Will Democrats sell out on Social Security/Medicare/Medicaid?

[jaichind]

The simple and most sensible solution for Social Security is to lift the payroll cap for contributions and cap benefits at the level of someone who made $113,000 a year(the current contribution cap, indexed to inflation, of course).  This is an easy, sensible solution.  Make Mitt Romney contribute the same 6.2% that the rest of us do.  That would save the system long term.  The problem is that the contribution base is too damn low.

They do that now

Yes.  And thanks to Greenspan Commission back in the 1980s, 85% of SS benefits are taxed which is already sort of means testing of SS on top of the SS payout equations that gives higher returns to lower income payers into SS.

[jaichind]

Per the poll, I don't think most Americans understand that the CPI index overstates inflation, and thus in real dollars SS benefits keep going up.

Actually it understates inflation.

There were actually a couple years recently when there was no cost-of-living increase at all. Thus forcing Grandma to eat dog food.

I agree with both statements.  CPI-W overstates inflation and chained-index is a far superior measurement.  On the other hand for people getting SS the basket of goods in CPI-W might not be realistic.  For that CPI-U might be closer so perhaps a compromise might be an chained-index of CPI-U.  Of course if we did that it would not solve the problem of making the program solvent as if anything it would increase payouts not reduce them.

Of course on this topic of chained-index CPI-W, it does address the Dem demand for more revenue.  Note the COLA index which is CPI-W is also used for calculating adjustments for income tax brackets.    So if we use chained-index CPI-W for COLA it also means greater income tax revenue as the cut-offs for each bracket would grow slower.  So if the GOP proposes using chained-indexed CPI-W and the Dem say "we also need revenue" the GOP can say "you got your revenue in this same change."

[krazen1211]

The simple and most sensible solution for Social Security is to lift the payroll cap for contributions and cap benefits at the level of someone who made $113,000 a year(the current contribution cap, indexed to inflation, of course).  This is an easy, sensible solution.  Make Mitt Romney contribute the same 6.2% that the rest of us do.  That would save the system long term.  The problem is that the contribution base is too damn low.

They do that now

Yes.  And thanks to Greenspan Commission back in the 1980s, 85% of SS benefits are taxed which is already sort of means testing of SS on top of the SS payout equations that gives higher returns to lower income payers into SS.

Mitt Romney doesn't have much wage income anyway.

[Mr.Phips]

The simple and most sensible solution for Social Security is to lift the payroll cap for contributions and cap benefits at the level of someone who made $113,000 a year(the current contribution cap, indexed to inflation, of course).  This is an easy, sensible solution.  Make Mitt Romney contribute the same 6.2% that the rest of us do.  That would save the system long term.  The problem is that the contribution base is too damn low.

They do that now

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Plugging the numbers, you would have had to average a bit over $100 000 a year in real terms over your career in order to get the maximum benefit.

I know they did that already.  We need to change the contribution so that all income is taxed.

[Mr.Phips]

The simple and most sensible solution for Social Security is to lift the payroll cap for contributions and cap benefits at the level of someone who made $113,000 a year(the current contribution cap, indexed to inflation, of course).  This is an easy, sensible solution.  Make Mitt Romney contribute the same 6.2% that the rest of us do.  That would save the system long term.  The problem is that the contribution base is too damn low.

They do that now

Yes.  And thanks to Greenspan Commission back in the 1980s, 85% of SS benefits are taxed which is already sort of means testing of SS on top of the SS payout equations that gives higher returns to lower income payers into SS.

Mitt Romney doesn't have much wage income anyway.

My point exactly.  Make the Social Security tax on AGI rather than just wages(which hits the poor and middle class most).  Don't cap the contribution level, but keep the benefits capped.  That extends life of the program indefinately.

[jaichind]

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Plugging the numbers, you would have had to average a bit over $100 000 a year in real terms over your career in order to get the maximum benefit.

Yes.  Even though I am for just making social security private.  As a person I am not too opposed to increasing the cap where SS taxes apply if it means my full SS will be paid out projected.  This views comes from my analysis of SS as an investment scheme where I pay into this SS as an investment and will get returns later.  Here is the math/analysis:

I actually did some analysis of my SS withdraw scenario analysis. This is for my data only and not for DW (dear wife), yet.

What I did is first look look at all the SS taxes I paid over the years and deflated them into 2013 dollars.

Then I projected what SS taxes in 2013 dollars I will pay year by year between now and when I do my early retirement (4-5 years from now). This is easy since the SS tax cap is indexed by inflation so it is just equal to 2013 SS taxes every year I continue working.

I then went to SS web site and extracted what my benefits would be if I start withdrawing when I am 67 or 70.

Then I took 70% of the number to take into account the fact that SS will run out of funding and would be funded at 78% after 2033. I figured that 70% would be a conservative number.

Then what I did is a simple dollar and time weight ROI calculation. Since I am doing everything in 2013 dollars then my Rate of return would be in after inflation terms.

Then I tried various scenarios of when I stopped getting SS benefits which would represent what age my death would be.

This is what I got

Age of      With        With
Death       at 70       at 67

95             2.9%       2.4%
90             2.5%       2.1%
85             2.0%       1.6%
80             1.3%       0.9%
78             0.8%       0.6%
77             0.5%       0.4%
75             0.0%       0.0%

So for me with these assumptions 75 is the break-even age. This means if I plan to live past 75 then I am better of delaying SS until age 70.

Note for me pretty every year I paid SS taxes I paid the max. But I will end up paying SS taxes for 22-23 years whereas SS calculates benefits based on a 35 year average of such a total. So such a calculation would lead to a medium sort of result in terms of benefits.

For my DW, note it is the same thing, she would have worked 17-18 years before she will join me in early retirement. Every one of these years, like me, she maxed out SS tax. But since the average is over 35 year average she will be considered more "lower income" than myself so the ROI should be better. And it is.


Age of           With          With
Death            at 70         at 67

95                 3.3%          2.8%
90                 3.0%          2.5%
85                 2.5%          2.1%
80                 1.7%          1.4%
78                 1.2%          0.9%
77                 0.9%          0.7%
75                 0.2%          0.2%

I guess same is with her as myself, if she expects to live beyond 75 then she is better of with starting SS withdraw at 70.

When I did my estimates for post-early retirement future, I pretty much assumed our ROI in assets are around 1% greater than inflation. Looks like if my DW and I live beyond 80 then SS would have given us an return better than my assumptions on our other assets.

So note that I did all this analysis with the assumption that we will get 70% of our projected benefits.  So even if the government retroactively went back to the mid 1990s and raised the SS tax cap by 30% which in turn make sure we will get 100% of our projected benefits the analysis above holds.  

So since these returns exceed my projected conservative retirement investment ROI (assuming my DW and I live to at least 80 which is reasonable at this stage given our health).   In other words, the deal of raising the SS cap to ensure a fully paid SS benefit is not a bad deal for me personally.  Note that if my DW and I work 35 years instead of 23 and 18 years,  then these ROI numbers will look far worse.  Another reason to go into early retirement.

[jaichind]

I know they did that already.  We need to change the contribution so that all income is taxed.

Sigh.  You do realize the super- and some not-so-super rich has ways around that too.  They would have significant assets with a lot of capital gains on it.  But instead of selling them to fund their lifestyle and pay your extra SS taxes, they would just use those assets as collateral to get loans from various banks.  And when they pass away, these assets would pass to their heirs who would pay taxes on the entire inheritance but the capital gains would "disappear" as the "cost" of these assets would reset anyway at the point the assets pass to the said super-rich person's heirs.  Said heir would then just pay off the debt.  Money will find a way.  The 1% cannot be taxed.  There is a reason why they are the 1% in the first place.

[All Along The Watchtower]

Maybe not immediately, but I think there's a good chance Democrats 'sell out' on Social Security eventually. 

Demographics is destiny.  Democrats are increasingly reliant on millennials to win elections.   This age group doesn't have a positive view of social security in particular.

Which is unfortunate. The talking points of Serious People have been remarkably effective on this issue.

[Mr.Phips]

I know they did that already.  We need to change the contribution so that all income is taxed.

Sigh.  You do realize the super- and some not-so-super rich has ways around that too.  They would have significant assets with a lot of capital gains on it.  But instead of selling them to fund their lifestyle and pay your extra SS taxes, they would just use those assets as collateral to get loans from various banks.  And when they pass away, these assets would pass to their heirs who would pay taxes on the entire inheritance but the capital gains would "disappear" as the "cost" of these assets would reset anyway at the point the assets pass to the said super-rich person's heirs.  Said heir would then just pay off the debt.  Money will find a way.  The 1% cannot be taxed.  There is a reason why they are the 1% in the first place.

You need a valid purpose for a loan.  And you forget that these loans have interest associated with them, meaning that they would likely be paying as much interest as they would SS taxes had they just sold the assets.  Also remember that these investments are also likely paying dividends, that are also subject to SS taxes. 

And investing in tax advantaged stuff like muni bonds won't work either, as they have a very low return on investment compared to other taxable things.

[jaichind]

I know they did that already.  We need to change the contribution so that all income is taxed.

Sigh.  You do realize the super- and some not-so-super rich has ways around that too.  They would have significant assets with a lot of capital gains on it.  But instead of selling them to fund their lifestyle and pay your extra SS taxes, they would just use those assets as collateral to get loans from various banks.  And when they pass away, these assets would pass to their heirs who would pay taxes on the entire inheritance but the capital gains would "disappear" as the "cost" of these assets would reset anyway at the point the assets pass to the said super-rich person's heirs.  Said heir would then just pay off the debt.  Money will find a way.  The 1% cannot be taxed.  There is a reason why they are the 1% in the first place.

You need a valid purpose for a loan.  And you forget that these loans have interest associated with them, meaning that they would likely be paying as much interest as they would SS taxes had they just sold the assets.  Also remember that these investments are also likely paying dividends, that are also subject to SS taxes.  

And investing in tax advantaged stuff like muni bonds won't work either, as they have a very low return on investment compared to other taxable things.

Well, the current rate of taxes on capital gains are 20% at the federal level.  At the state level, lets take NY for instance, it would be around 7%.  So we add another SS 6.2% taxes on it it would make it even more obvious why someone with a significant asset should use the scheme I proposed.

Also as for purpose for a loan, that is what investment banks are all about.  There are tons of OTC structured deals that companies and High Net worth people engage in with investment banks.   I can on the top of my head come up with a half a dozen ways to structure such a loan deal and hedge for changes in value of said asset with a combination of regular options, total-return swaps, equity swaps, interest rate swaps and structured notes.  

As for stuff like munis I agree with you that the risk adjusted rate of return factor our the tax benefits.  I would say people who are just regular high net worth would do munis.  People who are truely super-rich has other ways.    Just see

http://www.businessweek.com/articles/2012-04-17/how-to-pay-no-taxes-10-strategies-used-by-the-rich#p2

One of the items in there talks about my loan scheme.  Having a SS tax on non-earned income would just make it more lucrative to engage in these types of scheme and the extra money raised near zero.  Just like in 1917 when they raised the top federal rate from 15% to 67%.  The number of people who were in that top rate pretty much went to single digits from a year earlier.  

Speaking of Munis, going off topic a bit, I have been investing in Muni ETFs for many years now due to the tax benefits.  The one I been going in and out of a lot is VTN (which is tax free for NY state taxes as well as federal taxes.)  If you look at 1/1/1993 to now, VTN returned about 6.5% annually while SPY has returned 8.9% annually.  If you take into account the tax benefits they are about the same in after tax terms.  Of course VTN has beta of about .4 when compared to SPY which means it is less riskly.  Overall Muni ETFs are a goo deal.  The current yield of VTN is 7.25% which is pretty good.

[opebo]

Progressive taxation of the parasitic class (and not just 'wage income', all income) would 'fix' this programs and allow for their expansion: the expansion I'd be most interested in would be a reduction in the retirement age to 50-55.  Second on my list would be simply applying medicare/caid to all americans regardless of age, and outlawing private health care.

[Ban my account ffs!]

SSI and Medicare are not "safety net" programs. "Safety net" implies something that catches you when you "fall" (i.e. an unexpected negative event like a job loss happens). Getting old, or getting too old to work, is not an unexpected, negative event. It happens to everyone and we all know it's going to happen to all of us eventually.

The fears about Social Security are pretty overblown. We'll always have "bubbles" when particularly large generations retire, followed by a reduction as they die and are replaced by a smaller subsequent generation. The Baby Boomers' retirement is problematic to the extent that there are so many of them. As they die and are replaced by Gen Xers, we'll be dealing with an old age cohort that's smaller in number for a couple of decades. Then when Generation Y retires, we'll have a somewhat less severe problem since they're the children of the Boomers and hence are large in number (the period from roughly 1987 to 1992 is considered the "Echo Boom" for this reason).

But Medicare worries me because costs can grow and have grown above and beyond simply having more people in the program.

You have to remember that the age structure has really changed due to immigration.  While immigration laws loosened in the 1960s, a huge number of the immigrants came in the 90s and 2000s and were mainly Gen X aged... so that our population pyramid now looks like this:



Where Gen X really isn't much smaller anymore... and the Millennials are just as big as the baby boom.

Compared to 1980:


You can see how enormous the baby boom was but that there had been a dip in births during the 1920s and depression and then again after the mid 1960s.

But thanks to immigration... and continued immigration, there are more younger people working and paying in every year... younger people we didn't even have to pay to raise or educate.

[Mr.Phips]

I know they did that already.  We need to change the contribution so that all income is taxed.

Sigh.  You do realize the super- and some not-so-super rich has ways around that too.  They would have significant assets with a lot of capital gains on it.  But instead of selling them to fund their lifestyle and pay your extra SS taxes, they would just use those assets as collateral to get loans from various banks.  And when they pass away, these assets would pass to their heirs who would pay taxes on the entire inheritance but the capital gains would "disappear" as the "cost" of these assets would reset anyway at the point the assets pass to the said super-rich person's heirs.  Said heir would then just pay off the debt.  Money will find a way.  The 1% cannot be taxed.  There is a reason why they are the 1% in the first place.

You need a valid purpose for a loan.  And you forget that these loans have interest associated with them, meaning that they would likely be paying as much interest as they would SS taxes had they just sold the assets.  Also remember that these investments are also likely paying dividends, that are also subject to SS taxes.  

And investing in tax advantaged stuff like muni bonds won't work either, as they have a very low return on investment compared to other taxable things.

Well, the current rate of taxes on capital gains are 20% at the federal level.  At the state level, lets take NY for instance, it would be around 7%.  So we add another SS 6.2% taxes on it it would make it even more obvious why someone with a significant asset should use the scheme I proposed.

Also as for purpose for a loan, that is what investment banks are all about.  There are tons of OTC structured deals that companies and High Net worth people engage in with investment banks.   I can on the top of my head come up with a half a dozen ways to structure such a loan deal and hedge for changes in value of said asset with a combination of regular options, total-return swaps, equity swaps, interest rate swaps and structured notes.  

As for stuff like munis I agree with you that the risk adjusted rate of return factor our the tax benefits.  I would say people who are just regular high net worth would do munis.  People who are truely super-rich has other ways.    Just see

http://www.businessweek.com/articles/2012-04-17/how-to-pay-no-taxes-10-strategies-used-by-the-rich#p2

One of the items in there talks about my loan scheme.  Having a SS tax on non-earned income would just make it more lucrative to engage in these types of scheme and the extra money raised near zero.  Just like in 1917 when they raised the top federal rate from 15% to 67%.  The number of people who were in that top rate pretty much went to single digits from a year earlier.  

Speaking of Munis, going off topic a bit, I have been investing in Muni ETFs for many years now due to the tax benefits.  The one I been going in and out of a lot is VTN (which is tax free for NY state taxes as well as federal taxes.)  If you look at 1/1/1993 to now, VTN returned about 6.5% annually while SPY has returned 8.9% annually.  If you take into account the tax benefits they are about the same in after tax terms.  Of course VTN has beta of about .4 when compared to SPY which means it is less riskly.  Overall Muni ETFs are a goo deal.  The current yield of VTN is 7.25% which is pretty good.

Even if they find all of these cleaver ways to possibly avoid it, it's only an extra 6.2%.  When the capital gains tax went from 20% to 28% in 1986, I don't believe capital gains tax revenue decreased.  It's not like we'd be going from 20% to 75%.

[jaichind]

Imagine if they did the opposite and lowered the Medicare age to 0. We already know what would happen.

http://en.wikipedia.org/wiki/Healthcare_in_Taiwan

Well, as someone from Taiwan Province of ROC I would like to comment on this as I also spend enough time on Taiwan Province after 1995 on my trips back and also experienced the post-1995 system which everyone calls "Lao Bao."

1) All the negativity of socialized medicine that one would expect did take place.  Lines, which were pretty long back in the 1980s which I also experienced as a child, got worse.   Doctors initially were happy at the extra customers but found the system to be inflexible as the government tried to balance the books.  
2) One significant part of the Taiwan Province health care system which is not discussed that much in the wiki page is the role of traditional Chinese medicine.   On Taiwan Province, most people use Western medicine for emergency care as well as annual checkups.  For preventative care most actually look to traditional Chinese medicine which only some of is covered by the system.  The way people involved in traditional Chinese medicine make money is mostly off the selling of various herbs which they charge a lot.  The cost of checkups are almost nothing.  The system covers the cost of checkups and only a tiny part of the cost of herbs.  The traditional Chinese medicine herb market is a very large shadow health care market that lives in parallel to the socialized Western healthcare system.  In fact a lot of people on Taiwan Province die each year from overdose on herbs from traditional Chinese medicine, some of which are very effective but others are really con artists.  So when we say that healthcare on Taiwan Province is Medicare for everyone. I would say, not really as the middle and upper class spend a lot of out-of-pocket costs on Chinese medicine herbs.
3) Lets be clear how this system came into being.  The long time ruling party KMT has always been close to the traditional Chinese medicine providers while the opposition DPP has always been close to Western medicine providers.  This system was put in place in 1995 was a part of KMT strategy to pull in Western medicine providers into its orbit by giving them more customers.  
4) The reason the ROC government was able to finance this system as they underestimated the cost of this program like all government is by under-spending on its defense budget.   There were several occasions  that this system ran out of money and ROC government had to rush in to reform it to put it back on track, usually by dumping in more money.  Another such crisis I think is coming soon.  As I pointed out, the ROC government last 20 years has spend very little on defense in light of the threat from PRC's PLA.  One of the main reasons why is how much this Lao Bao program is costing the government.  Of course the ROC view is: "we cannot stop the PLA anyway so why bother trying, lets free ride of the USA."  So the people that is really paying for the ROC socialized medicine is the American taxpayer.  If the ROC had to pay for its defense this socialized medicine would have shut down years ago as another expensive government boondoggle.  

[Ogre Mage]

Democrats will not sell out because the price for entitlement program cuts is tax increases.  They are not going to give away something so precious for nothing.  And Congressional Republicans will never agree to a tax increase.

[jaichind]

Even if they find all of these cleaver ways to possibly avoid it, it's only an extra 6.2%.  When the capital gains tax went from 20% to 28% in 1986, I don't believe capital gains tax revenue decreased.  It's not like we'd be going from 20% to 75%.

Sure.  I never said the super rich will pay no taxes or that revenue will decrease only that it will not increase in a meaningful way.  Only attempts to tax them to fund various government will come to naught.  The super rich has in mind what it will reasonably pay and if the tax rates exceed that will maneuver to pay the level they are comfortable with.  One can make an argument of punishing the super rich with high rates which merely inflicts on them more paper work their lawyers and accountants to avoid paying them so it does come at a cost to them.  But to argue that meaningful revenue will come to pass is not realistic. 

[King]

A government in static gridlock is far more effective than a government moving in a direction to appease the far right.