Hawaii Tax Foundation: Fixing Social Security, Medicare and Spending Will be Difficult

BY LOWELL KALAPA- Over the past few weeks this commentary has focused on the challenges before us as federal spending reels out of control and the benefits for current and future retirees stand in jeopardy.

So what can be done about this fiscal dilemma that we have identified over the past few weeks?  To a large degree, the current recession has jolted many into recognizing the perils of uncontrolled spending.  Burdened with mortgages and credit card debt, consumers have pulled back on their conspicuous consumption which many have argued has contributed to an even deeper recession.

What the current recession did do for consumers was to change their attitude about savings, putting a little money aside for emergencies like getting laid off or not having enough money to make the mortgage payment or to pay for the essential repairs around the house.

What it also made people think about is putting money away for their twilight years to complement their anticipated payments of Social Security.

For the baby boomers, it reminded them of the thrift that their parents exercised because many of them were products of the Great Depression.  Respecting the values of thrift, saving for the future and passing on a better world to the next generation is what it is all about and this recession has reminded many that there is a bottom to the barrel.  With that in mind, it is time to make some basic changes to how we view Social Security and Medicare.

While there have been a number of strategies put forth, David Walker, author of “Comeback America” and President and CEO of the Peter G. Peterson Foundation has the following suggestions:

– Provide a higher level floor benefit for those who have worked at least thirty (30) years to ensure they will not live in poverty, focusing on people most in need.

– Don’t eliminate Social Security benefits for higher income retirees, but reduce the relative benefit for middle and upper income persons through progressive wage indexing, ensuring that the benefits are better targeted to those in need without allowing the system to become a welfare program.

– Trim cost of living adjustments by at most 0.5% or less possibly targeted to middle and upper income beneficiaries, something that would boost reform while allowing a more sensible solution.

– Raise the normal and early retirement ages in recognition of longer life expectancy making allowances for disability benefits for those who perform hard manual labor.  This would allow for a slower shrinkage of the workforce and a larger contributing workforce.  This idea is currently being considered by Congress.

– Allow deferral of benefits to any age and permit an increase in the monthly benefit based on life-expectancy tables.

– On the revenue side, keep the current payroll tax rate of 6.2% but raise the ceiling on the taxable wage base from the current level of $106,800 to about $150,000.

– Finally, require supplemental savings accounts.  An additional 2% or 3% payroll deduction could be put into an individual account for each worker.  Professionally managed investment options could be made available to workers with options like those currently available to federal elected officials and employees.  This would help improve the nation’s savings rate while providing a meaningful pre-retirement death benefit and supplemental retirement benefits.

These changes could be phased in over time so that those who are already retired or nearing retirement would not be radically affected.  But these adjustments – over time – would result in a solvent, sustainable, secure and more savings oriented Social Security system.  They are not radical changes, but they are reforms that would secure a larger benefit for future generations while reversing some of the problems the system now faces.

Sure, people will resist change, but many of these recommendations are just common sense.  Raising the age of full retirement makes sense when one realizes that medical advances are allowing us to live longer and with better health.  Allowing the deferral of benefits to any age without penalties not only accrues a greater benefit but it stabilizes the amount of available resources to meet current and future needs.

But most important is that our nation’s leaders must treat our contributions with integrity and not use those contributions to expand federal spending at the expense of our future benefits.  But to make these changes will take leadership and courage, the question is where is that leadership?

LOWELL KALAPA IS PRESIDENT OF THE TAX FOUNDATION OF HAWAII

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