Thursday, January 22, 2009

Social Security and Medicare hide perverse incentives

Gary Andres (Dutko Worldwide) and James C. Capretta (EPPC, Ethics and Public Policy Center) have an op-ed on p A25 of the Jan. 22 Washington Times, “Needed: more elderly workers: Perverse social security, Medicare incentives must go,” link here.

For one thing, I didn’t know that the Annual Earnings Test used to be applied to age 69 until the 1995 Contract with America (Newt Gingrich’s baby) knocked it back to full retirement age.

There is also a disincentive built into counting only the top 35 years for total benefits (instead of all work). Workers and their employers continue to pay full FICA taxes if working past retirement age. And according to Reagan’s 1982 budget reforms, employers have to take care of the health care costs ahead of Medicare, if they offer insurance.

Hence, with these policy choices, employers have perverse incentives to push out retirees early, and employees have perverse incentives to take buyouts. Maybe a lot of us in our early or mid 60s would still be working at full income were it not for these perverse policy choices, say the authors. In my case, that’s believable. We would be paying a lot more income tax than what is saved in the short run by these rules.

Add another trick that the authors didn’t mention, the social security offset in pension calculations.

This piece didn’t go into the “morality’ of means testing, because conservative columnists generally don’t like to argue for playing Robin Hood (even when there are no “rich” to start with). But there may be some relatively painless fixes to Social Security and Medicare for Mr. Obama to consider after all.

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