Fix Social Security and Medicare

Puzzled About DerivativesRecently I started to do videos on the US Economy because it is very hard to read through Government reports.

After I received 27 emails asking how to Fix Social Security and Medicare I decided to look into it. What I found is that Social Security and Medicare shouldn’t be broken.

In this article I’m going to explain all of the numbers behind this debate. I may not be able to fix the damage the Government has done to these programs, but I will shine a light on the theft.

Social Security was Meant To Be a Retirement Account

I have heard numerous times that Social Security was not meant to be a retirement system. That is wrong!

Was it meant to pay large incomes in the retirement years? No, but it was and has paid for basic needs since it was created.

Social Security was expected to cover basic needs during retirement when Roosevelt signed it into law in 1935! Roosevelt repetitively called Social Security the Old-Age Pension.

During the Great Depression many older people were unemployed. Americans were living longer but retiring earlier; age discrimination made it difficult for elderly Americans to find employment. Dr. Francis E. Townsend advocated that all Americans over the age of 60 should stop working and receive $200 per month from the federal government. ($38,575.18 / year)

Roosevelt agreed! Congress voted down that number to what social security has historically paid. 14 to 16% above the poverty status in the US.

US Poverty Rate(2011): $10,890
Average Paid in SS (2011): $12,926

Social Security was always meant to cover the elderly in the retirement years.

How Much Does Social Security Pay to Retirees

The average person on Social Security gets 1,077.20 / month ($6.73 / hr). That is just about enough for basic needs and health insurance. I’ll break it down:

  • $1,077.20 Avg. Income on SS
  • – $115.40 Medicare costs / month
  • – $208.00 Least Expensive Medicare Supplement I found costs / month
  • –  $40.00 Medicare part D costs / month
  • – $208.00 Avg. Monthly Food Cost
  • – $625.00 Avg. Monthly Housing Cost

Total Amount Left after Covering Basic Needs -$119.20

How Much Does Medicare Cost the Government

  • Medicare Costs the government about $10,666 per person (43 Million People / 458 Billion per year)
  • Medicaid Costs the government about $6,226 per person (53 Million People / 330 Billion per year)

How Much Do Citizens Pay into Entitlement Programs

Payroll taxes pay for all of the entitlement programs:

  • Tax of 6.2% paid by employees and employers up to a maximum wage of $106,800
  • Tax of 1.45% of total wages
  • Self employed people pay 15.3% of income
  • In 2011, the employee’s contribution has been temporarily reduced to 4.2%, while the employer’s portion remained at 6.2%.

Those taxes are divided up to pay for individual entitlements:

  • 3.9% goes to Medicare
  • 12.4% goes to Social Security

Note: employers pay an additional 6.2% for unemployment benefits, but that tax isn’t going to be used in these calculations!

What is the Social Security Wage Cap

A cap on social security has been in place since it’s origin. However in 1984 Ronald Reagan dramatically increased the amount paid into social security by those earning less than $37,800. The self employed saw their social security tax double because of this bill.

In my opinion, there should be no cap and the revenue that was lost should be paid back to the people. I won’t go much more into this issue for political reasons.

Social Security isn’t taxed on income above $106,800.00, at which point the Social Security amount withheld would be $6,621.60 (6.2%).

This is one of the major reasons why Social Security isn’t working perfectly!

Since wages in the US have remained flat for the bottom 90% of Americans and have risen dramatically for everyone else, their lies another major reason why Social Security is where it is.

  • From 1980 to 2008 the Bottom 90% saw an increase in income of 1% or $303
  • From 1980 to 2008 the top .001% saw an increase of 403% $21,904,289

You can read more about US Income Inequality here.

The Social Security Administration has stated recently that the Wage Cap should be adjusted up to $191,000 to fund 90% of Social Security needs. That 90% number was set by Alan Greenspan in 1983 as the percentage needed to fully fund Social Security.

I have no idea why it hasn’t been raised?

How to Fix Medicare

Like I stated before Medicare shouldn’t be broken. Here I’ll demonstrate why. First I have to define some constants.

The Average Individual in the US has an average income of $19,352! Yes that number is very accurate. Check out the Federal Reserve Boards Survey of Consumer Finances. This number has remained flat for the last 35 years as I noted above.

This income inequality hurts the citizens, but it makes my calculations much easier.

I’m going to assume that a person earns the same amount over their 47 Working Years just to keep things simple.

Ok, remember that the government states that Medicare costs $10,666 per year for each person on it. Medicaid costs $6,266 per year. I’ll use the Medicare costs just to make my job harder.

The Number of Years an Average Person is on Medicare: 13.7 Years.

  • 13.7 (No. of yrs avg Person on Medicare)
  • * $10,666
  • $146,124

So I need to collect $146,124 to pay for an average citizens Medicare needs!

  • $19,352 (Avg. Income)
  • .039 (Medicare Tax)
  • $754.73 (Avg Payment to Medicare)

If this money was collected in an account and had a compounding interest rate of 5% over the 47 working years you’d have $141,153.67!

That’s $4,970.33 short of the total needs. Fine work 1 more year to the age of 66 and you have $149,003.83! Medicare is more than paid for.

So, why isn’t Medicare fully funded? Because their was no account. That money was spent, or should I say stolen?

How Do We Get Our Money Back

When I was a sales person, if you earned a commission that you didn’t deserve that income was Clawed Back! You didn’t receive any further commission until the company got its money back. The US citizens need to claw back income that was paid to those that didn’t deserve it.

I leave it to the government to do that. If the citizens tried to do it they’d be put in jail.

How to Fix Social Security

Based on the Social Security Administration, Social Security would be fine if the cap was just raised to $191,000. So, there you go Social Security is fixed!

Let me however look into how much would be paid in if there were no caps.

  • $19,352 (Avg. Income)
  • * .124 (Tax for Social Security)
  • = $2399.64 (Avg Payment to Social Security)
  • $2399.64 * 47 (Working Years) (Compounding Interest Rate of 5%) = $448,793

At 65 a citizen would have $448,793!

That investment would payout $22,439.65 per year in interest at 5% indefinitely!

Final Note

The top 1% earned an average income of $1,137,684 (2008 Number)

The top 2-10% of US citizens who earn an average income above $164,647 (2008 Number)

The income they didn’t pay social security on must be returned to the bottom 90% and everything is fixed! I explained why this is fair above.

Break Down the Numbers on the Top 1%

  • 116,783 Households in the US.
  • 1,167 in the top 1%
  • * $1,137,684 (Avg Income for top 1%)
  • $1.328 Trillion in income in 2008
  • $1,030,884 Income Not Subject to Social Security Tax per person
  • $127,829.62 Average Tax Due

$149,177,161.87 Total Due from Top 1% just for the year 2008!

Break Down the Numbers on the Top 2-10%

  • 116,783 Households in the US.
  • 11,678 in the top 2-10%
  • * $164,647 (Avg Income for top 2-10%)
  • $1.922 Trillion in income in 2008
  • $57,847 Income Not Subject to Social Security Tax per person
  • $7462.26 Average Tax Due

$87,144,307.31 Total Due from Top 2-10% just for the year 2008!

Now go collect all of that lost tax revenue (plus interest) since 1984 and the US will be a beautiful place again.

Will the government do this? No

Should they? Yes

This is my last US Economic article for a while. I promise 🙂

Till Next Time

Think Tank

5 Responses to “Fix Social Security and Medicare”

  1. Guest says:

    Are you trying to be taken seriously with this article?

    • admin says:

      The numbers are all real. I realize there is no savings and that much of the money was paid out to others though.

      Do I think 80% of US citizens won’t survive the retirement years without these programs? Yes

      Do I honestly think the government will try to solve these issues? No, or at least not until these programs are nearly worthless.

      • Greg Fletcher says:

        Here is a quick fix for Social Security: put Senators, Congressmen and All goverenmet officials in it. The money in Social Security, that was to be invested in goverment bonds, which would be all the money taken in each year minus those monies paid out to current benefit recieptients, was sent to the General Fund and spent. So, rather than earning interest the government placed a zero interest bearing note in place of an interest bearing government bond. If the government had left the Social Security money in gov. bonds, rather than spending it, it would be healthy and fully funded today, just like the system THEY have called the Civil Service Retirement Fund. Social Security monies taken in from workers pay checks (FICA) is now just called Internal Revenue and immediately tranferred to the General Fund. As a population the United States people are more trusting than smart.

  2. Andrew says:

    Dear Newthinktank,
    Thanks you for your post, It has been said that the older you get, the less you know. Or should that read the older you get the more you realize how little you know.
    Keep up the good work

    • admin says:

      I agree. It might be better to say, the older you get the more you realize there is no easy solution. Believe me I don’t take this article to seriously. I don’t believe in many politicians

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