America / U.S. Domestic Policy

Can Social Security Be Reformed To Improve Work Incentives?

It is no secret that large entitlement programs like Social Security and Medicare have been putting a huge strain on our nation’s finances. Mandatory spending continues to grow and takeup larger portions of the budget, particularly two of the largest offenders – Social Security and Medicare. In the past, entitlement programs were treated as sacred and could never be reformed. It is becoming apparent now that we need some reform to put government spending in check.

This past Thursday, the American Enterprise Institute (AEI) held an event titled “Improving work incentives and fairness in Social Security and Medicare.” Some key observations were made about how some current Social Security and Medicare policies encourage people to retire as soon as possible instead of working a few extra years.

This is a problem considering that life expectancy has gone up, while retirement age has stayed the same. With people living longer, they have to be prepared for up to a 30-year retirement, a difficult task considering many are only working an average of 40. Panelists commented that there will probably be a gradual shift in the next few decades to a 50 year work period, with a 20 year retirement. To make this possible, suggestions were proposed on what reforms can be made to Social Security and Medicare.

One disincentive to keep working past the retirement age is the Social Security payroll tax. If an individual decides to keep working past the retirement age, they are being taxed to do so. A solution to fix this would be to eliminate the payroll tax for people over 58 years old. This would help incentivize people to keep working, and would provide more revenue for the federal and state governments through Medicare and income taxes.

The retirement age itself, established through Social Security, suggests that people should retire even when they don’t need to yet. With increased life expectancy, most people are perfectly capable of continuing working past 65 years old. The Social Security retirement age creates this suggestion and makes it seem that people should retire as soon as they can so they can start receiving benefits.

Another incentive to retire is Medicare. Medicare is a secondary payer system, which means that if you are 65 and don’t work, you can begin to receive Medicare benefits. However, if you are 65 but still working for an employer with more than 20 employees, Medicare will only cover expenses not covered by your employer-sponsored plan. This is a huge tax on work when you cannot receive full Medicare benefits just because you have a job.

By reforming Social Security and Medicare to incentivize working longer, labor supply will increase and the amount of time an individual collects benefits will decrease. This will help take some of the financial stress off these large entitlement programs and help prevent them from going bankrupt. For more information on this topic and additional solutions on improving work incentives, check out this paper published recently by AEI.