The Need for a Primary Opponent for Obama

                                    Fixing Social Security

In the discussion about deficit reduction in prior blogs, President Obama was depicted as initially not wanting to touch Social Secxurity; then putting it on the table; followed by taking it off the table by endorsing the Reid plan; then agreeing to cut it by adopting the “Gang of Six” plan; and finally not mentioning it when he unveiled the details of his new long-range budgetary plan on September 19. Raymond Sandoval, who is President Obama’s New Mexico director, and who I have found to be a consummate spinner for Obama in reading his long emails, claims that Obama never offered any specifics about Social Security cuts, either publicly or privately, in his talks with Speaker Boehner. Instead, Sandoval claims that Obama cleverly put  Social Security, Medicare and Medicaid on the table to gain the public edge in the debt ceiling debate, and in the end was able to get House Republicans to lower their spending cut demands.

Although it is not clear what specifics Obama was offering on changes in Social Security, he reportedly was willing to adopt a new formula for the cost-of-living adjustment (COLA) — called the “chained” Consumer Price index — which tends to rise more slowly than the current index. Obama may also have been willing to consider raising the retirement age.

Although dealing with a Social Security funding shortfall which won’t occur until 2036 or so, is presented as an almost insurmountable problem, much of the problem can be alleviated without any major sacrifice for those very many recipients of benefits who don’t have a six-figure income.  

AARP, which keeps in close touch with Social Security actuaries, has presented a series of options to fix the system.

Lifting the cap entirely on income subject to the FICA tax would  close 99 percent of the future shortfall and raising it to $190,000 would close 31 percent of the gap.

Raising the FICA tax on both employers and employees from 6.2 percent to 6.7 percent would close half the shortfall.

Broadening the base of income subject to FICA taxes to include such tax-excluded health benefits and flexible-spending accounts would close 11 percent of the gap..

Raising the retirement age from 67 to 70 by 2040 would close 65 percent of the gap.

Changing to the “chained” COLA as mentioned above would close more of the gap.

U.S. Senator Bernie Sanders (I-VT) is advocating raising the FICA tax cap to $250,000, which Social :Security actuaries are telling him would allow full Social Security benefits to be paid for another 75 years

The proposal I am offering is composed of four elements: 1) raising the FICA tax cap; 2) raising the FICA tax; 3) lowering the COLA by 15 percent; and 4) creating a “rainy day” fund through taxing financial transactions..

There has always been a concern about breaking the relationship between taxes paid in and benefits received. Thus, removing the cap on FICA taxes entirely would completely destroy the relationship between taxes paid and benefits received. Raising the cap to $250,000 would considerably weaken the relationship. Setting the cap at $190,000 preserves more of the cap than would a higher cap. So at $190,000, 31 percent of the shortfall is eliminated.

Instead of jumping from a 6.2 percent FICA tax to 6.7 percent overnight, the tax was raised 0.1 percent every two years, we get to 6.7 percent in ten years. This would not close half the gap as proposed above; however, the trust fund savings would be significant.

An idea that has been kicking around for a long time is to limit annual Social Security benefit increases to 85 percent of the COLA. The rationale behind the 85 percent figure is that housing costs constitute about 15 percent of the cost-of-living and many seniors would have paid off their mortgages and/or most taxing jurisdictions provide generous discounts on property taxes paid by seniors.

I tested this 85 percent idea on my wife’s Social Security benefits and with a 3.5 percent COLA she would have received about a three percent increase. She would have lost about $50 for the year.

The final piece in this effort to fix Social Security long-term is to impose a tax of 0.25 percent or 0.3 percent on both ends of every financial transaction. This tax would be put in a “rainy day” fund and invested in government securities. At 0.25 percent this tax is projected to raise well over a hundred billion dollars a year. Half the money would be used to cover shortfalls in Medicare and the other half would be allowed to accumulate until needed to cover Social Security shortfalls.

Even if these measures outlined above would not cover completely any Social Security shortfalls, it should not be incumbent for the present U.S. Congress to cover 100 percent of a shortfall which may not occur until a quarter-century in the future. 

Although the Social Security shortfall looks scary, benefits currently equal 4.84 percent of gross domestic product and benefits will rise to just 6.22 percent in 2035 and then remain between 5.9 and 6 percent from 2050 through 2085.

 

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