Saturday, October 27, 2007

Social Security and Medicare Legislated Benefit Cuts

I have tried not to say too much if anything about Social Security during the campaign, but I must make a comment. In the past couple of weeks, the first baby boomer has applied for Social Security benefits (early retirement at age 62. The media has picked up and reported the age old problem about funding benefits. They have even stated that if nothing is done Social Security and Medicare will consume all federal revenues.

Well this is not going to happen. Besides the well known 1983 changes to Social Security most of us know about such as increasing the tax, base, retirement age and taxing Social Security benefits, there was another change made that few people know of and from what I have learned, no US Senator or US Representative seem to know.

Social Security by law cannot borrow money. It has statutory authority to spend only those funds received from the dedicated social security tax on wages, tax on benefits and funds in the trust fund. Federal Law prohibits transferring general revenues to any trust fund.[4]

By law the trust fund cannot be drawn down to zero. The trustees must submit a report promptly to congress detailing benefit cuts or tax increases when in any given year the trust fund is projected to fall below 20% of that given years expenses. Social Security's ability to pay future promised benefits is dependent solely on the ability to raise social security taxes.[5]

What does this mean for Social Security? It simply means that the trust fund may not be exhausted, but must maintain at a minimum, a balance equal to 20% of any given years expenses. This is because Social Security gets funded on a quarterly basis. Without this provison, benefits may be paid for the first two months of each quarter, but not the third. It also insinuates that if nothing is done, a cross the board cuts take place. I envision cost of living allowances to be the first things cut around 2035 with benefit reductions of about 3% a year there after until they total 30% if not more.

Medicare is a bit different. It if funded 50% by payroll taxes workers pay, 25% by premiums paid by beneficiaries and 25% funded using General Revenues. This formula creates a break on spending. The medicare tax of 2.9% on wages means that General Revenues can never contribute more than 25% x 2.9% of wages. Therefore, for Medicare to spend more than 5.8% of total wages, it must have congress increase the Medicare tax. If it does not do this, then across the board cuts take place.

For over twenty years the Social Security Trustees have projected and reported the trust fund to be exhausted anywhere between 2019 and 2042 which is decades before its original projection of 2064. Where is their report detailing benefit cuts and/or tax increases to rectify the inadequacy? When I asked Senator Lugar's staff this question five years ago, they were not aware of this statute. I have not heard back from anyone yet.

[4] United States Code Title 42, Chapter7, Subchapter VII, Sec. 911 (a),

[5] United States Code Title 42, Chapter7, Subchapter VII, Sec. 910 (a),

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