program should project every six months to prevent large shortfalls.

To prevent individuals from jumping in and out of the program to only pay during months when they need care, a minimum enrollment period could be instituted.  For example, a person who enrolls must remain enrolled for at least six months.  This allows the insurance group to recoup the cost of insuring the person.  If a person drops before six months due to financial problems, they can have the cost of the six month coverage extended over a full year.  They would be ineligible for coverage until that debt is paid in full.

An enrollment of only one million people would swell the Medicare coffers by a total of $61 million per week.  At worst, it would fully pay for itself and remain revenue neutral.  If less than the full one million people used medical care that week, then the result would be a net gain in Medicare funding.

If half of the 82 million uninsured participated, it would provide an additional $2.5 billion per week to Medicare.  This would be the equivalent of an annual funding increase of 1.5% per week for Medicare.

If half of the 82 million uninsured participated for at least six months, the revenue gain would be $64.9 billion.  This is the equivalent of an annual funding increase  of 43% for Medicare B.

To make Medicare B more affordable for low income workers, it should be deducted pre-tax.

Opening Medicare B to all Americans would mean that even underinsured Americans could purchase Medicare B to protect their family from health related problems.  This would provide an additional boost in revenue to the Medicare program.

Higher revenues should lead to a reduction in premiums to keep the program revenue neutral.  This would allow some Americans to provide Medicare B protection to additional members of their family for the same price as it originally costs to buy that protection for one person.

Provisions should be made to allow employers to utilize the full priced Medicare B for their employees.  Tax credits can be offered to entice employers to share the cost of this coverage with their employees.  When insurance is already offered, Medicare B would automatically become secondary insurance to cover otherwise uncovered expenses.

Allow municipalities and states to provide Medicare B coverage at cost to indigent persons to reduce ER visits from non-critical patients.

This program would allow for a fairer distribution of total tax burden while allowing all Americans to take responsibility for their medical care.

The proposals, in summary, are as follows:

-Strengthen SS by raising the ceiling on taxable earnings to one million dollars.  
-Institute a maximum benefit of $50,000 per year, automatically inflation adjusted.
-Create a tax credit on future SS benefits for those whose SS taxes exceed the amount necessary for their maximum benefit.
-Create an immediate increased IRA deduction for those whose SS taxes exceed the amount necessary for their maximum benefit at the rate of ½ the additional taxes.
-Raise the IRA limit to $5,000 and peg it to inflation to promote personal responsibility.
-Raise Medicare taxes to replace SS taxes after the SS tax ceiling.
-Allow all Americans to buy into the Medicare B program at full cost.
-Protect seniors against higher premiums by figuring their cost separate from the entire group and charging them the lower of the two premiums.
-Institute a minimum participation period for new buy-ins of six months.  If they must withdraw prior to that, the total cost will be charged to them over a full twelve months.  They will remain ineligible until the full cost is repaid.
-Encourage employers to offer Medicare B as supplemental insurance through use of tax credits.
-Allow states and municipalities to create Medicare B groups for indigent persons to lower the cost of charity health care to hospitals.

This group of proposals:
1)    Provides an immediate boost to Social Security revenues to prevent future insolvency.
2)    Limits outgoing liabilities to a reasonable level within the original scope of the program.
3)    Creates a fairer distribution of the flat-tax system Social Security utilizes to collect revenues.
4)    Compensates those who pay additional taxes with no additional benefits by allowing them to invest additional tax-free monies in existing IRAs and by creating future tax credits against Social Security benefits.
5)    Ensures the long term solvency of the Social Security program without cutting benefits or raising taxes on those already over-burdened by taxes.
6)    Creates a mechanism for increasing revenues in the Medicare program that faces shortfalls this year.
7)    Provides a totally level playing field with respect to payroll taxes.
8)    Opens Medicare B to all Americans, allowing them to choose which private company administrates their plan and thus creating a privately run health care system available and accessible to almost all Americans.  This also instantly provides a 100% portable health care policy that a worker can take with them when changing jobs.
9)    Provides tax incentives to business to provide greater health coverage to employees at a lower cost.
10)    Allows states and municipalities to create a means for controlling the cost of indigent care.

Christian Liberal is not an oxymoron.

by Xpatriated Texan on July 08 at 3:19 PM EST


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