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The U.S. government's debt—that is, our and our children's debt as taxpayers—is growing. This growth is largely driven by rising Social Security, Medicare, and Medicaid obligations. These are the programs Congress could focus on and work to reform. Only the Democrats are really talking about reform, though they want "reform" to be in the direction of making these programs even more expansive.
There's some hope, however, as politicians will have no choice but to face the facts on Social Security. Come 2035, this program's trust funds will run dry and, by law, benefits will automatically be cut by 20 percent. When that happens, Congress will have no option but to reform Social Security in a more fiscally prudent manner. I have some thoughts on how to do this.
But before I explain, let's make sure we're clear about one thing: The program is indeed growing insolvent. Since 2010, Social Security has run annual cash-flow deficits. This means that the payroll tax revenues collected from you and me aren't enough to fully pay the retirement benefits for current retirees. For now, the program makes up this gap by using assets in its trust fund.
It looks even worse in the long run. The Social Security Board of Trustees reports that over the next 75 years, the program will be underfunded by $13.9 trillion. To make Social Security solvent over this period would require an immediate and permanent payroll tax increase (today) of 2.78 percent of overall wages—which raises the average Social Security payroll tax bite by 25 percent. Alternatively, Congress could cut benefits by 17 percent. A mix of both tax increases and benefit cuts is obviously an option. No meaningful reform will be painless, and waiting only makes fixing the problem harder.
When Social Security was created in 1935, it was conceived to provide benefits for retired workers. Given the lower life expectancy back then, retired workers were never expected to live off of these benefits for very long. Over time, however, Congress expanded the program's eligibility, extending it to spouses, disabled persons, and also children. While some aspects of the program are means-tested, everyone—rich and poor—receives core Social Security benefits.
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