Eliminating Future Federal Budget Deficits Permanently by Reforming Social Security and Medicare

With President Obama's latest federal budget proposal it is no surprise that years of entitlement, pork barrel spending and outright waste are forcing drastic fiscal measures. The fact is, entitlements are destroying the U.S. from the inside out, like a form of stomach cancer, eating away at the very core of our country. Many in Washington D.C. are seeing the end of the road they've been kicking the can down for many years. Meaningful measures are going to be needed in fiscal reform if the U.S. is going to preserve its stature as the greatest nation the world has ever known. The question is, will this fiscal reform be significantly higher taxation or drastic reductions in spending? You see, we are at that proverbial fork in the road. Do we go left (increased taxation) or do we go right (decreased spending). There is only one choice if we believe in the American Dream and the preservation of our nation. This article will set out to make the case for reforming the entitlement programs that are dragging us down, in order to preserve the American Dream for future generations.

Social Security and Medicare, as they exist today are unsustainable. I did not make this up. David Walker, former head comptroller of the Congressional Budget Office, has been singing this tune for many years. Few argue with his assessment. In the secret enclaves around Capitol Hill, talk of the need to drastically reform Social Security and Medicare is omnipresent. Most accept the fact that these entitlement programs, one way or another, will go away. But without any real leadership on this issue in the White House, solutions are hard to come by.

Reforming Social Security and Medicare is the solution to our fiscal woes. But what should be done? What type of reform is needed?

The answer is simple. Privatize Social Security and Medicare. We need to take our federal and state governments out of the equation.

We can piggyback off the existing system by continuing the mandate for individuals and businesses to contribute 8% each (8% employee contributions and 8% employer contributions) to private retirement and medical health savings accounts. Three-fifths, or approximately 5%, would be mandated contributions into private retirement accounts and the balance, approximately 3%, would represent mandated contributions into health savings accounts. Implementing this reform, however, must address the need for phase-ins.

How to Phase-In Reform in six steps:

Step #1 Grandfathering Social Security and Medicare for those fifty and older.

Clearly any reform needs to address the needs of those who have contributed to Social Security and Medicare for most of their working lives. As such, we must preserve Social Security and Medicare benefits for those age fifty and over. This group would receive 100% of their Social Security and Medicare benefits. This group does not have the luxury of time on their side to participate in the reform that is needed without becoming financially destitute in their retirement years. This group must be grandfathered into the "old" Social Security/Medicare benefits system.

Step #2 Phase-Outs for those age forty - forty-nine

For this group, they have time to make contributions into their private retirement and health savings accounts. But their time is limited. As such, this group must be phased out of Social Security and Medicare. Preserving 50% of their future retirement benefits and mandating contributions to private retirement accounts and health savings accounts will provide this group with sufficient benefits for their retirement years.

Step #3 Privatizing Social Security and Medicare for those under age forty

This group has sufficient time for the mandated contributions to compound and grow, Social Security and Medicare would be completely phased out for this group, who will receive $0 Social Security and Medicare benefits. They will rely entirely on their accumulated private accounts.

Step #4 Eliminate the cap on earnings subject to the mandated 8% contributions

Currently, mandatory contributions to Social Security end once an individual reaches a certain earnings threshold for the year. This threshold would be eliminated and individuals would continue contributions into their private retirement accounts indefinitely.

Step #5 Contributions Allowed Past Age 70

For as long as individuals are physically able to earn income, they should be permitted to continue their contributions into their private retirement and health savings accounts with no minimum beginning date or required distribution date.

Step #6 Creating a Legacy for Future Generations

It is likely that some individuals will not outlive their private retirement/health savings accounts. As such, the balances remaining upon death should be passed along to designated beneficiaries, who will inherit these accounts for their future retirement and medical needs.

Tom is a Certified Public Accountant, a Certified Financial Planner, CLTC (Certified Long-Term Care) and President of Cerefice & Company, the largest CPA firm in Rahway, New Jersey. Tom works with clients helping them manage their money, retirement planning, college savings, life insurance needs, IRAs and qualified plan rollovers with an eye towards maximizing tax benefits and minimizing taxes. Tom is founder of the Rich Habits Institute and author of "Rich Habits".