The United States is experiencing the highest rates of inflation in 40 years. But unless the U.S. tackles Social Security and Medicare entitlements, the U.S. could face an economic doom loop of out-of-control deficits, ever higher interest rates needed to attract foreign capital, and slower economic growth.
Let’s be clear, in 2022, Social Security and Medicare are Ponzi schemes. They are not self-funding. The two pillars of government entitlements are not subject to the annual appropriations process, instead operating on autopilot. The programs rely on younger workers paying Federal Insurance Contributions Act employment taxes, which in turn are paid out to the rapidly growing population of retired workers. But demographics are destiny. Because Congress will not compromise and enact comprehensive immigration reform legislation, the working population is not large enough to sustain the benefits being paid out to beneficiaries of Social Security and Medicare. The two programs are going bankrupt.
MACE SUPPORTS MCCARTHY STRATEGY TO CRACK DOWN ON GOVERNMENT SPENDING
In June 2022, the Social Security and Medicare trustees released their annual reports on the state of the trust funds. The trustees found that Medicare’s Hospital Insurance trust fund would be insolvent by 2028 and that Social Security would go bust by 2035.
The root cause of the entitlements dilemma is that retiree benefits exceed the amounts that retirees had paid into the programs while they were working. That is especially the case for Medicare taxes and benefits. The Urban Institute, a left-of-center think tank, found that for a low-income single male with $25,000 in annual earnings, benefits paid out amount to $475,000, while FICA taxes paid in by that person equal $189,000. The mismatch is especially pronounced for Medicare, where taxes paid in amount to $39,000 and benefits paid out equal $274,000 net of premiums.
For a single male with average earnings, $56,000 in 2020 dollars, lifetime benefits are $606,000 balanced in part by lifetime FICA taxes of only $420,000. All numbers are inflation-adjusted and assume a 2% real interest rate.
The Republican Study Committee’s fiscal 2023 budget proposal recommends raising the eligibility age for Medicare to 67 years and for Social Security to 70 years. That would be outstanding policy. But President Joe Biden and the Democratic demagogue talk of entitlement reform. Instead, Democrats propose to raise taxes on corporations in part to delay the bankruptcy of Social Security and Medicare. Democrats do not understand that business funds investment and investment drives gains in productivity. Raising the corporation tax from 21% to 28% would reduce profits available for investment. Investment would fall. National productivity, already terrible, would suffer. Democratic policies would bring closer the economic and political doom loop that the country faces before this decade is out.
Entitlement reform is needed. Or, sooner or later, the economy is most certainly headed for doom.
CLICK HERE TO READ MORE FROM RESTORING AMERICA
James Rogan is a former foreign service officer who later worked in finance and law for 30 years. He writes a daily note on finance and the economy, politics, sociology, and criminal justice.
