Archive for the ‘Social Security’ Category
The 2011 Social Security Trustees Report — Harbinger of Bad News
The just-released 2011 annual report of the Social Security Trustees shows a significant worsening of the program’s finances.
Last year we were told that we would see payroll tax surpluses over benefit expenditures for a few more years — until 2015. That won’t happen according to the 2011 report; the program will now add to federal deficits in every future year — and increasingly so, which will ramp-up financial pressure to downsize other federal programs, increase taxes, or create yet more debt.
Note that both Republicans and Democrats negotiating over how to reduce federal deficits and the national debt have resolved to leave Social Security untouched for now. That leaves the program’s finances to fester and worsen — increasing the costs of future adjustments and burdens on future generations.
Many people, especially those who favor early reforms, say that the Social Security trust funds “don’t matter.” Note, however, that they lock up future federal revenues for Social Security benefit payments — on par with future dedicated payroll taxes.
The lock-up effect of the Social Security trust funds is demonstrated by the fact that the program’s cash flow deficits today are not forcing any benefit cuts or payroll tax increases. This can continue until the year 2036 according to the 2011 report.
But if we allow the situation to continue for that long, fixing the program will require a permanent benefit cut of at least 25 percent or a payroll tax increase of at least 40 percent of payrolls in 2036 and beyond.
Thirty Years of Private Social Security in Chile
The big international story that broke on Sunday understandably was the death of Osama Bin Laden. But another big story was that May 1 also marked the thirtieth anniversary of the introduction of Chile’s successful private pension system. Implemented by José Piñera (now a Distinguished Senior Fellow at Cato) to replace unsustainable public pensions, private retirement accounts have averaged real annual rates of return of more than 9 percent, contributed to economic growth and the rise in savings, and helped turn working Chileans into capitalists. They’ve been a key to Chile’s economic progress and political maturity. The reform has been copied in part or in full by some 30 countries around the world. And contrary to what American critics on the left claimed at the time, private pensions weathered the global financial storm admirably. It’s only a matter of time before the United States and other rich nations begin addressing the crisis in public pensions in the same way. But the sooner the better. See this piece from Investor’s Business Daily on Chile’s system at 30.
Taxing the Rich Is the Cure for Everything!
Under current law, Social Security is supposed to be an “earned benefit,” where taxes are akin to insurance premiums that finance retirement benefits for workers. And because there is a cap on retirement benefits, this means there also is a “wage-base cap” on the amount of income that is hit by the payroll tax.
For 2011, the maximum annual retirement benefit is about $28,400 and the maximum amount of income subject to the payroll tax is about $107,000.
It appears that President Obama wants to radically change this system so that it is based on a class-warfare model. During the 2008 campaign, for instance, then-Senator Obama suggested that the program’s giant long-run deficit could be addressed by busting the wage-base cap and imposing the payroll tax on a larger amount of income.
For the past two years, the White House (thankfully) has not followed through on this campaign rhetoric, but that’s now changing. His Fiscal Commission, as I noted last year, suggested a big hike in the payroll tax burden. And the President reiterated his support for a class-warfare approach earlier this week, leading the Wall Street Journal to opine:
Speaking Tuesday in Annandale, Virginia, Mr. Obama came out for lifting the cap on income on which the Social Security payroll tax is applied. Currently, the employer and employee each pay 6.2% up to $106,800, a level that rises with inflation each year.
…Mr. Obama didn’t hint at specifics, though he did run in 2008 on a plan to raise the “tax max” by somewhere between two to eight percentage points for the top 3% of earners.
…[M]ost of the increase could be paid by the middle class or modestly affluent — i.e., those who merely make somewhat more than $106,800. A 6.2% additional hit on every extra dollar they make above that level is a huge reduction from their take-home pay. If the cap is removed entirely, it will also mean a huge increase in the marginal tax rates that affect decisions to work, invest and save. In a recent paper for the American Enterprise Institute, Andrew Biggs calculates that this and other tax increases Mr. Obama favors would bring the top marginal rate to somewhere between 57% and 68% when factoring in state taxes. Tax levels like these haven’t been seen since the 1970s.
Obama is cleverly avoiding specifics, largely because the potential tax hike could be enormous. The excerpt above actually understates the potential damage since it mostly focuses on the “employee” side of the payroll tax. The “employer” share of the tax (which everyone agrees is paid for by workers in the form of reduced take-home wages) is also 6.2 percent, so the increase in marginal tax rates for affected workers could be as high as 12.4 percentage points.
After the jump is a video from the Center for Freedom and Prosperity, narrated by yours truly, that elaborates on why this is the wrong approach.
Why Should Social Insurance Reform Not Affect Those Over Age 54?
House Budget Committee Chairman Paul Ryan’s budget plan is ostensibly for FY 2012, but it contains reforms with far-reaching implications for the nation’s fiscal condition.
Most of the action in his plan is on the spending side and mainly on health care entitlements: Medicare and Medicaid. Many pundits on the left are claiming it is a political document rather than a serious budget proposal, especially because it lacks details on many of its proposed policy changes.
One thing that stands out, as pointed out by David Leonhardt in the NYT, is that Ryan’s plan exempts people older than age 55 from bearing any share of the adjustment costs. They should, instead, be called upon to share some of the burden, Leonhardt argues — a point that I agree with. If seniors are receiving tens of thousands of dollars more than what they paid in for Medicare, then they should not be allowed to hide behind the tired old argument of being too old to bear any adjustment cost. Indeed, seniors hold most of the nation’s assets and a progressive-minded reform would ask them to fork over a small share to relieve the financial burden that must otherwise be imposed on young workers and future generations.
The numbers presented by Leonhardt are computed by analysts at the Urban Institute. However, those numbers aren’t quite as one-sided as Leonhardt and Urban scholars suggest, because they only compare Medicare payroll taxes by age group to Medicare benefits. A large part of Medicare benefits (Medicare’s outpatient care, physicians’ fees, and federal premium support for prescription drugs) are financed out of general tax revenues, not just Medicare taxes. General tax revenues, of course, include revenues from income taxes, indirect taxes, and other non-social-insurance taxes and fees. Seniors pay some of those taxes as well — especially by way of capital income and capital gains taxes — but the Urban calculations fail to account for this. That means that the net benefit to seniors from Medicare is smaller than Leonhardt claims in his column. I don’t know whether it would bring the per-person Medicare taxes and benefits as close to each other as they are for Social Security, however. (See Leonhardt’s column for more on this point.)
Leonhardt also notes that Chairman Ryan’s proposal leaves out revenue increases as a potential solution to the growing debt problem. Leonhardt argues that wealthy individuals (mostly large and small entrepreneurs) received high returns on assets during the last few years (pre-recession) and could afford to pay more in taxes.
But it would be poor policy to raise these entrepreneurs’ income taxes — that would distort incentives to work, invest, innovate, and hire in their businesses. Instead, policymakers should consider reducing high-earners’ Medicare and Social Security benefits (premium supports under the Ryan plan) in a progressive manner, including allowing them to opt out of Medicare and Social Security completely if they wish to.
During recent business trips to a few Midwestern towns, I met several investors and professionals in real estate, financial planning, and manufacturing concerns, most of whom expressed their willingness to forego social insurance benefits during retirement. So there seems to be some public support for such a reform of social insurance programs.
The Case for Social Security Personal Accounts
There are two crises facing Social Security. First the program has a gigantic unfunded liability, largely caused by demographics. Second, the program is a very bad deal for younger workers, making them pay record amounts of tax in exchange for comparatively meager benefits. This video explains how personal accounts can solve both problems, and also notes that nations as varied as Australia, Chile, Sweden, and Hong Kong have implemented this pro-growth reform.
Social Security reform received a good bit of attention in the past two decades. President Clinton openly flirted with the idea, and President Bush explicitly endorsed the concept. But it has faded from the public square in recent years. But this may be about to change. Personal accounts are part of Congressman Paul Ryan’s Roadmap proposal, and recent polls show continued strong support for letting younger workers shift some of their payroll taxes to individual accounts.
Equally important, the American people understand that Social Security’s finances are unsustainable. They may not know specific numbers, but they know politicians have created a house of cards, which is why jokes about the system are so easily understandable.
President Obama thinks the answer is higher taxes, which is hardly a surprise. But making people pay more is hardly an attractive option, unless you’re the type of person who thinks it’s okay to give people a hamburger and charge them for a steak.
Other nations have figured out the right approach. Australia began to implement personal accounts back in the mid-1980s, and the results have been remarkable. The government’s finances are stronger. National saving has increased. But most important, people now can look forward to a safer and more secure retirement. Another great example is Chile, which set up personal accounts in the early 1980s. This interview with Jose Pinera, who designed the Chilean system, is a great summary of why personal accounts are necessary. All told, about 30 nations around the world have set up some form of personal accounts. Even Sweden, which the left usually wants to mimic, has partially privatized its Social Security system.
It also should be noted that personal accounts would be good for growth and competitiveness. Reforming a tax-and-transfer entitlement scheme into a system of private savings will boost jobs by lowering the marginal tax rate on work. Personal accounts also will boost private savings. And Social Security reform will reduce the long-run burden of government spending, something that is desperately needed if we want to avoid the kind of fiscal crisis that is afflicting European welfare states such as Greece.
Last but not least, it is important to understand that personal retirement accounts are not a free lunch. Social Security is a pay-as-you-go system, so if we let younger workers shift their payroll taxes to individual accounts, that means the money won’t be there to pay benefits to current retirees. Fulfilling the government’s promise to those retirees, as well as to older workers who wouldn’t have time to benefit from the new system, will require a lot of money over the next couple of decades, probably more than $5 trillion.
That’s a shocking number, but it’s important to remember that it would be even more expensive to bail out the current system. As I explain at the conclusion of the video, we’re in a deep hole, but it will be easier to climb out if we implement real reform.
Social Security Disability Benefits Unsustainable
The disability insurance component of Social Security was created in 1956 to provide income support to individuals aged 50 to 64 who were permanently disabled. As is typical with government programs, eligibility and benefits were greatly expanded over the subsequent decades.
SSDI, which is funded through a 1.8 percent payroll tax on all workers, was recently described by the Congressional Budget Office as “not financially sustainable.” The following chart shows that SSDI benefit payments have soared 119 percent since 1995 in real or inflation-adjusted terms:
The Correct Perspective on Social Security Privatization
In today’s WSJ, William Shipman and Peter Ferrara have a column criticizing President Obama’s recent and vehement rejection of Social Security private accounts. I agree with Shipman and Ferrara — it’s rather shabby logic from a president of all Americans.
Shipman and Ferrara correctly note that Social Security privatization options provide participants with a choice — opt for private accounts or stay with the traditional system. In other words, people can choose their preferred risk set — political or market. The lesson here is that there’s no avoiding risk.
Shipman and Ferrara suggest that all investments in private Social Security accounts do not have to be in stocks; people can choose bonds as well. Better yet, they can hold the market basket of all stocks and bonds through low-cost index funds and hold some cash. They can select the mix between these elements to optimize the risk-return trade-off given their abilities/preferences on the two. This investment strategy is transparent and easy to learn; it requires only a modicum of financial literacy.
However, I find their ”Joe the Plumber” example unpersuasive. Who cares if investing on the planet Mars yields 50 percent annual returns if we cannot do it unconditionally — that is, without incurring costs that would neutralize its higher-than-Social Security returns? Those additional costs arise from having to borrow to pay existing Social Security beneficiaries their “promised” benefits, and from carrying market risks on personal account portfolios of Martian investments.
Market risk represents a real cost, even if investments are for the long term. The Shipman/Ferrara calculations take account of the recent financial crisis. But they don’t take account of the potential for fat tails in the distribution of financial crises going forward. The recent crisis could have been less severe. But what if it had been more severe and had wiped out all savings for many more people? Is there zero risk of such an outcome? A generalization on the basis of just one 40-year record of investment returns is inappropriate and insufficient for ruling out the importance of market risk.
Liberal Dogma on Social Security Redux
Liberal posturing on Social Security reform continues unabated – betraying nervousness that Obama’s Deficit Reduction Commission will recommend Social Security benefit cuts.
Left-wing voices also continue to repeat the mantra that introducing private Social Security accounts would be a bad idea. Ronald Brownstein’s recent recent column in the National Journal is a case in point. However, Brownstein’s readers may come away thinking that he believes breaking promises is a good idea.
Brownstein concedes that “Social Security indeed faces a long-term imbalance between expected revenue and promised benefits.” I consider this to be progress — at least relative to the erstwhile “there’s nothing wrong and nothing to fix” mantra adopted by liberal adherents of the status quo on Social Security.
Notice Brownstein’s use of the term “promised benefits.” A promise implies a commitment and obligation to make good on future benefit payments. But the solution that Mr. Brownstein points to is as follows:
Instead [of private accounts], Obama argued, the two parties could emulate the Reagan model and arrive at a sensible solution… [T]he program’s long-term shortfall could be eliminated just by trimming benefits for the top half of earners [JG note: breaking the Social Security benefit promise here], linking the retirement age to lengthening life spans [JG note: breaking the promise here too], and imposing a partial payroll tax on earnings above $250,000 [JG note: that is, promise more benefits by expanding the definition of covered earnings and increasing payroll taxes on high earners].”
But all that the last element may achieve is to stave of the program’s insolvency for a few more years.
My comment: Please don’t drag Reagan into this “solution.” The 1983 reforms were implemented under the gun, at a time when there was no way out of Social Security’s imminent revenue shortfall. If President Reagan had enjoyed the luxury of a couple more years to plan changes to Social Security, he would have adopted a different approach, and be much better off today. According to broad market indexes such as the S&P 500, total returns averaged well above 10 percent per year during the 1980s and 90s – so, well above inflation. (The first decade of the 2000s yielded a negative 1 percent return.)
Personal Accounts for Social Security an Election Killer — Not Quite
You can tell its election season because Democrats are once again attacking Republican’s for daring to propose reforms to Social Security. These attacks come despite the fact that Social Security is already running a temporary deficit, and that deficit will turn permanent in just five years. Overall, the amount the system has promised beyond what it can actually pay now totals $18.7 trillion.
But the latest Pew Poll suggests that attacking Republicans for wanting to “privatize” Social Security might not be such an effective tactic after all. According to the poll, Americans support proposals to “allow workers younger than age 55 to invest a portion of their Social Security taxes in personal retirement accounts that would rise and fall with the markets” by 58 – 28 percent. Younger voters supported personal accounts my an astounding 70-14 percent margin, but every age group except seniors was supportive. Seniors split evenly. Independents, widely believed to be the key to the upcoming election, supported personal accounts by 61-27, and even Democrats favored the idea by 50-36.
Maybe this will finally give the Republicans some courage on the issue.
A Birthday Gift from Paul Krugman
I turn 41 this summer (thank you for the condolences). Along with the well wishes of family and friends, I received an unexpected gift from NY Times writer Paul Krugman: this column in which he bashes people who are critical of Social Security in its current form or who worry about its ability to deliver expected benefits.
At first glance, the column hardly seems like a gift: it’s long on pointless insults, short on thoughtful discussion, and misleading. But it offers such a poor defense of the Social Security status quo that I suspect readers will be more skeptical of the program after seeing the column, not less. Hence, Krugman’s gift.
He writes:
Social Security has been running surpluses for the last quarter-century, banking those surpluses in a special account, the so-called trust fund. The program won’t have to turn to Congress for help or cut benefits until or unless the trust fund is exhausted, which the program’s actuaries don’t expect to happen until 2037 — and there’s a significant chance, according to their estimates, that that day will never come.
OK, 2037 — no worries. Except that, as I said, I turn 41 this summer, which means I’ll turn 67 and qualify for full Social Security benefits in mid-2036. The very next year, the Social Security trust fund will be exhausted, according to the “intermediate” scenario contained in the most recent Social Security Trustees Report, available here (see Section IV-B and Appendix E). The program will still pay out some benefits — but less than 3/4s of what it now promises. So what happens then? That’s not a good question if you’re my age or younger.
But suppose you’re not my age or younger. Suppose you’re 10 years older than me, and will have collected 10 years of benefits by 2037. Don’t feel smug — you’ll be asking “So what happens next?” when you’re 77. That’s not a good question at your age, either.
In fairness to Krugman, the Trustees Report considers different Social Security cost scenarios, the most optimistic of which projects that the trust fund will not be fully exhausted over the 75-year period the report considers. Krugman says there’s “a significant chance” this will be the case, but my (admittedly quick) skim of the report suggests it’s more just “a chance.”
One quick aside about the 2037 exhaustion date: when Krugman wrote this column in 2005, the Trustees’ intermediate scenario projected that the trust fund would last until 2042. In five years’ time, that date has grown 10 years closer. Not good.
The Washington Post Misleads Readers about Medicare & Social Security Funding
Here’s a poor, unsuccessful letter I submitted to the editor of The Washington Post:
The Post’s economic reporters need to convey to readers that the Medicare and Social Security “trust funds” contain zero funds [“Medicare Funds to Last 12 Years Longer than Earlier Forecast, Report Says,” August 6].
This is not up for dispute. When those programs’ revenues exceed outlays, Congress puts the excess in general revenues and spends it. Congress marks the event by leaving an IOU to itself in these “trust funds.” Those IOUs are not “funds,” any more than an IOU that you write to yourself is money. These so-called “trust funds” therefore have no bearing on the (in)solvency of Medicare and Social Security.
Yet every year, the trustees for these programs claim that they do, making the Medicare and Social Security trustees reports an annual, ritualized lie that the U.S. government broadcasts to the American people.
Properly educating reporters, editors, and politicians about the Medicare and Social Security “trust funds” is a decades-long project.
The Social Security and Medicare ‘Trust Funds’ Are a … What’s the Word?
Yesterday’s New York Times editorialized:
It’s the time of year when the trustees of Medicare and Social Security release their annual reports on the programs’ financial health. And that means Americans are likely to be bathed in a fog of political rhetoric that makes it hard to sort out fact from fiction.
Here’s the bottom line…
The Times then proceeded to bathe its readers in fog:
According to the reports, the date of insolvency for Medicare’s hospital fund was pushed back, from 2017 to 2029, because of cost-saving measures in health reform. As for Social Security, without any changes, it will be able to pay full benefits until 2037 and partial benefits after that, the same estimate as in last year’s report, despite temporary setbacks from the recession…
A lot of attention will be paid to the finding in the Social Security report that payouts will exceed revenues in 2010 and 2011…That doesn’t endanger benefits, because any shortfall can be covered by the trust fund.
No. It. Can’t. Because there are no funds in the Social Security “trust fund.” There are no funds in the Medicare “trust fund.” As Fortune magazine’s senior editor-at-large Allan Sloan explains in today’s Washington Post, those “trust funds” contain nothing but “funny money.”
In a 2006 blog post titled, “Sometimes, Governments Lie,” I offered the following proposition:
If the government knows that there are no assets in the Social Security and Medicare “trust funds,” and yet projects the interest earned on those non-assets and the date on which those non-assets will be exhausted, then the government is lying.
That still seems correct to me: the whole idea of the Social Security and Medicare “trust funds” is a lie. An institutionalized, ritualized lie that the U.S. government tells the American people. Perpetuated by both political parties, and others with an interest in hiding the reality of these programs’ unfunded liabilities from voters. One that many journalists uncritically repeat.
The State of Social Security: Maybe a Little Better, Maybe a Little Worse?
The Social Security Trustees released their annual report yesterday, showing a small improvement in the system’s finances over the long-term. That’s rather surprising given that the recent recession has reduced the program’s revenues and brought forward the date when the program begins to drain money from the general budget — from 2016 last year to 2015 in the new report. The Trust Fund exhaustion date is 2037, the same as it was in last year’s report.
The new health care law is likely to increase the program’s revenues as employers reduce payroll-tax-free health insurance coverage and offset the reduction in employee compensation through higher wages that would be subject to payroll taxes. This sets up a competition between the health care law–induced increase in Social Security revenues and declines in revenues and increases in outlays for other reasons — a sluggish economy, improving longevity, the addition of another year at the end of the 75-year projection horizon, and changes in economic and demographic data, assumptions, and methods.
The positive revenue effect of the health care law (14 basis points) more than offsets the negative effects of all of the other factors (6 basis points) on the system’s long-range actuarial balance. That yields a total improvement of the program’s actuarial balance from –2.00 percent of taxable payroll to –1.92 percent. In next year’s report, however, this year’s “legislative” effects may be folded into changes from technical adjustments and incoming data. We may never know whether today’s assumptions on the revenue effects of the health care law are correct or not.
It could be that those assumptions are too large, especially if Congress postpones the tax on Cadillac health care plans because of pressure from unions. It could also be too small if many employers decide to eliminate health insurance coverage and opt to pay the less costly penalty. On balance, I’ve concluded that, faced with such wide uncertainty about future outcomes, the Social Security trustees have chosen to be relatively conservative in their estimates of the health care law’s revenue effect.
Another curious item is that the program’s long-range imbalance increased from $15.1 trillion to $16.1 trillion. However, the report states that “the near-term negative effects on employment of the slightly deeper recession than assumed last year are offset by higher than expected real growth in the average earnings level” (Section D: Projections of Future Financial Status). As a result, the program’s total (infinite-horizon) imbalance ratio declines from 3.4 percent in 2009 to 3.3 percent today.
Note that a deeper recession and higher unemployment than was assumed last year does not necessarily justify a correspondingly faster recovery, with unchanged long-term equilibrium unemployment and earnings growth rates. The trustees are discounting the possibility that the unemployment rate may remain higher than was assumed last year and that, therefore, earnings may not rebound any faster compared to last year’s assumptions. It appears that that incoming data on unemployment and GDP growth played little if any role in informing assumptions about future earnings growth rates.
Finally, it should be noted that this year there were no public trustees to oversee and modulate the report as it was being produced.
Social Security Bloviate-fest
The annual bloviate-fest on Social Security has begun, even before the Social Security Trustees’ report has been released this year. Apparently the report is to be released next week — after a three-month delay from its statutory release deadline of April 1.
There’s concern from groups interested in preserving Social Security that President Obama’s National Commission on Deficit Reduction will propose changes to the program involving benefit cuts. These groups, which include the AFL-CIO, MoveOn.org, NOW, and the NAACP have issued and allegedly rebutted five “myths” about Social Security. But their selection of myths and myth-busting arguments are weak and involves questionable arguments.
Below is a list of the twisted logic that these groups are using to convince voters that all’s well with Social Security’s finances and that we should not worry and just be happy. Also below are my reactions to the “faux-myth-busters” arguments.
Myth #1: Social Security is going broke.
Reality: There is no Social Security crisis. By 2023, Social Security will have a $4.6 trillion surplus (yes, trillion with a ‘T’). It can pay out all scheduled benefits for the next quarter-century with no changes whatsoever. After 2037, it’ll still be able to pay out 75% of scheduled benefits — and again, that’s without any changes. The program started preparing for the Baby Boomers’ retirement decades ago. Anyone who insists Social Security is broke probably wants to break it themselves.
Real Reality: We’re in a vortex, and these folks refuse to extend help. Yes, I also don’t like the “crisis” terminology. A better descriptor is “vortex,” the upper reaches of which can seem calm, for a time. But eventually, we’ll realize that what we thought was a good place to be is really an inexorable path to the doom of being spun around super fast.
Yes, Social Security will have a surplus (of Treasury IOUs) of $4.6 trillion by 2023. But, notwithstanding the “T” attached to that sum, all’s not well. By 2023, the program’s net liabilities (the shortfall of future revenues relative to future benefit commitments under existing laws) will exceed $20 trillion (note, also with a “T”). Last I checked, 20 exceeds 4.6 by about four fold.
The fact that Social Security “will be able to pay” 75% of scheduled benefits after 2037 means we would have to impose a 25% benefit cut at that time if no adjustments are made earlier. It’s said that the natural human instinct for justice emanates from a simple thought experiment — of placing oneself in the shoes of the victims. In this case, it’s those poor future souls who would have to acquiesce to a 25 percent benefit cut. But they would be forced to do so only because the faux-myth-busting authors shrieked in horror when confronted with a much smaller benefit cut that would be required now to place the program’s finances on a sustainable course. Read the rest of this post »
Heating Up the Covert Generational War
My latest book Social Security: A Fresh Look at Reform Alternatives (available here) argues that it’s not just labor quantity — the number of employees who are accruing future Social Security benefits — that will determine the size of Social Security’s future imbalances (and, incidentally, those of Medicare, and the size of deficits for all of government), but also the quality of that labor — the value of the work those employees are doing.
Declining labor quality (as experienced baby boomers retire) will reduce taxable payrolls faster than is being projected by the Social Security Administration and the Congressional Budget Office. The result is even more beneficiaries receiving Social Security checks, and lower-wage workers who will be funding those checks.
In the book, I construct a detailed simulation of U.S. demographic and economic forces over the coming decades to estimate how much of a drag declining labor quality will exert on labor productivity, countering the effects of capital accumulation and technological advance.
Now James Heckman has coauthored a study suggesting that the same thing is happening in Europe, traceable in part to public policies promoting less use and low maintenance of worker skills through the early retirement incentives of their public pension, welfare, and health systems.
So it is quite clear how the developed world (Anglo-Saxon and mainland Europe) will spiral downward. We’ll all vote to “strengthen” social insurance systems (the U.S. health care “reform” this year being the latest example), only to further weaken incentives for the young to acquire skills, further erode the tax base, which in turn will promote the further “strengthening” of social insurance protections … and so on.
My old idea of a “covert generational war” is playing out before our very (but fully blind) eyes.
Two months ago, EU officials were even flirting with the idea of a cross-country crisis insurance institution — a European Monetary Fund.
One ironic element in the ongoing European crisis: Remember how the EU’s erstwhile Stability and Growth Pact included penalties on nations who exceeded the 3 percent fiscal deficit rule? Turns out, penalties must now be paid by the “successful” countries — mainly Germany and France — by coughing up the aid packages!
Social Security in the Red
Social Security is officially in the red. The New York Times reports that the system will pay out more than it takes in this year. Explains the Times:
The bursting of the real estate bubble and the ensuing recession have hurt jobs, home prices and now Social Security.
This year, the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office.
Stephen C. Goss, chief actuary of the Social Security Administration, said that while the Congressional projection would probably be borne out, the change would have no effect on benefits in 2010 and retirees would keep receiving their checks as usual.
The problem, he said, is that payments have risen more than expected during the downturn, because jobs disappeared and people applied for benefits sooner than they had planned. At the same time, the program’s revenue has fallen sharply, because there are fewer paychecks to tax.
Analysts have long tried to predict the year when Social Security would pay out more than it took in because they view it as a tipping point — the first step of a long, slow march to insolvency, unless Congress strengthens the program’s finances.
The crisis is now, since the vaunted “trust fund” is filled with non-recourse government bonds–essentially worthless pieces of paper. There’s no there there when it comes to financing future benefits. Either payments have to come down or taxes have to go up, unless we adopt real reform centered around personal accounts. And the latter course seems ever more distant after Congress voted to expand federal control over every Americans’ health care.
Bush’s Third Term
With President Obama’s repeated attempts to draw distinctions between himself from his predecessor—and a widespread belief that he and Bush are polar opposites in nearly every way—it’s actually startling how similar the two men are. And if the policies match the rhetoric, it’s going to be another very long 4-8 years filled with ever more government intrusion and red ink.
| Obama’s Quotes | Bush’s Quotes |
|---|---|
| “So we face big and difficult challenges. And what the American people hope – what they deserve – is for all of us, Democrats and Republicans, to work through our differences; to overcome the numbing weight of our politics. For while the people who sent us here have different backgrounds, different stories and different beliefs, the anxieties they face are the same. The aspirations they hold are shared. A job that pays the bills. A chance to get ahead. Most of all, the ability to give their children a better life.” –Barack Obama, 2010 SOTU |
“We’re not the first to come here with a Government divided and uncertainty in the air. Like many before us, we can work through our differences, and we can achieve big things for the American people. Our citizens don’t much care which side of the aisle we sit on, as long as we’re willing to cross that aisle when there is work to be done. Our job is to make life better for our fellow Americans and to help them build a future of hope and opportunity, and this is the business before us tonight.”
–George W. Bush, 2007 SOTU “In a system of two parties, two chambers, and two elected branches, there will always be differences and debate. But even tough debates can be conducted in a civil tone, and our differences cannot be allowed to harden into anger. To confront the great issues before us, we must act in a spirit of goodwill and respect for one another – and I will do my part. Tonight the state of our Union is strong, and together we will make it stronger.” –George W. Bush, 2006 SOTU |
| “I realize that for every success story, there are other stories, of men and women who wake up with the anguish of not knowing where their next paycheck will come from; who send out resumes week after week and hear nothing in response. That is why jobs must be our number one focus in 2010, and that is why I am calling for a new jobs bill tonight.” –Barack Obama, 2010 SOTU |
“Americans who have lost their jobs need our help, and I support extending unemployment benefits and direct assistance for health care coverage. Yet, American workers want more than unemployment checks; they want a steady paycheck. When America works, America prospers, so my economic security plan can be summed up in one word: jobs.”
–George W. Bush, 2002 SOTU |
| “Now, the true engine of job creation in this country will always be America’s businesses. But government can create the conditions necessary for businesses to expand and hire more workers. We should start where most new jobs do – in small businesses, companies that begin when an entrepreneur takes a chance on a dream, or a worker decides its time she became her own boss.” –Barack Obama, 2010 SOTU |
“The way out of this recession, the way to create jobs, is to grow the economy by encouraging investment in factories and equipment and by speeding up tax relief so people have more money to spend. For the sake of American workers, let’s pass a stimulus package.”
–George W. Bush, 2002 SOTU |
| “Next, we need to encourage American innovation. Last year, we made the largest investment in basic research funding in history – an investment that could lead to the world’s cheapest solar cells or treatment that kills cancer cells but leaves healthy ones untouched. And no area is more ripe for such innovation than energy.” –Barack Obama, 2010 SOTU |
“And my budget provides strong funding for leading-edge technology – from hydrogen-fueled cars, to clean coal, to renewable sources such as ethanol. Four years of debate is enough – I urge Congress to pass legislation that makes America more secure and less dependent on foreign energy.”
–George W. Bush, 2005 SOTU “Since 2001, we have spent nearly $10 billion to develop cleaner, cheaper, and more reliable alternative energy sources. And we are on the threshold of incredible advances. So tonight I announce the Advanced Energy Initiative – a 22-percent increase in clean-energy research – at the Department of Energy, to push for breakthroughs in two vital areas. To change how we power our homes and offices, we will invest more in zero-emission coal-fired plants, revolutionary solar and wind technologies, and clean, safe nuclear energy.” –George W. Bush, 2006 SOTU |
| “But to create more of these clean energy jobs, we need more production, more efficiency, more incentives. That means building a new generation of safe, clean nuclear power plants in this country. It means making tough decisions about opening new offshore areas for oil and gas development. It means continued investment in advanced biofuels and clean coal technologies. And yes, it means passing a comprehensive energy and climate bill with incentives that will finally make clean energy the profitable kind of energy in America.” –Barack Obama, 2010 SOTU |
“Good jobs also depend on reliable and affordable energy. This Congress must act to encourage conservation, promote technology, build infrastructure, and it must act to increase energy production at home so America is less dependent on foreign oil.”
–George W. Bush, 2002 SOTU “I have sent you a comprehensive energy plan to promote energy efficiency and conservation, to develop cleaner technology, and to produce more energy at home. I have sent you Clear Skies legislation that mandates a 70-percent cut in air pollution from powerplants over the next 15 years.” –George W. Bush, 2003 SOTU |
| “The idea here is simple: instead of rewarding failure, we only reward success. Instead of funding the status quo, we only invest in reform – reform that raises student achievement, inspires students to excel in math and science, and turns around failing schools that steal the future of too many young Americans, from rural communities to inner-cities. In the 21st century, one of the best anti-poverty programs is a world-class education. In this country, the success of our children cannot depend more on where they live than their potential.” –Barack Obama, 2010 SOTU |
“When it comes to our schools, dollars alone do not always make the difference. Funding is important, and so is reform. So we must tie funding to higher standards and accountability for results.”
–George W. Bush, 2001 SOTU |
| “Still, in this economy, a high school diploma no longer guarantees a good job. I urge the Senate to follow the House and pass a bill that will revitalize our community colleges, which are a career pathway to the children of so many working families. To make college more affordable, this bill will finally end the unwarranted taxpayer-subsidies that go to banks for student loans. Instead, let’s take that money and give families a $10,000 tax credit for four years of college and increase Pell Grants.” –Barack Obama, 2010 SOTU |
“We will help an additional 200,000 workers to get training for a better career, by reforming our job training system and strengthening America’s community colleges. And we will make it easier for Americans to afford a college education, by increasing the size of Pell Grants.”
–George W. Bush, 2005 SOTU |
| “That’s why we’re working to lift the value of a family’s single largest investment – their home. The steps we took last year to shore up the housing market have allowed millions of Americans to take out new loans and save an average of $1,500 on mortgage payments. This year, we will step up re-financing so that homeowners can move into more affordable mortgages.” –Barack Obama, 2010 SOTU |
“On housing, we must trust Americans with the responsibility of homeownership and empower them to weather turbulent times in the housing market. My administration brought together the HOPE NOW Alliance, which is helping many struggling homeowners avoid foreclosure. And Congress can help even more. Tonight I ask you to pass legislation to reform Fannie Mae and Freddie Mac, modernize the Federal Housing Administration, and allow State housing agencies to issue tax-free bonds to help homeowners refinance their mortgages. These are difficult times for many American families, and by taking these steps, we can help more of them keep their homes.”
–George W. Bush, 2008 SOTU |
| “By the time I’m finished speaking tonight, more Americans will have lost their health insurance. Millions will lose it this year. Our deficit will grow. Premiums will go up. Patients will be denied the care they need. Small business owners will continue to drop coverage altogether. I will not walk away from these Americans, and neither should the people in this chamber.” –Barack Obama, 2010 SOTU |
“Our Nation’s health care system, like our economy, is also in a time of change. Amazing medical technologies are improving and saving lives. This dramatic progress has brought its own challenge, in the rising costs of medical care and health insurance. Members of Congress, we must work together to help control those costs and extend the benefits of modern medicine throughout our country.”
–George W. Bush, 2004 SOTU “Keeping America competitive requires affordable health care. Our Government has a responsibility to provide health care for the poor and the elderly, and we are meeting that responsibility. For all Americans, we must confront the rising cost of care, strengthen the doctor-patient relationship, and help people afford the insurance coverage they need.” –George W. Bush, 2006 SOTU |
| “Now if we had taken office in ordinary times, I would have liked nothing more than to start bringing down the deficit. But we took office amid a crisis, and our efforts to prevent a second Depression have added another $1 trillion to our national debt. I am absolutely convinced that was the right thing to do. But families across the country are tightening their belts and making tough decisions. The federal government should do the same. So tonight, I’m proposing specific steps to pay for the $1 trillion that it took to rescue the economy last year.” –Barack Obama, 2010 SOTU |
“Many of you have talked about the need to pay down our national debt. I listened, and I agree. We owe it to our children and grandchildren to act now, and I hope you will join me to pay down $2 trillion in debt during the next 10 years.”
–George W. Bush, 2001 SOTU |
| “Starting in 2011, we are prepared to freeze government spending for three years. Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected. But all other discretionary government programs will. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t. And if I have to enforce this discipline by veto, I will. We will continue to go through the budget line by line to eliminate programs that we can’t afford and don’t work.” –Barack Obama, 2010 SOTU |
“Just as we trust Americans with their own money, we need to earn their trust by spending their tax dollars wisely. Next week, I’ll send you a budget that terminates or substantially reduces 151 wasteful or bloated programs, totaling more than $18 billion. The budget that I will submit will keep America on track for a surplus in 2012.”
–George W. Bush, 2008 SOTU “In 2 weeks, I will send you a budget that funds the war, protects the homeland, and meets important domestic needs while limiting the growth in discretionary spending to less than 4 percent. This will require that Congress focus on priorities, cut wasteful spending, and be wise with the people’s money. By doing so, we can cut the deficit in half over the next 5 years.” –George W. Bush, 2004 SOTU “My budget substantially reduces or eliminates more than 150 government programs that are not getting results, or duplicate current efforts, or do not fulfill essential priorities. The principle here is clear: a taxpayer dollar must be spent wisely, or not at all.” –George W. Bush, 2005 SOTU |
| “Now, even after paying for what we spent on my watch, we will still face the massive deficit we had when I took office. More importantly, the cost of Medicare, Medicaid, and Social Security will continue to skyrocket. That’s why I’ve called for a bipartisan, Fiscal Commission, modeled on a proposal by Republican Judd Gregg and Democrat Kent Conrad. This can’t be one of those Washington gimmicks that lets us pretend we solved a problem. The Commission will have to provide a specific set of solutions by a certain deadline.” –Barack Obama, 2010 SOTU |
“So tonight I ask you to join me in creating a commission to examine the full impact of baby boom retirements on Social Security, Medicare, and Medicaid. This commission should include Members of Congress of both parties, and offer bipartisan solutions. We need to put aside partisan politics and work together and get this problem solved.”
–George W. Bush, 2006 SOTU |
| “I’m also calling on Congress to continue down the path of earmark reform. You have trimmed some of this spending and embraced some meaningful change. But restoring the public trust demands more. For example, some members of Congress post some earmark requests online. Tonight, I’m calling on Congress to publish all earmark requests on a single website before there’s a vote so that the American people can see how their money is being spent.” –Barack Obama, 2010 SOTU |
“The time has come to end this practice. So let us work together to reform the budget process, expose every earmark to the light of day and to a vote in Congress, and cut the number and cost of earmarks at least in half by the end of this session.”
–George W. Bush, 2007 SOTU “The people’s trust in their Government is undermined by congressional earmarks, special interest projects that are often snuck in at the last minute, without discussion or debate. Last year, I asked you to voluntarily cut the number and cost of earmarks in half. I also asked you to stop slipping earmarks into committee reports that never even come to a vote. Unfortunately, neither goal was met. So this time, if you send me an appropriations bill that does not cut the number and cost of earmarks in half, I’ll send it back to you with my veto. And tomorrow I will issue an Executive order that directs Federal Agencies to ignore any future earmark that is not voted on by Congress. If these items are truly worth funding, Congress should debate them in the open and hold a public vote.” –George W. Bush, 2008 SOTU |
Baucus Finances Health Overhaul by Raiding Social Security
Andrew Biggs, FTW.
Filed under: General; Health Care; Social Security; Tax and Budget Policy
Emergency Aid to Seniors? No Way
Social Security benefits are indexed for inflation, but because inflation has been roughly zero for the past year, the adjustment formula implies no increase in benefits this year. Nevertheless,
President Obama on Wednesday attempted to preempt the announcement that Social Security recipients will not get an increase in their benefit checks for the first time in three decades, encouraging Congress to provide a one-time payment of $250 to help seniors and disabled Americans weather the recession.
Obama endorsed the idea, which is expected to cost at least $13 billion, as the administration gropes for ways to sustain an apparent economic rebound without the kind of massive spending package that critics could label a second stimulus act.
This is outrageous on four levels:
1. If the president thinks the economy needs more stimulus, he should say that explicitly and have an honest debate.
2. This is the wrong kind of stimulus. Any further stimulus should consist of reductions in marginal tax rates, such as a cut in the corporate income tax (or better yet, repeal).
3. All Social Security recipients already have a moderate guaranteed income, and many have significant income beyond their Social Security benefits. This kind of transfer has no plausible justification as redistribution for the needy.
4. Sending checks to seniors is a blatant attempt to buy their support for Obamacare, which promises to cut Medicare spending substantially.
Frozen Minds on the Medicare Part B Premium Freeze
This week, Sen. Tom Coburn (R-OK) blocked an attempt by Sen. Max Baucus (D-MT) to move — without a recorded vote or CBO score – H.R. 3631, legislation to freeze Medicare Part B premiums. These premiums are automatically deducted from the Social Security checks of seniors, almost all of whom are enrolled in the Medicare Part B (Supplemental Medical Insurance) program.
Social Security recipients will not receive a COLA increase in their monthly checks beginning January 2010 because inflation between October 2008 and September 2009 was negative. But if Part B premiums increase, the dollar amount of their Social Security checks will decrease beginning in January 2010.
What would happen if the Part B premium were frozen for 2010? Seniors would get a double benefit. First they are gaining from a zero reduction in their Social Security checks even though inflation in 2008-2009 was negative. That means the purchasing power of their Social Security checks will be larger (assuming inflation remains low during the 4th quarter of this year).
On top of that, a frozen Part B premium would provide them with more generous Part B coverage because health care prices became more expensive during 2009 relative to other goods and services.
Senator Coburn’s action in blocking the premium freeze is courageous and correct. In a small but important way, it combats the busting of the federal budget by already generous Medicare Part B benefits that seniors receive — three-quarters of which are funded out of federal general revenues (that is, financed out of taxes paid by younger workers).
