Friday, January 13, 2012
Thinking About Medicare and Social Security
But these programs are not going away. While both need reform, it may turn out to be politically impossible to even reform them.
But if we take off the table for a moment their existence and their basic structure, there is still an enormous problem we might fix: pricing. There is absolutely nothing more deadly to an economy than a false or corrupted pricing signal. But that is clearly what we have with these two programs. The Medicare “premium” (tax) taken out of every paycheck is clearly way too small to cover true actuarial costs of this program. And while Social Security rates may have been set right if the premiums were really being kept in escrow for the future, the fact is that the so-called trust fund has been raided into oblivion by past government spending programs – Social Security taxes need to be reset to reflect that fact.
The result, of course, will be a substantial increase in both payroll taxes. I am not a big fan of tax increases, and find taxes on labor to be among the worst. But as long as we hold on to the collective notion that these are insurance programs and the taxes we pay are premiums, its time to stop fooling Americans into thinking that the premiums they are paying are truly sufficient to fund their benefits. Maybe after we reprice the “premiums” to their true actuarial value, we can then have a real debate about the structure and existence of these programs.