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Friday, June 3, 2011

Thompson: Phasing Out Social Security and Medicare for High Income Retirees

Samuel C. Thompson, Jr. (Penn State) has posted The Missing Ingredient in the Budget Debate: Phasing Out Social Security and Medicare for High Income Retirees on SSRN. Here is the abstract:

The budget proposals of the Deficit Commission, Congressman Ryan, and President Obama do not effectively address the long-term problem with the funding of Social Security and Medicare. As a tool for limiting the costs of these two entitlements and thereby helping to put these programs on a sustainable basis without reducing the effectiveness of their “safety net” function, Congress should phase-out the benefits under these programs for high income retirees. Under the phase-outs I propose in this article:

  1. the Social Security benefit would be phased out as individuals move from $75,000 of annual Broadly Measured Income to $175,000 (Social Security Phase-Out Requirement), and
  2. to participate in Medicare, retired persons would be required to pay an increasing portion of the premium covering the economic costs of Medicare benefits as they move from $75,000 of annual Broadly Measured Income to $175,000 (Medicare Premium Payment Requirement).

Similar to the effective date of the Ryan Proposal, these provisions in general would only apply to people who are 55 years old or younger.

The Social Security Phase-Out Requirement is similar to the phase-out for such payments under Canadian law, and the Medicare Premium Payment Requirement is structured so that even a high income person who elected to be self-insured would not see all of his or her assets completely depleted as a result of the cost of health care. Thus, the Medicare structure proposed here addresses President Kennedy’s argument, also advanced in the Ryan Proposal, that Medicare should be adopted because it would prevent “people who had worked for years [from] suddenly [finding] all their savings gone because of a costly health problem.”

The phase-out proposal advanced here significantly cuts benefits, but only for those future retirees who will not suffer a material financial hardship as a result of a reduction or elimination of their Social Security and Medicare benefits. As a practical matter, adoption of the proposal here will, in most cases, simply mean that the heirs of the affected high income retirees will get smaller inheritances, because under the current system, the Social Security and Medicare benefits received by these high income retirees do not generally result in higher spending. Rather, in many instances, the benefits merely increase the assets passed on to their heirs. Politicians of all political persuasions should have the courage to bring his government funding of inheritances to an end, thereby reducing the adverse impact these programs have on long-term debt.

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Comments

This is what other countries have done, and it is inevitable. Unfortunately it penalizes a lifetime of thrift and rewards a lifetime of profligacy. In effect, it's yet another tax on income, one that only applies if the income was saved rather than spent.

Nevertheless this approach appears less undesirable than the other available options to close the fiscal gap. I doubt that many people will suddenly decide to become profligate and rely on government programs that have just been demonstrated to be unreliable.

Posted by: AMTbuff | Jun 3, 2011 9:03:57 PM

I agree with AMT, although I am not sure these "savings" will be mostly symbolic. And symbolic of what, exactly? I think this is a fight that can not be conceded without exacting some moral concessions. During the debate, I would like to see trade-offs between socialized savings and individualized pain: e.g., how many days of delaying everyone's retirement age would buy exempting various income levels of "richness" from confiscation, so those affected can see how small a price the community was unwilling to pay to avoid an injustice. Also, the SS Admin should still be required to continue sending the annual statement summarizing one's life-time contributions to SS and Medicare so they can be displayed alongside collections of Confederate bonds, Argentine Passbooks, etc.

Posted by: MG | Jun 4, 2011 10:28:23 AM