Image source: Getty Images.
According to the December snapshot from the Social Security Administration (SSA), more than 41 million retired workers were counting on an average monthly payment of $1,360 from the SSA. For a majority of these seniors, their Social Security payment represents more than half of their monthly income during retirement.
Likewise, of the roughly 56 million seniors eligible for Medicare, approximately five in six are seniors aged 65 and up. Without being able to lean on Medicare to cover around 80% of their eligible medical expenses, it's plausible that the poverty rate for seniors could be much higher than they are now since medical costs have the potential to wipe out retirees' nest eggs.
The importance of Social Security and Medicare cannot be overstated
The integrity and health of both of these programs are critical to the financial and physical well-being of senior citizens during retirement. Unfortunately, neither program is financially sound.
The Social Security and Medicare Board of Trustees reports from 2016 found that Social Security's more than $2.8 trillion in spare cash is estimated to be depleted by the year 2034. This reversal from a cash inflow into the program to a cash outflow is based on a confluence of factors that's often headline by the retirement of baby boomers and the lengthening of life expectancies.
Similarly, the Hospital Insurance Trust, which helps fund Medicare Part A, the component of Medicare that covers in-patient hospital services, surgeries, and long-term skilled nursing care, is expected to exhaust its spare cash by 2028.
Should both key programs deplete their cash reserves, they would essentially become budget-neutral programs. In other words, the money being paid out to Social Security beneficiaries and physicians/hospitals that accept Medicare would be commensurate with the amount of money brought in via the payroll tax and other smaller sources of revenue. The Trustees report projects that Social Security benefits would be cut by 21% across the board, while Medicare reimbursements would drop by 13%.
To many Americans, protecting Social Security and Medicare for future generations should be a very high priority for Congress.
Sen. Mick Mulvaney (R-S.C.). Image source: Mark Taylor, Flickr.
This Trump appointee wants to cut Social Security and Medicare
For his part, President Donald Trump offered to leave Social Security and Medicare "as is" during his campaign. Rather than change either program directly, Trump is planning indirect methods of improvement that he believes could work wonders. For instance, cutting individual and corporate income taxes could put more money back into the pockets of consumers and businesses and spur our consumption-driven economy. More income for all workers could mean higher payroll tax revenue for both programs and thus push back or eliminate the budgetary issues with Social Security and Medicare.
However, one of Trump's top appointees has a markedly different view on what should be done with these programs. If Sen. Mick Mulvaney (R-S.C.), Trump's appointee to be the director of the U.S. Office of Budget Management, could have his way, Social Security's annual budget would be cut and certain people now eligible for Medicare would have their benefits completely taken away.
Last week, Mulvaney was steadfast in his support for a tightly run ship in Washington, stating to the Senate budget and home security committees that his job was "to be completely and brutally honest with him [President Trump]" even though Mulvaney knows full well that Trump is unlikely to change his stance anytime soon on touching entitlement programs.
Image source: Getty Images.
In particular, Mulvaney would implement two key changes that are designed to reduce payouts to Social Security and Medicare.
First, he wants a gradual increase in Social Security's full retirement age to 70. Your full retirement age is the point at which you become eligible to receive 100% of your monthly benefit. Filing for benefits prior to reaching your full retirement age means accepting a reduced monthly payout. Right now, your full retirement age is determined by your birth year, and it'll top out at age 67 in the year 2022 for those born in 1960 and later.
If Mulvaney gets his wish and the full retirement age gets gradually bumped up to age 70, all future retirees will face a reduced payout unless they choose to wait until age 70 to enroll in benefits. You'll note, though, that raising the full retirement age does not impact current retirees. Mulvaney has stated previously that reducing the benefits of current retirees is off the table.
With regard to Medicare, Mulvaney would institute a type of means-testing to reduce benefits. Means-testing involves setting up a qualifying cutoff for Medicare based on annual income limits. In other words, if an individual makes more than $100,000 a year (as an arbitrary value), they won't qualify for Medicare benefits because they're deemed to have sufficient income to cover their own medical care. Removing these well-to-do individuals from the equation could save the program money.
Image source: Sebastiaan ter Burg, Flickr.
It's not entirely crazy
Though these solutions might make some people upset, they do hit on a critical point of Social Security and/or Medicare reform: the idea that benefit cuts may need to be accepted alongside increases to revenue in order to negotiate a long-term solution.
For example, the "Voice of the People" survey found that 79% of the nearly 8,700 adults questioned across America from all political parties would prefer to increase Social Security's retirement age to 68 from 67 if it meant the preservation of the program for future generations of Americans. Even though increasing the retirement age could effectively decrease payouts for all future generations of retirees, the public recognizes the need make the program work.
No matter how Social Security or Medicare are eventually fixed, the reality is that something, or someone, has to give. If benefits are kept where they are now without a cut, it means the workforce will have to pay more into both programs. If the working class isn't going to pay anymore, it means future and/or current retirees may need to deal with a cut in benefits.
Mulvaney described himself during his hearings as a "straight shooter." While his ideas of cutting Social Security and Medicare benefits may not be popular in Washington, they speak to the reality that if something is going to get done, someone's going to have to take a pay cut.
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