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Financial News

Will the government cut Social Security and Medicare spending?

The GOP seeks to extract concessions from Dems on cuts for social programs before agreeing to increase the debt ceiling. The strategy could backfire...here is why.

The GOP seeks to extract concessions from Dems on cuts for social programs before agreeing to increase the debt ceiling. The strategy could backfire...here is why.

The US Treasury announced late last week that it had begun to take “extraordinary measures” as the country met its debt limit. The actions taken extend the period the federal government has to increase or suspend the debt ceiling before it defaults on its loan payment.

Republicans hold a slight majority in the House of Representatives and are keen to extract concessions from Democrats over social spending before the debt limit is increased. However, the White House and Democratic leaders in the House and Senate have expressed an unwillingness to engage and negotiate any such terms.

We are going to have a clear debate on two different visions for the country – one that cuts Social Security, and one that protects it – and the President is happy to discuss that with the Speaker.

White House Press Secretary Karine Jean-Pierre

For the newly elected Speaker of the House, Kevin McCarthy, navigating this political process will be his second major test to show he is in control of his caucus. To get the gavel, McCarthy made significant concessions to many far-right members of the Freedom Caucus, and unconditional debt ceiling increases are essentially off the bargaining table.

McCarthy begins a game of chicken with the White House

Speaker McCarthy has placed himself in a highly delicate and challenging position, wherein by keeping his members happy, he is forced to take two dangerous political risks.

Suppose the White House refuses to alter the funding mechanisms or eligibility requirements for Social Security and Medicare, and the House of Representatives forces a US debt default. In that case, Republicans are likely to be blamed for the financial crisis that would follow, jeopardizing their electoral chances in 2024.

Additionally, raising the retirement age or taking other measures that lower the benefit amounts for Social Security are highly unpopular, particularly with seniors, who are one of the most reliable voting blocks.

Could Republicans increase the retirement age?

In 2022, the Republican Study Committee released the “Blueprint to Save America,” a plan to balance the federal budget. While the GOP has not yet published the list of conditions they would like attached to a bill to increase the debt ceiling, this document details some possible proposals.

Motivated by fears over a declining worker-to-retiree ratio and increasing life expectancy

Over the last sixty years, the United States has seen birthrates decline like many other high-and-middle-income countries. The practical impacts of Social Security are that fewer workers are paying into the entitlement program compared to when the programs were established. The GOP blueprint highlights that “in 1945 there were 41.9 workers to cover each Social Security beneficiary;” by 1960, that number had fallen to 5.1 workers and now stands at 2.8.

The retirement age is a political football tossed around by politicians anytime changes to Social Security are brought up, but the concept is as simple as it appears. There are two main retirement ages to be aware of. The first is the age at which Social Security benefits can be claimed, which currently stands at 62. The second is the full retirement age which represents the age at which a worker can retire with their maximum benefit amount. For those born after 1960, the full retirement age sits at 67 years old.

Extending the retirement age could have deadly consequences

Before 2000, the full retirement age was sixty-five, but it has steadily increased over the course of the last twenty-two years to sixty-seven. The GOP plan would continue to increase it at a rate of three months a year through 2040, wherein the full retirement age would reach seventy.

This policy proposal is exceptionally punitive to low-income workers involved in physically demanding and generally more dangerous industries. In 2021, the labor participation rate for people sixty-five and older (i.e., the percent of people within this age group that work) was twenty-four percent, representing around 4.2 percent of the entire labor force. In the same year, this age group made up thirteen percent of deaths in the workplace.

After forty-five years of age, workplace fatalities become much more common, showing that while Americans may be living longer, there could be impairments as we age that can affect our safety in the workplace.

Workers in sectors that require high amounts of physical labor are at a significant disadvantage if they are forced to retire early and cannot claim their maximum benefit amount.

Since many higher-income workers may be able to save in a private retirement account like a 401(k), increasing the retirement age will disproportionately impact the working poor who do not have access to these private plans and, even if they did would not be able to contribute a significant percentage of their income.

New reports show that a growing number of seniors, including those over seventy, continue to work for longer. From 2002 to 2007, eighty-eight percent of seniors between seventy and seventy-four years old were retired. This figure has fallen five percent to eighty-three, and similar trends have been tracked for those between sixty-five and sixty-nine and those over seventy-five.

The GOP’s focus on demographics

The argument laid out by Republicans on why the retirement age should be increased hinges on two main issues: the declining ratio between workers and retirees and the increasing longevity of Americans.

On the first point, there are ways to increase this ratio. One option is comprehensive immigration reform that provides a path to citizenship or legal residency for the more than eleven million undocumented immigrants who may be working but not paying into Social Security. However, this idea is off the table for the GOP since far-right party members promote an increasingly xenophobic and isolationist view on immigration. The only policy to increase birthrates in the US proposed by the Republican Party in recent years has centered on limiting access to abortion and sexual healthcare.

Leaders in Washington have other options besides increasing the retirement age that are quite popular and does not depend so heavily on demographics. High earners are only required to pay Social Security tax on the first $147,000 they make in a year. A poll by the Program for Public Consultation found that eight and ten Republicans and nine in ten Democrats supported removing this cap, which would cut the budget shortfall for Social Security by sixty-one percent. Data for Progress reported a similar rate of support across various demographic groups.

A similar story for Medicare

Following concerns over the evergrowing longevity of the American public, the GOP’s blueprint “proposes aligning Medicare’s eligibility age with the normal retirement age for Social Security and then indexing this age to life expectancy.”

Currently, Social Security benefits can begin to be claimed at sixty-two years, but Medicare benefits are unavailable until a person turns sixty-five. It appears that the GOP is recommending that the ages be pegged together. For those born after 1960, the full retirement age is sixty-seven, and if Congress agrees to a continued increase, that could be pushed up to seventy for younger workers.

This could mean a person retires but cannot receive Medicare for several years, leaving them dependent on expensive private market options that charge seniors more because they typically require more care.

The changes to Medicare’s structures proposed by Republicans work to encourage greater market competition to lower costs for seniors. The program would establish a “Fed Plan” that included the traditional Parts A, B, and D of Medicare, competing against standalone Part D plans and Part C Medicare Advantage Plans.

“Medicare Advantage plans would be required to cover the same percentage of health expenses for enrollees as the Fed Plan while allowing them to innovate and offer more tailored plans,” reads the blueprint. The GOP imagines the Medicare exchange as free from the heavy hand of government and allows it to “organically determine the geographic areas or other parameters that make sense for being listed on each exchange.”

A significant issue for Medicare Advantage Plans is the high-cost disparities for those living in urban and rural areas. Often in rural geographies, there are fewer healthcare providers, allowing those who operate in those areas to charge higher prices for care; overall, plans in rural areas are typically fifteen percent higher.

The plan states that these actions would lower costs. Still, without incentives to provide affordable coverage in rural areas, companies are likely to focus on areas where reaching a thriving economy of scale is much easier.

White House sets the tone

So far, the message from the White House is “raising the debt ceiling is not a negotiation; it is an obligation of this country and its leaders to avoid economic chaos.”

However, on Friday, White House Press Secretary Karine Jean-Pierre said that President Biden “looks forward to learning more” about Republican plans that include “a fiscal plan to cut Social Security, cut Medicare, cut other vital programs, and [implementation] a 30 percent national sales tax.”

Not a positive sign for Republicans is that former-President Trump has come out against making any cuts to Medicare and Social Security.

Next week we should gain greater insights into where the negotiations are heading and how long this standoff could last.