What happens to tax rates now?

The pandemic and economic shutdowns have pushed many problems out of the spotlight, but that doesn't mean they've gone away.
Stacks of coins increasing

Finally! The elections are over. Whether you liked the outcome or not, most people are relieved it’s over. Hopefully, we can soon go back to focusing on other problems. The million-dollar question now (or should I say the trillion-dollar question) is what will be the impact on taxes? While much of that remains to be seen, one thing is glaringly clear. Taxes are going up!

The pandemic and economic shutdowns have pushed many problems out of the spotlight, but that doesn’t mean they’ve gone away. In some cases, they’ve worsened. As recently as last year, Social Security was expected to run out of money by the mid-2030s, but that estimate was based on a steadily growing economy and tax money flowing into the trust fund.

No trust fund for Social Security

Technically, there is no actual trust fund with money sitting in it. Money comes into the trust fund from Social Security taxes paid by you and your employer. That money then goes into the US Treasury, and they issue special IOUs to the trust fund. In the meantime, the government has use of the money but will have to pay it back to the trust fund as needed. Therein lies the worry that the government will not be able to pay it back someday, and social security will go broke. Most people don’t think that will ever happen, and the government will fund social security as needed. But with fiscal deficits and government debts getting bigger and bigger, that becomes a growing challenge as there are so many competing needs that must be funded.

With unemployment presently almost twice what it was at the start of 2020, funds are flowing into the trust a bit slower than anticipated, and the trust will run out of cash a bit earlier than expected. As with any fund, if you pay out more than you take in for long enough, you eventually run a negative balance. Even after the fund dries up, Social Security will still receive about 75 percent of what it needs in tax revenue to pay its bills. So it’s not like we won’t be sending out checks. And we’ll fix the problem before then, right? Maybe. Maybe not. Doing so will be painful, as in either higher Social Security taxes, reduced benefits, or a higher age for eligibility.

Immediate problem with Medicare

Then there is Medicare, for which the problem is more immediate. Instead of fixing it, we’re making it worse. In April 2020, the committee that oversees Medicare estimated that the fund would run dry by 2026, but they were quick to point out that their analysis didn’t include any effects of the pandemic. Obviously, we’ve used our healthcare system more than usual over the last nine months, so we’ve used up more of the fund than we expected to this year. But we’ve also paid less into it, for the same reason that there is less money in Social Security. With less money coming in and more going out, the date that Medicare goes bust has moved up. Several groups that have reviewed the present state of Medicare now estimate that the trust fund could go broke as early as 2022 or as late as 2024. Either way, Medicare will likely hit a negative balance during the next presidential term. How do you suppose that will get fixed?

That’s bad enough, but for reasons that only make sense to politicians, we also borrowed $60 billion from the Medicare trust fund to help pay for the CARES Act, which will make the fund go under that much faster. Now, in a nod to public healthcare options, a Biden administration is likely to push to make Medicare available to Americans at age 60, five years sooner than the current 65 age eligibility. This will be a godsend to pensions across the nation, but it will add another layer of burden onto a program that’s already on the road to bankruptcy.

Underfunded pensions

I often write about underfunded pensions in state and local governments, a situation that eventually will require federal bailouts. There’s no path short of asset confiscation or bankruptcy for Illinois and Chicago to make good on their debts. But the pensions aren’t the only issue. Other Post-Employment Benefits (OPEB), or retiree health care, are often forgotten or left out of the conversation because, unlike a pension, such benefits are not guaranteed. Typically, states are free to change or to end retiree healthcare benefits any time they want. That might come as a shock to most of the people who rely on the benefits.

Cumulatively, state OPEB funds are underfunded by roughly $1 trillion. Many states put away exactly zero dollars for this cost. Instead, funding the benefits is on a pay-as-you-go basis. As healthcare costs escalate, states are forced to use more of their scarce resources to pay the bills. To keep their costs under control as much as possible, states often require retirees to sign up for Medicare as soon as they become eligible.

You can see where the lines will cross. When the eligibility age drops from 65 to 60, state and local employees who retired before age 65 but are at least 60 years old will immediately be moved off of state OPEB rolls and onto the federal Medicare program, even though there are zero dollars in the system to pay for them. And all this is even before any of the “Medicare for All” discussions that some have advocated. Buckle up because this ride is going to get bumpy.

Among the many problems President Joe Biden will be facing, this will certainly be one of the bigger ones. He has long favored a public healthcare option. Medicare is already failing. And now it’s likely we’re making this program bigger, which means it will require more tax dollars. I hate to be so negative and the messenger of bad news, but it is clear our taxes are going higher. It’s just a question of when and by how much. As the saying goes, President Biden, be careful what you wish for. Thanks for reading.

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About Nick Massey

Nick Massey is President of Massey Financial Services in Edmond, Oklahoma. Nick can be reached at www.nickmassey.com. Investment advice offered through Householder Group Estate and Retirement Specialists, a registered investment advisor.