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Opinion

Why US should not pay Warren Buffett's Social Security and Medicare

Means testing is the missing element in ongoing debt talks. Reducing Social Security and Medicare benefits for higher-income retirees would enable the US to continue funding these programs. Politicians must have a discussion on where to draw the line.

By Sam Thompson / July 20, 2011



University Park, Pa.

Both sides of the political spectrum recognize the severity of our yearly federal budget deficits and the growing outstanding federal debt. However, the recent proposals for addressing the debt issue do not effectively tackle the long-term problem with the funding of Social Security and Medicare.

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In his July 15 news conference on the debt issue, President Obama indicated that in an effort to address the long-term problems with Medicare (and presumably Social Security), he would be willing to consider “means testing” these programs, that is, reducing the benefits for retirees with high incomes.

In my May article “The Missing Ingredient in the Budget Debate: Phasing Out Social Security and Medicare for High Income Retirees” (Social Science Research Network, Economic Growth eJournal), I set out a means testing proposal for both Social Security and Medicare.

In the article, I argue that as a tool for limiting the costs of these programs and thereby helping to put them on a sustainable basis without reducing the effectiveness of their “safety net” function, Congress should phase-out the benefits under these programs for high-income retirees.

Two phase-out proposals

Specifically, I set out the following phase-out proposals:

  1. The Social Security benefit should be phased out incrementally as individuals move from $75,000 of annual retirement income to $175,000.
  2. To participate in Medicare, retired persons should be required to pay an increasing portion of the premium covering the costs of Medicare benefits as they move from $75,000 of annual retirement income to $175,000.

As with the proposal Congressman Paul Ryan (D) of Wisconsin has made to reform Medicare, these phase-out provisions in general would only apply to people who are presently younger than 55. Also, the thresholds for the phase-outs would be annually adjusted for inflation and would reflect at the time the provisions become law the inflated value of $75,000 and $175,000 in 2011 dollars.

The Social Security phase-out proposal is similar to the phase-out for such payments under Canadian law. The Canadian phase-out (what Canadians call a claw-back), which was enacted many years ago, is not considered controversial and is generally accepted as fair.

Medicare premium payment requirement protects rich, too

And the Medicare proposal is structured so that even a high-income person who elected to self-insure would not see all of his or her assets completely depleted as a result of the cost of health care. This point can be illustrated as follows. Once a retired person’s investable assets (including assets held in a pension plan, but not a principal residence) produced less than $175,000 in retirement income, the person would be entitled to some support from Medicare, and if such person’s investable assets failed to produce $75,000 in retirement income, the person would be entitled to full Medicare benefits.

With a 5 percent annual return of earnings and capital gains, the $175,000 threshold would translate into approximately $3.5 million in investable assets, and the $75,000 threshold would translate into approximately $1.5 million in investable assets. So, as a practical matter, a retired person with less than approximately $1.5 million in investable assets would likely be entitled to full Medicare benefits. Consequently, someone who self-insured would not see his or her investable assets reduced below approximately $1.5 million as a result of medical bills.

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