Just the facts, Ma’am 1 11 February 2019.

The Congressional Budget Office (CBO) reports that spending on people aged 65 and older[1] has increased as a share of federal spending from 35 percent (2005) to 40 percent (2018) and is projected to rise to 50 percent (2029).  The federal budget deficit is projected to exceed $1 trillion a year from 2022 to 2029.  Proposals recently offered by Democrats intending to run for President in 2020 or to shape the party’s policy for that race may have an effect on this situation.  None of the proposals claim to aim at deficit reduction.  Instead, they target reducing income inequality and/or financing expanded programs.

First, it is proposed to reform Social Security.[2]  As originally designed, Social Security enhanced private preparation for retirement by adding the resources from a tax on currently working people to individual savings and/or pensions.  Today, however, there appears to be a savings crisis among working people.

There is also a financing crisis for Social Security.  The actuaries at the Social Security Administration report that outlays (payments) will soon exceed income (withholding tax revenues).  Thereafter the payments will be paid from an accumulated surplus held in the form of U.S. treasury bonds.  When that trust fund is exhausted by 2034, benefits will have to be reduced.  Currently, about 63 million people receive Social Security benefits.  The number is expected to rise to 89 million by 2030.  The total current cost is about $1 trillion.  The maximum amount of income subject to Social Security tax is $132,900; the current withholding tax on payrolls is 12.4 percent.

Democrats propose to increase the minimum benefit to help lower-income people who have saved less than have higher income people; increase benefits by an average of about two percent; raise the annual cost-of-living adjustment to payments to respond to the reality that retirees consume goods and services in a different pattern than do still-working people; cut the tax on benefits for middle-income recipients while increasing them on upper-income recipients; and increase the payroll tax rate from the current to 14.8 percent by 2040, and the payroll tax would be imposed on incomes above $400,000 a year, while incomes between $132,900 a year and $400,000 a year would not be subject to taxation.

This proposal would permanently fix the financing problem.  It would also increase benefits paid out to some Social Security recipients.  An estimated three-quarters of the extra income would go to covering the looming deficit; the rest would go to increased benefits for lower-income recipients.

[1] Social Security, Medicare, Medicaid.

[2] Robert Pear, “Democrats Push First Major Social Security Expansion Since 1972,” NYT, 4 February 2019.

Campaign Issues 2016 1.

Currently, Social Security faces two fundamental problems.[1]  One fundamental problem is that Social Security is based on a “pay-as-you-go” model: withholding taxes from people who are working pay for the retirement of people who are no longer working.  Fine.  If there are a lot of people working and a smaller number not working, then the system functions smoothly.  What if the number of people working declines relative to the number of those who are not working?  That’s more of a problem.  Taxes on those still working will have to rise to pay for those no longer working.  That is the situation in which Americans find themselves as the “Baby Boom” generation passes out of the work force and into the work-for-me force.

This problem has been around for a long time and people in authority have been trying to devise a solution for a long time.   In 1983 a bi-partisan commission investigated solutions.  Congress followed the commission’s recommendations by raising taxes and extending the age of full eligibility. That fixed the problem for a while, but—of course–“I’m back!”  In a report of 2015, the trustees reported that the Social Security trust fund will go broke in 2034, with the Social Security Administration able to pay less than 79 cents on the dollar of benefits.  In 2011-2012, President Barack Obama sketched a budget compromise agreement in which Social Security would be continually eroded by inflation.  The Republicans weren’t buying this idea.  Another solution, which could be combined with de-coupling Social Security benefits from the inflation index, would be to raise the cap on with-holding taxes.  Currently, only income below about $134,000 a year is subject to with-holding.  Raising that ceiling would generate a lot of revenue.  Taken together, these proposals probably offer a manageable means to solve the Social Security problem for the immediate future.

A second fundamental problem is that Social Security was never designed to be a full retirement pension.  It was meant to provide a basic income for retirees, who were expected to save from current income to pay for the bulk of their future retirement needs.  However, many members of the “Baby Boom” did not do any significant saving for their retirement.

Now, under the influence of the Bernie Sanders campaign, the Democrats have come out for expanding Social Security to make its benefits more generous.  Hillary Clinton has pledged to increase benefits for widows and for those who stop working to be care providers for children or sick family members; to resist reduction of cost-of-living increases; and to resist increasing the age for full eligibility.  She would pay for these increased benefits through higher taxes on the wealthy.  Still, even these proposals don’t go as far as the left wing of the party wants.  President Obama has remarked that “a lot of Americans don’t have retirement savings [and] fewer people have pensions they can really count on.”  How to make up for this lifetime lack of thrift?

Current proposals include increasing the benefits for all recipients while providing additional benefits for the uncertain number of the “most vulnerable”; and/or increasing cost-of-living adjustments to include medical costs.

Several questions arise out of these problems.  First, which “Baby Boomers” did not save and why did they not save?  Moral recriminations are going to be a part of this debate.  Second, what are these proposals likely to cost?  Third, how large a share of the well-off will have to be taxed more heavily?  Just the “1 percent” or the “5 percent” or anyone who did manage to save?  Fourth, do Americans want to transition Social Security from the current partial pension system to a full-blown national retirement system?   What would a long-term system require?

[1] Robert Pear, “Driven by Campaign Populism, Democrats Unite on Social Security Plan,” NYT, 19 June 2016.

The Social Trampoline.

In 2012, 46 percent of the US Government’s non-interest spending went to Social Security, Medicare, and Medicaid; by 2030 it was projected to rise to 61 percent.  That is, these safety-net programs either will crowd out spending on other things or force a substantial increase in in government spending over-all.[1]

One driver here is the retirement of the “Baby Boom.”  In 2012 there were 49 million people on Medicare (and presumably s slightly smaller number receiving Social Security).  By 2030, that number is projected to grow to 80 million.

Another driver is high medical costs.  In 2011, Medicare spent $560 billion.  By 2022, Medicare spending is projected to rise to $1.1 trillion.

“Reforming” entitlements really means cutting someone’s income.  Whose ox is going to get gored?

Hoping to avoid this ugly reality, people grasp at straws.  Medicare is already “means-tested” (that is, individuals/couples making more than $85,000/$170,000 a year pay higher premiums).  Raising the Medicare eligibility age from 65 to 67 would cut costs by about 5 percent over the long run because those people are basically still healthy.  Raising the Social Security retirement age to 70 would cut spending by 13 percent by 2060.

Cutting medical costs would involve reducing the incomes of medical personnel, hospitals, and drug manufacturers.[2]  Democrats want to do this through government regulation by bureaucracies subject to pressure from elected representatives.  Yea, right.  Republicans want to do it “through the market:” by giving everyone some miserly sum and making individuals bargain with big corporations.  Yea, right.

Avoiding these fights by just raising taxes on the wealthy could have a certain broad appeal.[3]  However, rich people are adept at defending themselves.  Even if they had to put up with higher taxes for a while, they would eventually get them over-turned.  Democrats are always going on about how high taxes on the rich were commonly accepted for a long time after the Second World War.  Where do they think that the Reagan and Bush II tax cuts came from if not from simmering resentment of high income earners?

The simplest fix for Social Security would be to raise or remove the cap on payroll taxes on incomes over $110,000 a year.  That would solve the problem for 75 years at least.  Additionally, reducing inflation-indexing of Social Security could save a lot of money.  Depending on how far it was pushed, this could save $100 billion over ten years.  Probably one would have to do both to limit the political reaction by high-income earners.

One argument against raising the retirement age is that it would disproportionately penalize lower class and middle class people.  They generally don’t live quite so long as do rich people.  So, it would cut into their retirement “golden years.”  Doctors and nurses aren’t going to want to give up a big chunk of their income.  Rich people aren’t going to want to pay an even more disproportionate share of taxes.  “Baby Boomers” have a notion that they have a bargain with America and that America needs to honor its “promises” to them.  However, the truth is that they promised themselves these benefits and that they promised that a younger generation—which had no voice in the bargain—would pay the costs.  The simple human truth here is that people are selfish.  Not much sign of civic solidarity.

[1] “Fixing the safety net,” The Week, 21 December 2012, p. 9.

[2] See: “Single Payer.”  https://waroftheworldblog.com/2016/05/17/single-payer/

[3] “A poor man with a ballot box can rob you as easily as a rich man with a pen.”—Woody Guthrie.

Expect the Unexpected.

Change and innovation lead to un-foreseen effects.  Caller ID allows people to tell whether they are being called by someone they know or by some unknown person.  If the call comes at the dinner-hour, it’s 99.9 percent sure to be somebody trying to raise money for the local fire department or somebody conducting a survey.  In either case, most people don’t want to talk to the caller.  In 1997, the response rate to telephone surveys was a measly 36 percent (unless you count “Go to Hell!” as a response).  By 2014 it had fallen to 9 percent.[1]  How exactly is anyone supposed to measure public opinion if the public won’t give it?  Hard for politicians to pander to the voters if they don’t know what the voters want to hear.  Maybe they’re stuck pandering to the donors?  We could end up back in the land of “Dewey Beats Truman!”

“Baby Boomers” are entering the “golden years.”  One natural response to having the kids out of the house is “downsizing” to a smaller home or an apartment.  Lots of older people with—comparatively—lots of money are entering the market for smaller homes and apartments.  This pushes up the price of what used to be “starter homes” (now to be re-labeled “finisher homes”?) and the rent for apartments.  Between 1995 and 2005, the average share of income devoted to rent was 24 percent.  By Summer 2015, it had risen to 30.2 percent.[2]  This is likely to make things more difficult for younger people with—comparatively—less money.[3]

The “fracking revolution” has brought down energy prices.  (By August 2015, they were at a six-year low.)  The fall in energy prices has damped down inflation.  Low inflation means that—for the third time since 2010—Social Security recipients will see no increase in their benefits.  On the other hand, Medicare premiums are not linked to the inflation rate.  So these will rise in 2016.[4]  The disposable income of retirees is likely to shrink.

When energy (if not yet the climate) became a grave concern back in the 1970s, a sustained drive got underway to make all sorts of things more energy efficient.  Today, American houses are 31 percent more energy efficient than they were forty years ago.  On the other hand, American homes are 57 percent larger than they were forty years ago.  In the 1970s the average American home was about 1,300 square feet.  In 2012 the average American home was 1,864 square feet.  The most recently built homes are averaging 2,657 square feet.  This cancels out the gains in efficiency.[5]  Several puzzles arise.  Where does the extra space go?  Garages?  Bigger bedrooms for the kids?  A bathroom every ten feet?  Why are homes larger when families are smaller?  What is it like to live in one of these homes?  Do family-members retreat into their own space and close the door?  Is the same thing true of the improved gas mileage of cars?  Is efficiency improved, but we drive more?

The current, much-discussed surge in opiod addiction has led to a surge in deaths from drug overdoses.  That, in turn, has led to a rise in the number of organ donors.  They now provide better than ten percent of all organ donations, up from about 3 percent in 2006.[6]  So, higher death rates for some mean longer lives for others.

After the San Bernardino terrorist attack liberals characterized the attack as a “mass shooting” and called for tighter gun controls. Unlicensed gun-dealers, a common “bete noire” of gun control advocates, came in for special presidential attention.  Gun sales zoomed upward.  In December 2015, Americans bought 3.3 million guns.  All of these sales have been from licensed gun-dealers because the government background check system has been swamped.  Attorney General Loretta Lynch has asked for the hiring of 430 additional people just to process the background checks of Americans complying with the existing gun laws.[7]

The Americans with Disabilities Act bars discrimination against people with disabilities.  Some of this is left open to interpretation by government officials.  As a result, the state of Iowa will issue gun permits to blind people.[8]

Should these random reports make people cautious in regarding business plans, campaign platforms (“The New” Anything), or succeeding at their New Year’s Resolutions?  Just asking.

[1] “The bottom line,” The Week, 5 September 2014, p. 32.

[2] “Noted,” The Week, 28 August, 2015, p. 14.

[3] “The bottom line,” The Week, 15 October 2015, p. 36.

[4] “The bottom line,” The Week, 30 October 2015, p. 36.

[5] “The bottom line,” The Week, 20 November 2015, p. 32; “Noted,” The Week, 27 November 2015, p. 16.  .

[6] “Noted,” The Week, 20 May 2016, p. 18.

[7] “Noted,” The Week, 5 February 2016, p.8.

[8] “Noted,” The Week, 20 September 2013, p. 16.

The Golden Years.

Can “social progress” have negative consequences? The social security systems established after the Second World War rested on the assumption that many workers would pay a small tax to support a few retirees for a few years.[1] In Western countries the ratio between active, tax-paying workers and inactive, benefit-receiving retirees has shifted from 14 retirees/100 people to 29 retirees/100 people. This has shifted the balance between the number of workers whose taxes support retirees and the number of retirees. Furthermore, people are living longer. Just since 1970, the average period which people spend in retirement has increased by seven years. This has increased the costs of retirement born by advanced societies. Between 1990 and 2011, public spending in this area increased from 6.2 percent of GDP to 7.9 percent. An aging population has more and more retirees and fewer and fewer workers to support them.

There’s Social Security and then there are your personal savings. These are the two chief components of retirement income for most American workers. Social Security originally was not meant to be a national pension system. It was meant to insure the aged against a steady diet of cat-food noodle casseroles. Today, Social Security pays out 39 percent of the career-average earnings of middle income workers and 54 percent of the career-average earnings of a low-wage worker. If projected personal savings are added to projected Social Security benefits, then a low wage worker could anticipate receiving 90 percent of his/her average lifetime wage. However, most low-wage workers don’t manage to save much. One study estimated that less than ten percent of the bottom 20 percent of retirees has any personal savings. Social Security only pays about 54 percent of these peoples average lifetime wage. Old age means a big fall in income.

The problems will get worse. Nominally, Social Security recipients are buffered by the Social Security “trust fund.” Even if we accept this fiction, then the trust fund will eventually be exhausted. By 2035, Social Security will be paying only 27.5 percent of average career wages.

The slow-growth American economy will not make it easier to resolve these problems. It isn’t generating higher wages for most workers. The retirement of the “Baby Boom” generation is likely to create labor shortages that will drag on economic growth. While it seems to be accepted that many Americans who are doing some kind of physical labor will have a hard time adding more years to their careers, it is also likely that many people doing some kind of office work will see their intellectual abilities degrade in the same way.

So, what is to be done? One solution—popular among liberals, but poison among conservatives—is to raise the cap on Social Security withholding for higher income groups in order to re-distribute the income (and reduce the savings) of the well-paid and the provident. Another solution—popular among the “serious people” often derided by Paul Krugman—is to raise the retirement age in order to reduce spending while raising contributions. The discussion of these options is likely to be messy. Both sides are likely to frame the debate in moral, rather than practical, terms. The well-off will be portrayed as “greedy,” as “selfish,” and as not “needing” all that they have. The needy will be portrayed as “takers,” as “slackers” and as people wanting to manipulate the political system to escape the consequences of their own bad choices.

Less than a year out from a presidential election, it would be nice if the issue came up in a debate.

[1] Eduardo Porter, “An Aging Society Changes the Story About a Decline of Poverty for Retirees,” NYT, 23 December 2015.