U.S. Debt Proposal Would Cut Social Security, Taxes, Medicare

U.S. Debt Proposal Would Cut Social Security, Taxes, Medicare

From the start of the program in 1936 till 2005, an estimated $8.9 trillion have been paid out as Social Security benefits. In the same period, the program has received $10.7 trillion in income. - Interesting Facts About Social Security Numbers, Money, Matter and More Musings, March 5, 2007

With $2.6 trillion left in the Social Security war chest, there is no immediate threat to the status quo. - What’s Really in the Social Security Trust Fund?, The Daily Reckoning, September 28, 2010

During FY 2009, the federal government collected approximately $2.1 trillion in tax revenue. Primary receipt categories included individual income taxes (43%), Social Security/Social Insurance taxes (42%), and corporate taxes (7%). Other types included excise, estate and gift taxes. Tax revenues are significantly affected by the economy. Recessions typically reduce government tax collections as economic activity slows. For example, during FY2009, the U.S. government collected about $400 billion less than FY2008. Individual income taxes declined 20%, while corporate taxes declined 50%. At 15% of GDP, the 2009 collections were the lowest level of the past 50 years. During FY 2009, the federal government spent nearly $3.52 trillion on a budget or cash basis, up 18% versus FY2008 spending of $2.97 trillion. Primary expenditure categories include: Defense and Homeland Security ($782B or 23%), Social Security ($678B or 20%), and Medicare & Medicaid ($676B or 19%). Expenditures are classified as mandatory, with payments required by specific laws, or discretionary, with payment amounts renewed annually as part of the budget process. In FY2008, Social Security received $180 billion more in payroll taxes and accrued interest than it paid out in benefits. This annual surplus is credited to Social Security trust funds that hold special non-marketable Treasury securities. The Social Security surplus reduces the amount of U.S. Treasury borrowing from the public. The total balance of the trust funds was $2.4 trillion in 2008 and is estimated to reach $3.7 trillion by 2016. At that point, payments will exceed payroll tax revenues, resulting in the gradual reduction of the trust funds balance as the securities are redeemed against other types of government revenues. [Source: Wikipedia]

November 10, 2010

Bloomberg - A presidential commission’s leaders proposed a $3.8 trillion-cutting plan that would trim Social Security and Medicare, reduce income-tax rates and eliminate tax breaks including the mortgage-interest deduction.

The plan would throw out hundreds of tax breaks for items such as capital gains and child care. It would raise the gas tax, slash defense spending and bring down health-care costs by clamping down on medical malpractice suits. The Social Security retirement age would rise to 68 in about 2050 and 69 in about 2075.

“This country’s out of money and we better start thinking,” said Erskine Bowles, co-chairman of the panel created by President Barack Obama. Without “tough choices,” Bowles said, “we’re on the most predictable path toward an economic crisis that I can imagine.”

Bowles, former President Bill Clinton’s chief of staff, and former Senator Alan Simpson, a Wyoming Republican, announced the proposal in Washington today, stressing that it was intended as a starting point for discussion.

The savings would come between 2012 and 2020. The result would be a deficit totaling about $400 billion or about 2.2 percent of the nation’s gross domestic product in 2015. That would exceed Obama’s goal for the panel of a reduction to 3 percent, from the current 9 percent of GDP.

White House spokesman Bill Burton said in an e-mail the proposals “are only a step in the process towards coming up with a set of recommendations.” He said Obama wants to give the panel “space to work on it” and wouldn’t comment on the plan.

Lawmakers Balking

The chairmen’s plan is already causing some Democrats and Republicans on the 18-member commission to balk. While most economists say some combination of spending cuts and tax increases is necessary, Republicans are wary of tax hikes and Democrats are reluctant to reduce U.S. government benefits.

“This is not a package that I could support,” Representative Jan Schakowsky, an Illinois Democrat, said during a break in a private meeting by the commission before the chairmen released details of their plan.

She said any package able to win the necessary 14 votes on the panel would have to look “very different” from the options under discussion.

House Speaker Nancy Pelosi of California called the plan “simply unacceptable,” saying older Americans “are counting on the bedrock promises of Social Security and Medicare.”

Boehner Backs Freeze

House Republican leader John Boehner of Ohio, who will become speaker in January, said before the plan’s release that he supported a freeze on federal hiring and the pay of U.S. government workers.

None of the proposals would take effect next year to avoid disrupting the economic recovery. Under one option, income-tax rates would be reduced to three levels: 8 percent, 14 percent and 23 percent. Currently there are six tax levels ranging from 10 percent to 35 percent. The corporate income-tax rate would be cut to 26 percent from 35 percent.

Wiping out all tax breaks, including the home mortgage deduction, while lowering rates would cost taxpayers $100 billion a year under the plan. Members of the panel could decide to keep some of the breaks by offering offsetting cuts, Bowles said.

‘Harpooned Every Whale’

John Courson, chief executive officer of the Mortgage Bankers Association in Washington, said eliminating or reducing the mortgage deduction would drive down home values.

“Of all the times to do it, now is not the time,” he said in an interview.

Bowles said about three-quarters of the savings would come from spending cuts, with the remainder from tax increases.

“We have harpooned every whale in the ocean and some of the minnows,” Simpson said. “No one has done this before.”

The proposal calls for discretionary spending to be cut by $1.4 trillion over 10 years, while mandatory spending -- including Social Security, Medicare and Medicaid -- would be reduced by $733 billion. Taxes would be raised by $751 billion, including a 15-cent increase in the gas tax starting in 2013.

Tax increases would begin in 2012, when they would total $69 billion. They would ramp up to $372 billion in 2015, $588 billion in 2018 and $761 billion in 2020.

Farm subsidies would be cut by $3 billion a year. The proposal would also attempt to slow the growth of health-care costs by paying doctors participating in the Medicare health program for the elderly less and calling for “comprehensive” legislation to reduce malpractice costs.

Freezing Federal Salaries

Discretionary spending cuts in the plan include reducing congressional and White House budgets by 15 percent, freezing federal salaries and cutting the federal workforce by 10 percent. The discretionary reductions would be split equally between defense and domestic programs, Bowles said.

The plan spells out $100 billion in defense cuts, including freezing Defense Department salaries and noncombat military pay at 2011 levels for three years, cutting overseas bases by one-third and doubling proposed cuts in defense contracting.

The government is projected to run $8 trillion in deficits over the next 10 years, which would push the national debt up to more than $20 trillion.

The panel’s goals drew praise from Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget, a Washington-based group that advocates balanced budgets. The plan “would fix our fiscal problems and truly reflects a balanced compromise across party lines,” she said.

‘Drop Dead’

Some of the plan would be painful, she said, “but we must be mindful of the consequences if we fail to act.”

AFL-CIO President Richard Trumka said the panel chairmen “just told working Americans to ‘drop dead.’” In an e-mailed statement, Trumka said,

“The very people who want to slash Social Security and Medicare spent this week clamoring for more unpaid Bush tax cuts for millionaires.”

John Rother, executive vice president for policy at the senior citizens’ group AARP, said his group would oppose the plan because it would be “dramatically lowering benefits over time” in Social Security and Medicare.

Simpson said the plan was designed to give members of the panel something to “chew on” for further discussions. The panel will meet again next week, said Senate Budget Committee Kent Conrad of North Dakota.

“This is Al’s and my proposal, nobody else’s,” Bowles said. “The president hasn’t seen this proposal.”

‘Witness Protection’

Some members of Obama’s financial team have seen the plan and they liked some things and not others, he said.

Asked how interest groups would react, Bowles joked, “we’re going to be in the witness-protection program.”

Senator Dick Durbin, an Illinois Democrat, called the plan a “starting point for the conversation.”

“We’re not going to have an up-or-down vote on this,” said Durbin. “There are proposals in there that are painful. I told them I said there are things in here which inspire me and other things which I hate like the devil hates holy water. I’m not going to vote for those things.”

Some Republicans also expressed skepticism that the report would survive in its current form. New Hampshire Senator Judd Gregg called the plan a “starting point.” Representative Jeb Hensarling of Texas said “some of it I like, some of it disturbs me.”

See: The Final Red Herring: The Threatened Bankruptcy of Social Security
See: Opinion: President Obama Plans to Cut Social Security Next
See: The Government Has Looted the Social Security Trust Fund

The amount subject to Social Security tax has had an average annual increase of 5.85% through 2007, while the maximum tax itself has increased 6.58% over the same time period. If you were 22 when you started working 30 years ago [which would now make you 52 years old] and you continued to work and pay the maximum amount into Social Security, how much could you have by the time you were 62? For 2008, the maximum Social Security tax is $6,324. If we increase that amount by the average annual increase of 6.58% for the following 9 years, you could have over $789,000 by age 62 [the forward-looking numbers are adjusted for inflation and assume a conservative 8% ROR minus a 3% inflation rate]. A 4% withdrawal rate would give you a first-year income of over $31,584 or $2,632 per month. [I left out the employer’s portion of the Social Security tax, which is equal to the amount the employee pays]. - How Much Could You Have If Social Security Was YOUR Money?, AllFinancialMatters, May 16, 2008