Amidst cries of foul on the part of Democratic leaders – including Nancy Pelosi and union boss Richard Trumka – deficit commission co-chairs Erskine Bowles and former Senator Alan Simpson have floated a trial balloon on reforms designed to help bring the national debt under control.

While the co-chairs address a number of issues ranging from taxes to government defense to entitlement programs, let’s take a look at their proposals for curbing entitlement programs.

Social Security Reforms

  • Index the retirement age to longevity — increase the retirement age to qualify for Social Security to age 69 by 2075.

On the face of it, this appears to be a reasonable proposal –with one exception. We need to examine the impact of delaying social security for workers who participate in dangerous and more physically stressful work. For example, it hardly seems out of line to require an attorney, doctor or anyone with a desk job to work until they are 69 before they collect their social security payments. But is it fair for a West Virginian working in the coal mines to have to put in the additional four years? The commission might wish to examine a ‘blue collar’ exception to this proposal.

While some are having an allergic reaction to this proposal, keep in mind that when Social Security was created, the average life ended at 62 years of age. That meant that roughly half of those who qualified for inclusion in Social Security were unlikely to live long enough to collect any of their social security benefits. With life spans now greatly increased –and promising to continue to rise- the system simply cannot support the payments that currently begin age 65.

RATING: One thumbs up. If the commission can devise a workable means of creating reasonable exceptions for physically challenging blue-collar jobs, this is a good proposal.

  • Increase progressivity of benefit formula – this would reduce benefits by 2050 for middle, and, especially, higher earners, relative to current benefits.

This is an essential proposal as it makes no sense to pay the same benefits to people with ample funds for retirement that we pay to those who are in greater need of the safety net. Nobody knows how life will turn out. Social Security should exist as a safety net for those who find the support necessary should they be unable to support themselves on their savings come retirement time.

For those who argue that they paid into the fund and should, as a result, be entitled to get their fair share out no matter what their financial status, consider this – you pay annual insurance premiums on your house, your car, etc. Does that mean you are disappointed when your house doesn’t burn down or your car isn’t stolen? After all, when nothing goes wrong, you are being denied the opportunity to collect on your insurance investment.

Why should social security be any different?

RATING: Enthusiastic two thumbs up.

  • Increase the Social Security contribution ceiling.

Currently, Social Security taxes are paid on approximately 86% of an individual’s earnings up to a maximum earning level of $106,800. The commission proposes raising the ceiling to include 90% of wages.

But here is the problem – as currently constructed, a person with a gross income of $10,000 will have $620.00 withheld as Social Security tax from his check, with the employer paying a matching $620.00. A person with $110,000 of gross income in 2010 pays Social Security tax of $6,621.60 resulting in an effective rate of approximately 6% which is lower than the 6.2% rate paid by those who earn less than $106,800.00. An individual earning a million dollars a year in wages will pay the same $6,621.60 in Social Security tax (resulting in an effective rate of approximately 0.66%), with similar employer matching.

Does that strike anyone as fair?  Those earning the most money end up paying a dramatically lower percentage. While I don’t know that someone earning $1,000,000 should necessarily pay the full 6.2%, there does appear room for some progressive increase that would have them contributing a bit more.

Raising the ceiling to include 90% of wages does not go far enough. We need to increase the amount contributed by higher earners.

RATING: One thumb down. The provision does not go far enough to collect more from those who earn so much more.

Medicare & Medicaid

  • More low-income individuals into Medicaid managed care.

On the face of this proposal, it is not such a bad idea. However, it will only work if medicine is organized to provide services to what would be a substantial increase in Medicaid recipients. Currently, fewer and fewer physicians are willing to accept Medicaid payments, making it difficult for those in the program to find medical care.  Greatly increasing the participation level could exacerbate this to crisis proportions.

As an additional issue, placing more people into Medicaid programs would mean increasing the burden on state governments who typically pick up ½ of the tab for Medicaid. This would hardly be the time to do this given the poor financial condition of most of our state governments.

RATING: None yet. More information needs to be provided on how state government will be positioned to handle the additional costs. We will also need to hear more as to how the realities of providing care to lower-income families in the Medicaid program will be addressed.

  • Increase Medicaid co-pays.

This is likely to prove an unrealistic proposal and one that could end up costing the taxpayer more money than it saves. Increasing co-pays for lower-income individuals would mean additional financial stress on people who are already struggling. If a person feels that he or she cannot afford the co-pay, that individual is likely to skip the visit to the doctor – leading, in some cases, to far greater expenses when a condition gets out of hand and requires hospitalization or worse.

RATING: Two thumbs down. This reform is likely to cost more than it saves.

  • Accelerate already-planned cuts to Medicare Advantage and home health care programs.

Part of this proposal works – part does not.

While many seniors object to cutting back on Medicare Advantage programs, the fact remains that these programs exist on a government subsidy that results in Medicare paying 12% more for services and procedures than what would be paid by Medicare directly to the care giver, hospital, etc. These subsidies were always intended to end in 2010 as the insurance companies who offer Medicare Advantage argued that, come 2010, they would no longer need the government’s support to operate the programs. It was that very promise that caused government to agree to subsidize the private insurance companies when the programs went into effect. Further, much of what Medicare Advantage programs offer are non-essential services and benefits designed more to lure customers than provide valuable medical benefits  (with some exceptions such as programs that include eye care and, occasionally, dental.) Medicare was never designed for these programs. Had the insurance companies been able to operate the program without government subsidy, it would be fine. They cannot – and we cannot afford to subsidize them at the expense of the majority of senior citizens who do not purchase these programs.

Cutting home health care is a different matter. Once again, these cuts can lead to greater expense. Those who benefit from this service are those who have severe difficulty leaving home to gain medical care. If the home services are cut, many will not get the care they need, resulting in far more expensive illnesses that will cost taxpayers more money than what the proposed cuts would save.

RATING: Two thumbs up on accelerating cuts to Medicare Advantage. Two thumbs down on cutting home health care services.

  • Create a cap for Medicaid/Medicare growth that would force Congress and the President to increase premiums or co-pays or raise the Medicare eligibility age (among other options) if the system encounters cost overruns over the course of 5 years.

It’s difficult to say how this proposal would work out. At the least, it would keep the pressure on Congress to innovate solutions or face an angry and powerful senior citizen voting block.

RATING: One thumb up. We can give it a try and see if it has the desired effect.

http://blogs.forbes.com/rickungar/2010/11/11/rating-the-deficit-panels-dramatic-entitlement-reforms/