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Touching the third rail

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Frank S.

Touching the third rail

#1 Post by Frank S. » ... n_budget_4

Greenspan Urges Social Security Cuts


WASHINGTON - Federal Reserve Chairman Alan Greenspan urged Congress on Wednesday to deal with the country's escalating budget deficit by cutting benefits for future Social Security retirees rather than raising taxes.

In testimony before the House Budget Committee, Greenspan said the current deficit situation, with a projected record red ink of $521 billion this year, will worsen dramatically once the baby boom generation starts becoming eligible for Social Security benefits in just four years.

He said the prospect of the retirement of 77 million baby boomers will radically change the mix of people working and paying into the Social Security retirement fund and those drawing benefits from the fund.

"This dramatic demographic change is certain to place enormous demands on our nation's resources — demands we will almost surely be unable to meet unless action is taken," Greenspan said. "For a variety of reasons, that action is better taken as soon as possible."

Greenspan, who turns 78 next week, said that the benefits now received by current retirees should not be touched but he suggested trimming benefits for future retirees and doing it soon enough so that they could begin making adjustments to their own finances to better prepare for retirement.

But while Greenspan urged urgency, Congress is unlikely to take up the controversial issue of cutting Social Security benefits in an election year.

Greenspan suggested two ways that benefits could be trimmed. He said that the annual cost-of-living adjustments for those receiving benefits could be made using a new version of the Consumer Price Index called the chain-weighted index, which gives lower readings on inflation.

He also said that the age for retirement should be indexed in some way to take into account longer lifespans. He noted that presently the age for being able to get full Social Security benefits is rising from 65 to 67 as one of the changes Congress adopted in the mid-1980s, based on recommendations of a commission Greenspan chaired. In his testimony, Greenspan said Congress should go further and index the retirement age so that it will keep rising.

As he has in the past, Greenspan called on Congress to reinstitute rules that require any future tax increases to be paid for either by spending cuts or increases in other taxes.

While that would erect a high hurdle to President Bush's call for making his 2001 and 2003 tax cuts permanent, estimated to cost at least $1 trillion over a decade, Greenspan again repeated his belief that spending cuts rather than tax increases were the best way to deal with the exploding deficit.

While not ruling out totally the use of tax increases to deal with at least part of the looming surge in spending on Social Security, Medicare and other entitlement programs, Greenspan urged caution in increasing taxes.

"Tax rate increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base," Greenspan said. "The exact magnitude of such risks is very difficult to estimate, but they are of enough concern, in my judgment, to warrant aiming to close the fiscal gap primarily, if not wholly, from the outlay side."

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Frank S.

#2 Post by Frank S. » ... P73718.asp

How Social Security cheats you to pay the rich

By Liz Pulliam Weston

What would you think of a tax system that took money from the poor to give to the rich?

That’s essentially what’s happening with our Social Security and Medicare tax system, where low-income workers are dunned to pay benefits for high-income seniors.

Before the AARP strings me up for heresy, I’ll quickly add that lots of folks paying into the system are better off than lots of folks who get money out of it. In fact, two-thirds of seniors rely on Social Security for more than half their income, and four out of 10 say it comprises more than 80%.

I’m also not saying there’s anything wrong with drawing a Social Security check. You paid into the system, and you’re getting what you were promised.

But that doesn’t change the fact that some guy making minimum wage with no health insurance has to pay 7.65% of every dollar he earns, while some seniors worth millions get checks and discounted health care. That’s Robin Hood in reverse.

The rich really do get a deal on Social Security
This is a reality that gets far too little attention, particularly when Congress is busy adding to the problem with a Medicare prescription drug benefit.
I’ll make my biases clear: I work for a living, so I pay Social Security and Medicare taxes. But I’m one of the lucky ones, in that my annual income is above $87,900. That’s the cutoff for having to pay Social Security taxes in 2004. (I still have to pay Medicare taxes above that amount, since that particular tax has no income limit.) Roughly 20% of households report incomes above that threshold, according to the Census Bureau. The total income of that 20% of families represents half of all U.S. income.

So the proportion of my income that goes to Social Security and Medicare taxes is actually smaller than what most of America pays.

The Social Security outlay for folks like me and Michael Eisner, the chairman of the Walt Disney Co., is capped at $5,449.80 this year. (He makes a wee bit more than I do, so we’ll use him as an example.) This maximum contribution is about half of one percent of Eisner’s $1 million base salary. Eisner’s Medicare taxes would be $14,500 -- the same 1.45% of salary as every other worker pays. All told, his bill would be about 2% of that base paycheck.

Meanwhile, the average working stiff must give up 6.2% of each dollar earned to Social Security and 1.45% to Medicare, for that 7.65% total.

No Social Security tax cuts
What’s more, when income tax rates are cut, Mike and I really benefit. (Mike a bit more so than me, but I won’t begrudge him.)

Social Security and Medicare tax rates, by contrast, have never been trimmed. Since the first payroll tax was collected in 1937, the rates have gone just one way: up.

Social Security and Medicare
tax rates since 1937
Years Rate
1937-49 1.00%
1950 1.50%
1951-53 1.50%
1954-56 2.00%
1957-58 2.25%
1959 2.50%
1960-61 3.00%
1962 3.13%
1963-65 3.63%
1966 4.20%*
1967 4.40%
1968 4.40%
1969-70 4.80%
1971-72 5.20%
1973 5.85%
1974-77 5.85%
1978 6.05%
1979-80 6.13%
1981 6.65%
1982-83 6.70%
1984 7.00%
1985 7.05%
1986-87 7.15%
1988-89 7.51%
1990 and later 7.65%

*Medicare taxes were first collected in 1966.
Source: Social Security Administration

Not only haven’t there been any tax cuts, but there aren’t any credits, exemptions, deductions or fancy tax shelters to help that guy making minimum wage shield any of his income from payroll taxes.

And as he’ll probably tell you, our minimum-wage worker has no assurance he’ll get anything back for the money he’s putting in. The system’s hurtling toward bankruptcy, after all.

The Medicare drug benefit is, well, bizarre
So, Congress just had to go and make matters worse by adding a drug benefit to Medicare.

The idea was good -- let’s make sure seniors can afford the drugs they need. But the result was bizarre, to say the least.

If you haven’t already seen it, it’s a doozy. First, it doesn’t become available until 2006. Then, here’s how it’s supposed to work:

How the Medicare drug benefit works
Amount Benefit
First $250 in prescription drug costs No benefit
Prescription costs between $250 and $2,250 Medicare pays 75%
Prescription costs between $2,250 and $3,600 No benefit*
Prescription costs above $3,600 Medicare pays 95%

*This is the infamous “donut hole.”
Source: Social Security Administration

Now, does that make sense to you? Does it make sense to anybody?

The only reason to structure the benefit like that was to ensure that as many seniors as possible got a piece of the pie -- whether they needed the helping or not -- while still making the initial cost of the program halfway palatable.

And the real costs were off by a third
If the goal were to get benefits to the most cash-strapped seniors, the plan would have been means-tested. (That is, as your income increases, the benefit decreases.) If the goal were to prevent catastrophic drug bills from bankrupting older Americans, the deductible could have been higher, and there wouldn’t be that ludicrous “donut hole” in the middle.

Reducing the package to cover just those who need the help, though, wouldn’t have flown politically.

Meanwhile, we learn that the cost of this added benefit won’t be a mere $395 billion over the next decade. The White House now says those guesstimates were off by one-third. The real costs now will be $534 billion.

I argued in “The tax cut taxpayers need most” that working families really need a break from Social Security and Medicare taxes. We could give them one by exempting the first $10,000 of income from payroll taxes -- saving each worker $765 a year -- or by reducing the payroll tax rate by a point or two. We could swing such a break only if we get serious about Social Security reforms.

But, as the prescription drug benefit shows, there’s no political will to do so. The only steps Congress seems to be able to make are giant ones in the wrong direction.

Which means, for the folks paying into the system, that there’s no relief in sight.

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