Retirement Matters
February 2024
Making Sense of Federal Uncertainty — Federal employees have been fired to cut waste and fraud. Consider the advice of Deep Throat, a character in the movie “All the President’s Men,” who said, “Follow the money.” The cost of all federal workers is about 5 percent of total federal spending. The federal administrative reductions will not be enough to resolve significant issues like reducing the federal deficit or renewing the 2017 tax cuts.
The loss of services that these workers provide will likely have an effect on the benefits received by everyday Americans. Retirees rely on the Social Security Administration (SSA) which is already fragile because of mostly flat budget increases over the decades. According to USA Today, the administration plans to cut more than 100,000 employees from the 2.3 million civilian federal jobs by firing or offering buyouts. This includes a cut of 7,000 of SSA’s 57,000 work force, representing a 12 percent reduction. The total number of workers to be reduced is not available from the administration.
Tax Cuts — Tax cuts reduce the amount of revenue available to pay for services. What was missing from the recent State of the Union address was a discussion of the very high-cost budget issue -- what it will cost the average working American to renew these tax cuts? The benefit of the 2017 tax cuts was significantly tilted toward corporations and the wealthiest. According to the Institute on Taxation and Economic Policy (ITEP), the effective tax rate for America’s most profitable corporations, or taxes paid as a portion of profits, was reduced from 22 percent on average, to 12.8 percent on average, after the law passed. Unless renewed, these tax cuts will expire at the end of 2025.
ITEP estimates the amount of federal tax cuts by individual income ranges in a March 5, 2025, analysis. It concludes that this tax policy would provide large tax cuts for corporations and the wealthy individuals that increases inequality, provides a tax cut for those that need it the least, and makes it very difficult for the government to finance health care, education, and the infrastructure required to keep our communities working.
Each income group would receive an income tax cut. The cuts range from the lowest income group (incomes of $28,600 or less, a tax cut of $110). Many of Michigan’s State employee retirees fall into this income group. This tax cut would be significantly offset by losing access to many federal programs, like lifesaving health care coverage through Medicaid, for example. On the other hand, those in the highest 1 percent income range of $914,900 and above, would receive a tax cut of $45,790. See the “Average Tax Change from Making the Trump Law Permanent” chart. Missing from the proposed 2026 tax cut renewal is improved premium tax credits available since 2021, making the Affordable Care Act (ACA) health care coverage more affordable for more than 20 million people. This group includes 3 million small business owners and self-employed workers.
The federal administration’s proposed cuts are more about capping federal funding and shifting costs to the states. The intent to drastically cut the federal budget was adopted in a recent U.S. House-passed continuing resolution (CR). Extending the tax cuts is expected to cost $4.5 trillion. This would require cuts in federal spending of up to $2 trillion over a decade, making Medicaid, with one of the largest federal budgets of $600 billion a year, a target for cuts. Savings beyond just Medicaid are needed.
Medicaid — or health care for working Americans, will be dramatically reduced. To fund the tax cuts, federal cuts to Medicaid have been proposed that reduce the federal share paid for Medicaid, including the 2014 ACA Medicaid expansion. This would lead to significant holes in State government budgets. Estimates for lowering the federal share, currently paid for Medicaid expansion from 90 percent, would save the feds $560 billion over a decade. This federal cut would significantly change the shared responsibility for health care to the poorest Americans as well as to the providers and nursing homes. State trigger laws are in place, in around ten states, to reverse state funding if the feds reduce Medicaid expansion funding. This leaves 40 states to decide whether they will continue Medicaid coverage for millions through reductions to large state programs.
If proposed work requirements are implemented, an estimated 36 million people nationwide may lose Medicaid, according to estimates from the Center for Budget and Policy Priorities (CBPP) in February 2025. This is estimated to reduce Medicaid spending by $120 billion. Those losing coverage include people unable to fill out the complex work reporting and verification systems monthly. In addition, people are unable to work through the required exemption process, if they are laid off or unemployed temporarily. Millions more people enrolled in the Medicaid Disability Pathways could be at risk.
Chipping Away at SS — Many retirees are hoping for the best, that their SS benefits to individuals will not be reduced. However, SS checks could be stopped for some, even without direct benefit cuts. On March 3, Martin O’Mally, the former SSA Commissioner until November 2024, told CNBC that recent Department of Governmental Efficiency (DOGE) cuts may risk monthly benefit payments for over 72.5 million Americans, including 56 million elderly individuals who receive SS. According to the American Federation of Government Employees (AFGE), a union representing 42,000 SS workers, staff was already at a 50-year low, at the same time that those receiving benefits are rising by 10,000 individuals per day. In addition, Rich Couture, an AFGE representative, said SSA had operational costs of less than 1 percent of annual payments and was very efficient. DOGE reductions of SSA workers will result in the departure of key staff and threaten the agency’s basic operations. Eventually, the SSA system will collapse and payments could stop because there will be less staff to resolve everyday issues. At the already underfunded SSA, O’Mally warned of disruptions which he believes could happen in the next 30 to 90 days. O’Mally suggests that retirees prepare themselves and “start saving” now.
Editor’s note: Joanne Bump serves as feature columnist for “Retirement Matters.” Column content is time sensitive and is based on information as of 3/9/25. Joanne can be contacted by e-mail at joannebump@gmail.com.
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