How Bush's health care plan hurts the Social Security system

There is already a debate on whether the health care “plan” that Bush has recently offered will “level the playing field” for low-income workers and self employed individuals or if it is so bad that it is “dead on arrival”. While this is certainly a good thing, many of the arguments are focusing on whether this will expand coverage to more people in need, whether this is feasible, what the overall cost impact would be and other similar items.

However, there is another level here which is largely overlooked which would adversely impact the very people that it purports to help the most – the lower income families. Not only that, but it will add two layers of additional strain to the very social program that Bush already tried to dismantle – social security. Not only will there be less in tax receipts from the Bush proposal, but the proposal would also have the effect of reducing future social security benefits for nearly all workers.

While I don’t really want this to end up as a debate over whether there will be any benefits left to collect in 20, 30 or 40 years – I do want to point out how, intentionally or not, this plan will end up hurting workers (or more accurately, retirees) in a way that has received little press to date.

A small but important article in the most recent Newsweek called Don’t Forget to Fix Social Security sheds light on how the Bush medical plan will accomplish both the reduction in tax receipts and the reduction in benefit payments. And while the reduction in social security benefits won’t really mean that much to higher wage earners, those who aren’t quite so lucky would feel an even bigger pinch.

The Bush plan focuses on “employer-paid health insurance” which is currently not taxable income to employees. But the plan would make this a taxable item to employees, while allowing for a deduction of either $7,500 (single) or $15,000 (family) from income –this amount would not be subject to Social Security or Medicare tax (commonly known collectively as our friend “FICA”).

Net-net, if you are employed and your employer pays less than $7,500 (or $15,000 if a family) in health insurance for you, then you, the employee, would pay less in social security tax. While I don’t pretend to know how much employer paid health insurance is around the country, I will assume for now (because I haven’t seen much about this number being absurdly low) that it is a relatively fair number.

Now, everyone likes to pay LESS tax, especially with all of the questions surrounding the social security system and how much in future benefits today’s employees will actually see. However, the way to address the social security issues that exist is most certainly NOT to have LESS in revenues.

While I specialize in payroll tax issues (at my day job....) and picked up on this part of the Bush plan, I didn’t even make the connection that the author, Allan Sloan did with respect to social security benefits.

There is a basic calculation regarding social security benefits. The formula, which is not important now, calculates benefits based on the social security wages paid to an individual over the course of their career. The lower the wages, the lower the benefit. That part is fairly straightforward.

But, as Sloan indicates, the reduction in ultimate social security benefits for lower income families (for example, those whose income is around $30,000 as opposed to those who hit the social security wage limit which is currently around $97,000) would be hit harder as far as benefits go. For starters, these are the families who are more likely to depend on social security for their income. And the reduction to their benefits would be a larger percentage than for those who earn two to three times more.

Sloan describes it well:

The way the formula works, someone who pays Social Security tax to the max each year—for 2007, it's on $97,500 of income—would see his benefit shrink by less than 15 percent if he excluded $15,000 from Social Security tax. But low-paid people—who get much more in benefits per dollar of Social Security tax than maxed-out folks do—would see benefits shrink by a far higher percentage. "A family earning $30,000 a year could see its retirement benefit cut in half," says Len Burman, director of the Tax Policy Center in Washington. That would be an especially serious blow, because $30,000 families tend to rely almost entirely on Social Security for retirement income, whereas high-income families typically supplement Social Security with retirement accounts, pensions and savings.

You gotta hand it to Bush and those who came up with this “plan” – and I am NOT giving them the benefit of the doubt here. Since dismantling social security was a non-starter, they have figured out a way to negatively impact the system through a half-hearted attempt to “address” the healthcare issues facing out country.

Senator Stabenow better be right – this plan should be DOA in Congress, as should any plan that resembles this one. For many reasons – even the ones that aren’t immediately identified.