What House Speaker Mike Johnson has said about Social Security and Medicare

By Brett Arends

Johnson has backed cutting benefits and raising the age of eligibility

Mike Johnson, the new speaker of the U.S. House of Representatives, is on record making bold and dramatic proposals to cut and reform Social Security and Medicare.

And his ideas are likely to have a key role in the coming political battle over both programs, which face major financial crises in the years ahead that may only be resolved by deep cuts to benefits or by higher taxes.

Johnson was the chair of the Republican Study Committee, a conservative House caucus, when it laid out a blueprint for reforming both programs in 2019. Since then he has publicly doubled down on the need for urgency in reforming both programs -- although he has also significantly backtracked on one of his key proposals.

Johnson's staff did not respond to messages left at all four of his offices seeking comment.

In 2019, Johnson and his committee proposed sharply scaling back the future cost-of-living adjustments to Social Security benefits for higher-income and even middle-income people. He also proposed a total overhaul of Medicare, switching it over to private insurance companies and drastically cutting how much the federal government spends on better-off seniors. The proposals would move both programs more toward means-tested benefits, targeting them to the people who need them most, rather than to all seniors.

Johnson and his committee also proposed raising the age of eligibility for both Social Security and Medicare by several years and ensuring that age would keep rising in the future as U.S. life expectancies rise.

Since Johnson's election as House speaker on Oct. 25, those proposals have been slammed as extremist by liberal critics and many in the media.

But Johnson says they are an attempt to balance the programs' books without having to raise taxes. The trustees of the Social Security and Medicare trust funds revealed in their latest annual reports that the two programs have a total funding gap of $25 trillion, almost equal to the annual U.S. gross domestic product. This is on top of the official national debt, which is also about equal to GDP.

That $25 trillion figure doesn't include the future funding needs of Medicare's nonhospital benefits, which will be paid out of general taxation. Nor does it include the present value of the two program's unfunded liabilities beyond the next 75 years, which amount to trillions more even in today's dollars.

On current projections, Medicare's trust fund is due to run out in 2031 and Social Security's in 2034. Without changes to the law, that would immediately trigger deep cuts in payments.

On Social Security, Johnson and his committee in 2019 proposed ending all annual cost-of-living adjustments, or COLAs, for retirees with an annual income of more than $85,000 for single people, or $170,000 a year for joint filers. They also proposed phasing out auxiliary Social Security benefits, such as spousal and child benefits, for higher earners.

And they proposed scaling back future COLAs for everyone else by changing the official inflation calculations in two ways. First they proposed switching from one technical inflation measure, known as the CPI-W, to another, known as the chained CPI-U, which would result in lower adjustments. And they proposed excluding the rising costs of housing, which includes rents, from the inflation figures, because, they said, "the vast majority of retirees own their homes, [so] this is not a cost increase many experience." Based on all the inflation numbers since 2000, each of these changes would decrease the average annual COLA by about 10%.

Also read: Social Security's COLA for 2024 is 3.2%, vs. 2023's historic 8.7% inflation-fueled adjustment

Johnson and his team also proposed raising benefits for the poorest seniors and for those in their 80s.

The Republican Study Committee's proposals for Medicare were much more radical than those for Social Security -- they were what amounts to a complete overhaul of the system. Over a 10-year period, the committee's numbers show, they want to cut Social Security spending by 5% and Medicare spending by 16%.

The heart of the changes for Medicare would involve moving it to a version of Obamacare. Under the committee's proposals, Medicare would in the future mostly be delivered by private insurance companies, although traditional government-run Medicare would also be an option. Seniors would purchase their Medicare insurance through an exchange or marketplace specifically for seniors. The government would spend its money on subsidies, means-tested toward those who needed them the most, to help them buy insurance.

While completely shifting Medicare to private companies would surely be politically controversial, that process is already well under way. More than half of all Medicare beneficiaries already get their insurance from private insurers through the Medicare Advantage program.

Johnson and his team proposed means testing premium subsidies as well as slowly cutting them -- as a percentage of average premiums -- over time. They noted that Medicare now pays about 75% of seniors' medical costs, whereas when President Lyndon Johnson set the program up in the 1960s, he said that figure should be about 50%. Their proposal implies doubling the share of costs that seniors pay themselves over the long term. Based on the committee's principles, this new burden would fall heaviest on seniors with higher incomes.

For context, Fidelity Investments estimates that the typical individual turning 65 today will need to have more than $150,000 saved to be able to cover their healthcare costs in retirement. That's assuming they have full Medicare -- parts A, B and C. It also doesn't include long-term-care costs.

Also read: Here's how much caring for aging family members can cost

The committee led by Johnson also proposed radical overhauls of many other more technical aspects of Medicare, such as merging the hospital and outpatient plans (parts A and B), changing how supplemental policies interact with Medicare and slashing the amount of hospital bad debts that get covered by taxpayers. The goals, they say, are to make the system more efficient and drive down waste and fraud.

Beyond all of this, Johnson and his colleagues proposed shoring up the finances of Medicare and Social Security by raising the age at which people can become eligible for both programs: to 65 to claim early Social Security benefits, from today's 62; to 70 for full Social Security retirement age, from today's 67; and to 70 for Medicare, from today's 65. They also proposed tying Medicare and the normal Social Security retirement ages together, so that in the future they would move up in tandem. And they proposed a continuous process of slowly raising both in line with rising life expectancies.

The stated rationale is that Americans are living much longer than they used to, and that the systems cannot cope financially with all the extra years of benefits.

According to federal government data, when Social Security was created in the 1930s, the average 40-year-old could expect to live to 71. Today, that figure is 81. For Black Americans, the figure has risen from 66 to 78.

In 2019, Johnson and his colleagues proposed raising these eligibility ages quickly, over the course of about a decade. But in a phone-in event on C-Span last year, Johnson backtracked dramatically. He ruled out delaying retirement ages for anyone whose retirement was "on the near horizon" and instead talked about introducing these changes only for those who today are "30 ... or 35." Johnson said that even these delayed changes would be enough to improve the financial sustainability of Social Security "dramatically."

While Johnson and his conservative colleagues want to shore up Social Security's and Medicare's finances by changing and cutting the programs, targeting them most to those most in need, President Joe Biden and Democrats want to bail the programs out by raising taxes, generally on those making higher incomes.

Curiously, two other ideas are almost completely ignored. One would be to tax U.S. wealth as well as work income. Under the current system, those who work for income, including those who run small businesses, pay taxes -- often hefty taxes -- to keep the system going. Meanwhile, those who live on capital, typically the very richest, pay little in taxes or even nothing at all. They can tap into their fortunes, converting some of their wealth into cash, tax-free, simply by borrowing against it at the bank.

If the equivalent rules applied to everyone else, they wouldn't have to pay tax either. Workers and small-business owners would simply recategorize any income from their employer, clients or customers as perpetual, tax-free, interest-free loans.

Even a low 1% annual tax on wealth would be enough to fill the entire funding gaps of Social Security and Medicare in perpetuity, data from the Federal Reserve, the Congressional Budget Office and the two programs' trustees show.

The other idea that's been ignored is to invest some or most of Social Security's and Medicare's trust funds in high-earning stocks. This is what every other pension fund in America and around the world does. It's what everyone is strongly advised, by all experts, to do with their own retirement plans. The reason is simple: Stocks earn much higher long-term returns than bonds. Social Security is instead entirely invested in low-returning U.S. Treasury bonds. That's the result of a legal decision that was taken by Congress in the 1930s and never changed.

If the trust fund had been invested instead 60% in stocks and 40% in bonds like a regular pension fund, there would now be no crisis, no funding shortfall and no need to talk about increasing eligibility ages, cutting benefits or raising taxes.

(MORE TO FOLLOW) Dow Jones Newswires

11-04-23 1220ET

Copyright (c) 2023 Dow Jones & Company, Inc.