Economist's View

"The Truth Behind the Social Security and Medicare Alarm Bells"

Robert Reich reacts to yesterday's report on Social Security and Medicare finances:

The Truth Behind the Social Security and Medicare Alarm Bells, by Robert Reich: What are we to make of yesterday's report from the trustees of the Social Security and Medicare trust funds that Social Security will run out of assets in 2037, four years sooner than previously forecast, and Medicare’s hospital fund will be exhausted by 2017, two years earlier than predicted a year ago?

Reports of these two funds' demise are not new. Fifteen years ago, when I was a trustee of the Social Security and the Medicare trust funds ... both funds were supposedly in trouble. But as I learned, the timing and magnitude of the trouble depended a great deal on what assumptions the actuary used in his models. As I recall, he then assumed that the economy would grow by about 2.6 percent a year over the next seventy-five years. But go back into American history all the way to the Civil War -- including the Great Depression and the severe depressions of the late 19th century -- and the economy's average annual growth is closer to 3 percent. Use a 3 percent assumption and Social Security is flush for the next seventy-five years. ...

Even if you assume Social Security is a problem, it's ... a tiny problem, as these things go. Medicare is entirely different. It's a monster. But fixing it has everything to do with slowing the rate of growth of medical costs -- including, let's not forget, having a public option when it comes to choosing insurance plans under the emerging universal health insurance bill. With a public option, the government can use its bargaining power with drug companies and suppliers of medical services to reduce prices. And, as I've noted, keep pressure on private insurers to trim costs yet provide effective medical outcomes.

Don't be confused by these alarms from the Social Security and Medicare trustees. Social Security is a tiny problem. Medicare is a terrible one, but the problem is not really Medicare; it's quickly rising health-care costs. Look more closely and the real problem isn't even health-care costs; it's a system that pushes up costs by rewarding inefficiency, causing unbelievable waste, pushing over-medication, providing inadequate prevention, over-using emergency rooms because many uninsured people can't afford regular doctor checkups, and spending billions on advertising and marketing seeking to enroll healthy people and avoid sick ones.

The Social Security Obsession

Something to keep an eye on, the "Very Serious People" inside the beltway are at it again:

Lawmakers Seeking Consensus On Social Security Overhaul, by Lori Montgomery, Washington Post: Key lawmakers from both parties have held tentative talks about overhauling the Social Security system, and Congress could turn its attention to the federal retirement program as soon as this fall if a bipartisan consensus emerges...

So far, Democrats have found a willing partner in the Senate, where Sen. Lindsey O. Graham (R-S.C.) has stated his desire to work with President Obama to make changes to keep Social Security solvent. ... Graham said yesterday that he has spoken to Hoyer and Sen. Richard J. Durbin of Illinois, the second-ranking Senate Democrat, about the issue and that he stands ready "as a Republican to more than meet the president in the middle."

"I know what it takes to get a solution," Graham said. "I think we can get double-digit Republican support for a reasonable compromise. But the key to this, at the end of the day, is presidential leadership."

Graham ... sketched out a plan that would include lower benefits for wealthy Americans, a higher retirement age and additional revenues. With the stock market devastated by the recession, the traditional Republican option of diverting Social Security taxes to new private retirement accounts is, he said, "off the table." ...

Hoyer is expected to sketch out a similar plan in a speech today... According to an advance copy of the speech, Hoyer will suggest that Congress could approve "more revenues," "restrain the growth of benefits, particularly for higher-income workers," "and/or we can raise the retirement age, recognizing that our life expectancy is higher today."

"What is missing here is not ideas -- it is political will," the speech says. ...

"Right now energy and health-care bills are the major focus," Hoyer said. But if those issues are finished by the August break, he said, "we could start focusing on . . . Social Security early this fall." ...

"At the end of the day, most Americans would embrace a balanced solution that did not require Draconian impact. They are ready to make some hard decisions for the benefit of future generations," Graham said. "If there were ever a time to do it, it's now."

Remember that the "Beltway obsession with Social Security reflects ideology and fashion, not the real problems facing America." They may think that they can wait until health care reform is completed before turning to this issue, but if they continue to have these meetings and push this agenda, there's a good chance Social Security will become a bargaining chip during the health care debate. However, trading Social Security against health care is not an outcome I'd like to see. There is no pressing need to modify the Social Security program, fairly minor changes will solve whatever problems the program has, and there are many other possible tradeoffs within the budget that could fund a new health care system (on both the revenue and spending sides). But I'm sure conservatives would love the chance to pit these two porgrams against each other as part of the health care reform process.

Entitlement Reform Morphs into Health Care Reform

Ezra Klein says there's little need for worry about the fiscal responsibility summit today, policymakers are finally getting the message that the true problem is rising health care costs in both the public and private sectors, not entitlements. That's good news, but I still plan to keep my eyes and ears open just in case the urge to compromise in order to move things forward threatens to also compromise important social programs:

How Entitlement Reform Became Health Reform, by Ezra Klein, American Prospect: It's testament to how deeply the idea of an entitlement crisis has embedded itself in Washington that news that Obama planned a "fiscal accountability summit" was immediately taken as proof by The Washington Post that he was readying a frontal assault on Medicare, Medicaid, and Social Security.

It was an understandable leap for the paper to make. Fiscal responsibility has, in this town, long been an anodyne synonym for entitlement reform. The "responsible" part signaled that you were courageous enough to cut treasured social programs in service of the national debt. The left, which never bought into this ruthlessly austere vision of responsibility, reacted with a defensive fury. It had just spent eight years protecting the entitlement programs from sharp-knifed "reformers." Would it have to do so again?

Today's "White House Fiscal Summit" ... will feature speeches from the president and vice president and "breakout" sessions... Notice what's not in there: Entitlement Reform.

Its absence is the product of a quiet but powerful change in thinking that has taken place in the offices of elite Washington and, now, the halls of the White House. Where a decade ago the looming fiscal threat of entitlement spending led economists and budget wonks to wear out their worry beads, today a more subtle understanding of our fiscal future dominates. In this telling, there's no such program as SocialSecurityandMedicareandMedicaid. There's Social Security, which ... needs little, if any, help. And then there's health-care reform. "That," says Henry Aaron, a senior economist at the Brookings Institution, "is the big kahuna."

How this happened depends on whom you talk to. Dean Baker ... points to the 2005 Social Security privatization fight. ... That forced left-of-center wonks who'd not thought much about the crisis to confront the numbers...

Aaron locates his light-bulb moment in a paper written by Richard Kogan, Matt Fiedler, Aviva Aron-Dine, and Jim Horney for the Center on Budget and Policy Priorities. He remembers sitting around a table with ... an array of ... economic luminaries while Kogan and Horney presented their findings. "The long-term fiscal outlook is bleak," they wrote, and "rising health care costs are the single largest cause."

Aaron says that the "meeting was sort of a slap-the-forehead moment. I said 'you guys are saying there is no problem other than a health-care financing problem long-term!' Credit goes to them, in my opinion." ...

What everyone agrees on is that the thinking entered government in the person of Peter Orszag. In 2007, Orszag was named director of the Congressional Budget Office. From that perch, he brought Kogan and Horney's thinking to the halls of Congress. Orszag liked to show a particular slide in his public presentations... Government spending and Social Security, it says, will hold relatively constant in coming years. It's Medicare and Medicaid that chew up federal spending.

This graph, however, could be used as evidence for a simple focus on Medicare and Medicaid. The programs are unsustainable. They need to be slashed. The next slide in Orszag's presentation is titled "misdiagnosing the problem." The fiscal threat, it argues, is not more beneficiaries or ... factors internal to Medicare and Medicaid. It's the cost per beneficiary. Orszag has a graph for this, too...

And since Medicaid and Medicare pay for health services on the private market, this can only be fixed through broader health reform. Orszag ... will lead today's "health care" breakout session. Richard Kogan works for him. So it's no surprise that asked for details on today's fiscal summit, one senior administration official told me that "the most likely outcome at this point is that we focus on health care given that it's the key to our fiscal future." Another explained the focus starkly. "Health is mathematically bigger,"... The rumors originally held that eager entitlement cutter Peter G. Peterson would give the day's keynote. Now Robert Greenstein, director of the very think tank that released Kogan and Horney and Cox's paper, will speak.

Fiscal responsibility, in other words, is no longer a stand-in for entitlement reform. In Obama's Washington, it means health reform.

Social Insecurity

Pension system reforms have exposed individuals to too much risk:

Have social security reforms shifted too much risk to individuals? The financial crisis suggests they might have, by Monika Bütler, Commentary, Vox EU: The financial crisis comes right at a time when major reforms to social security systems around the world are evolving. These reforms were primarily initiated to tackle demographic transitions and resolve resulting fiscal imbalances. Measures taken or planned include strengthening employer-based, fully funded occupational pension schemes and full or partial privatisation of social security, often even including subsistence-level provisions. The reforms include more individual choice and greater individual risk.

In many countries, majorities of the populations are directly affected by the turbulence on the capital markets, even those who do not or did not privately own shares, at least in part due to a shift to more funded schemes. The world's pension funds have lost up to 30% or more of the value of their assets. Of the people in funded plans, the financial crisis hit those insured with individual schemes worst. While the older covered by collectively organised systems (such as those in the Netherlands and Switzerland) will feel little impact – perhaps even too little – many people with individual accounts have considerably less pension capital than they did the year before.

"Looting Social Security"

Haven't posted much on Social Security lately, but that may change:

Looting Social Security, by William Greider, The Nation: Governing elites in Washington and Wall Street have devised a fiendishly clever "grand bargain" they want President Obama to embrace in the name of "fiscal responsibility." The government, they argue, having spent billions on bailing out the banks, can recover its costs by looting the Social Security system. They are also targeting Medicare and Medicaid. The pitch sounds preposterous to millions of ordinary working people anxious about their economic security and worried about their retirement years. But an impressive armada is lined up to push the idea--Washington's leading think tanks, the prestige media, tax-exempt foundations, skillful propagandists posing as economic experts and a self-righteous billionaire spending his fortune to save the nation from the elderly. ... This swindle is portrayed as "fiscal reform." In fact, it's the political equivalent of bait-and-switch fraud.

Defending Social Security sounds like yesterday's issue... But the financial establishment has pushed it back on the table, claiming that the current crisis requires "responsible" leaders to take action. Will Obama take the bait? Surely not. ... The program's financing is basically sound, he has explained, and can be assured far into the future by making only modest adjustments.

But Obama is also playing footsie with the conservative advocates of "entitlement reform" (their euphemism for cutting benefits). The president wants the corporate establishment's support on many other important matters, and he recently promised to hold a "fiscal responsibility summit" to examine the long-term costs of entitlements. That forum could set the trap for a "bipartisan compromise" that may become difficult for Obama to resist, given the burgeoning deficit. If he resists, he will be denounced as an old-fashioned free-spending liberal. ...

To understand the mechanics of this attempted swindle, you have to roll back twenty-five years, to the time the game of bait and switch began, under Ronald Reagan.

The Gipper's ... massive tax cuts for corporations and upper-income ranks ... launched the era of swollen federal budget deficits. But their economic impact was offset by the huge tax increase ... imposed on working people in 1983: the payroll tax rate supporting Social Security... A blue-ribbon commission chaired by Alan Greenspan worked out the terms, then both parties signed on. ...

Ever since, working Americans have paid higher taxes on their labor wages--12.4 percent, split between employees and employers. As a result, the Social Security system has accumulated a vast surplus--now around $2.5 trillion and growing. This is the money pot the establishment wants to grab, claiming the government can no longer afford to keep the promise it made to workers twenty-five years ago. ...

Follow the bouncing ball: Washington first cuts taxes on the well-to-do, then offsets the revenue loss by raising taxes on the working class and tells folks it is saving their money for future retirement. But Washington spends the money on other stuff, so when workers need it for their retirement, they are told, Sorry, we can't afford it. ...

The assault sounds outrageous and bound to fail, but the conservative interests may have Obama in a neat trap. Their fog of scary propaganda makes it easier to distort the president's position and blame him for any fiscal disorders driven by the current financial collapse. He will be urged to "do the right thing" for the country and make the hard choices... Obama's fate may depend on informing the public--now, not later...

Quick Note

I will be in Salem, Oregon tonight as part of a discussion of the movie I.O.U.S.A. (details). It's at the Grand Theater, 191 High Street NE at 7:00 p.m.

Social Security and the Budget

Somebody should reassure this poor woman that there is absolutely nothing for her to worry about:

Answers, not IOUs, for Social Security, by David Lazarus, Consumer Confidential. LA Times: Whatever happened to Social Security?

As the Democrats prepare to convene this week in Denver, and the Republicans gear up for their get-together in St. Paul, Minn...., precious little has been said about an issue that touches virtually every American family and, for a brief spell a few years ago, dominated the political agenda.

West Los Angeles resident Marilyn Taylor, 78, is typical of many seniors in relying on Social Security for a significant portion of her income. She told me she received about $1,100 a month from Uncle Sam, which covered about a third of her expenses.

These days, Taylor wonders whether she'll keep receiving her full Social Security payments. ...

That's a pretty misleading introduction to a Social Security story unless your intention is to create undue fear about the program's solvency. The article cites some scary sounding numbers, but that's because the totals are accumulated over so many years. Here's some perspective (which is missing from the article):

If Congress makes permanent the 2001 and 2003 tax cuts without paying for them, the cost over the next 75 years will be about three times the size of the Social Security shortfall over this period.

It's acceleration in health care costs, not Social Security, that is the biggest budget problem going forward.

Since we're on the topic of Social Security and entitlements more generally, Diane Rogers responds to Glenn Hubbard's recent WSJ editorial criticizing Barack Obama's approach to Social Security:

We Can’t Entitle Our Way Out of Paying Taxes, by economistmom: Thursday’s Wall Street Journal contained an opinion column by Glenn Hubbard, arguing that ”We Can’t Tax Our Way Out of the Entitlement Crisis.” Glenn, whom I worked closely with as his resident tax-policy antagonist at the Council of Economic Advisers for the first 100 days of the Bush Administration (my being a staff holdover from the Clinton Administration CEA), uses the column to criticize what seems to be Senator Obama’s tax-heavy approach to entitlement reform (or at least Social Security reform). ...

Immigration, Social Security, and Housing Markets

Dean Baker reports:

Census Bureau Trashes Social Security Trustees Immigration Assumptions, Beat the Press: [Census Bureau Trashes Social Security Trustees Immigration Assumptions] could have been the headline of an article reporting on a new set of projections for immigration from the Census Bureau. According to the article, immigration will rise from its current rate of 1.3 million a year to more than 2 million a year by the middle of the century.

By contrast, the Social Security trustees intermediate scenario assumes that immigration will fall from its current rate to just over 1 million a year by the middle of the century. Even the low cost scenario assumes immigration of only 1.3 million a year by the middle of the century.

A more rapid pace of immigration improves the financial situation of Social Security. If the Census projections prove correct, then close to 30 percent of the projected Social Security shortfall would be eliminated. ...

Speaking of immigration:

Greenspan's Greater Foreign Fool Theory, by Paul Kedrosky: While I agree that it makes sense for the U.S. to increase immigration of skilled workers, I laughed out loud at ex-Fed chair Alan Greenspan's other rationale letting more people into the U.S.:

"The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants." The only sustainable way to increase demand for vacant houses is to spur the formation of new households. Admitting more skilled immigrants, who tend to earn enough to buy homes, would accomplish that while paying other dividends to the U.S. economy.

He estimates the number of new households in the U.S. is increasing at an annual rate of about 800,000, of whom about one-third are immigrants. "Perhaps 150,000 of those are loosely classified as skilled," he says. "A double or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale -- and hence help stabilize prices."

Awesome. Why wait around for sovereign wealth funds to bail the U.S. out when you can simply invite foreigners in and suggest they buy real estate? Alan's soo-oooo clever. [via WSJ]

What are McCain's Plans for Social Security?

Mark Kleiman notes the implications of the McCain campaign's recent statements about taxes and Social Security:

McCain says: "Slash Social Security benefits", by Mark Kleiman: No, that's not a headline you can expect to read. But it's the truth.

Carly Fiorina says that McCain might raise taxes on rich folks as part of a Social Security deal.

Grover Norquist, speaking as the Grand Inquisitioner of the anti-taxers, more or less replies: "Bullsh*t! I wear McCain's b*lls on my keyring!"

Then comes the punchline:

A McCain campaign spokesman told ABC News Monday that McCain continues to oppose any tax increase as part of Social Security reform, notwithstanding Fiorina's comments.

"The lesson of history is that too many specifics at this point polarize the debate, that is the argument Carly was trying to make," Taylor Griffin said. "However, John McCain does believe that we can fix Social Security without raising taxes. As president, John McCain will call on Congress to develop a bi-partisan solution to Social Security — and if they won't, he will."

Three points here:

1. "Too many specifics at this point polarize the debate" translates into English as "If we told the retirees how completely we plan to shaft them, they might not vote for us."

2. The McCain camp seems to have invented a new idea: unilateral bipartisanship. If Congress doesn't come up with a bi-partisan plan, McCain will single-handedly come up with his own bi-partisan plan.

3. Since McCain has now committed to "fixing" the Social Security "problem" without raising taxes, and since the only two ways of getting projected revenues to match projected benefits is to increase revenues or reduce benefits, it follows that McCain is committed to cutting Social Security benefits. And that's before he has to reduce them again to accommodate the diversion of new money into private accounts.

So not only does McCain think that Social Security is "an absolute disgrace," he knows what he wants to do about it: he'll reduce pensions but not increase taxes on the wealthy.

This seems to me like Christmas in July.

First, I don't want to leave the impression that Social Security is a big problem - it's not. Some tweaks may be needed to bring revenue and benefits into alignment, but it's nothing that can't be handled relatively easily according to current projections.

But McCain believes there is a problem despite the projections (otherwise why would he be talking about fixing it?), and his plan for dealing with it appears to be to cut benefits (I count increasing the retirement age as a cut in benefits and, since you work and pay taxes for more years than before, an increase in taxes as well, so is he ruling this out?). Whether the problem is real or not, his choice of how to deal with it is telling.

Then here's the question. Why hasn't the Obama campaign opened their Christmas gifts and made use of them? Why haven't they gone after McCain's "disgrace" remark regarding Social Security? Have they said anything at all about that? Why haven't they hammered away at some of his statements and the inconsistencies surrounding them about carve-out privatization plans? Will they do anything with the implication identified above that McCain must be planning to cut benefits? Why so much silence from the Obama campaign on the Social Security issue?

A Disgrace?

Dean Baker:

For folks not familiar with Social Security, it is the country's biggest social program. It costs over $600 billion a year (20 percent of the federal budget) and has 50 million beneficiaries.

At a forum on Monday, after wrongly claiming that Social Security won't be there when young workers retire, McCain went on to say:

"Americans have got to understand that we are paying present-day retirees with the taxes paid by young workers in America today. And that's a disgrace. It's an absolute disgrace, and it's got to be fixed." [Transcript available from Congressional Quarterly]

Of course present-day retirees have always been paid their benefits from the taxes paid by current workers. That has been true from Social Security's inception.

Some folks might have thought Senator McCain's description of Social Security as a "disgrace" was worth a mention somewhere in the media, but the NYT, Washington Post, WSJ, and USA Today don't seem to have noticed. It's not like he said "bitter."

hilzoy:

I was watching CSPAN yesterday, while I was eating dinner, and who should I see but John McCain. And he said the most extraordinary thing. It's the second paragraph of the excerpt that follows; I've included the rest so that you can see that there was no context that made it seem more reasonable...

Let me repeat the astonishing bit: "Americans have got to understand that we are paying present-day retirees with the taxes paid by young workers in America today. And that's a disgrace. It's an absolute disgrace, and it's got to be fixed."

The fact that we are paying present-day retirees with the taxes paid by workers, young or otherwise, is not a disgrace, or a scandal, or a new development. Social Security has been funded this way since its inception.  ... This is not a disgrace; it's the way the system operates. And it's certainly not a sign that we've mortgaged our children's futures, or that something has to be fixed.

One interpretation of this statement would be that McCain is being deceptive: trying to make a straightforward feature of Social Security seem like a scary new problem, in order to gin up support for his nonexistent plans to fix it. I tend to think that he just doesn't know how Social Security works. (This would explain why he doesn't see the problem with privatizing the system: the need to pay a generation's worth of transition costs.) However, it doesn't really matter which explanation is right: either one ought to be close to disqualifying. ...

More hilzoy:

Just one day after releasing an economic plan (pdf) that said that "John McCain supports supplementing the current Social Security system with personal accounts" (p. 5), McCain repeated his earlier claim that "I want young workers to be able to, if they choose, to take part of their own money, which is their taxes, and put it in an account which has their name on it."

Supplementing Social Security with private accounts is one thing. Allowing workers to divert their FICA taxes into private accounts is another. The first just gives workers more options; the second guts Social Security's funding. These are very, very different proposals. Unfortunately, McCain doesn't seem to understand the difference, perhaps because he doesn't understand how Social Security works.

And there's this:

Now, before you think, "Wow, that must be a slip of the tongue, he can't possibly mean that," please note that McCain said essentially the same thing to John Roberts on CNN this morning. ...

This is not the first time that McCain has hinted that he will follow in Bush's Social-Security-dismantling footsteps. In a Wall Street Journal interview published in March, he made his intentions explicit:

"I'm totally in favor of personal savings accounts," [McCain] says. When reminded that his Web site says something different, he says he will change the Web site. (As of Sunday night, he hadn't.) "As part of Social Security reform, I believe that private savings accounts are a part of it—along the lines that President Bush proposed.

(Months later, McCain still hasn't changed his website.)

Does McCain really think he can get away with having two different Social Security plans? Well, as ThinkProgress has pointed out, McCain was denying his history of supporting private accounts just last month. It seems he just can't make up his mind. But perhaps having two different positions makes political sense—especially if one of them has already failed.

It's becoming clear that McCain simply reads what's on the cards (and not very well), but he really doesn't get the finer details of policy and is thus susceptible to confusion, misdiagnosis, and to bad suggestions from those around him. Haven't we had enough of that over the last seven and a half years?

Update: Paul Krugman on McCain's knowledge of policy, doomsaying about Social Security as a badge of seriousness in Washington, and taking bad advice:

A disgrace, all right

Dean Baker points us to John McCain...

I’d guess that there are three things going on here.

First, McCain has no idea how Social Security works. That may sound hard to believe, but not to anyone who has spent any time in or around the federal government. Politicians, by and large, get where they are mainly by looking and sounding good; this may or may not go along with any actual understanding of governing.

Second, McCain lives in the Washington bubble; and as I wrote a while back,

Inside the Beltway, doomsaying about Social Security — declaring that the program as we know it can’t survive the onslaught of retiring baby boomers — is regarded as a sort of badge of seriousness, a way of showing how statesmanlike and tough-minded you are.

Finally, McCain has surrounded himself with people who hate Social Security. They probably tell him that it’s a doomed Ponzi scheme, and he believes them.

Kevin Drum notes McCain also spouted the usual tax cuts are self-financing nonsense. If he doesn't know this claim is false by now, he's not qualified to set economic policy. And if he does know it, and he must, what does it say about his character that he is willing to say it anyway?:

John McCain ... sure seems to think [Social Security's] funding mechanism is a disgrace, and last night he repeated himself... This is nuts. McCain is talking as if he just figured out that this is how Social Security works and he's scandalized by it. ...

But you want something even scarier? In the very same interview, McCain serves up the supply-side full monty to CNN's John Roberts: "You can't get over the fact that historically when you raise people's taxes, revenue goes down," he said. "Every time we cut capital gains taxes, there has been an increase in revenues." The second half of this statement is flat out wrong, and the first half is so wrong that we need a new name for it. This is Jonestown levels of Koolaid drinking.

But maybe we're being unfair. After all, 300 economists signed a letter enthusiastically supporting McCain's economic plan. Or did they? Kevin Drum again:

This is amusing. A couple of Politico reporters called some of the 300 economists who "enthusiastically support" John McCain's "Jobs for America" plan and found that their support was somewhat less enthusiastic than advertised:

In interviews with more than a dozen of the signatories, Politico found that, far from embracing McCain's economic plan, many were unfamiliar with — or downright opposed to — key details. While most of those contacted by Politico had warm feelings about McCain, many did not want to associate themselves too closely with his campaign and its policy prescriptions.

....Constantine Alexandrakis, a professor at the University of Massachusetts-Dartmouth, expressed second thoughts about signing. "I would describe myself as an Obama supporter," he explained. "Maybe I shouldn't have rushed into signing the letter."

Maybe he shouldn't have! As for the others, it turns out that they merely signed on to a brief statement of intent (low taxes, low spending, free trade, etc.), not the 15-page number-free plan that McCain released on Monday. So there's no telling how much of his plan they actually support. ...

Somebody who's not me ought to start dialing up the other 280+ signatories and find out just how much of McCain's plan they really support. Do they think the current Social Security funding mechanism is a disgrace? Are they in favor of a gas tax holiday? Do they think his multi-trillion tax cut will increase revenues? Inquiring minds want to know.

Is McCain Confused?

Is McCain confused about what he has said in the past, or is he being less than truthful about his previous position on Social Security privatization?:

“Without privatization..." by Cliff Schecter: This is what John McCain said regarding Social Security on November 18, 2004 on C-SPAN's Road To The White House ["...Without privatization, I don't see how you can possibly, over time, make sure that young Americans are able to receive Social Security benefits"]. Why am I telling you this? Because today during a back and forth with an elderly gentleman he said this:

"I am not for privatizing Social Security. I never have been. I never will be."

In other words, here we go again. Honestly, does anyone really believe this guy is a straight-talker anymore? How many more examples of his absolute willingness to say or support anything at any given time do we need?

Ok, you need more? You got it. Here is McCain from March of this year on at least partially privatizing Social Security:

"As part of Social Security reform, I believe that private savings accounts are a part of it – along the lines of what President Bush proposed." [Wall Street Journal, 3/3/2008]

Once again, case closed. McCain has conveniently changed what he believes, because that's just what "straight-talking mavericks" do.

I guess he forgot that he voted for Bush's 2006 Social Security privatization plan.

Here's more "confusion" (this is just two things from today, it's not an exhaustive list by any means). This is part of a discussion of a report from the Tax Policy Center comparing the economic plans of the two candidates. (The report has a graph showing the impact of the plans across the income distribution. Guess which plan is more beneficial to the wealthy, McCain's or Obama's? To the working class?):

Obama And McCain On Taxes, by hilzoy: ...One more interesting note: the Wonk Room points out that this report attributes to McCain some positions that are at odds with his web site and what he's said in the past -- as recently as the day before yesterday, in fact. Most notably, McCain's website says that "John McCain will permanently repeal the Alternative Minimum Tax (AMT) – a tax that will be paid nearly exclusively by 25 million middle class families." The TPC report, by contrast, says: "Senator McCain proposes to extend permanently the AMT "patch" that has prevented most individuals and families with incomes below $200,000 from being affected by the tax."

This is a big difference. ...

The Tax Policy Center consulted with both campaigns before writing this report. If what they say is accurate, then McCain has changed an important part of his tax policy, but neither his website nor (apparently) McCain himself as of two days ago have caught up with this fact. On the other hand, if the TPC is wrong, and McCain does plan to repeal the AMT, then the TPC's estimates of the cost of his tax plans need to be revised as well.

According to the CBPP, the difference between amending the AMT to exclude people with incomes under $200,000 a year and repealing it altogether is over $50 billion dollars a year. Since the CTP estimates the cost of the candidates' tax plans over a ten year period, if they're wrong about what McCain thinks, we'll just have to tack another half a trillion dollars onto their estimate of his plan's cost.

Confusion and reckless profligacy, or no confusion and even more reckless profligacy? We report; you decide.

Maybe it's just an old guy getting confused on a variety of issues, but it's starting to look like more than that. Social Security was and is a huge political issue. The chance that he is confused about or has forgotten positions he has held in the past is just not credible unless age has started to take its toll. He either knows what he said in the past and intentionally said something else to please a voter, or he can no longer remember crucial details about key issues that happened relatively recently. Either way, it raises big questions.

He deserves the same scrutiny from the media that Clinton or Obama (or Kerry) would get if they were doing these things, but that just isn't happening.

Finally, you have to wonder if this is who you want leading you into the digital age:

Sen. McCain, You've Got Be KIDDING Me!, by Maggie Barker: ...I couldn't help but laugh in disbelief at an interview of U.S. Sen McCain admitting that he doesn't know how to use a computer.

When asked by the Politico's Mike Allen whether he uses a Mac or PC, here's what he said:

Neither. I am an illiterate that has to rely on my wife for all the assistance I can get.

I mean, really? How does he not know how to use one of most simple, yet important, technologies in our homes, workplaces, research labs, schools, universities, and enterprises? ... Sen. McCain simply seems out of touch with the modern ways of the world. And he admits it, with no apologies. How can he envision and plan for America's future when he has no interest in or curiousity of current modes of communication, commerce, and education? Sure, Sen. McCain pre-dates the computer age, but how many of us have parents or grandparents who log on every now and then? I respect Sen. McCain immensely for the sacrifices he's made for this country, but times, they are a-changin'. Sen. McCain's already been left behind.

Update: Now McCain is trying to claim that his plan is not a privatization scheme, therefore what he said is not misleading. However, from TPM:

In the post below I noted how John McCain is now going in for the same Social Security 'privatization' bamboozlement that President Bush did, claiming that calling his policy 'privatization' is some sort of lie or spin.

Here's video of McCain using the word himself in 2004 and then claiming it's all a bum rap just this morning...

More from Think Progress.

Jason Furman, Social Security, and Wal-Mart

If you haven't heard, Barack Obama named Jason Furman as his economic policy director. Because of his centrist leanings and his identification with Rubinomics, some have questioned Furman's dedication to progressive causes, and there has been quite a bit written about this, not all of it accurate.

For example, take an article in the LA times on Furman's position on Social Security privatization. This response to the article is from the Economists for Obama web site:

Jason Furman and Social Security, Economists for Obama: As Brad Delong points out, this article in the LA Times completely misrepresents Obama Economic Policy Director Jason Furman's position on Social Security privatization. In fact, Jason is the economist who did the most to supply the intellectual ammunition to gun down Bush's proposal during the great Social Security battle of 2005. Jason, with help from Dean Baker and Brad Delong, was key to victory in that struggle. It's not hyperbole to say that without their efforts (especially Jason's), Bush might have succeeded in his efforts to gut the most important social safety net we have. See this paper for one of Jason's contributions in that battle.

Regarding the broader concerns raised in the article, I think Jared Bernstein has it right:

One economist from the left-leaning Economic Policy Institute, Jared Bernstein, offered praise for Furman, saying he understood why some critics were unhappy, though he thought their fears were misplaced.

"I understand the concerns, given positions he has taken" on some issues, Bernstein said. "But I am 110% certain that it will be Barack Obama -- not Jason Furman or Robert Rubin -- who will be setting the policies for the Obama administration." ...

Brad DeLong emailed the author of the article to ask how the inaccurate representation in the article could have happened given how well-known (and easy to find online) Jason's position on Social Security privatization is:

We Get an Email from Tom Hamburger..., by Brad DeLong: Apropos of the astonishing and false claim in this morning's LA Times that Jason Furman is some sort of a crypto-Bushie with views on Social Security matters "similar" to those Bush proposed in 2005, I write to the reporter involved, Tom Hamburger. And he writes back:

Mr. Hamburger's bottom line appears to be that his leaving a lot of readers with a false view of Jason Furman's position on Social Security is OK because that was "not the point of this story..."

So I write back:

Grandma Needs a Job

If older workers want to retire later, or are forced to do so, will they be able to find jobs?:

Older Staffers Get Uneasy Embrace, by David Wessel, WSJ: Americans are going to have to retire later, we're often told. They live longer than their ancestors. Neither their retirement savings nor the taxes of younger generations can support ever-longer retirements. ... But will employers want more older workers?

"There's a lot of happy talk around that we're going to have slowing in the rate of growth in young workers and, therefore, employers are going to want to hire older workers just at the time that older workers are going to want to work," says Boston College economist Alicia Munnell... "We think it's much less clear than that." ...

A significant minority of employers see this demographic reality, broadcast affection for "mature workers" and win plaudits from AARP, an advocacy group for older people. ...

Bookstore chain Borders Group says it finds "mature workers" appealing because half its customers are over 45 and turnover among older workers is one-sixth that of under-30 workers. About 18% of Borders' 30,000 workers are over 50, double the fraction six years ago, and the company anticipates by 2010 one in four will be.

At the Blue Cross Blue Shield Association in Chicago, 40% of 1,000 mainly professional employees are 50 or older and 25% are 55 or older. ...

For all the heart-warming pictures such efforts produce, they appear to be exceptions. ...

Surveys by Boston College's Center for Retirement Research found that employers expect about a quarter of employees currently in their 50s will want to work two to four years longer than past workers. Then employers were asked if they would accommodate half those who wanted to work later. "On a scale of 1 (unlikely) to 10 (likely), the median response was a lukewarm 6," the researchers say.

While employers are "reasonably comfortable" with the older workers they currently employ, "they are not keen on retaining even half who want to stay on to age 67 or 69," the Boston researchers concluded. They predict "a messy and uncomfortable mismatch with large numbers of older workers wanting to stay on while employers prefer that they do not."

Why? Employers fear older workers "cost too much, lack current skills and don't stick around long," Ms. Munnell and co-author Steven Sass write. Wages tend to rise with seniority. Health costs for older workers are higher. Older workers are viewed, rightly or not, as less supple in dealing with new technologies. And old workers tend to be in older industries and occupations in which employment is growing slowly if at all.

The image of companies loyally retaining scarce, seasoned workers is at odds with reality. Among male workers between 58 and 62, only 44% still work for the outfit that employed them at 50, down from 70% two decades ago. And even if labor shortages emerge, they argue, many employers will hire younger immigrants, shift work overseas or deploy labor-saving technology (like the cashier-less grocery-store checkout) instead of hiring older workers. ... [Video]

Applauding Failure

What's the best thing Bush tried to do, but couldn't?

The Best Thing that Didn't Happen During The Bush Administration, by Robert Reich: The best thing to have occurred during the Bush administration is something that did not happen. We did not privatize Social Security.

Had we done so, boomers facing retirement over the next few years would be even worse off than they are today. Now they’re struggling with pension plans worth less than they counted on, and home values that are tanking. At least they can rely on a monthly Social Security check.

But had we privatized, they’d be totally reliant on the stock market. And look what’s happened to the market: Compared to stock values ten years ago, the S&P 500 has risen a little over 1 percent a year, adjusted for inflation. Even Treasury bonds have done better. Go back nine years and there’s been no gain at all. Go back eight years and the market has been off an average of 1.4 percent a year.

Yes, I know, it’s been a rough time. First the tech bubble bursting, then 9/11, then Enron, then the housing bubble bursting, then the credit crunch. But that’s my point. We can’t necessarily rely on the stock market. ...

Sure, the stock market has done well over the past half century. But there have been decades like the 1970s and this one, so far, where it’s been a disaster. That’s why we have Social Security – so that if your timing is bad and you get caught in a downdraft, you still have something to fall back on in retirement.

If we had privatized, you’d have had nothing to fall back on. You’d crash.

I'm pretty happy the whole permanent Republican majority thing didn't work out so well either.

"False Budget Comparisons"

In a commentary in the Wall Street Journal ("The Coming Tax Bomb"), John Cogan and Glenn Hubbard argue that we shouldn't let the Bush tax cuts expire. Andrew Samwick isn't much impressed with their arguments:

More False Budget Comparisons, by Andrew Samwick: ...I object to many parts of the op-ed, but two in particular. First, the expiration of tax cuts that were legislated to be temporary is now described as:

This would be the largest increase in personal income taxes since World War II.

How might such a change in taxes have been avoided?  Perhaps by not ramming through such budget-busting tax cuts in the first place. Perhaps by not letting them persist for so long, running up deficits during business cycle peaks in the intervening years. Until Hubbard and Cogan are willing to commit to a responsible budget policy, of which tax policy is one component, it is impossible to take an op-ed like this seriously. ...

Second, picking up on Stan's point about the problems in using historical comparisons, the following statement from the op-ed completely undermines any responsible action on entitlement reform:

By historical standards, federal revenues relative to GDP, at 18.8% last year, are high. In the past 25 years, this level was only exceeded during the five years from 1996 to 2000.

Note that the 18.8% includes the Social Security surplus.  So according to Hubbard and Cogan, that money is available to be spent on current government expenditures, rather than used to repurchase government debt, which would make the Social Security Trust Fund a legitimate savings vehicle. (Yes, this is the same Cogan who laments that Trust Fund accounting doesn't work because the government just spends the money.  I wonder whose op-eds they use to justify their reckless behavior.) 

Returning to Stan's point, we should have a higher tax/GDP ratio today because we should be using the Social Security surplus to prefund a portion of the retirement benefits of the Baby Boom generation. ... [Update: More here.]

Trust in the Fund

This is worth echoing:

About the Social Security trust fund, by Paul Krugman: I see from comments on an earlier post, plus some of the incoming links, that the whole “there is no trust fund, so the system will be in crisis in 2017″ thing is still out there. So I’m just going to reprint what I wrote about this three years ago:

Social Security is a government program supported by a dedicated tax, like highway maintenance. Now you can say that assigning a particular tax to a particular program is merely a fiction, but in fact such assignments have both legal and political force. If Ronald Reagan had said, back in the 1980s, “Let’s increase a regressive tax that falls mainly on the working class, while cutting taxes that fall mainly on much richer people,” he would have faced a political firestorm. But because the increase in the regressive payroll tax was recommended by the Greenspan Commission to support Social Security, it was politically in a different box - you might even call it a lockbox - from Reagan’s tax cuts.

The purpose of that tax increase was to maintain the dedicated tax system into the future, by having Social Security’s assigned tax take in more money than the system paid out while the baby boomers were still working, then use the trust fund built up by those surpluses to pay future bills. Viewed in its own terms, that strategy was highly successful.

The date at which the trust fund will run out, according to Social Security Administration projections, has receded steadily into the future: 10 years ago it was 2029, now it’s 2042. As Kevin Drum, Brad DeLong, and others have pointed out, the SSA estimates are very conservative, and quite moderate projections of economic growth push the exhaustion date into the indefinite future.

But the privatizers won’t take yes for an answer when it comes to the sustainability of Social Security. Their answer to the pretty good numbers is to say that the trust fund is meaningless, because it’s invested in U.S. government bonds. They aren’t really saying that government bonds are worthless; their point is that the whole notion of a separate budget for Social Security is a fiction. And if that’s true, the idea that one part of the government can have a positive trust fund while the government as a whole is in debt does become strange.

But there are two problems with their position.

A "53-Trillion Dollar Asteroid"?

This argues we should leave Social Security benefits alone:

Time to honour America’s debt to the retired, by John Shilling, Commentary, Financial Times: The first American baby boomers have now become eligible to retire and start drawing on Social Security... Many politicians are telling us that the resulting rise in Social Security “entitlement” payments will break the budget, so we have to cut benefits to retired people. But the politicians do not want to mention that the Social Security system has been compiling a huge surplus. Why? Because they have been using that surplus for years to hide the real size of the current federal budget deficit, allowing them to spend more and justify tax cuts for the wealthy. ...

Social Security was initially a pay-as-you-go system – annual payroll taxes of workers covered that year’s payments to retired people. By the early 1980s, however, it was clear that this system was not sustainable. Payments were increasing faster than revenues, and when the baby boomers started retiring and collecting pensions, there would be huge shortfalls. President Ronald Reagan had the prudence to address this problem early enough to make Social Security sustainable. ... Social Security payroll taxes were raised, creating a surplus in the trust fund that would fully cover the future costs of baby-boomer retirement. ...

Baby boomers, and all others who have worked since 1983, paid in more than needed for Social Security retirement payments. They saved and created the trust fund surplus, which now amounts to more than $2,000bn and must be invested in US Treasury bonds. It is projected to reach nearly $3,000bn in 10 years. Then Social Security will stop generating a surplus to subsidise the rest of the budget and will begin redeeming its bonds to help make payments.

Current projections show that the trust fund bonds may be exhausted by about 2041. The trust fund’s full sustainability for at least the next 75 years could be restored easily with minor adjustments...

Politicians understand that, with the Social Security Trust Fund surplus declining, they will no longer be able to borrow from them under the table while announcing fictitiously smaller deficits to justify continued expenditures and tax cuts. And they will have to generate funds from other sources of revenue to redeem the bonds after 2017. Rather than admit too much was borrowed recently, and must now be repaid, they want to reduce Social Security benefits. This puts much of the burden on the middle class, who created most of the surplus that has been used to hide the real size of the deficits.

Fundamentally, the Social Security issue is not one of “entitlements” but of the obligation of our government to honour its debt and not reduce Social Security benefits.

There has been lots written and discussed in the media on Social Security, but not nearly as much on the real problem, rising health care costs.

Maybe one reason people are so confused about about the Social Security funding issue and the degree to which it is a problem is due to imagery like this from supposedly trusted news sources:

The broadcast itself did mention health costs and Medicare, but it would have been difficult to tell from the broadcast, or from Wolf Blitzer's questions and presentation, that the rising cost of health care rather than Social Security is the source of the problems. And the interview with Glenn Beck didn't help at all.

Update: See pgl at Angry Bear who also noticed Beck's claim.

"Immigration and Social Security"

From Kevin Drum:

Immigration and Social Security, by Kevin Drum: Paul Krugman points out that in the 2008 report of the Social Security Trustees released today the "actuarial balance" of the system is better than it's been since 1993. ... But how much better? ... [L]ast year the trustees estimated that Social Security had an overall 75-year deficit of 1.95% of taxable payroll. ...This year it's 1.70%. That's a pretty substantial improvement. What caused it? ...

[I]mmigrants. To be specific, better estimates of the taxes and benefits received by illegal immigrants — or, as the trustees refer to them, "other-immigrants":

In previous reports, the other-immigrant population was projected using assumed ... numbers... For this year's report, the ... numbers ... are projected by explicitly modeling other immigrants and other emigrants...

Translation: instead of just pulling a net number out of a hat, the trustees built a model... And guess what?

• Illegal immigrants tend to skew young. This benefits the system.
• Young people have more children than older people. This benefits the system.
• Some illegal immigrants pay taxes for a few years and then leave. This benefits the system.

Bottom line: "This year's report results in [...] a substantial increase in the number of working-age individuals contributing payroll taxes, but a relatively smaller increase in the number of retirement-age individuals receiving benefits in the latter half of the long-range period." Give or take a bit, it turns out that this shores up the Social Security system to the tune of around $13 billion per year. Thanks, illegal immigrants!

"Bush's Market-Liberal Scam"

This is from the Ludwig von Mises Institute. They are pleased Bush wasn't able to get his Social Security plan implemented because it would have undermined free market capitalism:

Bush's Market-Liberal Scam, by Llewellyn H. Rockwell, Jr.: President Bush began his second term with a big push for "Social Security privatization." ... Let's say Bush had actually achieved his goal of creating private accounts..., and a sizable swath of the American public had invested in safe mutual funds spread across many sectors.

What would have been the result? Look at the state of the financial markets. The Bush administration would have holy Hell to pay. The public would have turned against the "market liberals" who gave us this scam. Capitalism would have been denounced as having generated yet another shock-therapy failure. Investment standards would have been ever more regulated. The companies that held most of the "private" funds would be declared too big to fail. The subprime bailout would have become a full-bore stock market bailout. This would have been declared the ultimate failure of free markets.

I think we can be pleased that Bush was unable to muster public enthusiasm for the program. ... It's hard to be grateful for anything during the Bush presidency, but the failure of a phony privatization that would have discredited free markets is one.

Of course, their point is that the government shouldn't be in the business of providing social insurance at all ("abolish it completely and instantly"), but once you accept that won't work, and it won't for a variety of reasons including significant market failures, these are some of the reasons why Social Security privatization schemes should be avoided.

The "Impending Demographic Crisis"?

John Shoven argues we should raise the Social Security retirement age to solve the "impending demographic crisis":

The Truth About Aging Boomers' Effect on Our Economy, by John B. Shoven, Foreign Policy and Alternet: There is a looming catastrophe stalking the developed world. It promises to devastate the global economy, overwhelm hospitals... What is the calamity... It's the aging of the world's baby boomers, the coming tidal wave of senior citizens who will live longer, consume more, and produce less, seriously challenging societies' ability to care for their graying ranks.

At least that's how the dire warnings generally sound. Alarming forecasts bombard us about an impending demographic crisis in the United States, Europe, Japan, and even China that will reshape the way we live and work. ... The fiscal burden of supporting this rapidly expanding segment of the global population not only threatens to bankrupt national healthcare systems..., but also revolutionize electoral politics, with political clashes no longer governed by right versus left, but young versus old.

If it sounds distressing, it shouldn't. The gloomy projections are deeply flawed. The reason lies in the misleading way in which we measure age. Typically, a person's age has been determined by the number of years since his or her birth. ... Thanks to the medical revolutions of the past century, however, life expectancies have been radically prolonged. Since 1960, the average Chinese person's life span has increased by 36 years. Over roughly 40 years, South Koreans have seen their lifetimes extended by an average of 24 years, Mexicans by 17 years, and the French by nearly a decade. Given these drastic changes, our conception of what qualifies as "old" has itself become old-fashioned.

Measuring age by years since birth is just as foolish as using the dollar as a timeless unit of value. ... Just as with the dollar, it is time to introduce inflation-adjusted ages as a superior method for measuring age. The best replacement gauge is mortality risk, or the chance a person has of dying within the next year. The higher the mortality risk, the "older" a person is. It's a measurement that reflects a much more accurate picture of a person's health, likely productivity, and remaining life expectancy.

When the U.S. Social Security system was designed seven decades ago, the 65-year mark was deemed the moment when Americans moved "beyond the productive period" and into dependency. That age was chosen based on mortality risk: a 65-year-old man in 1940 could expect to live an additional 11 years, a 65-year-old woman another 15 years. But medical advances have shifted mortality risks enormously. ...

The implications are significant: The magnitude of the elderly wave that demographic forecasters have predicted is, in reality, far smaller. Forecasts today tell us that the fraction of the population over the age of 65 will grow enormously. But consider what would happen if we replaced the 65-year marker with a mortality risk measurement that governs who is considered "elderly." In 2000, 12.4 percent of the U.S. population was over the age of 65... By 2050, only ... about 15 percent of the population ... will have a mortality risk greater than 1.5 percent. That's hardly a demographic tidal wave. The global outcomes are similarly striking: A mortality-based measurement lowers the projected elderly population in 2050 in Japan, Spain, and Italy by an average of 30 percent.

Just consider the consequences of altering the age when entitlement benefits kick in or retirement becomes mandatory to these new inflation-adjusted measurements. It doesn't mean shortening retirements, just stabilizing them. In 20th-century America, the average length of retirement grew from two years to more than 19 years. As life expectancies continue to rise, retirements will continue to get longer -- and the pension bill far larger. If benefits and retirements are governed by mortality risk instead of age, the costs will be far more manageable. ...

Three comments. First, there is no guarantee that the ability to work and lead a productive life expands at the same rate as life expectancy (e.g., if most of the extension in life expectancy in the future comes from expensive interventions toward the end of life rather than improvements in health during, say, the late 60s, that make working easier then there would be no reason to extend the retirement age). It would be better to define retirement in terms of the minimum of these two concepts, the time at which the typical person can no longer be expected to work full-time on a typical job that may have physical demands, and the life expectancy adjusted retirement age discussed above. But that is not the main objection. A second issue is that Social Security is not the entitlement problem we should worry about, that title belongs to Medicare where costs are expected to increase rapidly in the future. And the problem with Medicare costs brings up the third issue, demographic change is not the driving force behind rising healthcare costs (e.g., see this article from the CBO, "The rate at which health care costs grow relative to national income—rather than the aging of the population—will be the most important determinant of future federal spending."). Most projections see large increases in health care costs in the future, but the main problem is not from the growth of the elderly population. Even if the population remained stationary, costs would still be expected to escalate rapidly.

Mortgaging the Nest Egg

This is not a good sign. A lot of people are borrowing from their retirement accounts to pay off debt:

Borrowing from the Nest Egg, by Lane Kenworthy: This news is discouraging, but hardly unexpected. According to a “Marketplace” report, a survey by the Transamerica Center for Retirement Studies (pdf here) finds that the share of workers borrowing from their 401(k) retirement funds increased from 11% in 2006 to 18% in 2007. Nearly half of those taking out such loans in 2007 cited the need to pay off debt, compared to a quarter in 2006.

Stagnant wages and salaries, most spouses already employed, rising health care and college tuition costs, higher mortgage debt loads, and falling home values mean lots of American households — including many middle-income ones — are pinched financially. The late 1990s economic boom lessened the strain for a while. Then home equity loans helped. More recently, credit card usage has jumped. Borrowing against retirement savings is the logical next step.

See more discussion here, here, and here.

This is why I wonder about the long-term participation rate in "opt out" retirement accounts that are being promoted as a way to deal with the retirement security problem. How many people will opt out of these accounts when economic conditions for the household deteriorate temporarily for some reason? And once they opt out, will they opt back in? People who are motivated enough to borrow against their retirement accounts - almost one fifth in 2007 - would also be motivated enough to opt out of an automatic savings plan. Many of the studies, at least the ones I have seen, do not track people over long periods of time where this type of deterioration would be present, and they do not follow people through a recession when the pressure to opt out would be greatest. I'm not saying we shouldn't have these programs, they do help some people save, and even if some people opt out at least they have a source of funds to use when times get tough. The point, though, is that the people most likely to opt out are the very ones we would like to see participate in savings programs so that they have more than just Social Security available during their retirement years. Because of that, we should be careful not to place too much emphasis on opt-out types of mechanisms for solving the retirement security problem. These accounts may not provide as much of a boost as we hope to key segments of the population.

Update: Megan McArdle follows up with comments on forced saving as a solution to this problem.

Time to Lower Moody's Rating

If Moody's, the credit rating agency, can't get this analysis right, how can it possibly handle the evaluation of complex financial instruments? Or is it the case, as Dean Baker wonders below as he points out the flaws in the analysis, that analytical accuracy and objectivity are being sacrificed in the name of politics?:

Moody’s says spending threatens US rating, by Francesco Guerrera, Aline van Duyn, and Daniel Pimlott: The US is at risk of losing its top-notch triple-A credit rating within a decade unless it takes radical action to curb soaring healthcare and social security spending, Moody’s ... said on Thursday.

The warning over the future of the triple-A rating – granted to US government debt since it was first assessed in 1917 – reflects growing concerns over the country’s ability to retain its financial and economic supremacy. ...

Most analysts expect future governments to deal with the costs of healthcare and social security and there is no reflection of any long-term concern about the US financial health in the value of its debt. ...

Unlike Moody’s previous assessment of US government debt in 2005, Thursday’s report specifically links rises in healthcare and social security spending to the credit rating.

“The combination of the medical programmes and social security is the most important threat to the triple-A rating over the long term,” it said.

Steven Hess, Moody’s lead analyst for the US, told the Financial Times that in order to protect the country’s top rating, future administrations would have to rein in healthcare and social security costs.

“If no policy changes are made, in 10 years from now we would have to look very seriously at whether the US is still a triple-A credit,” he said. ...

Moody’s did once threaten to cut the rating of some of the US Treasury’s debt when Congress refused to pass the president’s budget in the mid-1990s.

Dean Baker has the response:

Does Politics Affect Moody's Ratings?, by Dean Baker: That is the question that the Financial Times reporter should have asked when Moody's apparently threatened to downgrade U.S. debt within a decade if the country does not reduce the projected growth of Medicare and Social Security.

This threat is very odd for several reasons. First, it is not clear why Moody's would be concerned about the composition of U.S. government spending. Lenders have reason to be concerned about the overall budget balance, but they have no obvious interest in the composition of spending. The United States recently increased its defense spending by more than a percentage point of GDP to cover the cost of the wars in Iraq and Afghanistan. If the government reduced defense spending to pre-war levels, as an alternative to cutting the cost of Social Security and Medicare, it is difficult to see why lenders should care.

It is also odd that Moody's would single out Social Security. Its cost is not rising at an especially rapid rate, in a decade its cost will have just risen back to its 1983 level measured as a share of GDP. Presumably, bond holders don't have any particular reason to object to spending on Social Security, so it is difficult to see why a bond rating agency should.

In the same vein, it is also possible to make up projected budget shortfalls with tax increases. Bondholders presumably care about borrowers ability to pay off their debts, ... tax rates in the U.S. would still be far below the OECD average even if they were raised by several percentage points.

The Financial Times reporter (and other reporters) should have asked why one of the world's leading bond rating agencies would make such an unusual intervention into U.S. domestic politics. Such detailed policy prescriptions for the United States are certainly rare, if not unprecedented.

In this context, it is worth noting that Moody's could face legal difficulties due to its recent rating practices. It gave top credit ratings to tens of billions of dollars of securities that were partially backed by very risky subprime mortgages. Now that these bonds are being written off at a very rapid pace, there may be some legal consequences for Moody's. Moody's potential legal problems should have been mentioned in the context of this intervention into U.S. politics. ...

It's *Not* Social Security

This is from Peter Orszag, Director of the CBO:

The Biggest Budget Buster, by Peter Orszag, Commentary, WSJ: The nation's economic outlook may look troubling in the short run, but these difficulties pale beside the economic consequences that will follow if we don't address the nation's long-term fiscal gap...

The fiscal gap does not arise, as many believe, primarily from the coming retirement of the baby boomers. Rather, the rate at which health-care costs grow will be the primary determinant of the nation's long-term budget picture. ...

The bottom line is that while we need to address the effects of the coming retirement of the baby boomers and the projected imbalance in Social Security, we have to pay even more attention to the health-care costs that exert the dominant influence on our fiscal future. ...

Over long periods, the cost growth per beneficiary in the Medicare and Medicaid programs has tracked cost trends in private-sector health-care markets. As a result, many analysts believe that significantly constraining the growth of costs for the public programs while maintaining broad access to hospitals and doctors under them will be possible only in conjunction with slowing cost growth in the health sector as a whole. ...

But it's too soon to conclude that the fiscal picture is hopelessly dismal. There remains the promising possibility of restraining health-care costs without incurring adverse health consequences. It may even be possible in some cases to reduce cost growth and improve health at the same time. Costs per beneficiary in Medicare, for example, vary substantially across the U.S. for reasons that cannot be explained fully by the characteristics of the patients or price levels in different areas.

High-spending regions do not generate better health outcomes, on average, than the lower-spending ones. ... Some academic research suggests that national costs for health care can be reduced by perhaps 30% without harming quality. ...

Here's a graph and accompanying report.

The Ruth Marcus Obsession with the Social Security Crisis that Does not Exist

Ruth Marcus of the Washington Post is at it again, trying to portray Social Security as a system in need of immediate fixing. But, as these responses by Dean Baker, Kevin Drum, and Paul Krugman make clear, Marcus is doing her best to elevate a second-tier problem (if it's even that) to the crisis, first-tier level. It appears that having taken a position on Social Security that is wrong, i.e. that it is a system headed for "crisis," she is incapable of admitting her errors and instead continues to defend the indefensible. She says it's irresponsible not to attack the problem now in her guise as one of the "Very Serious People," but the irresponsibility is coming from those, like herself, who are promoting a crisis that doesn't exist.

Here's Dean Baker:

More Social Securty UFOs at the Post, by Dean Baker: Ruth Marcus is on the warpath again arguing that those who don't want to jump in line on the SS crisis train are being irresponsible. Read it and weep.

A couple of quick points are in order.

Social Security and UFOs

Having recently taken on an editorial on Social Security by Ruth Marcus, I was going to let the latest Washington Post "the sky is falling" piece on Social Security and how it is headed for crisis pass by without comment (other than in the title I gave it in the daily links of "The Washington Post Continues to Promote the Lie that Social Security is Headed for a Crisis"), but on second thought, let's review. Here's Brad DeLong:

Hoisted from Comments: Low-Tech Cyclist Writes:

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal: I know bringing up Fred Hiatt is like shooting fish in a barrel on this score, but the WaPo has a subset of its unsigned editorials where it comments on what it calls "the ideas primary."

Five of the last seven Ideas Primary editorials have been on the Social Security 'crisis.' There have been 15 editorials in this series. One has been on global warming - the greatest crisis of our era - and two have been on our greatest domestic crisis, the lack of universal health care and the upcoming crisis in the Medicare trust fund. None have been on Iraq and the power vacuum we've created in the center of the Middle East. Interesting set of priorities, huh?

The most recent piece in the Washington Post on the "crisis" isn't from their "Ideas Primary," but it's just as bad. Dean Baker has the description:

Main THE UFOs Are Back at the Post (literally), by Dean Baker: I praised the Post a couple of weeks ago for printing a coherent column by Robert Ball in support of protecting the current level of Social Security benefits. This was an extraordinary departure from its never-ending drumbeat of SS crisis news stories, columns, and editorials.

Since that day, the Post has run a strange column by Ruth Marcus, a former editor, that seemed to attack Paul Krugman for changing his mind on Social Security. In another forum, I quipped about this column that "the UFOs have landed," referring to a nutty effort to discredit Social Security by claiming that more young people believe in UFOs than they will receive a Social Security check.

Well, today the Post actually has the UFO story in its full glory. It appears in an oped column by Amity Shales which is apparently further payback for the Robert Ball column. It looks like we must pay a high price for this modest dissent from the Post's dogma on the SS crisis.

On the substance, I am not quite sure why the opponents of SS believe that the effectiveness of their lies is a basis for gutting the program. This would be comparable to claiming that tens of millions of people believe that Saddam was responsible for September 11th, therefore we should invade Iraq. The fact that the public has been so terribly misled on the financial condition of its most important social program (even if they don't actually believe in UFOs) is a strong argument for putting off any changes until the public can learn the true facts of the situation.

After all the basic issues about the SS program -- how much money it should provide in retirement, how much people should be taxed in their working years, and how late in life they should have to work -- are issues that should be decided democratically, not by people who control major media outlets. And the public cannot possibly make such decisions in an intelligent manner when they are being deliberately misinformed about the true financial status of the program.

Where did the misleading UFO story come from? Here's President Bush on February 10, 2005 giving what was a standard speech at the time:

THE PRESIDENT: ...Somebody was telling me the other day ... he read an interesting poll; he said that a lot of younger workers felt like they're more likely to see a UFO than get a Social Security check. (Laughter.) It's an interesting dynamic, isn't it, when you think about it? There are a lot of young people, when they analyze Social Security and think about it, that they just don't think the government can fulfill the promise, which is a powerful -- it's powerful leverage for members of Congress to listen to.

In other words, the dynamic has shifted. The reason people are comfortable about taking on the Social Security issue..., there's a lot of folks out there who are demanding change -- for their sake. They're saying, what are you going to do about saving the system for me? I'm coming up; I have a better chance of seeing a UFO than getting a check from the government. What are you and the government going to do to make sure I get my check? That's the dynamic that's happening.

And that's why I'm optimistic something is going to get done, because people are beginning to speak out. Younger Americans who understand the math and know the reality are beginning to say to those of us who have been elected, what are you going to do about it? You're up there in Washington, D.C. -- do more than just occupy the office, solve problems and do your job. (Applause.)

I think the last quote should be:

Younger Americans who understand the math and know the reality are beginning to say to those of us who have been elected, why are you lying to us about it? (Applause.)

Why is the Washington Post participating in this attempt to mislead people about the nature of the problem? Brad DeLong is right:

Without major personnel changes, I give the Washington Post five years.

Ruth Marcus Tries to Show Her Beltway Badge of Seriousness

Ruth Marcus shows two things in her commentary today, "Krugman vs. Krugman". First, she hasn't a clue about Social Security financing. Second, she has no problem at all presenting a distorted picture to rationalize her clueless position.

On the Social Security financing issue, the most recent pieces I've seen are by Dean Baker, "The crisis that isn't," and Paul Starr, "Hold that Tax," but there's been so much written that it's hard to believe that anyone who isn't being willfully ignorant could be unaware of the true magnitude of the problem - the system is not headed for disaster, for a crash, or anything like that.

Anyone interested in understanding the financing issues ought to read America's Senior Moment by Paul Krugman. I refer you to this particular piece, from the New York Review of Books and written in 2005, because Ruth Marcus uses quotes from Paul Krugman dated 2001 or earlier to try to show he has been inconsistent on the Social Security financing issue. The subtext is, or course, that he is being dishonest.

But had Ruth Marcus included this quote from Paul Krugman's 2005 piece in her editorial (or quotes from other pieces of the vast amount Krugman has written about Social Security after 2001), it would have changed the interpretation of the quotes she includes in her article. Here, Paul Krugman explains why the future of Social Security was at issue at that time:

Four years ago, I and many other economists urged policymakers to think about the future cost of Social Security benefits, not because we thought there was anything wrong with Social Security itself, but because we regarded the future costs as a compelling reason not to cut taxes even if the overall budget was in surplus.

Keep that quote in mind, i.e. that the worry was that the Bush tax cuts would eat away at the accumulated Social Security surplus, as they did, as you read Ruth Marcus' desperate attempt to justify her doom and gloom about the future of Social Security:

Krugman vs. Krugman, by Ruth Marcus, Commentary, Washington Post: In liberal Democratic circles, the debate over Social Security has taken a dangerous "don't worry, be happy" turn.

The argument has two equally dishonest components. The first is to deny that Social Security faces a daunting financing problem... The second is to mischaracterize the arguments of those who advocate responsible action, accusing them of hyping the system's woes.

One prominent practitioner of this misguided approach is New York Times columnist Paul Krugman. "Inside the Beltway, doomsaying about Social Security -- declaring that the program as we know it can't survive the onslaught of retiring baby boomers -- is regarded as a sort of badge of seriousness, a way of showing how statesmanlike and tough-minded you are," Krugman wrote last week. "In fact, the whole Beltway obsession with the fiscal burden of an aging population is misguided."

Somebody should introduce Paul Krugman to . . . Paul Krugman.

"[A] decade from now the population served by those programs [Social Security and Medicare] will explode. . . . Because of those facts, merely balancing the federal budget would be a deeply irresponsible policy -- because that would leave us unprepared for the demographic deluge, with no alternative once it arrives except to raise taxes and slash benefits." (July 11, 2001)

"Broadly speaking, the next administration . . . will face two big economic tests. One . . . is whether it can stick to a fiscal policy, including a policy toward Social Security, that prepares this country for the demographic deluge." (Nov. 12, 2000)  ...

You get the idea, a lot of the article is just quotes from Krugman from 2001 or earlier (she even reaches back to 1996 at one point) as she tries to turn his concern over the effect tax cuts would have on the surplus, and hence our ability to meet future obligations, into more general concern over a potential crisis in the Social Security program even though that isn't what he was saying (and note the first quote also includes Medicare). The article then discusses whether or not Krugman mischaracterized the positions of politicians and the Washington Post editorial board, and again selectively quotes Krugman and others to try to justify her argument, but that, of course, has nothing at all to do with whether there is a Social Security "crisis". If there is no crisis - and there isn't - then it is being over-hyped. She doesn't think it's being over-hyped, but that's because she misunderstands the nature of the problem.

Not much of an argument - all it does for the most part is compare quotes from Krugman then and now without putting them in context (and leaving out a whole bunch of other quotes between 2001 and now). Even if there weren't an obvious context to Krugman's prior remarks, what if he had changed his mind as the evidence became clearer. What's wrong with that? That is, showing that someone said one thing in the past, and now says something different as they have learned more about the problem does not imply that what is said now is wrong or dishonest. What matters is if the new position is justifiable, and if Ruth Marcus wants to debate Paul Krugman on the correctness of his current postion on Social Security, which is, by the way, consistent with his prior position, all I can say is good luck --  though even the best of luck won't be enough to overcome the reality that she is on the wrong side of this argument.

Update: Here is Paul Krugman's response.

Update: More from Paul Krugman:

A thought about political discourse, by Paul Krugman: A meta-thought inspired by the Social Security craziness:

Faced with a major public issue, such as the future of Social Security, one might think that the crucial thing would be to ascertain the facts. If I say “there is no crisis,” and you think there is, well, produce the evidence that shows that my arithmetic is wrong — not something I once said that you think proves that I’ve changed my mind. Making this a game of gotcha is just childish.

But here’s the thing: this childishness infects a lot of political discourse. Think about what passes for a “tough” question on the Sunday talk shows. It’s not “Senator Bomfog — you say X, but the statistics show that it’s actually Y. How can you explain this discrepancy?” In fact, I’ve never seen that happen. In political reporting, being wrong means, at most, that your claims are “in dispute.”

No, what actually passes for “tough” questioning is “Senator Bomfog, you say X but last year you said Y. Aren’t you flip-flopping?”

Like I said, it’s childish — and destructive.

Social Security's Long-run Budget Math

Paul Krugman explains Social Security's long-run budget situation:

Long-run budget math, by Paul Krugman: Some commenters have asked for more about Social Security’s role in the long-run budget problem, and in ... my assertion that the Beltway obsession with Social Security reflects ignorance. So here’s a quick, informal explanation.

Start with the current position. Last year, federal spending on Social Security, Medicare, and Medicaid was 8.5 percent of GDP, equally divided between Social Security and the health care programs. Dismal long-run projections, like those of the GAO, have this total rising by 10 percentage points of GDP by mid-century.

So, how much of this is a Social Security problem? ...[T]he percentage of GDP spent on Social Security [will rise] from about 4 to 6 — that is, a rise of about 2 percentage points of GDP, which is a small fraction of the entitlements problem. See, for example, this chart from my NY Review of Books piece on the subject.

What’s more, Social Security has already been strengthened to deal with this rise. In 1983 the payroll tax was increased and adjustments made to the retirement age, so as to build up a trust fund. According to the “intermediate” projection of the Social Security trustees, this trust fund will be exhausted in 2041 — but they also present a more optimistic scenario, based on economic assumptions that don’t seem at all outlandish, in which the trust fund goes on forever.

This brings us to the claim that the trust fund doesn’t exist, because it’s invested in government bonds. The full explanation of why this is sophistry is here.

The bottom line is that Social Security is just not the major problem.

Now, part of the projected rise in Medicare and Medicaid costs represents the effects of an aging population. But as a new report from the CBO explains, demography is only a minor factor — mainly it’s rising health care costs. What’s more, the proposed “solutions” for the Social Security problem have no relevance to the issue of rising Medicare costs — even if privatization were a good idea, which it isn’t, it would do nothing to solve the problem of rising medical bills.

The Beltway obsession with Social Security is a classic case of a little knowledge being a dangerous thing. People have picked up a few facts about demography, and think they understand the long run budget problem. They don’t.

Update: See also Millions, Billions, Trillions, Who's Counting? by Dean Baker.

Paul Krugman: Played for a Sucker

Barack Obama tries to earn his "badge of seriousness," but ends up "being played for a fool":

Played for a Sucker, by Paul Krugman, Commentary, NY Times: Lately, Barack Obama has been saying that major action is needed to avert what he keeps calling a “crisis” in Social Security... Progressives who fought hard and successfully against the Bush administration’s attempt to panic America into privatizing the New Deal’s crown jewel are outraged, and rightly so. ...

To understand the nature of Mr. Obama’s mistake, you need to know something about the special role of Social Security in American political discourse. Inside the Beltway, doomsaying about Social Security ... is regarded as a sort of badge of seriousness, a way of showing how statesmanlike and tough-minded you are.

Consider, for example, this exchange about Social Security between Chris Matthews of MSNBC and Tim Russert of NBC, on ... “Hardball.”

Mr. Russert: “Everyone knows Social Security, as it’s constructed, is not going to be in the same place it’s going to be for the next generation....”

Mr. Matthews: “It’s a bad Ponzi scheme, at this point.”

Mr. Russert: “Yes.”

But the “everyone” who knows that Social Security is doomed doesn’t include anyone who actually understands the numbers. In fact, the whole Beltway obsession with the fiscal burden of an aging population is misguided.

As Peter Orszag, the director of the Congressional Budget Office, put it in a recent article co-authored with senior analyst Philip Ellis: “The long-term fiscal condition of the United States has been largely misdiagnosed. Despite all the attention paid to demographic challenges, ... our country’s financial health will in fact be determined primarily by the growth rate of per capita health care costs.”

How has conventional wisdom gotten this so wrong? Well, in large part it’s the result of decades of scare-mongering about Social Security’s future from conservative ideologues, whose ultimate goal is to undermine the program. ...

Fortunately, the scare tactics failed. Democrats in Congress stood their ground; progressive analysts debunked, one after another, the phony arguments of the privatizers; and the public made it clear that it wants to preserve a basic safety net for retired Americans.

That should have been that. But what Jonathan Chait of The New Republic calls “entitlement hysteria” never seems to die. ...

Which brings us back to Mr. Obama. Why would he, in effect, play along with this new round of scare-mongering and devalue one of the great progressive victories of the Bush years?

I don’t believe Mr. Obama is a closet privatizer. He is, however, someone who keeps insisting that he can transcend the partisanship of our times — and in this case, that turned him into a sucker.

Mr. Obama wanted a way to distinguish himself from Hillary Clinton — and for Mr. Obama, who has said that the reason “we can’t tackle the big problems that demand solutions” is that “politics has become so bitter and partisan,” joining in the attack on Senator Clinton’s Social Security position must have seemed like a golden opportunity to sound forceful yet bipartisan.

But Social Security isn’t a big problem that demands a solution; it’s a small problem, way down the list of major issues facing America, that has nonetheless become an obsession of Beltway insiders. And on Social Security, as on many other issues, what Washington means by bipartisanship is mainly that everyone should come together to give conservatives what they want.

We all wish that American politics weren’t so bitter and partisan. But if you try to find common ground where none exists — which is the case for many issues today — you end up being played for a fool. And that’s what has just happened to Mr. Obama.

Update: Robert Waldmann disagrees with Paul Krugman.

Update: PGL at Econospeak adds this update to his comments on the return of entitlement hysteria:

Greg Mankiw chastises Paul Krugman for that criticism of Senator Obama. But I don’t get what Greg is trying to say here. OK, back in 1998 we may have been forecasting that the Trust Fund reserves would be depleted by 2029. But I hope Greg has kept up with the revised forecasts that Paul was mentioning today. And Greg should know that what President Clinton was saying in 1998 is a far cry from the rightwing spin that Paul noted. Seriously – if one wants to attack Paul Krugman for something he said, one should be more accurate with what the argument was. And one should also use updated forecasts – and not some forecast from a decade ago.

"We Just Can't Afford to Cut Social Security Benefits Further"

Dean Baker is amazed:

The End Is Near! Post Publishes Column Defending Social Security, by Dean Baker: Is that a trumpet I hear in the distance? Why are the rivers flowing backwards? And who are those four guys on horses?

Yes, the Washington Post has published a column arguing against the Social Security crisis story. Robert Ball, the former Social Security commissioner, a member of the 1983 Greenspan commission, and a great defender of the system got 700 words in the paper this morning to make the case. Read it carefully, most of us will probably not live to see another such piece in the pages in the Post.

Here's the article:

A Social Security Fix For 2008, by Robert M. Ball, Washington Post: In the Oct. 19 editorial " Mr. Giuliani's No-Tax Pledge," The Post stated: "It's no more responsible for Republicans to rule out tax increases [to strengthen Social Security] than it is for Democrats to insist on no benefit cuts." The Post praised, as a "bipartisan blend," President Ronald Reagan's acceptance of a 1983 fix that included both.

I take exception. It's the essence of responsibility, in my view, to insist on no benefit cuts.

In 1983, I served on the National Commission on Social Security Reform (better known as the Greenspan Commission)... What was right in 1983 -- a balanced package of benefit cuts and tax increases as part, roughly half, of the final agreement -- would be wrong today.

Social Security benefits are modest by any measure and are already being cut -- by raising the age of eligibility for full benefits and by deducting ever-rising Medicare premiums from benefit checks. So the benefits provided for under present law will replace, on average, a lower percentage of prior earnings than in the past. To cut them further would undermine all that Social Security has achieved -- exposing millions of vulnerable people, both elderly and disabled, to needless economic hardship.

Social Security has never been more important to more Americans than it is now. Private pension plans continue to dwindle -- currently covering only about 20 percent of private-sector employees -- and the national rate of savings hovers around zero. We just can't afford to cut Social Security benefits further. ...

Social Security benefits are vital... About a third of the elderly rely on Social Security for 90 percent or more of their income; two-thirds count on it to supply at least half of their income. The program lifts 13 million elderly beneficiaries above poverty.

Without Social Security, 55 percent of the disabled -- and a million children -- would live in poverty. The program is particularly important to women and minorities. It provides 90 percent or more of the incomes of almost half of all unmarried women age 65 and older..., and it is the sole source of income for 40 percent of elderly African Americans and Hispanic Americans.

Social Security is the nation's most effective anti-poverty program. But it's much more than that. For every worker it provides a solid base on which to try to build an adequate level of retirement income. To weaken that foundation would be grossly irresponsible.

The good news is that there's no need to weaken it. ... The program can be brought into close actuarial balance over the long run with just three revenue-enhancing changes that are desirable in any case:

• Gradually increase the maximum amount of earnings covered by Social Security so that the traditional goal -- covering 90 percent of all earnings -- is once again achieved. This change would affect only the 6 percent of earners...

• Allow Social Security to improve earnings by investing some of its assets -- up to 20 percent, say -- in equities, as just about all other public and private pension plans do.

• Provide a new source of income by retaining a residual estate tax and dedicating it to Social Security. ... Dedicating the income from the tax to Social Security would considerably improve the progressivity of Social Security financing as well as increasing revenue.

Presidential candidates should be expected to discuss Social Security financing. But in 2008 they shouldn't be held to a 1983 formula. We're in a different time, with different needs -- and there are much better options available than benefit cuts.

Entitlement Hysteria

Jonathan Chait tries to figure the periodic episodes of hysteria over Social Security:

Fear Factor, by Jonathan Chait, The New Republic: The beginning of the fall season brought to Washington another periodic upsurge of entitlement hysteria. ...  Affected parties tend to furrow their brows and scold politicians in particular, and Americans in general, for our myopia in the face of the demographic tidal wave of retiring baby boomers who will drown the federal budget with unsustainable benefits. ... Those afflicted with entitlement hysteria are identifiable not by the realization that big social programs will need a fix--which is widely understood-- but by the urgency and gravity of their pleas. ...

There's some truth to their analysis, but it misses the point in a crucial way. The two largest entitlement programs, Social Security and Medicare, are in very different shape. The Social Security Trust Fund is scheduled to last until 2042, at which point we'll have to hike up taxes or trim spending a bit. Medicare, on the other hand, faces a day of reckoning in 2019.

Yet one of the oddities of the entitlement hysterics is that they are far more obsessed with the minor problems of Social Security than with the massive problems of Medicare. Indeed, ... they inevitably follow the same pattern: They begin with an ominous summation about entitlements--thus lumping together Medicare with Social Security--then swiftly proceed to demand that Social Security be shored up forthwith.

Russert's recent harangue at the Democratic presidential debate was a classic example. He began by warning of the crisis faced by "Social Security and Medicare" but proceeded to ask no fewer than 14 questions about Social Security, and zero about Medicare. ...

Should they stop being hysterical about Social Security and start being hysterical about Medicare? Well, that would be a start, but it would still elide the deeper problem. The reason Medicare is in such worse shape than Social Security is that it has to account for exploding health care costs. Their focus on demographics and greedy baby boomers is entirely misplaced. Indeed, the "entitlement problem" is mostly--three-quarters, to be precise--a function of rising health care costs.

Since you can't solve the entitlement problem without solving the health care problem, one might think that the entitlement hysterics would have gradually moved on to becoming health care hysterics. ... Yet this is another puzzling thing about entitlement hysteria: the sheer persistence of the obsession. ...[W]hy do they consider this to be a matter of such unique urgency? Put aside the war in Iraq, for which plenty of people (including me) lack any confident solution. In addition to the health care crisis, there's global warming. There are numerous loosely secured nuclear sites throughout the world... There are numerous diseases threatening the lives of millions of Africans whose deaths could be prevented at relatively modest expense. ...

Compared to such disasters, the entitlement nightmare scenario isn't so nightmarish. If we do absolutely nothing to fix Social Security, then, 35 years from now, the program will have to start paying out three-quarters benefits, or we'll have to raise taxes. It's not ideal, but it doesn't keep me awake at night.

Yes, the fix would be easier and fairer if we implemented it sooner. But the closer we get to Social Security's insolvency date, the easier it will become politically to do the fix. The last major fix to Social Security, implemented in 1983, came about just as the Trust Fund was on the verge of insolvency. ...

Ten or 20 years ago, you could plausibly deem Social Security's finances among the most pressing national problems. Those who were willing to take on the problem were admired for their farsightedness, bipartisanship, and seriousness of purpose. Social Security's place on our list of national problems has long since been overtaken, but, among Washington establishment types who remember those days, the issue retains its totemic significance. Entitlement hysteria has become less a response to a crisis than an expression of statesmanship. ...

It's an ideological fight and Social Security is the battleground. Finances are (mis)used in an attempt to motivate change, anything to shake up the system, but among the more hysterical finances are not the real concern.

Price versus Wage Indexing

Amity Shlaes at Bloomberg is trotting out the old let's save Social Security by using price rather than wage indexing:

Social Security Peg Is a Fix Boomers Can Embrace, by Amity Shlaes, Bloomberg: ...On Oct. 15 the first baby boomer demonstrated she's ready for more beach-time by applying for a Social Security pension. ... As the boomers head for the beach, the revenue flowing to the government will begin to recede.

Many Americans believe ... there's nothing they can do but watch. This is wrong. Fixing Social Security is doable. ... Though you might have missed it, the best method for such a fix was offered by Fred Thompson..., ''one of the things that could be done would be to index benefits to inflation. Index benefits to inflation for future retirees.''...

Under the current system, seniors' base pension ... is calculated to reflect not only inflation but also real increases in the average wage over their careers. Real wages in the U.S. tend to rise over time... Growing productivity gives workers this reward. ...

Thompson was suggesting that we base the formula upon inflation alone. Then every pensioner gets what his big brother or sister did, adjusted for inflation. But not more.

Some call such an adjustment ''a cut.'' But the change is only a cut against what is on the theoretical Social Security books. ...[T]he change could better be described as ''a reduction in growth.''...

So why do plans like Thompson's get so little traction?

As Thompson demonstrated, the Keynesian lexicon over indexing is a problem. These days we don't really know what we are saying when we talk about inflation. ''Wage inflation'' in this context happens to include a real increase in wages. ...

How about a $100 million ad campaign to demystify Thompson's peg proposal? ... If a clear explanation of this problem actually penetrated the boomer consciousness, they might be willing to trim growth in benefits. ...

As we know, the crisis in Social Security is way overblown, so I don't mean to buy into the hysteria by responding, but let's take a look at the proposal anyway because we are sure to hear it again.

First, the comment about Keynesian lexicon getting in the way is pretty uninformed (to put it mildly). It does appear that someone doesn't "really know what we are saying when we talk about inflation."

The basics are very simple. Remember the basic equation for profit maximization from your principles of microeconomics class? It said that the money wage equals the price level times marginal productivity (you may have called the right-hand side the value of marginal product of labor). It's nothing more than MC = MR on the input side, the standard profit maximization condition:

W = P*MP

Or, in terms of the real wage

W/P = MP

Now put the first equation in percentage change terms:

%ΔW = %ΔP + %ΔMP

or, in words,

wage inflation = price inflation + growth in productivity.

All she is saying is that the change in real wages, (Δ%W - %ΔP) equals the change in productivity. There's nothing Keynesian about that, it's just a basic neoclassical result, and her attempt to take a swipe at Keynesians reveals the political rather than economic nature of her argument. 

Now, as to indexing, here's what happens if you don't adjust for rising living standards. Nominal wage indexing (as is done now) accounts for both changes in inflation and changes productivity over time (see the %Δ equation above), whereas price indexing only adjusts for price changes, it makes no allowance at all for changes in living standards (i.e. for changes in productivity).

The first regular social security payment was to Ida May Fuller on January 31, 1940. The payment was for $22.54 (a month) according to Wikipedia. Let's adjust that figure to its value today using only a CPI adjustment, i.e. we won't make any adjustment at all for rising living standards, just for changing prices. Using these index numbers for the CPI to adjust the $22.54 payment and convert it to today's dollars gives a payment of $335.67.

[For more detail and a fuller picture, the minimum and maximum payments by year are listed here. For 1940 the benefit was a minimum of $10 and a maximum of $41.20. In today's dollars, that range is $149.92 to $613.56 (for comparison, the actual maximum payment for 2007 is $2,116).]

Maybe Ida May's $335.67 was enough to live on in 1940 given the living standards at the time, no computers, no internet, no TVs, no advances in health care, etc., but good luck living on that now. If we go to pure inflation indexing, fifty years from now we'll have the same problem and the payments will have to be adjusted upward to reflect changes in living standards. This "solution" doesn't solve anything long-term, it simply pushes the problem forward by delaying the living standard adjustment.

Treasury: Is the Social Security Trust Fund Real?

I don't get this. Why is Treasury doing this now? This is the second of three briefs sent to me by Bruce Bartlett on "Social Security Reform: A Framework for Analysis."

Here's the best I can come up with. It seems that this may be part of a concerted effort to put Social Security reform back on the table (we’ve been seeing this lately) and to try, yet again, to sell some sort of private account system. It’s played as a straightforward analysis, but I suspect there’s more behind it than that.

The brief makes the case, or at least considers it a strong possibility, that the Trust Fund cannot be protected from congress. The claim is that congress spends more when the surplus is present, so we need to look to ways to protect the Trust Fund assets (it's based upon an intergenerational equity argument premised on all congresses acting like the recent Republican congress). It mentions private accounts as a way to lock up the Trust Fund, and it promises another brief on how to protect trust fund assets in the future. Also, notice the suggested solution to the intergenerational inequity problem, i.e. reducing benefits.

Here's part of the second brief from the link above. The part in the box may be familiar - it explains how the Trust Fund operates. The rest of the discussion is about whether Social Security pre-funding is "real", and what happens if it isn't. Again, though, the question is why Treasury is spending the time and resources to do this now when there's no realistic chance of reform moving forward in the coming year:

Fourth Key Question: Is Attempted Pre-Funding Real? If Not, How Does That Affect the Answers to the Questions About Fairness and Benefit Size? ...The imminent retirement of the relatively large baby-boomer cohorts and sustained improvements in longevity are expected to cause the ratio of retirees to workers to rise rapidly over the next 30 years. In these circumstances, maintaining Social Security contributions and benefits that are stable relative to peoples’ wages while working implies that the system will collect more revenues than it pays out as benefits in the near term when the ratio of retirees to workers (the old-age dependency rate) is relatively low. It also implies that the system will pay more benefits than it collects in taxes later when the old-age dependency rate is relatively high. This financing strategy is reasonable provided that the near-term surplus revenues are safeguarded in a way that allows them to be used in the future to pay for benefits.

Alan Greenspan versus Naomi Klein

This is part of a longer interview of Alan Greenspan and Naomi Klein:

Alan Greenspan vs. Naomi Klein on the Iraq War, Bush's Tax Cuts, Economic Populism, Crony Capitalism and More, Democracy Now [Watch 128k stream, Watch 256k stream]: AMY GOODMAN: ...We welcome you both to Democracy Now! ... You worked with six presidents, with President Reagan, with both President Bushes. You worked with President Ford, and you worked with Bill Clinton, who you have called a Republican president; why?

ALAN GREENSPAN: That was supposed to be a quasi-joke. ... I’m a libertarian Republican, which means I believe in a series of issues, such as smaller government, constraint on budget deficits, free markets, globalization, and a whole series of other things, including welfare reform. And as you may remember, Bill Clinton was ... doing much that same agenda... [H]e is a centrist Democrat. And that's not all that far from libertarian Republicanism. ...

AMY GOODMAN: Alan Greenspan, let's talk about the war in Iraq. You said what for many in your circles is the unspeakable, that the war in Iraq was for oil. Can you explain?

Paul Krugman: Sad Alan's Lament

Paul Krugman takes issue with Alan Greenspan's contention that he didn't mean to endorse the Bush tax cuts:

Sad Alan’s Lament, by Paul Krugman, Commentary, NY Times: When President Bush first took office, it seemed unlikely that he would succeed in getting his proposed tax cuts enacted. The questionable nature of his installation in the White House seemed to leave him in a weak political position, while the Senate was evenly balanced between the parties. It was hard to see how a huge, controversial tax cut, which delivered most of its benefits to a wealthy elite, could get through Congress.

Then Alan Greenspan, the chairman of the Federal Reserve, testified before the Senate Budget Committee.

Until then Mr. Greenspan had presented himself as the voice of fiscal responsibility, warning the Clinton administration not to endanger its hard-won budget surpluses. But now Republicans held the White House, and ... Greenspan ... was a very different man.

Suddenly, his greatest concern ... was to avert the threat that the federal government might actually pay off all its debt. To avoid this awful outcome, he advocated tax cuts. And the floodgates were opened. ...

Mr. Greenspan now says that he didn’t mean to give the Bush tax cuts a green light, and that he was surprised at the political reaction to his remarks. ... But ... if Mr. Greenspan wasn’t intending to lend crucial support to the Bush tax cuts, he had ample opportunity to set the record straight...

His first big chance to clarify himself came a few weeks after that initial testimony, when he appeared before the Senate Committee on Banking, Housing and Urban Affairs.

Here’s what I wrote following that appearance: “Mr. Greenspan’s performance yesterday ... was a profile in cowardice. Again and again he was offered the opportunity to say something that would help rein in runaway tax-cutting; each time he evaded the question... He declared ... that he was speaking only for himself, thus granting himself leeway to pronounce on subjects far afield of his role as Federal Reserve chairman. But when pressed on the crucial question of whether the huge tax cuts that now seem inevitable are too large, he said it was inappropriate for him to comment on particular proposals.

“In short, Mr. Greenspan defined the rules of the game in a way that allows him to intervene as he likes in the political debate, but to retreat behind the veil of his office whenever anyone tries to hold him accountable for the results of those interventions.”...

I received an irate phone call from Mr. Greenspan ... in which he demanded to know what he had said that was wrong. In his book, he claims that Robert Rubin ... was stumped by that question. ... I certainly wasn’t: Mr. Greenspan’s argument for tax cuts was contorted and in places self-contradictory, not to mention based on budget projections that everyone knew, even then, were wildly overoptimistic.

[T]wo years later, when the administration proposed another round of tax cuts, even though the budget was now deep in deficit..., guess what? The former high priest of fiscal responsibility did not object.

And in 2004 he expressed support for making the Bush tax cuts permanent —... tax cuts he now says he didn’t endorse — and argued that the budget should be balanced with cuts in entitlement spending, including Social Security benefits, instead. ...

In retrospect, Mr. Greenspan’s moral collapse in 2001 was a portent. It foreshadowed the way many people in the foreign policy community would put their critical faculties on hold and support the invasion of Iraq, despite ample evidence that it was a really bad idea.

And like enthusiastic war supporters who have started describing themselves as war critics now that the Iraq venture has gone wrong, Mr. Greenspan has started portraying himself as a critic of administration fiscal irresponsibility now that President Bush has become deeply unpopular and Democrats control Congress.

_________________________
Previous (9/14) column: Paul Krugman: A Surge, and Then a Stab

"A Deliberate Deficit"

James Tobin in July, 1985:

Cutting Social Security Is the Wrong Answer, by James Tobin, Letter to the Editor, NY Times, July, 1985:

To the Editor:

Congress should not touch Old Age and Survivors Insurance (O.A.S.I.), ''Social Security'' in common parlance, this year. Leaving it alone is not just interest-group politics. It is good public policy.

The Greenspan-O'Neill-Reagan compromise of 1983, bipartisan statesmanship at its best, adjusted both benefits and taxes, and assured the solvency of the O.A.S.I. trust fund well into the next century. According to official median projections, surpluses of O.A.S.I. tax receipts over benefits will be helping to balance the unified budget until 2020.

Demographic and economic trends are likely to bring trouble thereafter, forcing choice between raising payroll taxes to maintain benefits at their traditional ratio to wages (about 40 percent on average) and lowering that earnings-replacement ratio. Baby boomers and their descendants (baby slumpers?) have time and, one hopes, wisdom to work it out for themselves. Let them do it, Peter G. Peterson (''Why Subsidize the Monied Classes?'' Op-Ed, July 18), and don't vent your hysteria about the 21st century on the inflation-indexed benefits promised to beneficiaries for the rest of this one. ...

Delaying cost-of-living adjustments six months was one of the 1983 measures. Now the Administration and the Senate want to make further permanent cuts in real benefits by tampering with the COLA again. Would they dare to propose the same cuts in dollars? Even if inflation were zero? Can you explain why you support this sneaky tactic (''Benign Trickery on Social Security,'' editorial, April 30), or why personal-income-tax indexing is not equally fair game?

Young people doubt that their payroll taxes will bring them any pensions when they retire; the July 13 Op-Ed piece by Caroline Fredrickson, a Yale senior (''Youth Should March on Washington''), is symptomatic. The evidence that O.A.S.I. benefits are just as vulnerable as any other Federal outlays to fiscal expediency and political whim is bound to reinforce such cynicism. ...

Proposed cuts in O.A.S.I. are neither necessary nor sufficient to improve the Federal fiscal outlook. General tax increases are the answer, as any arithmetician outside the White House knows. Tom Wicker (''A Deliberate Deficit,'' column, July 19) has discovered what was perfectly clear in 1981, that the Reagan strategy was to create deficits in order to bludgeon Congress into axing Federal social spending, including ''entitlements.'' And now perhaps you will urge Congress to face squarely the true fiscal problem.

James Tobin Springbrook, Wis., July 20, 1985 The writer is Sterling Professor of Economics at Yale University.

FRB Dallas: The U.S. Budget Deficit’s Uncertain Prospects

This Economic Letter from Jason Saving of the Dallas Fed examines potential paths for the budget deficit in coming years:

Fiscal Fitness: The U.S. Budget Deficit’s Uncertain Prospects, by Jason L. Saving, Economic Letter, Federal Reserve Bank of Dallas, Vol. 2, No. 4, April 2007: Recent headlines tell us U.S. budget deficits have been shrinking in the past few years, but Washington’s fiscal fitness remains a matter of concern.

The International Monetary Fund, for example, has argued that worldwide economic growth will be noticeably weaker in the future if the U.S. doesn’t get its fiscal house in order. In January, Federal Reserve Board Chairman Ben Bernanke told Congress that the U.S. faces an impending fiscal crisis if it fails to address key budget issues.[1]

Such warnings call for a sober examination of prospects for the nation’s budget deficits. The most recent proposal envisions eliminating them within six years, but doing so will require lawmakers to overcome several significant obstacles. Other uncertainties emerge from the recently approved pay-as-you-go, or paygo, rules and their effect on potential reforms of the alternative minimum tax (AMT). Both paygo and the AMT play important roles in another major fiscal question—the fate of the 2001 and 2003 tax cuts. Even if we manage to handle these short-term issues, the long-term challenge posed by entitlements is significantly greater, with no easy solutions in sight.

The inescapable conclusion is that we face a daunting fiscal situation, one with potentially harmful implications for the U.S. economy.

Spending Growth
The federal deficit has fallen for three straight years—from a record $412 billion in 2004 to $248 billion in 2006. In February, President Bush released a proposed budget under which red ink would decline to $244 billion this year and $187 billion in 2009. The document projects a surplus of $61 billion in 2012 (Chart 1).

What assumptions underlie these figures—and are they likely to hold? The proposed budget assumes 3 percent real annual growth in gross domestic product (GDP) and 4.8 percent unemployment between now and 2012, figures that aren’t out of line with most forecasts. But it also assumes that real spending growth will be held to 0.4 percent a year, very low by historical standards.

Past budgets have been presented with similarly inspiring calls to rein in government spending. If this year’s targets were to be similarly disregarded, what might the deficit picture look like? To answer this question, let’s look at the average annual increase in real federal outlays under the past few administrations (Chart 2).

Real outlays have grown at a 4.6 percent annual rate since President Bush took office in 2001, compared with 2.7 percent under Ronald Reagan and 0.8 percent under Bill Clinton. To some extent, the faster spending growth is expected, given that we are now using the post-Cold War “peace dividend” to fight the war on terrorism. Defense spending has indeed been sharply higher in recent years, but nondefense outlays have also risen more rapidly, growing at a real annual rate of 3.5 percent.

A Bargain at Any Price

Atrios on the Social Security report released today:

"Fixing" Social Security, Atrios: In the summary overview we have this:

Social Security could be brought into actuarial balance over the next 75 years in various ways, including an immediate increase of 16 percent in payroll tax revenues or an immediate reduction in benefits of 13 percent or some combination of the two.

Roughly, this would require increasing both the employee and employer share of the tax from 6.2% to 7.05% (there might be some employment/wage impacts of such a change so this is a rough take).

A small price to pay to ensure Robert Samuelson never writes another column.

And it's not even clear that we'll have to pay that.

Kash at The Street Light has more on the report, including some graphs I left out, but the basic message is that little has changed, though both trust funds are now expected to last an additional year:

Social Security and Medicare Outlook, by Kash: Today the 2007 reports on the Social Security and Medicare programs were released. For a summary, see the Status of the Social Security and Medicare Programs.

One of the most interesting things about the report is the contrast between the status of the two programs. From the summary:

The financial condition of the Social Security and Medicare programs remains problematic; we believe their currently projected long run growth rates are not sustainable under current financing arrangements.

Social Security

Projected OASDI tax income will begin to fall short of outlays in 2017, and will be sufficient to finance only 75 percent of scheduled annual benefits in 2041, when the combined OASDI Trust Fund is projected to be exhausted. Social Security could be brought into actuarial balance over the next 75 years in various ways, including an immediate increase of 16 percent in payroll tax revenues or an immediate reduction in benefits of 13 percent or some combination of the two.

Medicare

As we reported last year, Medicare's financial difficulties come sooner-and are much more severe-than those confronting Social Security. While both programs face demographic challenges, the impact is greater for Medicare because health care costs increase at older ages.

...The projected 75-year actuarial deficit in the Hospital Insurance (HI) Trust Fund is now 3.55 percent of taxable payroll, up slightly from 3.51 percent in last year's report... The projected date of HI Trust Fund exhaustion is 2019, one year later than in last year's report... The program could be brought into actuarial balance over the next 75 years by an immediate 122 percent increase in the payroll tax, or an immediate 51 percent reduction in program outlays or some combination of the two.

Yes, you read that correctly. The SS program will only be able to cover about three-fourths of its expenses by the year 2041; the Medicare program will reach almost the same point in 2019. Fixing the SS shortfall would require a 16 percent increase in payroll taxes; fixing the Medicare shortfall would require a 122 percent increase in payroll taxes. ...

But given the enormous variation in the outcomes one gets depending on the assumptions one makes, the main point I take from this is not to get too worked up about these long run projections - there's a good chance that they could be substantially wrong, and the problem really could just go away on its own.

The Social Security problem, that is. With Medicare, there are virtually no reasonable assumptions that one can make that make the problem go away.

Finally, it's worth noting one last interesting detail. From the summary ... President Bush must, by law, propose legislation that at least attempts to address the Medicare problem with his next budget, next January. So after six years of ignoring the problem (and in fact making it far worse, thanks to the prescription drug benefit he championed without thinking about how to pay for it), Bush must finally go on record with how he thinks the problem should be solved.

Robert Samuelson: Boomer Boomerang

Once again, Robert Samuelson lumps all the social insurance programs together and foresees a dire future, in this case generational warfare. But as Dean Baker continually and correctly reminds us, Social Security is not the problem, and the programs themselves are not to blame - Medicare is not the cause of the growth in costs for health care:

The Washington Post ... complained about ... "the coming crisis in Social Security and Medicare." The non-partisan Congressional Budget Office's most recent projections show that Social Security can pay all scheduled benefits, with no changes whatsoever, until 2046, and roughly 75 percent of scheduled benefits for many decades after that date, even if no changes are ever made. ...

The Medicare story of course boils down to projections of exploding health care costs. If the health care system is not fixed, then "fixing" Medicare is irrelevant. We can zero out the program, but exploding health care costs would still devastate the economy. If the health care system is fixed, so that costs in the U.S. are in line with health care costs in other wealthy countries, then Medicare would be easily affordable. ...

I think the last point is too often missed - it's not the Medicare program, it's the growth in health costs that is the source of the dire projections for rising budget deficits.

Nevertheless, here's Robert Samuelson complaining about the budget pressures from the Social Security, Medicare and Medicaid programs and the generational divide it will bring about:

Boomer Boomerang, by Robert J. Samuelson, Commentary, Washington Post: Cassandra Devine knows how to solve the coming "entitlements" crisis, preordained when the 77 million baby boomers begin hitting 65 in 2011: Pay retirees to kill themselves, a program she calls "transitioning." Volunteers could receive a lavish vacation beforehand ("a farewell honeymoon"), courtesy of the government, and their heirs would be spared the estate tax. If only 20 percent of boomers select suicide before the age of 70, she says, "Social Security, Medicare, Medicaid will be solvent. End of crisis."

Okay, Devine is a 29-year-old fictional blogger in Christopher Buckley's satirical novel "Boomsday." Infuriated at the injustices awaiting her generation, she becomes an instant media celebrity with a gift for incendiary rhetoric. "Someone my age will have to spend their entire life paying unfair taxes, just so the Boomers can hit the golf course at sixty-two and drink gin and tonics until they're ninety," she tells one TV reporter. ...

First, a generational backlash is inevitable. ...[T]he idea that younger workers will meekly bear the huge tax increases needed to pay all boomers' promised benefits is delusional. The increases are too steep, and too many boomers -- fairly wealthy and healthy -- will seem undeserving.

Consider: In 2007, Social Security, Medicare and Medicaid constitute 44 percent of the $2.7 trillion federal budget. To pay all future benefits could ... easily require tax increases of 30 to 50 percent by 2030. ...

Second, boomers will want even more benefits...: closing the "doughnut hole" -- a gap of coverage -- in Medicare's drug benefit; more lenient tax treatment for retirement accounts; more payments for nursing homes.

Out in front will be the 38-million-member AARP, the nation's most powerful interest group. In the past four years, notes National Journal, it's spent $88 million on lobbying. ... AARP's new public relations campaign (slogan: "Divided We Fail") misleadingly aims to project an unselfish and high-minded image. In practice, it means AARP will support higher government spending for all age groups, which (of course) will increase taxes further for tomorrow's workers.

For example, AARP urges the expansion of SCHIP, a program of health insurance for poor children that, ironically, illustrates the nation's twisted priorities. In 2007, SCHIP will cost $5.7 billion; Social Security and Medicare, $1 trillion. Well, maybe SCHIP should be expanded, but only if -- a test of AARP's real commitment -- cuts in Social Security and Medicare benefits pay for the expansion. A doubling of SCHIP would require cuts of about one half of 1 percent.

Social Security and Medicare are an essential part of the social fabric. ... But the vast benefits -- paid too early and too indiscriminately -- have become disconnected from genuine need. Unless the two are reconnected, these successful programs will tear at the social fabric. It is unfair to blame only baby boomers for not acting preemptively... Still, boomers deserve special disapproval.

"Baby Boomers," says Buckley's Devine, "made self-indulgence a virtue." Sure, that's a stereotype, but for opinion leaders and politicians, it is uncomfortably accurate. Consider Newsweek. It has a regular feature, "The Boomer Files," that celebrates boomer musicians, comedians, sports heroes and TV series. It discusses how boomers are "redefining the 'golden years' " -- but not a peep about the costs for their children.

I was born in late 1945 and count myself a part of this failure. In our careless self-absorption, we are committing a political and economic crime against our children and perhaps -- when they awaken to their victimization -- even ourselves.

He says:

Well, maybe SCHIP should be expanded, but only if -- a test of AARP's real commitment -- cuts in Social Security and Medicare benefits pay for the expansion.

Why does the expansion of SCHIP have to be paid for by reducing Social Security and Medicare as some test of AARP's commitment to children? I don't see that, there are plenty of other places to get the money. The program cost $5.7 billion in 2007. How much revenue was lost from tax cuts? Lots, no matter what the Lafferites try to tell you. The "twisted priority" is that there any poor children at all without health insurance.

Krugman vs. Barro

From the archives, a debate between Paul Krugman and Robert Barro:

The Charlie Rose Show, November 1, 2004:  CHARLIE ROSE: ... With only days until the election, domestic policy remains as much a concern for Americans as Iraq or national security. Joining me now two leading economists, Paul Krugman and Robert Barro. ... I'm pleased to have both of them at this table. Are tax cuts for the rich good for economic growth, for those people who make in this -- using the political numbers of our time, people who make more than $200,000 a year?

PAUL KRUGMAN: Not if they add to a budget deficit. Not if whatever arguments you can make for them are outweighed by the fact that it is adding to the amount of money the government is borrowing.

CHARLIE ROSE: I'm trying to get at this question. So, what is the basic difference between the two of you with respect to where this economy is and what it needs?

PAUL KRUGMAN: We have differences about what's effective for the economy as well, but the biggest difference is value. I want to maintain the social insurance institutions. I want to maintain Social Security, Medicare and Medicaid. And I want some from further expansion of health insurance. So I say look, you know, we don't have enough revenue as is. I don't want more tax cuts that will further undermine the revenue base that makes it possible to have these programs that sand off some of the rough edges of capitalism. And Robert will have to talk for himself on how he wants to go. But let me put it this way. If you are going to ask me about the Bush tax cuts, is the criterion, is the economy in better shape now currently than it would be if nothing had been done? Probably. I think we got some stimulus out of these tax cuts.

ROBERT BARRO: No, I disagree with a lot of this. Because I think where we are now, which is actually quite a good economy -- owes quite a bit to the 2003 tax cut plan. And I should distinguish a lot between the 2003 and 2001 tax cut plans. They are really quite different. The big thing about the 2003 plan is that it didn't just heap money to people. It didn't just particularly give money to people at increased incentives to do things. It did that particularly by accelerating the marginal income tax rate cuts. It did it by cutting some of the tax rates that pertain to saving. It motivated people to work more, to enhance productivity, to increase investment. It worked great. I mean, since early 2003, the economy has done extremely well. And I can't prove it for sure, but I think it is a very convincing case that that tax cut in 2003 was a lot responsible for it.

CHARLIE ROSE: But what about his basic argument that there is a difference in terms of value judgment here, in understanding distinctions between the two of you?

Arnold Kling: Guilty as Charged

Arnold Kling responds to my post on global warming and Social Security. I said:

Here's what I've noticed. Some of the same people who argue there's too much uncertainty about the climate 75 years in the future to justify drastic action now use the so-called crisis in Social Security funding 75 years from now (which is far more uncertain than climate change) to argue for drastic change today.

He says he's guilty as charged, but for good reason:

Social Security and Global Warming, by Arnold Kling: ...The reason we should try to fix Social Security now is that the cure can be painless now. The problem is that under conservative assumptions about productivity, promised future benefits exceed future revenues by an ever-growing amount. So cut promised future benefits, and then if productivity does well, you can restore benefits if you like. The point is, planning for the worst case scenario does not hurt anybody in the non-worst-case scenario.

In the case of global warming, taking drastic steps now to prevent the worst-case scenario has real costs, against benefits that are potentially nil--in fact likely nil, for a variety of reasons. So, contra Jane and Mark, it is possible to be rationally precautionary about Social Security and not so much about global warming--or precautionary in a different way about global warming, as I've been suggesting.

As an aside, I disagree with Mark's assessment of the relative likelihood of a Social Security crisis and a global warming crisis. ...

If I were to put numbers on it, my subjective probabilities would be that there is about a 5 percent chance of a significant shortfall in Social Security down the road, and less than a 1 percent chance of a climate catastrophe caused by carbon dioxide emissions. The climate catastrophe is potentially much, much worse, which makes it a legitimately larger worry. But the cost of acting now on Social Security is essentially zero, and the cost of acting now on carbon dioxide emissions is huge…

Arnold also says, in reference to a December 2004 post by Jane Galt about him:

Before I plead guilty, let me remind Mark that Jane Galt made this point over two years ago.

I appreciate the reminder. I didn't have a blog until a few months after Jane's post and had only just discovered econ blogs at that time so he's right, I missed that one.

I'm confused about something though. If you were to tell me that I will receive 1 million dollars on the day I turn 67 would that change my behavior today? Yes. I'm pretty sure it would. Would I feel better off today? Yes again.

So, go in the other direction. If you tell me I will have less money in the future because my benefits will be cut, maybe not by a million dollars but by enough to matter, will that change my behavior today? Yes it will, and I’ll feel worse off.

More importantly, is it reversible like Arnold says? Suppose I give up a vacation and save instead because I believe benefits will be cut in the future. I can't always reverse that later (I can't necessarily climb the same mountain or ski the same slopes when I'm older, and even if there's no physical constraint, the opportunities will differ with time). Or maybe the benefit cuts make it so I can't simultaneously send a child to college and save as much as I need to for retirement due to resource constraints. How does cutting future benefits, even probabilistically, leave me unaffected in such a case?

The point is that changing expected future benefits alters the time paths for consumption and saving (a premise, or at least a hope, of those in favor of privatization of Social Security)  which, contrary to the claim above, does affect people "in the non-worst-case scenario."

Update: Angry Bear has more, including rebuttal comments by Arnold Kling.

The Welfare State or The Insurance State?

Robert Samuelson is at it again:

Welfare State Stasis, by Robert J. Samuelson, Commentary, Washington Post: ...In 1956, defense dominated the budget; the Cold War buildup was in full swing. The welfare state, which is what "payments to individuals" signifies, was modest. Now everything is reversed. ... The welfare state has made budgeting an exercise in futility. Both liberals and conservatives, in their own ways, peddle phony solutions. ...

It might help if Americans called welfare programs -- current benefits for select populations, paid for by current taxes -- by their proper name, rather than by the soothing (and misleading) labels of "entitlements" and "social insurance." That way, we might ask ourselves who deserves welfare and why. ...

[M]ost Americans don't want to admit that they are current or prospective welfare recipients. They prefer to think that they automatically deserve whatever they've been promised simply because the promises were made. ...

To the archive:

Fire Insurance is not Welfare and Neither is Social Security, by Mark Thoma: Robert Samuelson, and many others, appear to believe that any time there is a transfer of income between individuals or groups it is welfare. This is wrong. According to Samuelson:

Welfare is a governmental transfer from one group to another for the benefit of those receiving. The transfer involves cash or services (health care, education). We have welfare for the poor, the old, the disabled, farmers and corporations. Social Security is mainly welfare...

Not it isn’t. Social Security is mainly a means of insuring against economic risk. It is fundamentally an insurance program, not a saving program, and as such it is not welfare.

Just because an economic activity transfers income from one person or group to another does not make it welfare. ... Social Security is ... insurance ... against economic risk as I explain in this Op-Ed piece. ...

There is an important distinction between needing insurance ex-ante and needing it ex-post. Insurance does redistribute income ex-post, but that doesn't imply that it was a bad deal ex-ante (i.e., when people start their work lives). ...

Angry Bear agrees with me on this and the two of us have been independently saying the same thing (in fact, I first encountered AB in a Google search for Social Security, insurance, and risk). As AB said (the full text is well worth reading):

What does all of this have to do with Social Security? Those who are hard-working, fortunate, and not too profligate will have a large nest egg at retirement and Social Security will account for only a small portion of their retirement portfolio. This is tantamount to paying for insurance and then not needing it. This happens all the time -- every year someone fails to get sick or injured and, while surely happy in their good health, would have been better off not buying insurance. That's the nature of insurance: if you don't need it, then you'll always wish you hadn't purchased it. Only in the context of retirement insurance is this considered a crisis.

On the other hand, those with bad luck or insufficient income will not have a nest egg at retirement. Because of Social Security, instead of facing the risk of zero income at retirement, they are guaranteed income sufficient to subsist.

This is precisely like the insurance example I worked through above: people with good outcomes will wish they hadn't paid into the insurance fund; those with bad outcomes will be glad they did. Ex-ante, everyone benefits from the insurance. Overall, society is better off because risk is reduced; because people are risk-averse, the gains are quite large.

When I think of welfare, I think of pure money transfers from one group to another without any economic basis for the transfer. In such cases, one person’s gain arises from another’s loss. But economic activity that results in the exchange of goods and services is different. It is not a zero sum game. One person’s gain does not come at the expense of someone else.

The main feature of Social Security is not welfare as Samuelson asserts. The main feature is insurance against economic risks and as such it makes us collectively better off. Calling it welfare when it isn’t is misleading and causes unnecessary class distinctions and resentments from the losers ex-post. More importantly, it ignores and obscures the important role Social Security plays in society as insurance against the economic risks we all face.

If you think you are so rich and powerful that you don’t need such insurance, consider this. The stock market collapse of 1929 at the onset of the Great Depression wiped out substantial quantities of wealth. The typical stock was worth only one sixth its pre-crash value once the bottom was reached. Whatever insurance existed in the stock market evaporated as the crash unfolded.

It wasn’t the poor jumping out of windows on Wall street. If you think it can’t happen to you, think again.

[See also "The Need for Social Insurance."]

What Solvency Crisis?

James Pethokoukis at U.S. News & World Report's blog Capital Commerce emails:

Bush's Secret Plan to Save Social Security, by James Pethokoukis: Is the Social Security solvency "crisis" really not a crisis at all? Maybe not, if Edward Lazear, chairman of President Bush's Council of Economic Advisers, has his numbers correct. Yesterday, Lazear held a media briefing about the 2007 Economic Report of the President. During the press conference, Lazear said the following about the future rate of productivity growth:

I wouldn't necessarily say 3 percent. But I would expect that we could expect to see high rates, perhaps not quite at the 3 percent level, but somewhere higher than 2 percent. I would expect somewhere closer to 3 percent...

...Now here is why Lazear's prediction is important: Higher productivity growth–and the stronger economy and higher wages that it implies–would completely solve Social Security budget woes for the next 75 years. Right now, the Social Security Administration is assuming that long-term productivity growth is 1.7 percent. An alternative, rosier forecast has it at 2 percent. If the rosier forecast were correct, the 75-year shortfall would be 25 percent less. But if Lazear's even more optimistic prediction is right, the 75-year shortfall would be eliminated.

Here is what economist Brad DeLong ... wrote in his popular blog on the topic: "Each 0.1 percentage point increase in the growth rate of productivity reduces the long-horizon Social Security deficit by approximately 0.1 percent of taxable payroll. Elementary. Obvious to everyone who has even a surface knowledge of how our current system works. Real wage and productivity growth of 3 percent per year ... would wipe out the 75-year deficit."

Now DeLong doubts such growth is possible. But Lazear thinks it is doable with the right policies: "And I think we do have that kind of an economy, because, again we have a relatively low-tax economy, we have an economy that's open to trade for the most part, we've encouraged foreign investment, all of which have been important and instrumental in creating our economic growth."

Those on the left might also add other factors that they think are necessary for growth, such as greater public investment in basic scientific research or a modified social insurance system–improved healthcare, wage insurance–to make worried workers more willing to take entrepreneurial risks like starting their own business. ...

Here's what I've noticed. Some of the same people who argue there's too much uncertainty about the climate 75 years in the future to justify drastic action now use the so-called crisis in Social Security funding 75 years from now (which is far more uncertain than climate change) to argue for drastic change today.

Progressive Indexing

One proposal for Social Security that is floated repeatedly is to move to progressive indexing. Currently, until retirement, Social Security payments grow with wage inflation which, according to theory, ought to grow at the rate of inflation plus the rate of productivity growth. This allows a worker to receive payments consistent with the standard of living at the time of retirement.

Under progressive indexing, payments are linked to inflation only, they don't increase with productivity. What difference would this make over the life of a worker?

Assume a standard of living equivalent to $10,000 per year in 1960. At a 2% rate of inflation and a 2.5% rate of productivity growth, here is the difference between wage indexing and inflation indexing:

At the end of 40 years, (e.g. start working at 25, retire at 65) the difference in nominal income would be $58,164 - $22,080 = $36,084.

But what is the difference in real term? The next graph shows the difference between a constant real income of $10,000 - as with inflation indexing - and income that grows in real terms with the rate of productivity of 2.5% as with wage indexing:

At the end of 40 years, after the standard of living has more than doubled, the difference is $26,851 - $10,000 = $16,851. That's how much less, in real terms, a worker eligible for this level of payments would receive at retirement under progressive indexing, a large loss in relative terms.

Update: A comment says this demonstrates price versus wage indexing, not progressive indexing.  Fair enough - I wanted to avoid all the detail and focus on the essence of price indexing which is at the core of progressive indexing proposals (and not have several categories to present with different combinations of price and productivity adjustments). This shows how it would work for those who face a full phase out of productivity growth adjustments. Intermediate cases are easy to figure out from the diagrams. The main goal was to illustrate how these indexing proposals work in general and show the source of any saving from reduced benefits.

Means-Testing Middle Class Benefits

From the Financial Times, Bush's budget proposes more guns, less butter:

Bush wants to means-test middle-class benefits, by Caroline Daniel and Krishna Guha, Financial Times: President George W. Bush presented his $2,900bn budget to Congress on Monday, setting the stage for a confrontation with Democrats by making greater means-testing for middle-class benefits a central part of his proposals to address entitlement reform.

The budget represents a challenge to parts of the system of entitlements enacted as part of the Great Society agenda of the 1960s, with plans to cut Medicare spending, the main publicly funded health insurance programme for those over 65, by raising premiums for wealthier recipients.

That could save $66bn over five years, according to budget estimates, and up to $9,000bn during the next 75 years, according to some analysts...

The budget underscored Mr Bush’s political priorities for his final two years, with proposals to aggressively fund defence, the Iraq war, homeland security and US diplomatic operations generously. According to budget forecasts, the deficit will decline from 1.8 per cent in fiscal 2007 to 1.6 per cent in fiscal 2008, before declining further to turn into a surplus of 0.3 per cent of gross domestic product in 2012.

Democrats, however, expressed doubts about the budget, with one committee chairman dismissing the rise in defence spending to a record $481bn, as “staggering”, while others questioned the political viability of the entitlement cuts. ...

Also, Greg Ip of the Wall Street Journal talks to former Treasury Secretary John Snow about Social Security reform and Sarbanes-Oxley. Interestingly, Snow disagrees with the administration's claim the Sarbanes-Oxley is causing U.S. capital markets to lose competitiveness. I have to say, Snow sounds much more reasonable now that he no longer has to sell administration policy:

A Bridge Too Far, by Greg Ip, Washington Wire: Former Treasury Secretary John Snow says the Bush administration’s first effort to overhaul Social Security failed because the administration was “intransigent” on private accounts.

Snow ... says that the administration’s insistence that a Social Security fix include private accounts carved out of the program shifted the focus away from making the retirement program solvent, and added that would have been better to propose private accounts on top of the existing program as some Democrats have suggested.

“You can’t do health care reform or Social Security reform …. without a bipartisan consensus,” Snow said... “If we made a mistake, it was not approaching it in more of a bipartisan way.”

“We were pretty intransigent about the private accounts,” he said. The administration’s “condition for engaging” was private accounts carved out of the existing social security system, said Snow... “That was a bridge too far for the Democrats.”

Snow said the administration may have succeeded “If we had been a little cleverer and talked about augmentation of 401(k)’s, augmentation of private savings, but not by diverting money out of Social Security. I think that that was a winning formula.”

“What wasn’t salable was the fundamental argument that we make Social Security stronger for our children and grand children by diverting money out of it: putting it into private accounts, running up trillions of dollars of debt in the interim and it will all be okay in 2094,” he said. “That was a losing argument.” ...

Snow said the odds of success are higher this year than in 2005 because Bush has promised to be more bipartisan. Even so, he said, there is “not much, unfortunately” chance of success...

Whether Bush would ever agree to higher payroll taxes as part of a Social Security fix “depends on how badly the White House wants Social Security.” ...

He said it would be “easier” to raise the cap on wages that are subject to payroll tax — $97,500 this year — rather than raising the payroll tax rate itself. “You could, almost with a straight face, … get away with saying we didn’t raise the rates, we just raised the cap.”...

On a separate issue, Snow said, “I don’t think a case can be made that Sarbanes-Oxley is making U.S. capital markets fundamentally less competitive”...

Much of the loss of market share by U.S. capital markets, he said, reflects the natural, growing sophistication of other markets. “Just like we’ve lost manufacturing because other people could do manufacturing at comparable quality and lower cost, it applies in financial markets as well. As other substitutes develop for whatever it is you’re selling, you’re going to have a lower market share.”

Snow said while Sarbanes Oxley should be re-examined, chief executives ought not to seek a wholesale change.. He said CEOs are still held in low public esteem and many Americans are still bitter about jobs and benefits lost in the last round of scandals...

James Galbraith: Cutting Social Security, Medicare and Medicaid Should be Off the Table

James Galbraith disagrees with Ben Bernanke's assertion that we are headed for fiscal disaster unless there are drastic changes in Social Security, Medicare and Medicaid:

The baby boom is old news, by James K Galbraith, Commentary, Guardian: The Federal Reserve noise machine is back at work, in the form of new testimony by Chairman Ben Bernanke, grimly warning the Senate Budget Committee of a future crisis. ... And what, or should I say who, is the source of this crisis? ... Why ... I am! I'm a Baby Boomer ..., a demographic disaster, a ticking time bomb, a walking road to ruin...

This is news? Bernanke should check with the Census Bureau. They will advise, I think, that the tale of the Baby Boomers isn't exactly new. The last of us was born, so they say, in the early 1960s. We've been counted and schooled. ... Nobody in the history of the universe is better documented than we are.

Or Ben might ask Alan Greenspan. Did he know about the Baby Boomers when he chaired a commission on Social Security back in 1983? ... I'm fairly sure he was aware, in general terms, of my existence. And his commission, back then, knew exactly how old we'd all be when 2008 came around and kids born in 1946 started to retire.

The Greenspan commission put the Social Security system into a pay-in-advance mode. Payroll taxes were raised and the Social Security trust fund built up an enormous surplus, held as US government bonds, ever since. That surplus exists today. Social Security assets are over four times costs right now - and are expected to remain above three times costs for at least the next twenty years. That means interest payments will be coming in, to supplement payroll taxes and meet the bills.

Is there a Social Security financing crisis? No. And there won't be one, either.

Bernanke says that our "problem" is an aging population, plus rising health care costs. The inference is that we, as a society, cannot afford to keep our elderly in modest comfort, or to pay their medical bills. He implies (without quite saying it) that the solution must be cuts in Social Security, Medicare and Medicaid. And that, of course, is what the press picks up.

Here's the truth: By any measure of living standards, we're richer now than ever before. By any projection, we will be richer still in twenty or thirty years. By any measure, we can afford the Social Security program we've got now. And we can afford health care too, although costs are a problem, and getting insurance to those who don't have it is an even bigger problem.

The "fundamental decision" isn't over how much to spend on Social Security, Medicare, and Medicaid. The fundamental decision is: what should happen to today's working Americans, when we get old? For just as my generation didn't appear yesterday, we won't disappear, either, when pensions and health care are cut. We'll just lead poorer, sicker, and shorter lives.

Cutting Social Security, Medicare and Medicaid should be off the table. Now. After that, we can talk, if we must: about letting Bush's tax cuts expire, or reforming health care, or about the money we could save by getting out of Iraq; or, for that matter, about whether there really is, or really will be, a federal deficit problem.

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.

Universal 401(k) Accounts

Tyler Cowen wants to use universal 401(k) accounts to reduce income inequality:

Universal 401(k) Accounts Would Bring the Poor Into the Ownership Society, by Tyler Cowen, Economic Scene, NY Times: Of the current proposals to address income inequality, the universal 401(k) is the most likely to bring general prosperity.

The core idea is simple. The federal government creates tax-free retirement accounts for lower-income Americans, supplementing private accounts where they already exist, and matching personal contributions to those accounts. The amount of the match would depend on the income of the family and how much they save. Gene B. Sperling, senior fellow at the Center for American Progress and the best-known proponent of this idea...

[C]urrently only 55 percent of Americans working full time hold a job with a retirement savings plan; the rate is even lower for part-time workers and the poor. Thus the bottom 60 percent of taxpayers receives only 10 percent of the tax incentives for savings.

A universal 401(k) plan would spread these tax benefits more evenly and induce more Americans to save. ... By directing the benefits toward the neediest, the universal 401(k) savings plan tries to increase economic security in a cost-effective manner.

There is an obvious way to pay for a universal 401(k) plan. For every dollar spent on the universal 401(k), the federal government could spend one dollar less on Medicare and Social Security benefits. ...[T]he resulting benefit freezes and cuts would apply to all recipients, not just lower-income groups, so the poor would still come out ahead.

Since the reform is revenue-neutral, it would not increase tax rates on the work and savings decisions of wealthier Americans. In the longer run, the increased savings and investment would, to some extent, help pay for the additional government transfer of money to the poor.

America would move closer to President Bush’s vision of an ownership society, while addressing income inequality. The poor get more upfront, and their longer-run gains are greater... Furthermore, if we suspect that globalization and information technology will erode future wage gains, increasing the extent of capital ownership will spread the benefits from economic growth more evenly.

It may seem that what the poor need is more money to spend, but the universal 401(k) plan is taking a gamble by encouraging them to lock up more savings. Perhaps support for a culture of savings and discipline is more important than subsidizing additional spending.

The catch is this: the universal 401(k) plan would split the poor into two classes. The first group would allow savings to accumulate and reap the wonders of compound returns for their old age. But other low-income recipients would undermine the intent of the plan. Either they still would not save or, as the government added to their accounts, they would borrow more elsewhere or behave more irresponsibly toward their future in other ways. Their net positions would not much improve.

The uncomfortable truth is that many of the most effective antipoverty measures leave more than a few people behind. A leveraged antipoverty plan offers incentives for the poor to change their behavior in a favorable manner; for these incentives to matter, it has to hurt not to save. If a universal 401(k) is to create a culture of savings and investment, it cannot extend the same benefits to all of the poor.

Poor Americans who are hit by bad luck, like unforeseen medical expenses, would create a policy dilemma. These individuals might seek to remove funds from their 401(k) accounts, but a generous government match in savings would require tough restrictions on removals. ... A successful universal 401(k) plan would have to be run as a tough-minded investment opportunity and not as a welfare program. ...

A fiscally responsible universal 401(k) plan would not make everyone happy. Libertarians and conservatives would be suspicious of government-created accounts. Liberals might not like freezing or reducing future expenditures on Medicare and Social Security. But if we are looking for policy initiatives that address real-world problems and offer something to each side, encouraging low-income savings is a good place to start.

I would describe this as addressing wealth inequality more than income inequality, but that is a minor quibble. As for the proposed policy, proposals with government matches for saving coupled with opt-out saving programs are worth considering as add-on accounts to the present social insurance system. But I can't support the carve-out part of this proposal:

There is an obvious way to pay for a universal 401(k) plan. For every dollar spent on the universal 401(k), the federal government could spend one dollar less on Medicare and Social Security benefits.

I also see this differently:

It may seem that what the poor need is more money to spend, but the universal 401(k) plan is taking a gamble by encouraging them to lock up more savings. Perhaps support for a culture of savings and discipline is more important than subsidizing additional spending.

Perhaps not. The proposal doesn't just encourage the poor "to lock up more savings," at the expense of consumption. If the poor, who are struggling to get by as it is don't "change their behavior in a favorable manner" and voluntarily save more, then "it has to hurt."

I don't think we should expect people who are having a tough time making ends meet to trade present for future consumption voluntarily, or that such a change necessarily represents a "favorable" change in behavior from their or society's perspective.

This seems relevant:

Up for Review: 401(k) Industry, by Tom Lauricella, WSJ: In recent months, a series of lawsuits has raised questions that longstanding business practices in the [401(k) plan] industry may represent illegal forms of collusion. ... A November report by the Congressional Government Accountability Office said some practices "may not be in the best interest" of investors. ...

The GAO ... said current rules result in "piecemeal" disclosure and that investors aren't given information that would help them determine whether they were getting a good deal. The GAO also warned against some of the same practices targeted by the lawsuits, saying they may hide conflicts of interest.

The GAO also said the Labor Department, which is responsible for regulating 401(k) plans, hasn't been collecting the kind of information on the plans that it needs to do the job. ...

Avoiding the Budgetary Bait and Switch

Bruce Bartlett is critical of the Bush administration's cut taxes, spend, and claim it pays for itself policy:

Debts and deficits, by By Bruce Bartlett, Commentary, Washington Times: On Oct. 11, George W. Bush went before the television cameras to proudly announce the budget deficit for fiscal 2006 ... was only $248 billion. This was a great success, he said, because in February the Office of Management and Budget had estimated the deficit would be $423 billion.

If this is the standard for success, one wonders why we didn't do even better. All Mr. Bush had to do was order OMB to make an even bigger mistake... If it had wrongly projected the deficit to be $500 billion or $600 billion in 2006, then Mr. Bush could have announced an even bigger improvement...

In the real world, of course, people measure progress not against some incorrect forecast but against actual results. By this standard, the numbers don't look as good. Mr. Bush inherited a budget surplus of $128 billion in fiscal 2001.. By the following year, fiscal 2002, the surplus was gone and the government had a deficit of $158 billion, which rose to $378 billion in 2003 and $413 billion in 2004, before falling to $318 billion in 2005 and $248 billion last year.

But these figures greatly understate the budgetary turnaround. In January 2001, the Congressional Budget Office (CBO) estimated budget surpluses as far as the eye could see. It projected an aggregate surplus of more than $2 trillion between 2002 and 2006. Instead, we had an aggregate deficit of $1.5 trillion -- a deterioration of $3.5 trillion.

Yet these figures still understate the budgetary damage caused by the Bush administration because it leaves out changes in the budgetary status of entitlement programs such as Social Security and Medicare. ...

Over the next 75 years, these two programs have an unfunded liability of $44 trillion -- $15 trillion for Social Security and another $29 trillion for Medicare.

What is really frightening is that Mr. Bush apparently has no clue the problems of Medicare are twice as bad as Social Security's and are worsening much faster. At the end of fiscal 2002, Social Security's unfunded liability was $11 trillion and Medicare's was just $13 trillion. Today, Social Security is a little worse, but Medicare is much, much worse.

Yet over and over again, Mr. Bush has said we must fix Social Security -- even if we have to raise taxes -- while saying nothing about the way Medicare is hemorrhaging money. He can't because his massive, unfunded program for prescription drugs in 2003 is the principal reason Medicare's financial problems have gotten so much worse since 2002.

Medicare is the biggest worry, no disagreement there. But before we begin using the deficit as a reason to begin slashing valuable social programs, remember that we've had higher debt to GDP ratios in the past and survived. The worry is the future and very specifically, as noted above, Medicare payments are the biggest concern. Thus, getting our health care costs under control is an essential step in bringing the budget into balance.

In light of that, we should be careful to avoid a bait (reducing the deficit) and switch (from solving the health care problem to cutting other social programs) on this issue, particularly since the deficit was enhanced by ill-advised tax cuts.

---

[Health care has been a topic of much recent discussion, e.g. from yesterday see Ezra Klein, Going universal, Commentary, Los Angeles Times and Raging Lefty Watch, by Daniel Gross. On taxes, I don't oppose revenue neutral changes designed to minimize economic distortions and promote fairness. But that's not what we got.]

Is Social Security In Need of Reform?

This commentary on Social Security from the Washington Times isn't exactly what I expected. When private accounts seemed like a possibility, we heard a lot about the Social Security solvency crisis. Private accounts wouldn't actually address the solvency crisis, and as Dean Baker and others have repeatedly told us there is no crisis anyway, but that didn't stop private accounts from being sold as the solution to the solvency crisis when the push for reform first began.

Later, when it became clear that private accounts wouldn't help with solvency, the solvency crisis was used as a way to argue for the need for reform. The idea was to get the ball rolling on the need for reform, then use the legislative majority to steer reform in the direction of private accounts. However, now that private accounts are off the table for all intents and purposes, suddenly there is no solvency crisis and hence no need for reform. After all, most of the reform proposals include lifting the ceiling on contributions for higher income individuals, and such increases in taxes are unacceptable:

Stop raids on Social Security, by Lawrence A. Hunter, Commentary, Washington Times: Advanced maneuvering for the coming White House sellout on Social Security is well under way. The only question remaining is will the legacy-desperate, Iraq-beleaguered president succeed in bamboozling members of Congress into launching a totally unnecessary, strategically disastrous pre-emptive strike on Social Security to raise taxes and cut future benefits in the name of heading off a non-existent "solvency crisis?"

A worrisome sign the White House might actually pull off this scam came last week when one of the president's biggest cheerleaders for his last pre-emptive strike -- the Editors of National Review -- said they were willing to take personal accounts off the table and accept a Social Security tax increase. Here we go again.

Another indication that the sellout is well advanced came ... when ... Rep. Bill Thomas, California Republican, reportedly told an American Enterprise Institute forum on tax havens and tax competition that the people he talks to inside the Bush administration are clearly signaling their willingness to acquiesce with a wink and a nod to higher marginal tax rates as part of a larger fiscal deal.

The administration's advance guard of Chicken Littles, such as the nonprofit FOG Brigade (For Our Grandchildren) -- call them neosolvents or "neosols" -- are fanning out through the Halls of Congress spreading fear about the program's solvency and propagating the urgency of cutting a deal with the Democrats before this president leaves office: It's the legacy, stupid. It looks like the president hopes to tempt Democrats into participating in what might be called "Operation Trinity," a pre-emptive strike on Social Security that forgoes use of conventional personal accounts in favor of three nuclear options: tax increases, benefit cuts and increases in the retirement age.

When confronted with the suggestion the president has taken the conventional option of personal accounts off the table, the White House reacts as it does typically when crossed and starts trashing its critics and placing calls to Capitol Hill twisting the arms of conservative members... "Of course, personal accounts remain on the table," the administration insists, but what they don't say is that the accounts they have in mind are add-on accounts financed not by Social Security surpluses but by a tax increase, aka another new Bush entitlement program...

Social Security's near-term cash-flow situation ... is quite good, scheduled to remain in surplus until 2017; until 2027 if the annual interest due the Trust Fund is taken into account, as it should be. Therefore, higher tax revenues today that enlarged and extended the surpluses would not improve the program's solvency; they would only paper it over with more IOUs and magnify the size of the theft Congress perpetrates on the Trust Fund each year. If Congress wants to do something serious about Social Security's solvency, it should stop the raid on Social Security, not expand it.

Rather than rush to the nuclear options of raising taxes, cutting future benefits and raising the retirement age, if Congress would only stop stealing the Trust Fund surpluses and get about actually paying the Trust Fund the annual interest owed it and then start using those surpluses and interest payments to begin prefunding future retirees' retirement, Social Security could be made solvent for decades to come without raising one new dollar in taxes or cutting a single dollar in future benefits or making old people work one year longer. ...

The Limit as t approaches T

This is one of those all about me posts, so please feel free to skip it.

I'm 50 today. Somewhere around today anyway, I don't actually know the exact day I was born. I know the official date, 12/15/56, but the actual day could be the 14th, 15th, or 16th.

I was born at exactly midnight and my parents were given the choice of which day to choose as my birthday. [When I was a kid, I read a book that said people born a midnight can see ghosts. I thought that was pretty cool. But the empirical evidence since then hasn't lived up to the hopes I had at the time.] My mom says it had to have been between the 15th and the 16th because they chose the date that would keep my birthday as far as possible from Christmas. My dad says he's pretty sure I was born between the 14th and the 15th, but he doesn't have any reason to back it up, that's just what he remembers. They bicker about it if I bring it up. But given that my mom also has a December birthday and is sensitive to keeping birthdays and Christmas separate, and experience with which parent is more likely to have been paying attention to such things, I've always thought my mom's story made sense. So, I guess I'm not actually 50 yet. That won't happen until midnight tonight.

Does turning 50 bother me? Nah. So far, the only thing that really bothers me is having to wear reading glasses. Besides, if I had twelve fingers and toes instead of ten, I'd only be 42. I really haven't thought much about it except when people ask. Maybe I will now.

Okay, enough rambling. There are still lots of things to do, and T is closing in faster than I thought.