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November 28, 2006Deficit dementia
Michael Mandel
My regular readers know that I'm not terribly worried about the budget deficit, at least at current levels (see for example this piece here). Nor am I particularly worried about entitlement spending, which has been overhyped as a problem because of a weird forecasting methodology (see here)
So I was very happy to see a new post from Max Sawicky on "deficit dementia." Max writes:
Let us recap ten fallacies of deficit dementia:
1. Lumping debt service, Social Security and other "entitlements" with the only genuine fiscal problem -- Medicare and Medicaid.2. Obsessing over retiree to worker ratios, instead of total population to worker ratios.
3. Exaggerating the tax adjustments required to finance Social Security.
4. Presuming that deficit reduction will spur capital formation and economic growth.
5. Assuming the Federal budget ought to be balanced, as a matter of course.
6. Treating tax increases to finance entitlement growth as "unprecedented" and politically impossible, but considering draconian benefits cuts as politically feasible and inevitable.
7. Assuming taxes could not be higher, for economic reasons.
8. Pretending we have a clue as to the nature of the economy forty (thirty? twenty?) years or more in the future.
9. Comparing the rate of return of equities over extended periods too long to be susceptible to prolonged slumps that would plague an actual investor to a program that a) paid the legacy costs of elderly who never contributed to Social Security, b) has lower risk than equities, c) provides an inflation-proof annuity with zero conversion cost at retirement, d) has minuscule administrative overhead, e) provides disability and survivors insurance, and f) provides insurance against low earnings over one's lifetime.
10. Comparing accumulations of program deficits over 75, 100, or eternal time horizons to this year's GDP.
To this I would add...counting government spending on as R&D, education--and yes, part of health care--as consumption rather than essential long-term investment that can be and should financed by borrowing.
11:04 AM
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Comments
All true... as long as the Dollar remains the world's reserve currency and interest rates (returns) remain competitive against other potential reserve currencies. I don't see that as a given.
Posted by: Brandon W at November 28, 2006 12:26 PM
"health-care costs per beneficiary will grow at a rate one percentage point faster than per-capita GDP"....how is this actually calculated--using like measures of GDP (real-to-real or nominal-to-nominal)?...or something stranger? For example, if real GDP is growing 3%/yr, are they assuming that real health care costs are going up 4% and then adding CPI to get a nominal number? Or what?
Posted by: david foster at November 28, 2006 07:05 PM
Michael, you worry about the federal deficit but you overlook how our taxes are being spent.
You worry about the Housing Market but housing continues to be a safe investment in the long term. You worry about US Health Care but Americans are living longer.
You worry about our national savings rate but we are saving about 1 trillion dollars per year in IRAs and CDs.
Will you be upset if your building doesn't have Wi-Fi or HDTV? When does a luxury become a necessity?
Posted by: Frank at November 28, 2006 10:49 PM
While I would somewhat agree with point 8, I'm not sure why you're reprinting this stupid list, especially with the ridiculous statements about Social Security. According to the CBO and the SS trustees, revenues will not cover benefits in 10-15 years. The "surplus" does not exist, it was frittered away by the government. If boomers think they will get away with raising taxes to pay for their social security benefits, they better think again. I am 27 and I will not vote to dump more money into SS and I'm willing to bet that other Gen-X and -Yers will not also (together we outnumber the boomers, btw). There is going to be a reduction in benefits no matter what, at the very least from wage indexing to price indexing, most likely an age hike and more. The people who will pay the price for this are those who believe the Democrats now: they are the ones who will get burned later. Rather than let that happen, we need to start privatizing SS now. Make it a mandatory 401(k) if you must, whatever it is, we will have to pay the price later if we don't do this now.
Posted by: Ajay at November 29, 2006 05:10 AM
David,
Yes, you've got the gist of the health care spending forecast. Make whatever assumption you want about future real gdp growth, and add one percentage point to get the growth rate of health care (the actual methodology is actually a bit more complicated than that, but that's it).
The problem is that there is no way to grow your way out of the problem once you have made that assumption. Yucko...that's a technical term.
Posted by: Mike Mandel at November 29, 2006 11:28 AM
Ajay,
Social Security can be fixed by some minor technical twiddles. According to the latest report from the SSA trustees, the 75 year deficit is about 2% of taxable payroll. That's very small.
Posted by: Mike Mandel at November 29, 2006 11:32 AM
I thought that 2% number sounded fishy so I went to the trouble of looking it up. It comes from this table (http://www.ssa.gov/OACT/TR/TR06/IV_LRest.html#wp276411) in the SSA report, where they have the temerity to count the supposed current trust fund of 1.86 trillion as an asset and actually subtract it from the predicted shortfall. As that 1.86 trillion is in actuality a debt that will have to be paid in 10 years, you really get a number of 3.4% of taxable payroll. That is, assuming you trust them not to also fudge the numbers elsewhere (the numbers in that table look too small to me, I don't trust whatever discount rate they're using).
All that said, I don't think SS is a disaster. However, it will put a lot of elderly people in pain when everyone else refuses to bail them out and SS as a whole is prone to even more political mismanagement. That is why I think we should take this opportunity to restructure this antiquated safety net rather than continuing blithely along, pretending it will be able to take the weight of all the boomers who will fall into it in the coming decades.
Posted by: Ajay at November 29, 2006 01:38 PM
Social Security can be fixed very easily by simply indexing the retirement age to the continually rising life expectancy.
For people born after 1960, make the early age 65 and the full age 69.
From there, add on 3 months for every year of birth. Thus, for people born in 1964, the ages are 66/70. For people born in 1968, the ages are 67/71. For people born in 1972, the ages are 68/72, and so on.
That alone would slash the expenditures.
Beyond that, I agree that privitazation is the answer. People who oppose it are fools, because it is *optional*. People could choose to keep it in money market funds rather than equities if they wanted. Currently, people are *forced* to keep it in T-bills and do not have the choice of equities.
Thirdly, the SS payroll tax is far too regressive. Low income people still pay 6.2% of their pay, yet people who make above $94,500 pay nothing on income above that level.
Instead, we should not collect it on the first $30,000 of income, but instead start from $30,001 and go until unlimited income. The revenue the govt collects would be about the same, but lower income people would pay much less, and this would effectively have the same economic stimulus benefit as a tax cut.
For example :
A person making $30,000 pays nothing, and neither does his employers.
A person making $70,000 pays 6.2% of $40,000 and his employer matches that.
A person making $200,000 pays 6.2% of $170,000, his employer matches that.
A person making $3 million pays 6.2% of $2,970,000, and so on.
This would be a far better way to collect the benefits, and would make privitization easier, since now contributions have shifted to people who are more likely to max out their 401K anyway, and are thus more favorable to private accounts.
Posted by: Kartik at November 29, 2006 01:51 PM
Hi Ajay,
If you don't like the 2%, how about this from the trustee report:
"benefits could be reduced to the level that is payable with scheduled tax rates in each year beginning in 2040. Under this scenario,
benefits would be reduced 26 percent at the point of trust fund exhaustion in 2040, with reductions reaching 30 percent in 2080."
That is, if nothing else changes, the inflows and outflows would be balanced if benefits in 2080 are cut by 30% below the current projections.
However, for a medium earner, real benefits in 2080 are currently projected to be approximately $35316 per year, compared to $16127 now. That is to say, benefits in 75 years are projected to be roughly 120% higher, in real terms, than today's benefits.
(see here http://www.ssa.gov/OACT/TR/TR06/lr6F10.html#2)
So if we cut future benefits by 30%, they are still more than 50% higher than today's benefits. True, the new benefits only replace 29% of income, rather than 41%. So that means middle-income Americans who retire in 2080 will have to accept a decline in living standards equivalent to about 13% of their pre-retirement income, or find another income source. Is that horrible? I don't think so.
Posted by: Mike Mandel at November 29, 2006 02:09 PM
I like this list a lot. SS has been made a crisis by those with political axes to grind and those gullible enough to fall for it.
Posted by: Lord at November 29, 2006 03:15 PM
2080? There won't be middle-income Americans in 2080. There won't be humans in 2080. There will have been a technological singularity before then, where humans merge with their technology.
All credible futurists agree upon the singularity, and differ only on the timing and details of it.
Anyone who simply takes the trends of the last 75 years and projects them linearly over the next 75 going to be grossly off the mark in predicting the world of 2080.
Posted by: Kartik at November 29, 2006 04:16 PM
"credible futurists"
boneless ribs, military intelligence, religious freedom, government efficiency, Microsoft Works, reality television, working vacations...
Posted by: Janus Daniels at December 3, 2006 02:03 PM
Kartik,
From an economic point of view, what would such a singularity look like? Health care spending merges with info-tech spending?
Posted by: Mike Mandel at December 4, 2006 08:53 AM
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