Outside the Box: Will the new tax plan mean the end of Social Security and Medicare as we know it?
While there has been much talk about how the historic $ 1.5 trillion in pending tax cuts will spur the economy and drive new job growth, the real legacy of tax reform may be to end Social Security and Medicare as we know it.
Long a target of fiscal conservatives whose reform efforts have been thwarted for decades, these social programs finally look vulnerable to real cuts.
That’s because the tax bill is never going to generate enough new growth to pay for itself. William A. Niskanen, a member of President Reagan’s Council of Economic Advisers, described the claim that tax cuts can pay for themselves as “nonsense,” which is why none of the famous Reagan era tax-cuts passed under his watch made those assumptions.
In fact, both the nonpartisan Congressional Budget Office and the Joint Committee on Taxation estimate that, even assuming historically high levels of growth, the pending tax cuts will still add over a trillion dollars to the debt over the next 10 years. Similarly, a recent survey of 38 leading economists unanimously agreed the GOP tax bills would cause the U.S. debt to increase substantially faster than the economy.
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Ordinarily, projections like these would stop true Republican deficit hawks in their tracks, except for the fact that soaring debt projections are exactly the point of these tax cuts. The thinking is pretty simple, if cynical: if you can’t muster the support to cut entitlements outright, just make future benefits impossible to pay for.
Republican leadership has already tipped their hand toward this “starve the beast” strategy. In a recent interview, Speaker Paul Ryan said his members “have to get back next year at entitlement reform, which is how you tackle the debt and the deficit.” Staying on message, Senator Marco Rubio reiterated that “you also have to bring spending under control. . .The driver of our debt is the structure of Social Security and Medicare for future beneficiaries.” And President Donald Trump announced last week that welfare reform will “take place right after taxes, very soon, very shortly after taxes.”
Their comments sparked the usual Washington tea leaf reading to assess which programs will be on the chopping block. Some guess that targeted low-income security programs, like the Supplemental Nutrition Assistance Program, will be the first hit. Others point to further Medicaid cuts.
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But while these means-tested programs may very well be the most endangered, Republican leadership is focused on bigger entitlement programs. That’s because over $ 1 out of every $ 3 that the federal government spends goes to either Social Security or Medicare, now adding up to over $ 1.5 trillion in annual spending. Medicare will likely be the first to face cuts, since it only requires a simple majority in the Senate compared with the 60 votes required for budgetary changes to Social Security.
However, expected cuts to either of these programs could be devastating to aging Americans if the tax bills are any indication of how little thought is being invested in major public policy reforms these days.
Today, over 40 million retired households rely on these benefit programs, which generate an average of $ 1,370 in monthly income and insure against most of the ailments that affect us as we age. More tellingly, over half of retirees rely on Social Security for the majority of their income; for 33% of them, it provides more than 90% of their income.
There is also the fact that cuts to entitlement spending are not fully deductible from projected deficits. That’s because research has shown that entitlement programs also create an economic multiplier. One AARP study found, for instance, that $ 2 of GDP growth is generated for every $ 1 in Social Security benefits. That means that while deficits can be cut by reducing benefits, that strategy will also reduce taxable revenue.
Of course, America’s retirement and health care programs would benefit from some common-sense reforms. Raising the cap on income subject to payroll taxes would extend Social Security’s longevity. Investing a trial share of the trust fund in the market, as over a dozen other countries have successfully done, could make sense as well.
Medicare reform is trickier, but a start is the CHRONIC Care Act which unanimously passed in the Senate earlier this year. It both expanded care for the growing number of seniors with multiple chronic diseases, while also creating money-saving efficiencies. That type of practical win-win is exactly the kind of low-hanging reform that elected officials should flock to, in principle.
But sensible bipartisanship is not much on display these days. That means that with tax reform just days away from becoming law, retirees and soon-to-be-retirees should be on notice. They may have been largely overlooked in the tax bill, but their benefits are likely going to pay the tab.
Matt Fellowes is founder and CEO of United Income, which uses technology to provide holistic financial planning and money management services for people nearing or entering retirement. He previously founded HelloWallet and was the chief innovation officer at Morningstar.
Elizabeth Kelly serves as chief of staff for United Income. She previously served as special assistant to the president for economic policy in the Obama administration.