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Some unhappy news about Medicare and Social Security

Rick Newman

You’ll hear a lot of vague talk during the 2016 presidential election about “reforming” Social Security and Medicare. That’s because “reform” sounds a lot better than “cut,” “ration,” or “give up on.”

Politicians, the conventional wisdom goes, don’t get elected by telling people bad news. But Sen. Lindsey Graham of South Carolina — who says he's "92-and-a-half percent sure" he's going to run for president as a Republican — plans to do just that. “I’m going to ask [people] to give up a little bit to make sure the system doesn’t fail,” Graham tells me in the video above. “If we don’t, the baby boomers are going to wipe out Medicare and Social Security. We’ll become Greece.”

Many politicians know the math: On the present course, Medicare will begin to run short of money around 2030, while Social Security will remain solvent until about 2035. At that point, there will have to be either new taxes to keep benefits intact, or cuts in benefits as resources dwindle. Waiting until there’s an actual funding shortfall would force drastic, last-minute solutions instead of phasing in changes gradually.

Graham wants to address the problem now and get entitlement funding in place for generations, and he plans to use a presidential campaign to spread the word. “Republicans have to clean up the tax code and eliminate some deductions for the few at the expense of the many,” he says. “Democrats have to agree to means-test benefits and adjust the age of retirement.”

Various versions of that bipartisan solution have been bouncing around Washington for years. But Republicans generally oppose any move that would raise the tax burden (including fewer deductions), while Democrats draw the line at any cut in benefits. With the crisis still theoretical, the natural Washington inclination is to simply put it off.

Graham doesn’t yet have a full blueprint for his entitlement reform plan, but he wants to borrow heavily from the so-called Simpson-Bowles Commission, which in 2010 issued a well-regarded, bipartisan report on how to solve all the big problems related to taxes and spending. Commission leaders Alan Simpson and Erskine Bowles released an updated version in 2013. If you’ve never heard of Simpson-Bowles, or simply forgot about it, that’s because the plan would have done all sorts of sensible but deeply unpopular things that maybe three members of Congress would have the guts to vote for right now. The reports were widely praised, then buried.

Graham wants to “dust off” Simpson Bowles and use it as a template for straightening out Washington’s finances, which rely too heavily on borrowing, resulting in a national debt that now exceeds $18 trillion. The basic idea is to revamp tax and spending policies to use federal dollars more efficiently, sharply reduce the nation’s annual deficits and promote economic growth. In theory, that’s a win-win approach, because more stable government finances and a stronger economy benefit everybody. But there are always winners and losers when federal money gets reshuffled, as these provisions of the latest Simpson-Bowles report show:

* Require wealthier seniors to pay for a larger share of their Medicare benefits.

* Raise the eligibility age for Medicare from 65 to 67 and cut back on fees paid to healthcare providers.

* Raise the eligibility age for Social Security, lower the annual cost-of-living increases and raise the portion of every worker's income subject to the Social Security tax withholding.

* Replace the current income tax brackets with three new brackets: 12%, 22% and 28%. Tax investment income at the same rates as labor income.

* Cut the top corporate tax rate from 35% to 28%.

* Eliminate many tax deductions for both businesses and individuals.

* Raise the federal gas tax by 15 cents, to 33.4 cents per gallon.

If you were crafting a fiscal system from scratch, the Simpson-Bowles plan might be a plausible way to do it. But layering Simpson-Bowles onto the current system would generate strident opposition from every lobbying group with a tax deduction on the chopping block. The financial industry would lobby against hiking capital gains taxes. Governors and mayors would fight hard against eliminating the deductibility of state and local taxes. Insurers would protest eliminating the deductibility of employer- provided health insurance. So on and so on, through every interest group in Washington.

Graham argues that designing a plan to shore up Medicare and Social Security is “so simple you could do it on the back of a napkin.” Persuading Americans to support it — and Congress to vote for it — is far more complicated. It may take more than one presidential campaign to do that.

Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.