In less than three weeks, massive tax hikes and spending cuts are set to take effect unless the White House and Congress can agree on a plan to avoid the so-called fiscal cliff. President Barack Obama and House Speaker John Boehner held their first face-to-face meeting Sunday to discuss possible outcomes. Negotiations are likely continue until Congress leaves for the holiday recess. Republicans are starting to accept the fact that higher taxes on high-income earners will be part of a fiscal cliff deal.
Republican Senator Bob Corker from Tennessee told Fox News over the weekend that a growing number of Republicans, including himself, are willing to raise the tax rate on the top 2% of Americans if cuts are made to entitlements. The three top entitlement programs --Social Security, Medicare and Medicaid -- account for about 10% of U.S. GDP. Social Security and Medicare are expected to grow substantially over the next 10 years as baby boomers retire and become beneficiaries. But the future of the two programs look very different.
"Social security is the best-funded government program," says David Cay Johnston, a Pulitzer prize-winning reporter and author of several books on corporate and government policies including The Fine Print: How Big Companies Use "Plain English" to Rob You Blind. Johnston explains that Social Security has a dedicated stream of income and the program actually ended last year with a $2.7 trillion surplus. But Johnston concedes that changes must be made to the program in the future to keep the program solvent. Social Security could be at risk of owing $8.6 trillion to recipients in 75 years, he calculates.
Johnston suggests three fixes for Social Security:
1. Raise the wage base subject to Social Security taxes from $110,00 to $200,000. That would restore the share of American wages covered by Social Security to 90%, like it was under President Reagan, from 83% currently.
2. Raise the Social Security tax by 2 percentage points. The higher tax could help offset the fund's drop due to declining wages. The Social Security tax is currently 6.2% for employers and 4.2% for employees. It was cut for employees two years ago as part of the payroll tax holiday and set to expire at the end of the year. President Obama wants to extend the tax cut.
3. Increase employment and wages. Of course, this is easier said than done and something that politicians are scrambling to accomplish. When more people are working, the government collects more funds for Social Security.
In contrast to Social Security, "Medicare is a real nightmare," says Johnston. He says healthcare payments for Medicare recipients surpass the healthcare liabilities of 33 other countries in the Organisation for Economic Co-operation and Development (OECD), all of whom have universal healthcare. He suggests that the U.S. adopt a single-payer healthcare system but admits it's unlikely to happen in the foreseeable future.
In the meantime, he suggests the U.S. switch from what he calls a "business model" focused on profits for insurers to a service model like education and police.
"It would require a sea change of thinking," says Johnston, but "it's possible."
Johnston also suggests a national health service for older Americans that would help drive down the cost of healthcare. Doctors would be protected from the lawsuits that often threaten private practices and the service would end "defensive medicine" -- i.e. extra, and often expensive, tests. Those additional tests—not the lawsuits—are what's largely driving healthcare costs higher, Johnston says.
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