Bernanke: Entitlement Spending Threatens Future Economy

Federal Reserve Chair Ben Bernanke testified before the Senate Budget Committee today. Greg Ip summarizes his testimony [Update: Video of testimony from CSPAN]:

Bernanke to Congress: Time for Action, by Greg Ip, Washington Wire: Bernanke Federal Reserve Chairman Ben Bernanke testified today that “long-term fiscal imbalances” due to rising spending on entitlement programs such as Medicare and Social Security imperil the economy. “If early and meaningful action is not taken,” he warned Congress, “the U.S. economy could be seriously weakened, with future generations bearing much of the cost.”

When Senate Budget Committee Chairman Kent Conrad (D., N.D.) asked, “How urgent is it that we address these long term imbalances?” Bernanke replied: “The right time to start is about 10 years ago.”

I think that Bernanke should speak out on the budget issue if he is concerned, and I was pleased that he adopted a neutral stance and resisted saying whether taxes or spending changes are to be preferred in dealing with the projected budget problem. I don't think the Fed should take a position one way or the other, though hearing the Fed's view on the consequences of each strategy for dealing with the deficit issue would be helpful.

But if this had been a draft of his testimony rather than a finished product, I would have made three suggestions:

1. The Fed's job is monetary policy, not fiscal policy. Make the connection between budget deficits and, through the government budget constraint, the choices the Fed would have to make as a consequence. For example, if the economy were to slump as forecast in one scenario given in the talk, would the Fed steadfastly refuse to monetize the debt? Will the Fed's hand be forced in any particular way, or will it face any difficult tradeoffs due to the budget problem? I think the Fed would have difficult choices to make if the deficit increased as projected and it would be helpful to hear the the Bernanke's view on how the Fed would react. [Update: see Jim Hamilton on this point.]

2. The Social Security and Medicare problems are not of the same order of magnitude. Draw a sharper distinction and make it clear that Medicare is far and away the biggest worry.

3. The speech reads as if there are only two choices with respect to the budget problem, changing taxes or changing spending. But there is another choice too and it is related to the fact that Medicare is the biggest worry. By reorganizing our health care delivery system - e.g. a universal care, single-payer system - it may be possible to realize substantial savings. While it could be argued that this comes under the heading of changes in expenditures, achieving budget reduction by reorganizing the health care system is fundamentally different from what we usually think of as spending cuts.

Here's the written part of Bernanke's testimony before the Senate:

Long-term fiscal challenges facing the United States, by Ben Bernanke, Federal Reserve Chairman: Chairman Conrad, Senator Gregg, and other members of the Committee, I am pleased to be here to offer my views on the federal budget and related issues. At the outset, I should underscore that I speak only for myself and not necessarily for my colleagues at the Federal Reserve.

As you know, the deficit in the unified federal budget declined for a second year in fiscal year 2006, falling to $248 billion from $319 billion in fiscal 2005. As was the case in the preceding year, the improvement in 2006 was primarily the result of solid growth in tax receipts, especially in collections of personal and corporate income taxes. Federal government outlays in fiscal 2006 were 20.3 percent of nominal gross domestic product (GDP), receipts were 18.4 percent of GDP, and the deficit (equal to the difference of the two) was 1.9 percent of GDP. These percentages are close to their averages since 1960. The on-budget deficit, which differs from the unified budget deficit primarily in excluding receipts and payments of the Social Security system, was $434 billion, or 3.3 percent of GDP, in fiscal 2006.¹ As of the end of fiscal 2006, federal government debt held by the public, which includes holdings by the Federal Reserve but excludes those by the Social Security and other trust funds, amounted to about 37 percent of one year's GDP.

Official projections suggest that the unified budget deficit may stabilize or moderate further over the next few years. Unfortunately, we are experiencing what seems likely to be the calm before the storm. In particular, spending on entitlement programs will begin to climb quickly during the next decade. In fiscal 2006, federal spending for Social Security, Medicare, and Medicaid together totaled about 40 percent of federal expenditures, or roughly 8-1/2 percent of GDP.² In the most recent long-term projections prepared by the Congressional Budget Office (CBO), these outlays are projected to increase to 10-1/2 percent of GDP by 2015, an increase of about 2 percentage points of GDP in less than a decade. By 2030, according to the CBO, they will reach about 15 percent of GDP.³ As I will discuss, these rising entitlement obligations will put enormous pressure on the federal budget in coming years.

The large projected increases in future entitlement spending have two principal sources. First, like many other industrial countries, the United States has entered what is likely to be a long period of demographic transition, the result both of the reduction in fertility that followed the post-World War II baby boom and of ongoing increases in life expectancy. Longer life expectancies are certainly to be welcomed. But they are likely to lead to longer periods of retirement in the future, even as the growth rate of the workforce declines. As a consequence of the demographic trends, the number of people of retirement age will grow relative both to the population as a whole and to the number of potential workers. Currently, people 65 years and older make up about 12 percent of the U.S. population, and there are about five people between the ages of 20 and 64 for each person 65 and older. According to the intermediate projections of the Social Security Trustees, in 2030 Americans 65 and older will constitute about 19 percent of the U.S. population, and the ratio of those between the ages of 20 and 64 to those 65 and older will have fallen to about 3.

Although the retirement of the baby boomers will be an important milestone in the demographic transition--the oldest baby boomers will be eligible for Social Security benefits starting next year--the change in the nation's demographic structure is not just a temporary phenomenon related to the large relative size of the baby-boom generation. Rather, if the U.S. fertility rate remains close to current levels and life expectancies continue to rise, as demographers generally expect, the U.S. population will continue to grow older, even after the baby-boom generation has passed from the scene. If current law is maintained, that aging of the U.S. population will lead to sustained increases in federal entitlement spending on programs that benefit older Americans, such as Social Security and Medicare.

The second cause of rising entitlement spending is the expected continued increase in medical costs per beneficiary. Projections of future medical costs are fraught with uncertainty, but history suggests that--without significant changes in policy--these costs are likely to continue to rise more quickly than incomes, at least for the foreseeable future. Together with the aging of the population, ongoing increases in medical costs will lead to a rapid expansion of Medicare and Medicaid expenditures.

Long-range projections prepared by the CBO vividly portray the potential effects on the budget of an aging population and rapidly rising health care costs. The CBO has developed projections for a variety of alternative scenarios, based on different assumptions about the evolution of spending and taxes. The scenarios produce a wide range of possible budget outcomes, reflecting the substantial uncertainty that attends long-range budget projections.⁴ However, the outcomes that appear most likely, in the absence of policy changes, involve rising budget deficits and increases in the amount of federal debt outstanding to unprecedented levels. For example, one plausible scenario is based on the assumptions that (1) federal retirement and health spending will follow the CBO's intermediate projection; (2) defense spending will drift down over time as a percentage of GDP; (3) other non-interest spending will grow roughly in line with GDP; and (4) federal revenues will remain close to their historical share of GDP--that is, about where they are today.⁵ Under these assumptions, the CBO calculates that, by 2030, the federal budget deficit will approach 9 percent of GDP--more than four times greater as a share of GDP than the deficit in fiscal year 2006.

A particularly worrisome aspect of this projection and similar ones is the implied evolution of the national debt and the associated interest payments to government bondholders. Minor details aside, the federal debt held by the public increases each year by the amount of that year's unified deficit. Consequently, scenarios that project large deficits also project rapid growth in the outstanding government debt. The higher levels of debt in turn imply increased expenditures on interest payments to bondholders, which exacerbate the deficit problem still further. Thus, a vicious cycle may develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits. According to the CBO projection that I have been discussing, interest payments on the government's debt will reach 4-1/2 percent of GDP in 2030, nearly three times their current size relative to national output. Under this scenario, the ratio of federal debt held by the public to GDP would climb from 37 percent currently to roughly 100 percent in 2030 and would continue to grow exponentially after that. The only time in U.S. history that the debt-to-GDP ratio has been in the neighborhood of 100 percent was during World War II. People at that time understood the situation to be temporary and expected deficits and the debt-to-GDP ratio to fall rapidly after the war, as in fact they did. In contrast, under the scenario I have been discussing, the debt-to-GDP ratio would rise far into the future at an accelerating rate. Ultimately, this expansion of debt would spark a fiscal crisis, which could be addressed only by very sharp spending cuts or tax increases, or both.⁶

The CBO projections, by design, ignore the adverse effects that such high deficits would likely have on economic growth. But if government debt and deficits were actually to grow at the pace envisioned by the CBO's scenario, the effects on the U.S. economy would be severe. High rates of government borrowing would drain funds away from private capital formation and thus slow the growth of real incomes and living standards over time. Some fraction of the additional debt would likely be financed abroad, which would lessen the negative influence on domestic investment; however, the necessity of paying interest on the foreign-held debt would leave a smaller portion of our nation's future output available for domestic consumption. Moreover, uncertainty about the ultimate resolution of the fiscal imbalances would reduce the confidence of consumers, businesses, and investors in the U.S. economy, with adverse implications for investment and growth.

To some extent, strong economic growth can help to mitigate budgetary pressures, and all else being equal, fiscal policies that are supportive of growth would be beneficial. Unfortunately, economic growth alone is unlikely to solve the nation's impending fiscal problems. Economic growth leads to higher wages and profits and thus increases tax receipts, but higher wages also imply increased Social Security benefits, as those benefits are tied to wages. Higher incomes also tend to increase the demand for medical services so that, indirectly, higher incomes may also increase federal health expenditures. Increased rates of immigration could raise growth by raising the growth rate of the labor force. However, economists who have looked at the issue have found that even a doubling in the rate of immigration to the United States, from about 1 million to 2 million immigrants per year, would not significantly reduce the federal government's fiscal imbalance.⁷

The prospect of growing fiscal imbalances and their economic consequences also raises essential questions of intergenerational fairness.⁸ As I have noted, because of increasing life expectancy and the decline in fertility, the number of retirees that each worker will have to support in the future--either directly or indirectly through taxes paid to support government programs--will rise significantly. To the extent that federal budgetary policies inhibit capital formation and increase our net liabilities to foreigners, future generations of Americans will bear a growing burden of the debt and experience slower growth in per-capita incomes than would otherwise have been the case.

An important element in ensuring that we leave behind a stronger economy than we inherited, as did virtually all previous generations in this country, will be to move over time toward fiscal policies that are sustainable, efficient, and equitable across generations. Policies that promote private as well as public saving would also help us leave a more productive economy to our children and grandchildren. In addition, we should explore ways to make the labor market as accommodating as possible to older people who wish to continue working, as many will as longevity increases and health improves.

Addressing the country's fiscal problems will take persistence and a willingness to make difficult choices. In the end, the fundamental decision that the Congress, the Administration, and the American people must confront is how large a share of the nation's economic resources to devote to federal government programs, including transfer programs such as Social Security, Medicare, and Medicaid. Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run. Thus, members of the Congress who put special emphasis on keeping tax rates low must accept that low tax rates can be sustained only if outlays, including those on entitlements, are kept low as well. Likewise, members who favor a more expansive role of the government, including relatively more-generous benefits payments, must recognize the burden imposed by the additional taxes needed to pay for the higher spending, a burden that includes not only the resources transferred from the private sector but also any adverse economic incentives associated with higher tax rates.

Achieving fiscal sustainability will require sustained efforts and attention over many years. As an aid in charting the way forward, the Congress may find it useful to set some benchmarks against which to gauge progress toward key budgetary objectives. Because no single statistic fully describes the fiscal situation, the most effective approach would likely involve monitoring a number of fiscal indicators, each of which captures a different aspect of the budget and its economic impact. The unified budget deficit, projected forward a certain number of years, is an important measure that is already included in the congressional budgeting process. However, the unified budget deficit does not fully capture the fiscal situation and its effect on the economy, for at least two reasons.

First, the budget deficit by itself does not measure the quantity of resources that the government is taking from the private sector. An economy in which the government budget is balanced but in which government spending equals 20 percent of GDP is very different from one in which the government's budget is balanced but its spending is 40 percent of GDP, as the latter economy has both higher tax rates and a greater role for the government. Monitoring current and prospective levels of total government outlays relative to GDP or a similar indicator would help the Congress ensure that the overall size of the government relative to the economy is consistent with members' views and preferences.

Second, the annual budget deficit reflects only near-term financing needs and does not capture long-term fiscal imbalances. As the most difficult long-term budgetary issues are associated with the growth of entitlement spending, a comprehensive approach to budgeting would include close attention to measures of the long-term solvency of entitlement programs, such as long-horizon present values of unfunded liabilities for Social Security and Medicare.

To summarize, because of demographic changes and rising medical costs, federal expenditures for entitlement programs are projected to rise sharply over the next few decades. Dealing with the resulting fiscal strains will pose difficult choices for the Congress, the Administration, and the American people. However, if early and meaningful action is not taken, the U.S. economy could be seriously weakened, with future generations bearing much of the cost. The decisions the Congress will face will not be easy or simple, but the benefits of placing the budget on a path that is both sustainable and meets the nation's long-run needs would be substantial.

Thank you again for allowing me to comment on these important issues. I would be glad to take your questions.

---

Footnotes

1.  Excluding the operations of both Social Security and Medicare Part A, the budget deficit in fiscal year 2006 was $459 billion, or 3.5 percent of GDP. Like Social Security, Medicare Part A pays benefits out of, and receives a dedicated stream of revenues into, a trust fund.

2.  Net of Medicare premiums paid by beneficiaries and amounts paid by states from savings on Medicaid prescription drug costs, these outlays were equal to 8 percent of GDP.

3.  These projections are for the CBO's intermediate spending path. Consistent with the assumptions used by the Medicare trustees, this path is based on the assumption that, over the long run, per beneficiary health expenditures will increase at a rate that is 1 percentage point per year greater than the growth rate of per capita GDP. Over the past twenty-five years, however, per beneficiary Medicare spending has actually exceeded per capita GDP growth by about 2-1/2 percentage points per year. Thus, a significant slowing in the growth of medical costs per beneficiary will be needed to keep expenditures close to those projected in the CBO's intermediate-spending scenario. See Congressional Budget Office (2005), The Long-Term Budget Outlook, December, www.cbo.gov/ftpdocs/69xx/doc6982/12-15-LongTermOutlook.pdf (1.0 MB PDF).

4.  For example, in 2030, five of the six scenarios imply deficits ranging from 1-1/2 percent of GDP to nearly 14 percent of GDP; a sixth scenario is capable of producing a surplus, but it relies on the confluence of a very favorable set of assumptions.

5.  CBO (2005), The Long-Term Budget Outlook, pp. 5-13 and 48-49.

6.  To give a sense of the magnitudes involved, suppose--for the sake of illustration only--that the deficit projected for 2030 in the CBO scenario were to be eliminated entirely in that year, half through reductions in discretionary spending and half through increases in non-payroll taxes. (Of course, in reality the fiscal adjustment would likely not occur in one year, but this hypothetical example is useful for showing the magnitude of the problem.) This fiscal adjustment would involve a cut in discretionary spending (including defense) of nearly 80 percent (relative to its baseline level) and a rise in non-payroll taxes of more than 35 percent. The need for such painful measures could be diminished by beginning the process of fiscal adjustment much earlier, thereby avoiding some of the buildup in outstanding debt and the associated interest burden.

7.  CBO (2005), The Long-Term Budget Outlook, p. 3.

8.  I discussed this issue in Ben S. Bernanke (2006), "The Coming Demographic Transition: Will We Treat Future Generations Fairly?", speech delivered before the Washington Economic Club, Washington, October 4, www.federalreserve.gov/boarddocs/speeches/2006/20061004/default.htm.

Comments

[billy]

Social Security for dummies.

http://www.rgemonitor.com/blog/setser/173156

Read the comment thread - Dr Sester responds to the ridiculous arguments. The rightwing, conservative, lying, looting thugs still keep pushing those lies.

To quote one of Sester's comments

One part of the federal government (soc sec) set aside $10 out of its current revenue. Another part (the rest of the gov) spent $10 more than it took it. The rest of the government promised to repay social security with interest ...

at some point this will simply be reversed. the rest of the government will pay Social security $10 back plus interest (or borrow the funds needed to repay social security from the private market).

The social security surplus that finances a deficit elsewhere in the government will turn into a social security deficit financed by a surplus elsewhere (or my external borrowing).'

why does the internal accounting matter?

Simple -- different parts of the government have different revenue sources. Social security is financed by a flat payroll tax up to a cap. That's regressive (Soc sec benefits/ insurance is, by contrast, progressive). The rest of the gov. is financed by a progressive income tax.

The increase in the regressive payroll tax to build up the trust fund (keeping the progressive income tax or the deficit lower than it otherwise would have been) only makes sense in my view if the progressive income tax is used to collect the revenue needed to pay the social security system back.

Otherwise, as Dean Baker likes to point out, all those folks who paid more soc sec payroll taxes that needed to cover current soc sec benefits will have gotten royally screwed.

[js paine]

mark
a case in point
u need no jounalist hacks
when a guy this bright pulls
lawyerly stunts for his team
like lumping ssi with medicare
when only medicare
is in trouble
(with the payroll funded hospital part
already into its trust fund)
and only ssi is under practical attack
(though its at least 10 years from
the point where medA is already )

UNCLE BEN IS LEGITIMIZING
repug wall street's buzz bomb
terrorizing of our collective retirement system

[anne]

Notice, Ben Bernanke suddenly gets religion when there is a Democratic Congress. For a Republican Congress, Bernanke was an athiest.

Notice, the magic of a costless war and occupation that never ever has to be mentioned because it is costless. If the war and occupation were not costless Bernanke might have to mention the cost.

Notice, Democrats now are supposed to destroy themselves by attacking Social Security and Medicare. Forget all about the Terminator, Democrats must now be as impossibly stupid as they were in pre-Terminator days.

[Cassandra]

If there was any doubt beforehand of his ideological persuasion, Dr Bernanke has, with this speech, not so much leapt, but positively vaulted out of the closet, in full partisan regalia.

Shame about that. I still harbored hopes he might, in the heat of the moment, "swing the other way".

[Cent21]

How about some accounting.

Social Security for the past 25 years: a couple $Trillion surplus.

Rest of government for the past 25 years: $7+ Trillion of debt.

Projections for the next 20 years: Social Security will run $4 Trillion or so of surpluses. The rest of government is less predictable, but the current course is to run something like triple that in new debt.

There's really only one reason to lump Social Security and Medicare under the same reform effort, and that is that they are both financed by payroll taxes, so a future congress might be tempted to pay for a deficit in the Medicare accounts by drawing down SS surplus revenues.

But under any accounting, the biggest problem for the next quarter century or so is holding the rest of government accountable at least for the interest payments on the SS trust fund, and the only way that can happen if the rest of governments stops spending, what is it, a buck fifty for each buck it brings in?

And any fix in the next 10 years that makes any changes to Social Security before the general fund problems are fixed is simply throwing good money after bad.

[pgl]

I like his Footnote 1. His text talks about how the deficit has declined, but that's simply because the Trust Fund surpluses have increased. No, the General Fund deficit is still a mess even if tax revenues in 2006 were higher than those really low levels of 2003.

But as I read this, it's not all that fair and balanced. One could take away from this that his preferred way of cutting the deficit long-term is entitlement cuts as if tax increases are just an after thought to be avoided if at all possible.

[pgl]

Billy - thanks for the link to Brad Setser. Brad knocks this exploding entitlement garbage right out of the ball park.

[calmo]

slink wastes no time stealin Webb's shot.
Time to ask BB if he thinks its worth delineating "future generations" to the same levelof scrutiny that those numbers get --or should we start crying now for the plight of his future family's plight?

[Steve]

anne

How has his position changed since the Democrats took over? It seems to be the same as it was since he started doing these things.

Also, since when did the concept that Social Security and Medicare are in trouble become something that's uniquely Republican. Lockbox, anyone?

[anne]

"How has his position changed since the Democrats took over? It seems to be the same as it was since he started doing these things."

Sorry, I remember now, just before the election Ben Bernanke went before the Republican Congress to tell the Republican Congress to raise taxes or cut Social Security and Medicare, or to do both. And, the Republican Congress listened and heard and obeyed.

"Also, since when did the concept that Social Security and Medicare are in trouble become something that's uniquely Republican."

Sorry, I am so stupid, Democrats have wanted to cut Social Security since the days of Franklin Roosevelt, and wanted to cut Medicare since, well, before there was Medicare. Republicans, I remember, have always wanted more Social Security and Medicare. [Actually, Republicans did give us Medicare drug coverage, however, for which I am grateful.]

[js paine]

pgl:
"One could take away from this that his preferred way of cutting the deficit long-term
is entitlement cuts
as if tax increases are just an after thought
to be avoided if at all possible."

precisely

uncle ben is carry-ing the MAN's water here

[Steve]

Sorry, I remember now, just before the election Ben Bernanke went before the Republican Congress to tell the Republican Congress to raise taxes or cut Social Security and Medicare, or to do both. And, the Republican Congress listened and heard and obeyed.

Really? I don't remember that, but I'm willing to say it's possible I don't remember. If anyone has a link to it, I'd be happy to read about him saying that. But those sound like policy decisions and from day 1 he said he would not make policy recommendations, so I'm doubtful he ever said what you claim. But if he did say that, I'll gladly admit I was mistaken.

[js paine]

anne
the sarcasm works nicely here
its too plain to miss what's up

byw
conrad is a blue doggie fink
a democrat only because the tent is way way too broad on its right flank....

[anne]

A Democratic Congress that cuts Medicare or Social Security or raise taxes will be acting needlessly and self-destructively. That is known as the Arnold Schwarzzenger law of politics.

"Hasta la Vista, Baby."

Of course, the astonishing "I hate Middle East dictator loving liberals" Thomas Friedman advised taxes taxes taxes this morning in an interview not to be believed for meanness.

[anne]

Steve, I am sorry. I am in a war-monger bashing mood and should not have been sarcastic in reply to you. Frankly, I am surprised at Ben Bernanke and disappointed because I do not see a problem with Social Security and only a minor problem with Medicare.

When Arnold Schwarzzenger is pushing for universal health care coverage in California, Democrats had better be pushing in the same direction only more so and they are and will be.

Running tired me today (the heels I suppose) but I find the idea of trading butter for guns intolerable, and though I have to fight to make the point we are buying guns at the most alarming rate even for a paranoic.

[anne]

The Democratic House will be terrific, there are several Democratic Senators who are all but Republicans and there is Joe Lieberman who will support Social Security and Medicare as long as they are cut cut cut. The Democratic House will either hold or there will have been no reason for the last election.

Again, does the cost of Iraq matter at all? Suppose Martin Luther King does not count, and war really is fun only King never got the fun part. Even if war is fun, does it cost anything at all? Do we need to cut Social Security and Medicare for the sake of occupying Iraq? Or, is occupying Iraq costless and should I move to the University of Chicago?

[Steve]

Steve, I am sorry. I am in a war-monger bashing mood and should not have been sarcastic in reply to you. Frankly, I am surprised at Ben Bernanke and disappointed because I do not see a problem with Social Security and only a minor problem with Medicare.

Anne,

The way I see it there are two questions here. #1. Is there a problem with SS and Medicare and #2? If there is, what do you do about it?

From what I've read, there are plenty of politicians on both sides of the aisle that believe the answer to #1 is a resounding “yes.” I've ready many persuasive arguments that suggest there isn't, but for whatever reason that doesn't seem to have taken hold with our politicians.

Now, question #2 is where the politicians definitely diverge. The Republicans certainly are in favor of cutting entitlements, whereas the Democrats would be more inclined to increase taxes.

Bernanke made no specific recommendation in his statement. Now if you read between the lines, you might conclude that he's in favor of cutting entitlements and maybe he is, but I think he did a pretty good job of saying that it's up to the politicians to decide on how to handle this issue.

Personally, I think Bernanke is on the right track by refusing to answer questions about fiscal policy. It's certainly much more desirable than his predecessor who was more than happy to give his opinion on pretty much anything, even if it wasn't his place, which I would say is true with regard to fiscal policy. I think Bernanke does a much better job than Greenspan of maintaining the independence of the Fed and I'm glad to see that.

[Dave Schuler]

Obviously, I agree with your point about Social Security, Mark. That's just what the numbers say.

I'm not quite as sanguine about the prospects of single-payer for solving our budgetary woes as you are. Note that I'm not arguing against single-payer: I've been in favor of it for 20 years (just not for budgetary reasons).

In my view single-payer (from a budgetary standpoint) is the equivalent of an accounting trick: it's a one-time savings of something like 10% off the total healthcare bill. That won't solve the Medicare problem. Indeed, at the present expansion of healthcare costs it will be absorbed in a year or so.

To solve the problems that Medicare cause for the budget we're going to need a major system overhaula change in the way healthcare is delivered and paid for. Single-payer is treating the symptom not the disease. The disease is runaway costs.

Conversely, universal coverage would be much more tractable and affordable if healthcare costs were much, much lower. We need to grasp the nettle and solve the cost containment problem first.

[jamzo]

bernacke comments on social security and medicare policy but ignores market and econimic effects of laws
which subsidize and guarantee high levels of profits for the pharmaceutical industry (no governement price negotiation, transfer pricing, overseas profits, etc)

a classy guy!

[Dave Schuler]

Don't forget the largest subsidy pharmaceutical industry receives, jamzo: patents.

[James Killus]

Steve,
The "lockbox" proposal was a straightforward attempt to keep the Social Security surplus from being looted, which is to say that when Republicans say that SS is "in trouble" they want to "reform" it out of existence. When Democrats say that SS is in trouble, they mean that Republicans want to steal all the money as they "reform" it out of existence.

These are different views of what constitutes trouble, and should be noted as such.

[Steve]

James,

Bill Clinton was big on social seucrity reform, not social security protection or social security maintenance. See below:

Link

[anne]

Steve:

"Personally, I think Bernanke is on the right track by refusing to answer questions about fiscal policy. It's certainly much more desirable than his predecessor who was more than happy to give his opinion on pretty much anything, even if it wasn't his place, which I would say is true with regard to fiscal policy. I think Bernanke does a much better job than Greenspan of maintaining the independence of the Fed and I'm glad to see that."

Agreed completely. I do like your approach better than my gumbling. You make grumbling unnecessary. Here we have Alan Greenspan from a neutral fiscal policy perspective, but no more or less worrying than Alan Greenspan. Nice.

[billy]

The way I see it there are two questions here. #1. Is there a problem with SS and Medicare and #2? If there is, what do you do about it?

SS & Medicare, huh? That says a lot.

Bill Clinton was big on social seucrity reform, not social security protection or social security maintenance.

Right. Here is Clinton, quoted from your own Clinton link
"I have a simple four-word answer: save Social Security first," Clinton said, proposing to funnel "every penny" of the projected federal budget surplus, if needed, to keep the retirement program solvent for baby boomers.

His proposal brought bipartisan applause, though some Republicans want to use the windfall to cut taxes.

Is that the same as what the rightwing Republican & conservative thugs today push as "reform" ?

[anne]

Understood; but the comfort is knowing the House of Representatives is just not going to give way on Social Security or Medicare.

[Movie Guy]

Ben Bernanke's testimony today before the Senate Budget Committee is part of larger effort by Senator Conrad, its chairman, and the committee to discuss and review the long term outlook for a full range of considerations.

Senate Budget Committee
http://budget.senate.gov/

Senate Budget Committee Hearing Schedule
http://budget.senate.gov/democratic/hearingstate.html

January 11, 2007 at 10:30 AM: The Long-Term Budget Outlook
The Hon. David M. Walker -- Comptroller General of the United States

January 18, 2007 at 10:00 AM: Long-Term Economic and Budget Challenges
The Hon. Ben S. Bernanke -- Chairman, Board of Governors of the Federal Reserve System

January 23, 2007 at 10:00 AM: The Growing Tax Gap and Strategies for Reducing It
- Robert S. McIntyre -- Director, Citizens for Tax Justice
- Michael Brostek -- Director of Tax Issues, Government Accountability Office
- John Satagaj - Sm. Business Legislative Counsel, Small Business Tax Compliance & Fairness Coalition

Those who have expressed disapproval of Bernanke's testimony may not care to review or embrace the concerns expressed by David Walker, GAO Comptroller, in his January 11 testimony before the committee. But for those interested, I recommend a read of that testimony which includes charts. The outlook is not pretty.

David M. Walker -- Comptroller General of the United States
Long-Term Budget Outlook
January 11, 2007
http://budget.senate.gov/democratic/testimony/2007/Walkers%20Long-term%20Testimony.pdf

Having read Ben Bernanke's October 4, 2006 speech delivered to the Washington Economic Club (which was cited and linked in Bernanke's written testimony today), I recommend a read of that text as Ben did a good job of addressing his concerns and recommending solutions. I'm not sure why he didn't pull more material from that speech for the committe testimony appearance.

Here's the speech:

Remarks by Chairman Ben S. Bernanke
Before The Washington Economic Club, Washington, D.C.
October 4, 2006
http://www.federalreserve.gov/boarddocs/speeches/2006/20061004/default.htm

Ben explains:

"The outlook for Medicare is particularly sobering because it reflects not only an increasing number of retirees but also the expectation that Medicare expenditures per beneficiary will continue to rise faster than per capita GDP. For example, the Medicare trustees’ intermediate projections have Medicare spending growing from about 3 percent of GDP today to about 9 percent in 2050--a larger share of national output than is currently devoted to Social Security and Medicare together."

"The fiscal consequences of these trends are large and unavoidable. As the population ages, the nation will have to choose among higher taxes, less non-entitlement spending, a reduction in outlays for entitlement programs, a sharply higher budget deficit, or some combination thereof. To get a sense of the magnitudes involved, suppose that we tried to finance projected entitlement spending entirely by revenue increases. In that case, the taxes collected by the federal government would have to rise from about 18 percent of GDP today to about 24 percent of GDP in 2030, an increase of one-third in the tax burden over the next twenty-five years, with more increases to follow. (This calculation ignores the possible effects of higher tax rates on economic activity, an issue to which I will return later.) Alternatively, financing the projected increase in entitlement spending entirely by reducing outlays in other areas would require that spending for programs other than Medicare and Social Security be cut by about half, relative to GDP, from its current value of 12 percent of GDP today to about 6 percent of GDP by 2030. In today’s terms, this action would be equivalent to a budget cut of approximately $700 billion in non-entitlement spending."

"Besides tax increases, spending cuts, or reform of the major entitlement programs, the fourth possible fiscal response to population aging is to accommodate a portion of rising entitlement obligations through increases in the federal budget deficit. The economic costs and risks posed by large deficits have been frequently discussed and I will not repeat those points today. Instead, I will only observe that, among the possible effects, increases in the deficit (and, as a result, in the national debt) would shift the burden of paying for government spending from the present to the future. Consequently, the choices that fiscal policy makers make with respect to these programs will be a crucial determinant of the way the economic burden of an aging population is distributed between the current generation and the generations that will follow."

[pgl]

Billy - thanks for the link to Brad S. I featured this along with Dean Baker over at Angrybear (with a bit from Mark to break it up a bit).

[Steve]

billy,

The issue being debated is not the merits of reform plans, but whether or not there are Democrats who believe Social Security is in trouble.

Bill Clinton made it very clear that his position was that Social Security could not survive in its present state.

Are you suggesting that wasn't his position?

[calmo]

A good grumble is worth a carefully constructed delivery. Sometimes more.
Listening to a NPR news clip of a segment of the actual BB speech gives me the impression that honesty is with the grumblers.

[fiskhusjim]

The single greatest entitlement program in this country - and the one that is causing the greatest threat to financial stability - is the Pentagon Procurement Process.

War, especially a war of choice that yields benefits only for a very few of the American people, is a far greater threat to the continued existence of this country than arranging health, safety and security for our citizens.

[Steve]

billy,

To help answer your question, consider this:

"Social Security will run out money in 35 years, Medicare in 16 years. " -- Bill Clinton, March 30, 1999

[maria]

We were told by reputable economists that Bernanke was "OK." I begin to doubt that with his saying SS needs to be "fixed." Medicare is sure to be a problem, however. And what will the US do? I would guess nothing really until the sh*t hits the fan and then the Congress will do whatever is politically expedient and blame it all on the sitting President. Fasten seatbelts; rough times ahead.

[anne]

Steve:

"Bill Clinton made it very clear that his position was that Social Security could not survive in its present state."

Thank you for being kind, I do appreciate that. Now, back to grumbling. As with the war in and occupation of Iraq, I will actively work against any candidate who does not support leaving Iraq. I will actively work against any candidate who in any way cuts Social Security or Medicare or raise taxes for either program.

I could care less what Bill Clinton once thought or did not think about Social Security or Medicare, and for the sake of Hillary Clinton the thinking had better be protect both programs and stay away from additional taxes for either.

Worried about the budget, leave Iraq immediately.

[anne]

No problem; leave Iraq immediately and there we have $170 billion a year to assist states in building to a national health care program. Massachusetts, California, New York, Vermont, Maine, and more and more states will readily follow in a revenue sharing program.

[Bruce Webb]

Bear with me here.

Any proposal to cut future benefits that does not also have a private account component is not when analyzed really a threat at all to Social Security. Bush promised not to cut benefits of current retirees nor of retirees about to retire. This not only was the only way to not make Social Security "reform" not immediate political suicide but was built into the original 1983 Cato plan as outlined in Butler and Germanis. You can expect it or some version to be in any "reform" proposal they put forward.

Assuming that all benefit cuts are scheduled for retirees retiring at some point four, five, ten years down the road, all that you do is hasten the day that they have to acknowledge solvency. The only way to actually attack Social Security is to find a way to hijack the revenue stream.

Now to the the extent that this simply resulted in a diversion in FICA from Social Security to Medicare this might even be an optimal outcome. As the numbers are actually running Social Security may well be in surplus forever and Medicare does face a real, though highly exagerrated, income gap going forward.

Only if they find a way to actually transfer the current surplus to the General Fund permanently (i.e. and not credit the Trust Fund with the equivalent in Special Treasuries) is anything really put at risk. And that of course would be a straight out theft and would be seen as such.

As long as we can keep private accounts out of the mix Social Security Reform is a paper tiger. Legislative changes in benefits can be reversed and if current surpluses continue would be.

Future benefit cuts that don't effect total income only serve to change the Trust Fund Ratio faster and make outright assault on Social Security less likely.

Actually we could have a fruitful discussion on scheduled benefits and their appropriate level going forward, but only after we demonstrate solvency. Future benefit cuts move around future chairs and can always be rearranged. The real danger is in the here and now and the income stream.

There is a reason why payroll tax increases were taken off the table as a solution right off the bat. There was a danger that workers would do the math and say "okay". That is if you accept Intermediate Cost assumptions and think 100% of scheduled benefits is in fact the optimal and fair level then payroll increases are the way to go. As it turns out I don't accept Intermediate Cost and expect that current levels of FICA will adequately fund Social Security going forwards.

But the fact is that if we can protect the income stream future benefits will take care of themselves. No diversion, no problem.

[billy]

To help answer your question, consider this:

"Social Security will run out money in 35 years, Medicare in 16 years. "

Right. What else is knew? That's why I posted the Setser link.

I think you are peddling something here.

[Steve]

Worried about the budget, leave Iraq immediately.

Anne,
If you were expecting an argument from me over this statement, I'm afraid I cannot oblige.

[anne]

No argument with you, Steve. Do not for a moment think so; the argument is generic and I expect the Democratic House of Representatives will be sympathetic. Health care costs are and will be a problem, but manageable. My complaint will be that we can choose in a politically significant way.

Thanks for the reference, which I have filed and will read, Steve. Do not think argument with me. I can easily build around your points; and, I like and trust Bill Clinton in any event.

[billy]

"Social Security will run out money in 35 years, Medicare in 16 years. "

Actually there is a simple solution to the problem - let's raise the income tax today to "pre-fund" what the General Fund needs 35 years in future.

After all, the problem is that there wont be General Fund money to pay the SS debt at that time, right?

[kthomas]

In the words of H. Ross Perot, it's time to pay the piper, people.

Especially you greedy little baby-boomers.

[bakho]

There apparently is going to be another SS fight. We will win this one, too. Democratic Senators should be mindful that energy and time spent beating back attempts to privatize and destroy SS is energy and time that could be put to better use. I would hope that Pelosi would "just say no" so it doesn't waste any more time.

SS changes are DOA as long as Bush is president.

[knzn]

Fixing the health care system comes under the general "third category" of making government spending more efficient -- a method that is often suggested for improving fiscal conditions (particularly by people who are trying to get elected and want to avoid talking about the more unpleasant options). In general, I am in favor of such efforts but skeptical about how much they can save, and it is no different with health care (except that the problem is bigger).

[anne]

"Especially you greedy little baby-boomers."

Like my parents? That what your thinking? Like my parents? That is why Democrats will allow nothing to happen to Social Security or Medicare and there will be no problem at all.

Worried about greed? Leave Iraq immediately. My parents want to. Lots and lots of our parents want to. Worried about greed? No problem; leave Iraq immediately.

[James Killus]

Sure, kthomas, especially we "greedy little baby boomers' whose retirement taxes have been running surpluses for the past 20+ years. Or those of us who thought we had pensions, only to have corporations and the courts renege on the deal, while the people who made the decisions (and made those contracts) got golden parachutes. Or those of us who thought we had health insurance until somebody decided that it was a "pre-existing condition" and wasn't covered.

"Pay the Piper?" Yeah, we used to have a saying about the little rat-faced Piper. "Up against the wall, mo..." Well, you can fill in the last part for yourself.

[anne]

"No problemo," really. The Terminator is being a Roosevelt Democrat, and Democrats understand what this means. Can you ever imagine Charles Rangell damaging Social Security or Medicare? Nancy Pelosi? Please.

"Hasta la vista, Baby."

[calmo]

So Pelosi's first test and I hope she is listening to bakho's buckets of confidence and faith in those Dem Senators.
Right U B fisk, but how many believe that the Pentagon Procurement is necessary to keep Satan in his place, that above all, we must win something and figure out a way to pay for whateveritwas later? How many have this articulated for them by ex-Olbermann TV?
Good to hear your voice of reassurance Bruce, but not a critical word for BB? Maybe that is the superior strategy: ignore the provocative not-so-independent Fed Chairman as he performs what amounts to only a B grade rendition of the empty cabinet shuffle.

[kthomas]

Please forgive my assertion that all baby boomers are greedy. It was rude.

But are not most of the executives in charge these days (our President included) the very people in charge of all those lovely insitutions that have fleeced so much wealth out of their respective companies? Who voted for these people, I wonder?

History is already frowning on this generation of thieves and kleptocrats. Now that they run the country, they refuse to see the financial mess they are leaving the next generation of Americans.

Greed is good for them, not anyone else.

[anne]

K Thomas, agreed completely, and there is a kind of greed and denial about that needs to be looked to ever so closely. David Cay Johnston wrote a while ago of relatively less charitable giving among the richest. Why this should or could be is not clear, however.

[billy]

Greed is good for them, not anyone else.

Greed is good for the thieves and kleptocrats and their children. It will be bad only for the rest of the next generation and their boomer parents.

That's the subtle difference that gets lost in generational divisions.

Don't ever believe the snake-oil peddled about "this generation" and "next generation" - as if everyone in a generation are equally affected by the choices.

[Movie Guy]

Bruce Webb - ...Medicare does face a real, though highly exagerrated, income gap going forward."

Can you go into more detail on this point, Bruce?

If you will, please include in any discussion your expectations for Medicaid funding needs in the future.

MG

[Bruce Webb]

MG.

Medicare income projections are based on Intermediate Cost assumptions and so are biased to the low side.

Medicare at one point was projected to go to Depletion by 1999. That date is now 2016. There is a reason that date is moving. It really is up to those who push 'crisis' to provide an explanation for why that positive movement cannnot continue.

Insert honest economic numbers, particularly for productivity, and income numbers can, do and in my opinion will move and in a positive way. After all they have for a decade.

[Bruce Webb]

As for "greedy boomers" someone needs to buy a calender. In 2041 the youngest Boomers will be 77 the oldest 96. Which is to say that we will have paid pretty much full freight for our retirement.

Unless of course our kids and grandkids just refuse to repay the loans we gave them in the form of Special Treasures.

Kind of an odd definition of 'greed': 'expecting the Treasury to repay the money they legally owe'.

Look a narrative that made sense when Social Security depletion was projected for 2023 loses its impact when that is moved out to 2041. If you can use a calender.

[donna]

Maybe if we quit subsidizing the oil companies and defense contractors, we could afford to take care of our citizens...

Nah. Republicans would hate that.

[billy]

As for "greedy boomers" someone needs to buy a calender

That's unfair. You are using reason.

The "greedy boomer" is a fantasy character like the "fifth column leftist", the "national security Republican" and the "fiscally responsible conservative". It's not fair to bring calculators and calendars into fairy tales.

[calmo]

Is this useful to blame a demographic slice (boomers) for a characteristic (greed) that is not contained by any particular age group? (Lets dig up Mother Terresa and give her a good lashing she won't forget...)
Is it misplaced in another way: family transfers of wealth?
This is one of the gentlest things ever to spring from the Webb postKind of an odd definition of 'greed': 'expecting the Treasury to repay the money they legally owe'.

[ilsm]

Bernanke's comments were seriously slanted in the reporting.

He did, as Movie Guy points out, say the Medicare situation is sobering.

The press it seems has lumped SS and medicare together.

This is becuase it is feasible to talk this way and save both while not fixing the broader issue which is medical care in general takes too much, 15-16% of GDP.

Medicine in the US stays broken and SS pays for the continued pillaging by the medicine industrial complex.

Krugman will likely weigh in here.

[anne]

What matterts is that House Democrats know that cutting Social Security or Medicare would cost them the coming election, which it would if they were so foolish. Democrats however will not be fooled again. Fear-mongering Republicans will try to trap Democrats, but the answer is simple. Let Republicans push the President to leave Iraq immediately and poof there like magic is all the money we need for all we need. Poof, leave Iraq immediately.

[anne]

Understand, Republicans have done all that was possible to deny that there is a cost to Iraq, any cost. I listen to lunatics from the American Enterprise Institute tell us how cheap cheap cheap the occupation of Iraq is while Linda Bilmes and Joseph Stiglitz are sneered at for telling the truth about the horrid cost. So, when budget comes up what is coming up is Iraq which is why there is such a fear that we will come to understand what Iraq has truly cost us beyond part of our soul.

[anne]

http://select.nytimes.com/2006/10/24/opinion/24kristof.html

October 24, 2006

Iraq and Your Wallet
By NICHOLAS D. KRISTOF

For every additional second we stay in Iraq, we taxpayers will end up paying an additional $6,300.

So aside from the rising body counts and all the other good reasons to adopt a timetable for withdrawal from Iraq, here's another: We are spending vast sums there that would be better spent rescuing the American health care system, developing alternative forms of energy and making a serious effort to reduce global poverty.

In the run-up to the Iraq war, Donald Rumsfeld estimated that the overall cost would be under $50 billion. Paul Wolfowitz argued that Iraq could use its oil to "finance its own reconstruction."

But now several careful studies have attempted to tote up various costs, and they suggest that the tab will be more than $1 trillion — perhaps more than $2 trillion....

[elvis]

David Cay Johnston wrote a while ago of relatively less charitable giving among the richest.

Just have to add my 2 bits of experience. Many years ago delivering papers along route from Detroit across Mac Ave. into Grosse Pointe (very rich sub) all the way down to the lake (the richest).

Come Xmas time, many customers would give small gifts. That feeling of Xmas cheer ended where the real wealth began. To quote my mother, "The wealthy got that way because they hold onto it."

[kthomas]

Anne

Bush is a nation-builder. And History's first Great Decider.

[anne]

http://www.nytimes.com/2005/12/19/national/19give.html?ex=1292648400&en=83c752fafe5c479d&ei=5090&partner=rssuserland&emc=rss

December 19, 2005

Study Shows the Superrich Are Not the Most Generous
By DAVID CAY JOHNSTON

Working-age Americans who make $50,000 to $100,000 a year are two to six times more generous in the share of their investment assets that they give to charity than those Americans who make more than $10 million, a pioneering study of federal tax data shows.

The least generous of all working-age Americans in 2003, the latest year for which Internal Revenue Service data is available, were among the young and prosperous - the 285 taxpayers age 35 and under who made more than $10 million - and the 18,600 taxpayers making $500,000 to $1 million. The top group had on average $101 million of investment assets while the other group had on average $2.4 million of investment assets.

On average these two groups made charitable gifts equal to 0.4 percent of their assets, while people the same age who made $50,000 to $100,000 gave gifts equal to more than 2.5 percent of their investment assets, six times that of their far wealthier peers....

[bakho]

Time to write the senator a note: www.senate.gov

[Movie Guy]

Those who have dished Bernanke's concerns must be working off of a short list of future concerns.

[Michael Cain]

Medicare is sure to be a problem, however.

Yes, although it is telling that the same numbers that make Medicare a really serious problem also project that health care will be over 30% of GDP. It seems unlikely to me that the latter can actually happen (although I admit that I am surprised that we have managed to reach the current level). Something will effect cost containment, simply because we are not and are unlikely to become rich enough that the households can afford to spend that much of their income on health care. Given cost containment, the growth of Medicare at an exponential rate higher than that of the economy as a whole will disappear.

[elvis]

Those who have dished Bernanke's concerns must be working off of a short list of future concerns.
It seems to me that Bernanke is also working off a short list. There are a lot of concerns out there in the future.
Such as....
1. The Energy Dept. authorized some research to be done into a geological event that may take place sooner than Social Security runs into trouble.
Dept. Of Energy Report (pdf). One would think the Fed and all interested in the Economy would sit up and take note.

2. He makes little mention (no mention?) of military spending increases.

Because BB (King) sings the blues about SS and Medicare (only) and at this time (not previously), it seems to me that BB is merely restating (with more polysyllabics) what Bush said after his party "took a thumpin": "Don't make me raise taxes! Don't! You mean-spirited unpatriotic socialist herds!"

I could be wrong, sure. At least BB didn't mention private accounts.

[maria]

Elvis:

The really rich in the USA usually want lots of deference when they give. They like to put their name on buildings, or whatever, to elevate their "honor" and reputation. Giving a nice gift to the paperboy doesn't put their name in the papers or on a building, so they aren't much interested in doing it.

[anne]

http://www.prospect.org/deanbaker/2007/01/the_social_security_trust_fund.html

January 18, 2007

The Social Security Trust Fund
By Dean Baker

Since the “entitlement” cutters seem to be on the warpath again, it might be time for another sermon on the Social Security trust fund. This one really should not be hard, but I am afraid that that there are many powerful people with a vested interest in creating confusion, and they have succeeded.

In 1983, Congress (following the recommendation of the Greenspan commission) deliberately raised the Social Security tax far above the level needed to pay current Social Security benefits. This led to a large surplus. Under the law, this surplus must be used to buy U.S. government bonds. Also, under the law, the bonds held by Social Security are liabilities of the federal government, just like any other bonds. When the program needs the money from the bonds to pay benefits, it can rely on the interest and eventually the principle from these bonds, just like any private pension or individual.

Note, that there was never any rule that any Social Security only gets government bonds if the government runs a surplus. In other words, from the standpoint of Social Security, it matters not an iota that the government has mostly run deficits for the last quarter century. This may have been bad policy, but it doesn’t affect the size of the trust fund.

The most recent projections from the non-partisan Congressional Budget Office show that Social Security will have enough money between projected taxes and the bonds in the trust fund to pay all benefits through the year 2046, with no changes whatsoever.

This is very important to understand when someone like Federal Reserve Board Chairman Ben Bernanke proposes cuts to Social Security. Workers have already paid for these benefits. The Social Security tax is very regressive. Its regressivity can be justified by the progressive payback structure of the program. However, if the benefits are cut, at appoint when the program can still easily afford the benefits (e.g. 10-20 years), then the government has effectively stolen from the people who paid Social Security taxes.

There are many people who want to do this – effectively default on the government bonds held by the Social Security trust fund....

[Cent21]

Regarding the argument that it is greedy boomers that are "the problem" and reforms to cut future obligations will fix that - every reform that any politician has put forward has called for, at most, a gradual shift away from indexing to wages to indexing to inflation.

Translation - a few boomers at the tail end, retiring 20 years from now, might lose at most 10% of SS benefits. Everyone younger than the youngest boomers would lose more benefits than any boomers, with the loss increasing every year.

I was concerned that Bernanke considers the public debt to be the only thing that matters. That implies the interest accruing on the SS trust, because it does not affect current cash flow, is meaningless.

I wonder what Bernanke's opinion of savings bonds and other types of zero-coupon bonds is? For example, if a corporation issues zero-coupon bonds, does that record both an asset and a liability, or just an asset?

[cm]

anne: "Its regressivity can be justified by the progressive payback structure of the program."

Huh? I was under the impression payouts were also regressive -- when you pay in twice, you are going to get less than twice what the other guy does.

[cm]

Cent21: Careful there -- that may be me you are talking about! They guys who are supposed to get the shaft that is.

[Bruce Webb]

"In 1983, Congress (following the recommendation of the Greenspan commission) deliberately raised the Social Security tax far above the level needed to pay current Social Security benefits. "

Dean Baker is the Man! He was right on this issue early and often and anyone who hasn't read the introduction to Social Security: The Phony Crisis probably does not know what the hell he is talking about.

Then again the above quote is profoundly misleading. The 1983 Social Security tax increase was not "far above the level needed to pay current Social Security benefits". If it was "far above" you would have expected the Trust Fund Ratio to rapidly rise above 100%. Trust Fund Ratio Explained. The Trust Fund ratio is the Social Security Trust Fund expressed as a function of time. How much reserve is in the fund at any point in time if income simply ceased.

By law the Trust Fund is only in actuarial balance if it has a Trust Fund ratio above 100, that is has at least a year in reserves. If anyone would care to consult table VI.A4 Historical Operations of the Combined OASI and DI Trust Funds, Calendar Years 1957-2005 you would see that the Trust Fund did not achieve that modest goal until 1993, and that the balooning of that ratio to 318 in 2005 was the result of the unanticipated economic expansion of the 1990s.

Moynihan/Reagan picked a FICA rate increase designed to put the Trust Fund in actuarial balance given a mid-range economic performance. In other words they acted to preserve pay-go. The fact that the Trust Fund is so healthy today is more or less an artifact of history, the economy did in fact operate at the top end of the scale imagined in 1983. But if you revisit 1983 and plug in the mid-range assumptions the Trust Fund would be puttering along at about a 100 Trust Fund ratio, which is to say pay-go with a prudent reserve.

Dean is the Man. And PGL is a stalwart. But on this one they are missing the boat. It was never about pre-pay, it was always about pay-go, the currently bloated Trust Fund was never part of the plan. It just happened.

[anne]

CM

"Its regressivity can be justified by the progressive payback structure of the program."

Not my quote, and not my thought :)

[Callahan]

I thought Bernie Sanders (Indpendant from Vermont) asked the better questions, however the answers were bad.

Don't worry our "leaders" will figger sumpin out. Sure.

[Callahan]

Cure: Fix (Heal) Healthcare, right now it's enough to make you sick.

[Movie Guy]

I read Bernanke's testimony and followed up by listening to his testimony and Q&A before the Senate Finance Committee on CSPAN. Bernanke's thinking and remarks were certainly not limited to Social Security. His presentation was reasonably well balanced. As he noted, the issue is choices.

As I mentioned, the testimony of David Walker, GAO Comptroller, on 11 January was worth noting. And the next testimony on 23 January focused attention on the Senate Finance Committee's hearing subject of 'The Growing Tax Gap and Strategies for Reducing It'.

While I anticipate no major program changes with Social Security, Medicare, and other entitilement programs, I do believe that the potential budget revenue shortfalls of 2012-2020 as compared to overall budget programs' funding needs will require adjustments in budget planning. It has been reasonably well established that the U.S. is not anticipated to achieve sufficient economic growth enough to cover the anticipated revenues shortfall (with and without curtailment of existing recent tax cuts). While some will clown around and say that no one can prove this beyond a shadow of a doubt, it's time to face the potential budget problems of the next decade.

It is my recommendation that some come to grips with the possibility that some discretionary programs will have to bite the dust unless taxes are spiked through the roof (translation: raised) as Bernanke noted.

So, which discreptionary programs are any readers willing to part company with, beyond those who want to slash the Defense budget? What other federal programs are the readers willing to slash or eliminate? If the answer is "none", then some are living in a dreamworld of nonreality.

The real issue isn't that Social Security Trust Fund or other funds' IOUs are sitting there, but rather acknowledging that the federal budget deficits will soar less other sources of revenues are identified to cover not only entitlement program obligations, but also federal debt interest payment obligations (mandatory obligation) and discretionary programs' needs and desires.

[anne]

Happily, life is too much fun to ever be bothered with Ben Bernanke's testimony, but I am not in the least worried and Social Security or Medicare or Medicaid, only about Republican efforts to destroy the programs which should be an impossibility with the tough Democratic House of Representatives. Democrats will not be fooled by Republicans again.

As for Republican budget-mongers fear-mongering the solution is simple as lemon pie, leave Iraq immediately.

Of course, the point is always always always to leave the tragic lunacy of Iraq immediately in any event. Of course.