Associate Editorial

josePh C. Paviglianiti, mD

Withholding Medicine From a Sick Patient

Disclaimer: I tried my best to keep this article free of any political bias. Regardless of one’s political ideology, we are all going to hopefully retire someday.

Two months ago, the United States government announced an 8.7percent cost-of-living adjustment (COLA) to Social Security benefits starting January 2023. That’s certainly great news to those retirees already receiving benefits… but NOT such great news to those of us who are further away from retirement. At some point, somebody is going to have to pay for all these extra benefits. But just who should pay and when that should start has been hotly debated over decades.

Let’s review some facts... then some proposed solutions:

• As reviewed in Part I of this article a few months ago, the Social Security

Act was signed into law

August 14, 1935. • On January 1st, 1937, workers started having FICA (Federal

Insurance Contributions Act) taxes deducted from their paychecks. • Currently 6.2 percent of the first $147,000 of your salary is deducted as FICA taxes. Your employer kicks in a matching 6.2 percent. This total (12.4 percent of your salary) money goes into the OASDI Trust Fund (The

Old Age and Survivors/Disability

Income Trust Fund). That’s on top of our regular income tax.

As an aside, I was very recently on a walking tour through downtown

Salzburg, Austria and our guide noted that Austrians pay 25% of their income toward “pension and old age benefits” as well as about 40% of their income into income tax.

Sweden’s and Denmark’s collective tax rates for “income + retirement” hovers at 45% as well. • By January 1st, 1940, the OASDI

Trust Fund (otherwise known as the Social Security Trust Fund) had built up enough cash reserves from employee / employer FICA contributions that retirees began receiving a set amount monthly “for life”. At the time, since there were only a few million retirees, only those who had contributed into the program counted vs tens of millions of American workers contributing to the trust fund. By 1955 there were over 8 gainfully employed Americans for each retired American (8.5:1 employee: retiree ratio); thus, more money was going into the OASDI/SS

Trust Fund than was being paid out.

Each year, the OASDI/SS Trust Fund grew; excess funds were invested in government bonds as required by law and the interest was added back into the fund. Everything solvent.

All happy. • Currently, in December 2021, the

OASDI/SS Trust Fund has its value at $2.9 Trillion dollars. Ninety percent of the OASDI/SS trust fund is financed via our FICA taxes; 6.4 percent is from interest on those funds, and 3.5 percent is from taxation of the benefits that get paid out. • Even though the OASDI/SS Trust

Fund was growing, the “employee: retiree” ratio was shifting as the baby boom was ending. By 1983 there were only approx. 3.2:1 (employee contributors: retirees). Thus in 1983, the OASDI/SS Trust Fund “paid out” more money than it took in from FICA taxes for the first time in history. • The best analogy is the bathtub faucet and drain: The FICA tax on our salaries is the faucet and the monthly benefits paid to retirees is the bathtub drain. In the early years, the tub (the OASDI/SS Trust Fund) was overflowing. There were more workers “paying in “than retiring.

But as the population demographics changed, the FICA-faucet has been turned down and the tub drain is open wider...and opening wider by the day. When the tub is empty, the tub drain will need to be slowed down to exactly match the rate of the faucet.

www.acms.org

• As of the end of 2021, the OASDI/

SS Trust Fund/bathtub still had $2.9

Trillion dollars still in it; the faucet

“in” was $1.09 Trillion, but the bathtub drain was draining faster at $1.14 Trillion “out”. • The actuarial wonks in the late 1970s had foreseen this and so the government needed a way to increase the “money in” to the OASDI/

SS Trust Fund. After much debate, it was decided to TAX Social Security benefits (they were previously untaxed). That turned on the faucet a little more and the bathtub started to fill up, but not at nearly the rate it filled/overflowed in the early decades of the program (when there were 8 workers for each 1 beneficiary) • Taxing Social Security benefits starting in 1984 righted the ship for a few years, but based on population demographic info, the actuarial wonks predicted that in early 2019 the math would go bad again…i.e., that the

OASDI/SS Trust Fund would again start to “pay out” more money than it “took in.” The math never lies and as expected, almost to the hour, the

OASDI/SS Trust Fund started paying out more in benefits than it took in via

FICA taxes in March 2019. • It should be mentioned that the

OASDI/SS Trust Fund had a HUGE head start. As of right now, the trust fund still has $2.9 TRILLION dollars in it. But...since 2019, that trust fund savings goes “down” every month because it pays out more in monthly benefits than it takes in via monthly

FICA taxes. It is expected that the

OASDI/SS Trust Fund will be down to zero by 2035. Note that: Social Security will NEVER go “bankrupt”, since funds from employed workers will continue to go into the fund via

FICA taxes. But at that amount in approximately 2035 when the trust fund goes to zero, THEN Social

Security becomes exclusively a

“PAY-AS-YOU-GO Program. When it reaches “Pay-As-You-Go” status, the monthly FICA tax “in” will need to exactly equal the Social Security benefit “out.” This “post 2035” benefit amount is expected to be 20-25% less than current monthly benefit rate, adjusted for inflation. Remember, when OASDI/SS Trust Fund was doing well, it could offer benefits more than earned, COLA raises, etc. But after 2035, the OASDI/SS Trust Fund will only be able to “pay out” what it takes in that month. • As not seen on the imaginary table that I couldn’t figure out how to copy over to this word document, there used to be 8 1/2 workers per each

Social Security beneficiary back in 1955. In 2022, there are currently approximately 2.8 workers per Social

Security beneficiary. The graph is only going down, it will never go back up, unless a whole lot of people start pumping out a whole lot of babies.

But not just any kind of babies... they need to be babies that grow into citizens that are actually gainfully employed and who contribute FICA taxes “in”. If anyone has had any difficulties hiring medical technicians or getting a table at a “half full” restaurant or being in a hotel where there is only maid service every 4th day, the absence of “workers” in many job fields recently is obvious. And not just in entry-level jobs. How about

the difficulties in hiring a physician to join your practice or finding an anesthesiologist or nurse anesthetist to staff an operating room? The assumption that the younger generation want to work is not guaranteed. How many times have you caught yourself wondering “where are all the workers?” or “it seems that nobody wants to work”. The fact that currently “nobody seems to want to work” undercuts the entire financial foundation that Social Security is based on. • Interestingly, it’s these very younger workers (whom us old farts feel don’t want to work at all) who fear that Social Security will “completely disappear.” A study by Nationwide

Insurance in 2021 found that 71 percent of adults felt that Social

Security was going to “run out” in their lifetime. More importantly, 47 percent of millennials felt “they will not get a dime of Social Security benefits they have earned”. Those are sobering numbers.

POSSIBLE SOLUTIONS

So… how to fix the proverbial Social Security faucet/drain problem? I remember hearing that “Social Security was going broke” when I was a kid in the late 1970’s … however, other than the 1983 decision to “tax Social Security benefits,“ nothing else has been done to stop the “out” more than “in” situation. Lots of ideas have been put forth, but nobody’s had the guts to do anything about them, because reducing monthly social security benefits is political suicide.

Continued on Page 12

From Page 11 Instead, the government just recently increased payouts with a historic 8.7 percent COLA increase. Retirees now get “full” benefits thanks to historical population and employment growth… but that comes to a screeching halt in approximately 2035 (depending on who’s math you believe) when EVERYONE gets a 20-25 percent benefit cut. Most of us “still working” favor spreading that cut out over the upcoming 10 years to soften the blow and maybe kick the SS trust fund bankruptcy can further down the road.

But benefit cuts aren’t enough. The Committee for Responsible Federal Budget (CRFB) is a nonpartisan group that objectively looks at the fiscal impact of any federal spending program. In February 2020 to the CRFB suggested 10 options to secure the Social Security trust fund (see below).

Policy Ten-Year Savings

Revenue Options

Increase payroll tax rate by 1% $1.0 trillion

Increase taxable maximum to 90% of earnings ($350,000) $830 billion*

Eliminate the $147,000 taxable maximum $1.8 trillion*

Subject cafeteria plans to the payroll tax

Cover newly-hired state and local government employees $470 billion

$150 billion

75-Year Shortfall Reduction

28%

22%

68%

10%

3%

75th Year Deficit Reduction

23%

14%

60%

6%

-4%

Spending Options

Grow initial benefits with prices instead of wages

Reduce initial benefits for high earners

Increase earning years included for benefits from 35 to 40 $90 billion

$45 billion

$35 billion 97%

34%

13% 184%

39%

14%

Calculate Cost of Living Adjustments using chained CPI $245 billion 18% 18%

Raise retirement age to 69 and index for life expectancy $90 billion 36% 56%

Basically, it’s a mixture of increasing revenue and decreasing benefits. As one can see from the graph, the most successful revenue generator to the OASDI/SS Trust Fund would be “eliminating the $147,000 taxable limit”...in other words, don’t stop FICA taxation at the first 147K of salary but continue the FICA taxation all year for 100% of our salaries. This would generate $1.8 trillion for the trust fund over 10 years (remember, currently as of 2022, the OASDI/SS Trust fund (the bathtub) had $2.9 Trillion dollars remaining. If the above action were taken, that would make the balance of the trust fund approximately $1.8 trillion at 2032ish...which would likely buy us 5 more additional years of “enhanced” payouts, i.e., through 2038-40ish.

Another effective revenue generator would be increasing the payroll tax (FICA) by 1 percent (the 6.2+6.2 percent=12.4 would be increased to 6.7 percent+6.7 percent=13.4 percent). Painful, but effective. This would generate $1.0 trillion over 10 years. If BOTH of these tax increases were carried out, the effect on preserving the OASDI/SS Trust Fund would be dramatic, though still borne disproportionately (i.e., totally) on those “still working” without any penalization those current retirees.

Here’s some fuzzy math: For example, assuming a $250,000 salary: Currently FICA = first 147,000 x 6.2 percent = $9114 paid in FICA taxes yearly by each of us to the SS trust fund (employer matches another 6.2%). If both of the above proposals were enacted, full $250,000 x 6.7 percent = $16,750 in annual FICA taxes paid by each of us... That’s an 85.7 percent increase in FICA taxes for a person earning $250,000; worse for those who earn more. Now, contrast this for a person earning $70,000 ($70,000 x 6.2 percent currently= $4340/FICA annually. Under both new proposals, $70,000 x 6.7 percent=$4690/FICA annually. That is only an 8 percent increase!! Realistically, most of the increased “pay in “ would be by high earners but would be “paid out” disproportionally to lower earners.

Alternatively, the government could also focus on decreasing payout (decreasing benefits/closing the tub drain a little), either to all or to more wealthy retirees (such that higher earners pay in more, receive proportionately less). Currently, initial payout is calculated by annual employee wage growth...changing that so that a person’s lifetime earnings would be indexed for inflation rather than wage growth would have a large impact, though a slower one (i.e., over the next 75 years or so). Raising the full retirement age to 69 and/or containing COLA adjustments (unlike the 8.7 percent that was just announced) would also have a profoundly positive effect on this OASDI/SS Trust Fund insolvency gap. Reducing benefits payouts for high wage earners and increasing benefits to those closer to the poverty line (again, disproportionately handing out the pain) could have a profoundly positive effect on the OASDI/SS Trust Fund.

Of course, there are ethical dilemmas to this Robin Hood approach. Many high wage earners spent a ton of money on their own education and have big debts and high loan repayments. High wage earners have often sacrificed their young lives and sacrificed a lot of fun because it was a commitment they chose to engage in, knowing their medical salary would make up for it in the end. We had less fun growing up, studied longer hours, missed all our kids’ soccer games and life events...and would now get penalized disproportionately for it. But that is how the IRS tax code is set up, so it wouldn’t be a far stretch to see the OASDI/SS trust fund take this approach, either.

Clearly, these decisions are not easy and will hit some people harder than others. But the sooner some of these changes are enacted, the sooner the pain can be spread out of a much wider group of people. Social Security was NEVER intended to be an employee’s sole retirement net, and after 2035 or so, it can’t be. One wonders if the recent 8.7 percent COLA increase was a good idea. Why increase benefits a little now, if it hastens a HUGE benefit cut later? Perhaps, a small benefit cut would have been an unpopular, but more curative and gutsy solution. Whatever the answer, something needs done, and sooner rather than later. Spreading out the pain (i.e., including CURRENT retirees in some of the benefit cuts) will make the remedy less painful for all of us. Furthermore, large lobbying organizations, such as AARP, need to consider that many of their members are a long way from retirement, and will thus face a larger disproportionate share of the pain. Organizations like AARP need to lobby for quick but very thoughtful consideration of this issue and urge lawmakers to “do what needs to be done” rather than just encouraging and rejoicing when SS benefit payouts are increased. The Social Security system is ailing and any/all of the above unpopular bandaids need researched and applied. As Meryl Streep said whilst playing Margaret Thatcher in The Iron Lady: “Gentlemen, if we don’t cut spending, we will be bankrupt. Yes, the medicine is harsh, but the patient requires it in order to live. Shall we withhold the medicine? No! We are not wrong. We did not seek election and win in order to manage the demise of a great nation.”