(I found this essay by Mauldin to be very informative on the whole discussion; I'd much rather read this than the daily dose of crap Krugman puts out as chief flack, or cheap flake, for the "loyal opposition.")
Social Security and Other Myths
Social Security Do Nothing Act
So Many Promises, So Few Answers
By John Mauldin
February 4, 2005
Social Security in the US (and the equivalent in Europe and Japan), as well as
some pension plans, might be in far worse shape than you think. And the reason
may be very good news for you, and almost certainly will be for your kids.
Potentially very good indeed. Today we take a look at one potential pitfall in
the future of Social Security that no politician is talking about.
I had told myself that with so many people writing about Social Security that I
should just go on to another topic. That changed this morning. While dropping
off my 16 year old son at school, he turns off his brand new MP3 player (shock!)
and turns to me and asks, "So what do you think of this Social Security thing? I
mean, like private accounts and all? Isn't there some kind of risk in that?"
"Well, yes, Chad there is. Investing and saving for retirement is definitely
risky. There's lots of risk all around us. For instance, letting you drive is a
risk," I pointed out. "Not hardly!" he said. "I know what I am doing!" (Dad
sighs.)
But there is great risk, at least for elected officials, involved in messing
with Social Security. But there is even greater risk to Chad (and his six
siblings) in doing nothing. So today I write a letter to my kids, looking at a
future retirement for them that will almost certainly be far different than the
one they think (when the young do think about retirement) they face today. (As
long-time readers know, I am not interested in personally retiring, so the issue
is hopefully merely academic for me at this time.)
But before we deal with the heavy lifting, let me start with a lighter note.
Everyone knows that Republicans and Democrats do not agree on what to do about
Social Security. The atmosphere in Washington is poisonous, as some of the
recent Senate confirmation hearings demonstrated. We wonder how anything can get
done. But it has been worse. A lot worse. Art Cashin (of UBS and on CNBC daily)
does a daily letter which always starts off with a historical reference. Today
he wrote:
"On this day (+2) in 1858, that august deliberative body, the U.S. House of
Representatives was calmly discussing a matter of import to the nation.
Well.....maybe 'calmly discussing' misses the point. The House was in mid-
debate/mid-filibuster on the topic of admitting Kansas to statehood.....and
whether such admission should be as a free state or slave state.
"The debate had been going since the prior day and as it moved into the wee
small hours of February 6th the tension, partisanship and weariness began to
show. Since night-time in February, in Washington, in the Capitol building, in
the 1850's tended not to be too warm, several members of Congress were said to
have sipped (or gulped) some alcoholic beverages.....just to stave off the
chill.
"Rep. Keitt of S.C. made a rather uncomplimentary remark about Rep. Galusha Grow
of PA. (who had the floor at the time). Rep. Grow responded with an equally
unkind assessment of Keitt. Keitt went for Grow's neck, but was knocked to the
ground. Soon most of the House was wrestling, spitting, kicking and punching
their worthy and distinguished colleagues. Spittoons and inkwells flew through
the air. The Speaker gaveled for order with no success. The Sergeant at Arms
beat members with his staff (in a non-partisan way, of course).
"Rep. Grow was being pummeled by Barksdale of Mississippi when Washburn of
Wisconsin rushed to Grow's defense. Washburn's intention was to grab Barksdale
by the hair with his left hand and knock him out with a right uppercut. But when
he grabbed Barksdale's hair, it came off in his hand. Shocked, Washburn
screamed. The rioting representatives looked up and saw a suddenly bald
Barksdale.....and Washburn waving his wig. 'My God, he's been scalped!' shouted
someone and the riot broke up in riotous laughter.
"To mark the day suggest to the bipartisan leadership that as they begin to
debate Social Security consider appointing someone from the Hair Club as
doorkeeper."
The Union has survived worse political climates and partisanship than we see
today. My guess is that it will continue to survive.
I will get to the unspoken problem (and good news for us) with Social Security
at the end of the letter, but let's first quickly assess the problem. In just 10
years, spending on the elderly in the US will total nearly $1.8 trillion, almost
half the federal budget, according to new Brookings Institution and
Congressional Budget Office projections. That is up from 29% in 1990 and 35% in
2000. The bulk of that growth is spending on the federal government's two
largest health care programs, Medicare and Medicaid. Their combined costs are
projected to more than double, to a combined total of $1.2 trillion in 2015 from
$473 billion last year. Social Security spending is expected to rise to $888
billion from $492 billion in that span. (Source: Washington Post).
It gets worse of course. Douglas Holtz-Eakin, the Congressional Budget Office
director, notes that "Medicare and Medicaid spending triples, maybe quintuples
by 2050, while Social Security spending goes up by 50%."
Social Security Do Nothing Act
There is a great essay at The American Enterprise Magazine website. After
listing all the "new" innovations of 1935, as well as the then current
conditions, essayist Karl Zinzmeister takes us back to that period and writes:
"... Admittedly, the U.S. economy has seen better days. The human disruption of
the Dust Bowl storms is just beginning to subside. A quarter to a third of
today's U.S. population is quite poor.
"And amidst our economic disappointments, life's other ancient maladies continue
to sting. Doctors still have no effective medicines to stop biotic infections.
Tens of thousands of American children will be crippled by polio this year. U.S.
life expectancy averages only 59 years and some months.
"That last figure explains why another of the year's milestones produced only a
mild ripple among the public: This August 1935, Franklin Roosevelt pushed
through Congress a program for universal government-paid pensions. Checks will
begin to mail as soon as this new "Social Security" plan takes hold. But full
benefits don't commence until age 65--and, as a plain fact, most of us will be
gone before then.
"So: Do you want to base your security in old age on a program engineered at the
same time as the Model A and the vacuum-tube radio? Has work changed much since
the era when slopping pigs for Auntie Em was a typical job? Does the boundary
between state and individual look different now that the USSR has gone from
progressive polestar to oppressive flop? Has American finance advanced from the
decades when the only choices for ordinary savers were the passbook, the mason
jar, or the mattress? Are the retirement goals of Americans still the same as in
the days when the Bambino retired? Or is it time for Social Security to enjoy a
major-league update?
"The answer, I think, is obvious. Nothing but a government welfare program could
ever last this long in unimproved form. Our transportation networks, our medical
services, our economy are all light-years better than they were in 1935. So why
are we still stuck with a gramophone/Hupmobile/fountain pen system of public
pensions?
"Two reasons: First, sentimental Democrats have flatly refused to let go of
their FDR/New Deal glory days, and have repeatedly gone nuclear on anyone who
suggested we could do better than blue paper cards, musty claims offices, $420
monthly checks, and payroll taxes headed over 20 percent. Reactionary, backward-
looking politics has been reform blocker number one.
"Reform blocker number two has been the ability of crafty administrators and
legislators to prevent the public from understanding the demographic and
economic contradictions that doom old-style Social Security in a modern era.
Apologists have shamelessly employed dishonest terminology (from "Trust Fund" to
"insurance" to "employer contribution" to "lockbox"). They have relied on
repeated tax increases (from 2.0 percent of the worker's first $3,000 in the
early years to 15.3 percent of the first $90,000 today--with all of that
withheld from your paycheck before you even see it, so what's to miss?). They
have used a succession of "blue ribbon commissions" to paper over problems
rather than face them (I know--as a junior staffer I worked with the Greenspan
Commission that cobbled together the 1982 Social Security patch).
"But the days of being able to punt Social Security's glaring faults to the next
political generation are nearly at an end. With the aging Baby Boomers due to
start collecting checks in just three years, Social Security's finances will
soon head south in a big way. And then, just a few years later, an even worse
hemorrhaging commences in the other half of the Social Security Act: the
Medicare program that pays the doctor and drug bills of America's oldsters....
"...Two more honest politicians, Democrat Bob Kerrey and Republican Warren
Rudman, warned the nation a couple years ago where this would lead: "Suppose a
member of Congress introduced legislation called the Social Security Do Nothing
Act. Under this bill, promised retirement benefits would be cut...by 35 percent
for today's newborns. Alternatively, payroll taxes would go up by roughly 40
percent.... These are the choices under the Do Nothing Plan."
So Many Promises, So Few Answers
The sad fact is that we have made promises as a nation (this includes most of
Europe and Japan) that we simply cannot keep. Or more correctly, we have made
promises on behalf of our kids that they will not be able to keep. The Center
for Strategic and International Studies notes that if the increases needed for
our current programs comes entirely from tax increases, our taxes would rise to
33% of GDP by 2040. Except that such a tax rate would kill all growth in the
economy and cripple wage growth and increase unemployment. Or if we cut spending
on other unnecessary items like defense, parks, research and education, we would
see the national share of funds going to the elderly rise to 56%.
(By the way, if tax increases were the answer, not one European country would
pay less than 50% in taxes and France would pay 62% of GDP! Japan would see
rates rise to 40%. Germany today has 10% unemployment with a tax regime not as
bad as what the US (meaning our kids) will face if we do not act now.
Kerrey and Rudman noted above we could pay for increased Social Security
promises with a mere 40% increase in taxes. Of course, that leave the far larger
problem of Medicare unresolved.
We have simply promised too much of our children's future income to ourselves.
That worked when there were 30 or 15 or even 3 workers (as now) to every
retiree. It will not work when there are two. There are really only two
unpalatable choices: we can either cut benefits or raise taxes, or some
combination in between.
Of course, we could put off a decision for a few decades and make the situation
worse. Yes, I know we could make changes. We could lower the cost of healthcare
(not likely, as I will point out in a few paragraphs) or radically reduce the
size of government so that we could devote large amounts of our budget to caring
for retirees. Imagine the screams if we simply put a freeze on every government
program except for Social Security and Medicare?
At the end of the day, we are still going to have to raise taxes or cut benefits
or cut other spending.
If we do not tackle Social Security this year, I am pessimistic it will not
happen for another 8 years. If Congress cannot muster enough courage to do it
this year, then almost certainly it will not happen next year. Then Bush will be
a lame duck, the presidential campaign will be upon us and nothing will happen
for the next two years. Then we get a president who will want to "study" the
problem for another four years, and if we are lucky and he/she gets re-elected,
then maybe we get around to it in 2013. If not, then we start the cycle again,
and it is 2017 before something becomes politically possible.
Of course, the funding goes negative in 2018. But what's a few years among
friends?
The simple way to fix the Social Security problem involves several steps. First,
we need to increase the age of retirement gradually over time (see more below).
Secondly, for future retirees (not current retirees) we need to slow the growth
of increases to a rate that grows with inflation. We made a deal and should not
ask current retirees and those close to retirement age to have to make changes.
As Bush noted, if you are over 55, your deal will not change.
As an offset for lower future payments, we should fund private accounts that not
only have the potential to grow but will be able to be passed down to future
generations. As far as the $2 trillion dollars Bush wants to borrow over time?
We now owe $7 trillion, and will have to borrow it anyway if we do not act. Pay
me now or pay me later.
We must balance the budget and begin to pay down the debt. And then we need to
take a breath and tackle Medicare. But if we cannot do Social Security, there is
no way we can do Medicare.
And now let me speak a heresy. We need to recognize that Social Security is not
a retirement program, like a pension or 401k plan. It is a welfare program. It
transfers money from one group to another group. We need to means test Social
Security payments at some point in the future on a graduated scale.
One more note: a major study has found that approximately 50% of all
bankruptcies were due to medical bills, and that 76% of those were with people
who had insurance. |
