Candidate plans to fix Social Security and Medicare won't work
(Reuters) - Here's a political proposal that sounds reasonable: Fix struggling government entitlement programs by cutting the benefits of rich people, who don't need them anyway. How about it, Jon Huntsman?
"Well, let me just say on entitlements - across the board, I will tell the upper income category in this country that there will be means testing," Huntsman said in one of the New Hampshire GOP Presidential debates last weekend.
Huntsman isn't alone there - several other GOP presidential candidates have endorsed cutting entitlements for the wealthy, and President Obama has flirted with it, too. But as seductive as it sounds, the math on means testing entitlements just doesn't work, because there aren't enough wealthy seniors to solve the long-term problems of either Medicare or Social Security.
Let's look at Social Security first. The Republican candidates like to point to last year's Bowles-Simpson deficit report, which estimates that half of Social Security's long-range imbalance could be closed by cutting benefits. But Bowles-Simpson didn't propose traditional means testing, which would take away benefits from people who have other available sources of income or resources. Instead, it looked at a senior's lifetime earning history and changes the formulas used to determine benefits.
Most of the Bowles-Simpson cuts would fall on the middle class, not the rich. Ninety percent of seniors who had earned from $40,000 to $60,000 would see benefit cuts, and half of those would see reductions of 20 percent or more, according to the National Academy of Social Insurance (NASI).
Real means-testing of Social Security just can't produce much in the way of savings, because the program's benefits don't go to the rich. Warren Buffett's Social Security checks aside, only 2 percent of Social Security benefits go to seniors with non-Social Security income over $100,000. The largest monthly check amount in 2011? $3,123. The average check was $1,177. "A few rich people are getting Social Security, but nobody is getting enriched by Social Security," said Virginia Reno, vice president for income security at NASI.
Indeed, a projection last year by economist Dean Baker of the Center for Economic and Policy Research found that 90 percent of benefits go to seniors with less than $50,000 in annual income outside of Social Security. Baker found that a means test phasing out benefits at the rate of 10 cents for every dollar of additional income over $100,000 of non-Social Security income would save the program just 0.74 percent annually.
And that assumes no behavioral response by retirement savers, who might be expected to suddenly notice that their incentive to sock away money has been sharply reduced. Once you reach a certain threshold of income or resources, your Social Security benefits would be cut by a commensurate amount - so why bother to keep saving above that number?
Medicare has been means testing since 2003, when the Medicare Modernization Act established higher premiums for Part B (outpatient services) for individuals with $85,000 or more in annual income, and joint filers with income over $170,000.
The 2010 healthcare reform law expanded these income-related premiums to the Part D prescription drug benefit, and to the Part C Medicare Advantage program. Prior to passage of President Obama's healthcare reform law, the income thresholds were indexed to inflation annually to keep level the percentage of beneficiaries subject to the surcharge; the Affordable Care Act froze the threshold at 2010 levels through 2019.
That change will pull more seniors over the threshold over time. The Kaiser Family Foundation (KFF) estimates that 5 percent of Medicare enrollees are affected currently, a number that will rise to 14 percent by 2019. The Obama Administration proposed expanding means-testing of Medicare even further under a deficit cutting proposal he submitted to the now-defunct Congressional Super Committee.
How much does all this save the government? The Kaiser Family Foundation estimates that the higher premiums in place now will save taxpayers $25 billion for Part B from 2010 to 2019, and $10.7 billion for Part D. That's hardly a game changer for a program with total outlays of $566 billion in 2012 alone.
The author is a Reuters columnist. The opinions expressed are his own.
(Editing by Beth Pinsker Gladstone)