Thinking About Medicare and Social Security

Neither Medicare nor Social Security should be government programs.  The government essentially takes on two roles in these two insurance programs:  1) To subsidize the premiums of low income Americans; and 2) To use its power of coercion to force everyone to participate.  I have no stomach for the latter role and the former could be much more cheaply achieved with some sort of voucher or credit program.

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.

  • http://thegameiam.wordpress.com David

    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.

    While we're dreaming, can I have a pony?

  • http://genericconfusion.blogspot.com Greg

    Neither program needs to be a government program, but the fact that they're government programs makes it easier to get public support for the welfare components of the program.

  • epobirs

    After the recent argument over payroll tax holidays, these programs are now overtly entitlements.

  • Jon

    I cannot think of a better or more ironic example of the moral bankrupty of Washington than the fact that faced with a long term funding deficit for social security of 2% of payroll, what did Washington do? They doubled down. Lets increase the funding gap to 4%!

    There is another alternative to raising taxes. The primary cause of the deficit to Social Security is increased longevity, I don't remember the figures exactly, but I believe that raising the full retirement age about 20 Months over 20 years will bring social security into long term balance. Or, we could decrease life expectancy. Hmm..., Maybe Obamacare isn't such a bad idea after all.