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Archive for the ‘Social Security’ Category

The polling data I shared last month about confused young people was a bit of a downer, so let’s look at three different polls that are a bit more encouraging.

First, I’m glad to see that many Americans feel that government and politicians are their leading cause of daily stress.

Here’s some of what the Washington Post reported on this poll.

…much of that emotional response is completely justified. As if it weren’t enough that our politicians are actively working to harm the global economy and otherwise failing to do their jobs or even show up for work in general, they’re also stressing everyone out with the astonishing breadth and depth of their incompetence. And since high stress is linked to shorter life expectancy, they are also literally killing us with their incompetence. In other words, thanks, Obama (and everyone in Congress too).

My job is to connect the dots so that people understand that the only way to reduce stress is to make government smaller.

And, for what it’s worth, that’s the best way to make government at least semi-competent.

Our second batch of polling numbers come from Rasmussen. I’ve shared research and data on the negative impact of redistribution spending (as illustrated by this powerful chart), but I figured most Americans didn’t understand that such programs trap people in dependency.

I’m glad to read that I’m wrong. In an article entitled, “49% Believe Government Programs Increase Poverty in America,” Rasmussen reports the following.

Most Americans still believe current government anti-poverty programs have no impact on poverty in this country or actually increase it. A new Rasmussen Reports national telephone survey finds that a plurality (44%) of American Adults still think the government spends too much on poverty programs.

The Rasmussen folks also have this encouraging bit of public opinion research.

A new Rasmussen Reports national telephone survey finds that 67% of American Adults think there are too many in this country who are dependent on the government for financial aid, up slightly from 64% in September of last year.

Our third set of polling numbers come from the periodic Reason-Rupe poll.

I’ll share several pieces of data, but here are the numbers I find most encouraging. Apparently most people realize that pro-growth policy is the right approach, not class warfare and redistribution.

In terms of economic policies, 74 percent of Americans would like Congress to focus on policies to promote economic growth, while 20 percent favor policies to reduce income inequality.

I guess I’m also happy about these results, though I can’t help but think that there are some very confused folks in the Tea Party.

Fifty-five percent of Americans tell Reason-Rupe they have a favorable opinion of capitalism. Meanwhile, 36 percent of those surveyed, including 33 percent of independents and 26 percent of self-described Tea Party supporters, have a favorable opinion of socialism.

I don’t even think Obama’s a socialist, so these ostensibly anti-Obama folks apparently favor even more government than our statist President. Go figure.

Last but not least, I should like this result, but I’m actually disturbed since the margin is much smaller than it should be.

When asked about the size of government, 54 percent of Americans favor a smaller government providing fewer services. Forty-two percent favor a larger government providing more services.

P.S. Remember when I warned that the one downside to personal retirement accounts is that future politicians might steal the money?

Well, it’s happened again according to Reuters, this time in Russia.

Russia’s government has approved a plan to use contributions to employees’ privately-managed pension funds to plug budget holes for a second year running. The move was confirmed by Labour Minister Maxim Topilin on Tuesday in comments published on the ministry’s website. It has been heavily criticised by some officials and analysts, who say it will hurt the pensions industry and financial markets.

P.P.S. I was beginning to feel a bit more positive about the Tory-led government in the United Kingdom, particularly after reading about some well-designed welfare reform, significant corporate tax cuts, and postal service privatization.

Then I read something awful. And what could be worse than imposing a death tax on people who are still alive.

Savers could be forced to pay inheritance tax while they are still alive, under a new drive against tax avoidance planned by the Government. …Under plans put out for consultation, HM Revenue & Customs would have powers to subject people minimising inheritance tax to “accelerated payment” laws, meaning they would be forced to pay up front if officials suspect them of using new schemes to avoid tax. Experts have warned that under the rules, taxpayers will be treated as “guilty until proven innocent”. …there will be concerns that innocent people could be investigated and made to pay large sums before they are able to defend themselves. …Economists, tax experts and Tory MPs have called for reform of the tax, warning that it predominantly hits middle-class families.

Shame on David Cameron for allowing this to happen. But I’m not surprised given the government’s track record.

And what else would you expect from a government that brainwashes children to rat out their parents and also puts despicable Orwellian ads on subways and trains?

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With all the controversy over the failed and costly Obamacare program, it’s understandable that other entitlements aren’t getting much attention.

But that doesn’t mean there aren’t serious problems with Medicaid, Medicare, and Social Security.

Indeed, the annual Social Security Trustees Report was released a few days ago and the updated numbers for the government-run retirement program are rather sobering.

Thanks in part to sloppy journalism, many people only vaguely realize that Social Security is actuarially unsound.

In reality, the level of projected red ink is shocking. If you look at the report’s annual projections and then adjust them for inflation (so we get an idea of the size of the problem based on the value of today’s dollars), we can put together a very depressing chart.

How depressing is this chart? Well, cumulative deficits over the next 75 years will total an astounding $40 trillion. And keep in mind these are inflation-adjusted numbers. In nominal dollars, total red ink will be far more than $150 trillion.

That’s a lot of money even by Washington standards.

Just as worrisome, the trend is in the wrong direction. Last year, the cumulative inflation-adjusted shortfall was $36 trillion. The year before, the total amount of red ink was $30 trillion. And so on.

But regular readers know I’m not fixated on deficits and debt. I’m much more worried about the underlying problem of too much spending. So let’s look at the annual data showing how much payroll tax will be generated by Social Security and how much money will be paid out to beneficiaries.

As you can see, the problem is not inadequate tax revenue. Indeed, revenues will climb to record levels. The problem is that spending is projected to increase at an even faster rate.

Once again, don’t forget that these are inflation-adjusted numbers. In nominal dollars, the numbers are far bigger!

Why is the program becoming an ever-larger fiscal burden? The answer boils down to demographics. Simply stated, we will have more and more old people and fewer and fewer younger workers.

So if we do nothing, we’ll be Greece in 20 or 30 years.

That’s not a happy thought, so let’s close on a humorous note. Here’s a joke about how Social Security works, and you can enjoy some Social Security-themed cartoons here, here, and here.

P.S. I’m confident that few people will be surprised to learn that Obama’s supposed solution to this mess involves a huge tax increase.

P.P.S. The real solution is personal retirement accounts. I think Australia is the best role model, but Chile also is a big success.

P.P.S. The good news is that the American people are quite sympathetic to personal retirement accounts.

P.P.P.S. Statists try to scare people by claiming private investments are too risky, but one of my Cato colleagues showed that workers would be better off even if they retired after a stock market crash.

P.P.P.P.S. By the way, Social Security is a really bad deal for blacks and other minorities with lower-than-average life expectancies.

P.P.P.P.P.S. In the interests of fairness, I’ll admit the biggest weakness in the argument for personal accounts is that we might not be able to stop politicians from confiscating the money at some point in the future.

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I had a very bad lunch today.

But not because of what I ate. My lunch was unpleasant because I moderated a noontime panel on Capitol Hill featuring Senator Ron Johnson of Wisconsin and my Cato colleague Chris Edwards.

And I should hasten to add that they were splendid company. The unpleasant part of the lunch was the information they shared.

The Senator, in particular, looked at budgetary projections over the next 30 years and basically confirmed for the audience that an ever-expanding burden of federal spending is going to lead to a fiscal crisis.

To be blunt, he showed numbers that basically matched up with this Henry Payne cartoon.

Here’s a chart from his presentation. It shows the average burden of spending in past years, compared to various projections of how much bigger government will be – on average – over the next three decades.

The Senator warned that the most unfavorable projection (i.e., “CBO ALT FISC”) was also the most realistic one. In other words, federal spending will consume a much larger share of economic output over the next three decades than it has over the past two decades.

But our fiscal outlook is actually even worse than what you see in his slide.

The Senator’s numbers are based on average spending levels over the 2015-2044 period. That’s very useful – and sobering – data, but if you look at the annual numbers, you’ll see that the trendline gives us additional reasons to worry.

More specifically, spending for the major entitlement programs (Social Security and Medicare, as well as Medicaid) is closely tied to the aging population. So as more and more baby boomers retire over the next couple of decades, spending on these programs will become more burdensome.

In other words, our fiscal problem will be much larger in 2040 than it will be in 2020.

Here are the long-run numbers from the Congressional Budget Office. The blue line is federal spending on various programs and the pink line is total spending (i.e., programmatic spending plus interest payments). And keep in mind that these numbers don’t include state and local government spending, which presumably will chew up another 15 percent of our economic output!

In other words, America will become Greece.

And don’t delude yourself into thinking that CBO must be wrong. I’m not a big fan of the Congressional Budget Office (particularly CBO’s economic analysis), but these numbers are driven by demographics.

Moreover, CBO’s grim outlook is matched by similarly dismal numbers from the IMF, BIS, and OECD.

By the way, CBO doesn’t do projections once federal government debt exceeds 250 percent of GDP, so the gray-colored trendline beginning about 2048 is not an official projections. It’s merely an estimate of the total spending burden assuming that the federal budget is left on autopilot.

Of course, we’ll never reach that level. We will suffer a fiscal crisis before that point. But when it happens to us, the IMF won’t be there to bail us out for the simple reason that the IMF’s credibility is based on the backing of American taxpayers.

And we’ll already have been bled dry!

So unless we find some very rich Martians (who are also stupid enough to bail out profligate governments), it won’t be a pretty situation. I’m not sure we’ll have riots, such as the ones that have taken place in Europe, but there will be plenty of suffering.

Fortunately, there is a solution. All we need is a modest bit of fiscal restraint so that government grows slower than the private sector. That would completely reverse Senator Johnson’s dismal long-run numbers.

And some countries have shown that multi-year periods of fiscal restraint are possible.

The real question, though, is whether politicians in America would be willing to adopt the entitlement reforms that are needed to control the long-run growth of spending.

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I haven’t spent much time writing about Thomas Piketty’s inequality book for the simple reason that my goal is economic liberty, not equality.

That being said, I think that Piketty is fundamentally misguided even if the goal is helping the poor. Simply stated, long-run growth is the best way of reducing poverty and boosting living standards. Piketty, by contrast, focuses on redistribution – even though this would require punitive taxation, thus undermining growth and hurting the less fortunate.

This is very obvious when we look at economic performance in market-oriented nations and compare it to economic performance in countries where government plays a bigger role.

Most recently, I showed how Poland is out-pacing Ukraine.

I’ve compared South Korea and North Korea.

The data for Chile, Argentina, and Venezuela is very powerful.

I’ve shown how Singapore has eclipsed Jamaica.

And we can see that Hong Kong has caught up with the United States.

As I often remark in my speeches, I’d much rather be a poor person in a jurisdiction such as Hong Kong or Singapore rather than in a “compassionate” country such as France.

France might give me lots of handouts, but I’d remain poor. In a free-market society, by contrast, I could climb out of poverty.

Anyhow, let’s return to Piketty’s thesis about the rich benefiting from capital accumulation. All sorts of scholars have called into question his theoretical model and his empirical data, but I don’t even care if Piketty’s right. In a free society, the worst thing that happens is that the rich get richer faster than the poor get richer.

That’s why we should concentrate on what we can do to boost growth.

And there is one economic reform that is good for growth, but would be especially beneficial for lower-income people. Merrill Matthews of the Institute for Policy Innovation, in a column for Forbes, makes a powerful case for Social Security reform.

He starts with the essential insight that policy makers should focus on helping the poor, not penalizing success.

French economist Thomas Piketty wants to attack the issue of income inequality by redistributing the wealth of the highest earners. Wouldn’t a better solution be to increase the wealth of the lowest earners?

Merrill says we should make it easier for the overall population to become capitalists.

…instead of taxing that success even more than we already do, which discourages capital development and investment, Washington can help lower- and middle-income workers acquire capital so they too can partake in those higher returns.

He then points out that workers are forced to participate in a Social Security system that imposes very high taxes in exchange for rather meager benefits.

Eugene Steuerle and Caleb Quakenbush of the Urban Institute publish an annual estimate of how much workers at different income levels and marriage status pay into Social Security and Medicare and how much they can expect to receive in benefits. Their 2013 report estimates that a single male worker earning the average income of $44,800 (in 2013 dollars) turning 65 in 2015 can expect to receive $287,000 in Social Security benefits. However, that worker paid in $337,000, for a net loss of about $50,000. Both estimates assume a growth rate of 2 percent, which happens to match Piketty’s projection of long-term GDP growth. That disparity between contributions and benefits declines significantly for women, who tend to live longer. A single female worker would have paid in the same amount, $337,000, but could expect to receive $314,000.

Now we get to his proposed reform.

…what if workers were able to put that same amount of money—their 12.4 percent Social Security (FICA) tax; $5,555 in Stererle’s example—into a personal retirement account that could be invested in broad-based equities?

With personal retirement accounts, ordinary workers can generate big nest eggs.

Using an interest calculator, a $5,555 annual contribution over 40 years at 6 percent grows to about $970,000. Factor in that wealth and income inequality largely evaporates. …if the left is really concerned about income inequality, the best way to end it is wealth creation, not redistribution. Replacing Social Security’s financially struggling system with personal retirement accounts would create real wealth for millions of working Americans.

As you can imagine, I heartily concur. Here’s the video I narrated on the topic for the Center for Freedom and Prosperity.

By the way, if you think the stock market is too risky, particularly after the recent financial crisis, one of my Cato colleagues produced a thorough study showing that people who retired right after the market fell still would have been better off with personal accounts.

P.S. If you want to understand why class-warfare tax policy will backfire, another one of my colleagues dismantled the work of Piketty and others.

P.P.S. You can enjoy some Social Security cartoons here, here, and here. And we also have a Social Security joke, though I’m not sure we should laugh considering that tens of millions of Americans will suffer when the system no longer can afford to pay promised benefits.

P.P.P.S. Obama’s supposed solution would be an even bigger move in the wrong direction.

P.P.P.P.S. Last but definitely not least, watch Margaret Thatcher destroy the left’s position on income distribution.

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The Census Bureau just released a report on America’s aging population.

The big takeaway is that our population will be getting much older between now and 2050.

And since I’m a baby boomer, I very much like the fact that we’re expected to live longer.

But as a public finance economist, I’m not nearly as happy.

As I explain in this interview with the Wall Street Journal’s Digital Network (and as confirmed by BIS, OECD, and IMF data), the United States is going to get deluged by a tsunami of entitlement spending.

I mentioned that it’s important to focus on the ratio of workers to retirees. This “dependency ratio” matters because economic output largely is a function of an economy’s working-age population.

To cite my famous cartoons, you need a sufficient number of people pulling the wagon to support those riding in the wagon.

Here’s a chart from the Census report to help you understand the magnitude of the problem. As you can see, both in the United States and other nations, the increase in the dependency ratio is almost entirely the result of aging populations.

Census Dependency Ratio

This is why I said that we face a slow-motion train wreck because of poorly designed entitlement programs.

But the good news is that there is time to reform those programs and avert a crisis.

Which explains why I probably sound like a broken record about the need for genuine entitlement reform.

In a column citing the new private pension system in the Faroe Islands, I gave the arguments for modernizing Social Security with personal retirement accounts.

But we also need to deal with the health entitlements.

Here’s how to fix Medicare.

And here’s how to fix Medicaid.

By the way, some of the damaging provisions of Obamacare can be de facto repealed by including them in the Medicaid block grant, so it’s a critically important reform.

Needless to say, I think these reforms are far better for the economy than the big tax hike Obama has endorsed to deal with the giant financing gap.

P.S. For a clever look at the worker-dependency ratio, check out the party ship produced by a Danish think tank.

P.P.S. The interviewer also mentioned that America’s racial composition is changing, which gives me an excuse to point out that Social Security reform is particularly beneficial for blacks because of differences in life expectancy.

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As a supporter of genuine capitalism, which means the right of contract and the absence of coercion, I don’t think there should be any policies that help or hinder unions.

The government should simply be a neutral referee that enforces contracts and upholds the rule of law.

Similarly, I also don’t have any philosophical objection to employers and employees agreeing to “defined benefit” pension plans, which basically promise workers a pre-determined amount of money after they retire based on factors such as average pay and years in the workforce.

After all, my money and property aren’t involved, so it’s not my business.

That being said, these so-called “DB plans” have a bad habit of going bankrupt. And that means the rest of us may get stuck with the bill if there’s a taxpayer bailout.

I discuss these issues in an interview with Fox Business News.

My main point is that there’s a deep hole in many of these plans, so someone is going to feel some pain.

I don’t want taxpayers to be hit, and I also don’t think well-managed pensions should be gouged with ever-rising premiums simply because other plans are faltering.

But I bet both will suffer, as will workers and retirees in the under-funded plans.

As part of the interview, I also warned that other “DB plans” are ticking time bombs. More specifically, most pensions for state and local bureaucrats involve (overly generous) pre-determined commitments and very rarely have governments set aside the amount of money needed to fund those promises.

And the biggest DB time bomb is Social Security, which has an unfunded cash-flow liability of more than $30 trillion. That’s a lot of money even by Washington standards.

But I closed with a bit of good news.

As workers and employers have learned that DB plans tend to be unstable and unsustainable, there has been a marked shift toward “defined contribution” plans such as IRAs and 401(k)s.

These plans are the private property of workers, so there’s no risk that the money will be stolen or squandered.

But even this good news comes with a caveat. We closed the interview by fretting about the possibility that governments will steal (or at least over-tax) these private pension assets at some point in the future.

That’s already happened in Argentina and Poland, so I’m not just being a paranoid libertarian.

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Over the years, I’ve shared many charts, graphs, and tables to help people understand that the welfare state is fundamentally unsustainable.

And, assuming there’s not genuine entitlement reform, many of these fiscal estimates show that the United States has a very perilous future.

According to the Bank for International Settlements, the United States is in worse shape than every nation other than Japan and the United Kingdom.

According to the Organization for Economic Cooperation and Development, the United States has a bigger long-run fiscal problem than all countries other than New Zealand and Japan.

And according to International Monetary Fund estimates of both future spending increases and the need for reform, no nation has a bigger problem than the United States.

So do all these numbers mean the United States is really in worse shape than basket cases such as Italy, Spain, Japan, France, and Greece?

Yes and no. I realize that answer makes me sound like a politician, but it is  hard to answer that question because America’s grim long-run numbers are largely a function of rapidly rising health care spending.

And if you assume that Medicare, Medicaid, and Obamacare are left unreformed, then the budgets for these programs will eat up an ever-larger share of our economy and we’ll eventually suffer a fiscal collapse.

However, if you assume that these programs at some point get reformed (and it better be the right kind of reform), then the long-run outlook is considerably less severe.

But notice that I wrote “less severe.” That’s because we still have a demographic issue. Any type of pay-as-you-go welfare state becomes increasingly expensive when there are more and more old people and fewer and fewer young workers.

This is why new projections from the Pew Research Center are so sobering. They show the change in age dependency ratio between now and 2050.

As you can see, we currently have about 50 young or old people for every 100 working-age people. By 2050, however, there will be 66 dependents for every 100 working-age people. And most of that added dependency will be caused by an aging population, not more children.

Age Dependency Ratio Pew

But here’s the good news. Compared to nations such as Spain and Japan, we’re in pretty good shape. Or, to be more accurate, we don’t face as deep of a problem. Indeed, it’s hard to see how those nations will survive.

Same with South Korea and Italy.

Even Germany has a very difficult future. Its welfare state may not be as bloated as some other nations in Europe, and the work ethic may be stronger than most other European countries, but as I already explained, any welfare state becomes unsustainable without new workers to pay taxes to support the dependent class.

In other words, demographics can be destiny. Look at this data on the nations with the lowest fertility rates. You’ll notice that Germans are not reproducing. And the same is true of the Japanese, Italians, and South Koreans (Spain is in 191st place, so they also aren’t having many kids).

Fertility Rate by Nation

I don’t know where this will lead, but it won’t be pretty. Simply stated, the welfare states in these nations will have to be reformed.

But how does that happen in countries where people have been told for decades that they have a “human right” to freebies from the government?

I fear that European nations are going to suffer some major dislocations. And as this Michael Ramirez cartoon suggests, the same problem could happen in America.

Let’s close with some optimism. You’ll notice that two of the four jurisdictions with the lowest fertility rates in the entire world are Hong Kong and Singapore. Yet there’s no major long-run fiscal crisis in those places.

Why? Because they have “pre-funded” retirement systems. In other words, they have personal retirement accounts instead of tax-and-transfer entitlement systems.

The moral of the story is that demographics can be destiny, but it doesn’t have to be.

Something to keep in mind next time there’s a discussion of Social Security reform.

P.S. Considering the high levels of pulchritude in Estonia, Latvia, and Lithuania, I’m mystified that there’s so little reproduction in those nations. Maybe I should volunteer to help out?

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