The 81% Tax Increase
There are a number of reasons why I believe that U.S. economic growth will be slower than we had become accustomed to over the past two decades going forward. One of those reasons is the government's underfunded entitlement programs. Social Security and Medicare do not have enough money in them and one way or another someone is going to have to pay. Either taxpayers will have to pay higher rates or beneficiaries will receive lower benefits...or a combination of both. Either one would act as a drag upon economic growth. This issue has been talked about a little in the media lately because of the new government reports on these programs, but this is an issue that I strongly believe does not get the attention that it deserves.
Here are a few interesting quotes on Social Security and Medicare that I recently dug up.
"To put it another way, Social Security's unfunded liability equals 1.3% of the gross domestic product. So if we were to fund its deficit with general revenues, income taxes would have to rise by 1.3% of GDP immediately and forever. With the personal income tax raising about 10% of GDP in coming years, according to the Congressional Budget Office, this means that every taxpayer would have to pay 13% more just to make sure that all Social Security benefits currently promised will be paid."
"As bad as that is, however, Social Security's problems are trivial compared to Medicare's. Its trustees also issued a report this week. On page 69 we see that just part A of that program, which pays for hospital care, has an unfunded liability of $36.4 trillion in perpetuity. The payroll tax rate would have to rise by 6.5% immediately to cover that shortfall or 2.8% of GDP forever. Thus every taxpayer would face a 28% increase in their income taxes if general revenues were used to pay future Medicare part A benefits that have been promised over and above revenues from the Medicare tax."
The net result
"To summarize, we see that taxpayers are on the hook for Social Security and Medicare by these amounts: Social Security, 1.3% of GDP; Medicare part A, 2.8% of GDP; Medicare part B, 2.8% of GDP; and Medicare part D, 1.2% of GDP. This adds up to 8.1% of GDP. Thus federal income taxes for every taxpayer would have to rise by roughly 81% to pay all of the benefits promised by these programs under current law over and above the payroll tax."
Even if the calculations that were done by this article's author are wrong, and there is probably a decent chance that they are somehow, the fact remains that it will be nearly impossible for the U.S. government to pay the promised benefits for these programs as they currently stand in perpetuity. As politically unpopular as it would be (that's probably an understatement, it would be worse than unpopular for politicians to cut the benefits of the largest voting group...it could be terminal for their careers) it's time to stop this farce and to actually do something about this. Dramatic changes need to be made to Social Security and Medicare and they need to be made soon.
The 81% Tax Increase