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Archive for the ‘Entitlements’ Category

Not all birthdays are a cause for untrammeled joy. Most of us baby boomers, for instance, don’t like being reminded that we’re getting older.

And for folks who follow fiscal policy, the fact that Medicare is now 50 years old is hardly a cause for celebration. That’s because the program, as one of the three big entitlement programs, will turn American into Greece without substantial structural reform.

But it’s not just a budgetary issue.

Writing for the Wall Street Journal, Sally Pipes of the Pacific Research Institute opines that this isn’t a happy birthday for taxpayers, seniors, or the healthcare system.

The only birthday gift this middle-age government program merits is a reality check. Health insurance for senior citizens was part of LBJ’s expansion of the welfare state, all in the service of establishing a “Great Society.” Yet many beneficiaries today are struggling to secure access to high-quality care. Future beneficiaries, meanwhile, are forking over billions of dollars today to keep a program afloat that may be bankrupt when they retire.

Like many government programs, it is far more expensive than initially promised.

Medicare spending has zoomed far beyond original expectations and is now anything but sustainable. In its first year, 1966, Medicare spent $3 billion. In 1967 the House Ways and Means Committee predicted that the program would cost $12 billion by 1990. It ended up costing $110 billion that year. Last year the program cost $511 billion, and seven years from now it will double to more than $1 trillion, according to the Kaiser Family Foundation.

And like many government programs, it is riddled with waste, fraud, and abuse.

Medicare has been dogged by fraud and other improper payments—$60 billion overall in fiscal 2014, according to a recent report by the Government Accountability Office.

You can click here if you want some jaw-dropping examples of how the program squanders money.

Moreover, many doctors don’t want to treat Medicare recipients because they lose money after you included the expense of accompanying paperwork and regulations.

…nearly three in 10 seniors on Medicare struggle to find a primary-care doctor who will treat them, according to the Medicare Payment Advisory Commission. Another survey conducted by Jackson Healthcare, the health-care staffing company, found that 10% of the more than 2,000 physicians it surveyed don’t see Medicare patients at all.

So what’s the solution?

We’ve tried price controls and that doesn’t work.

Other approaches also won’t be adequate. So the only answer, Sally explains, is to shift to a form of vouchers sometimes called “premium support.”

…tweaking the eligibility age won’t be enough. If Medicare is to survive into old age, the program has to be converted from an open-ended entitlement to a system of means-tested vouchers. Under such a system, the government would give every senior a voucher based on health status, income and age. Seniors in better health and those who are wealthy would receive smaller vouchers. Sicker or needier seniors would receive larger ones. Seniors would then choose from among privately administered health plans the one that best suited their needs and budget. Insurers would have to compete for beneficiaries’ business, and providers would have to compete to get on the most popular plans. Lower prices and better-quality care would be the result.

Grace-Marie Turner of the Galen Institute and Merrill Matthews of the Institute for Policy Innovation have a similarly pessimistic perspective.

In a column for Investor’s Business Daily, they highlight some of the same problems with cost and quality, but they also add important insight about how Medicare has caused rising health care costs.

…health economist Theodore Marmor pointed out: “Hospital price increases presented the most intractable political problem for the Johnson administration. In the first year of Medicare’s operation, the average daily service charge in America’s hospitals increased by an unprecedented 21.9%. Each month the Labor Department’s consumer price survey reported further increases…”

Gee, what a surprise. With Uncle Sam picking up the tab, normal market forces were eroded and providers responded by jacking up prices.

The federal government has responded with price controls, but that’s been predictably ineffective.

Congress imposed a type of price-control mechanism in 1983 called Diagnostic Related Groups, or DRGs. And in the early 1990s, Congress tried to cut spending on physicians by creating the Resource Based Relative Value Scale. Then there was the infamous Medicare “Sustainable Growth Rate,” later dubbed the “doc fix,” which passed in 1996 to contain Medicare spending by cutting doctors’ fees. It was repealed only recently, after Congress had postponed the vote 17 times.

So what’s the bottom line?

Government involvement dramatically increases spending, followed by clampdowns on soaring prices, leading to restrictions on doctors and patients. Perhaps next time, we might try market forces rather than another failed effort at centralized government programs.

Or we can simply leave policy on autopilot and somehow have faith that Obamacare’s death panels will “solve” the problem.

P.S. Here’s the video I narrated which explains the importance of the right kind of Medicare reform.

And if you want (what I think) is a very good description of the program, it’s that Medicare charges seniors for a hamburger and gives them a hamburger, but taxpayers are getting a bill for a steak.

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I’ve written over and over again that the federal government’s so-called War on Poverty has been a disaster.

It’s been bad news for taxpayers, of course, but it’s also been bad news for poor people since they get trapped in dependency.

So what’s the alternative? Well, we actually can learn a lot from history.

Let’s start on the other side of the Atlantic. Professor Tyler Cowen of George Mason University has a fascinating video (which is part of a must-watch series) looking at the English debate in the 1830s on how best to deal with poverty.

Now let’s cross the ocean and look at the American experience.

Professor Thomas West of Hillsdale College has researched welfare policies in the early days of the United States.

Here are some of his key findings.

…government-funded welfare, not to mention generous private charity, has existed throughout American history. …The real difference between the Founders’ welfare policies and today’s is over how, not whether, government should help those in need.

Government was involved, but only at the local level, and assistance was a two-way street.

From the earliest colonial days, local governments took responsibility for their poor. However, able-bodied men and women generally were not supported by the taxpayers unless they worked. They would sometimes be placed in group homes that provided them with food and shelter in exchange for labor. Only those who were too young, old, weak, or sick and who had no friends or family to help them were taken care of in idleness.

Here’s more.

Welfare is kept local so that the administrators of the program will know the actual situations of the persons who ask for help. This will prevent abuses and freeloading. …A distinction between the deserving and undeserving poor is carefully observed. Able-bodied vagabonds get help, but they are required to work in institutions where they will be disciplined. Children and the disabled, on the other hand, are provided for, not lavishly but without public shame. …Poor laws to support individual cases of urgent need were not intended to go beyond a minimal safety net. Benefit levels were low.

Interestingly, Professor West writes about Benjamin Franklin’s low opinion of England’s welfare system (as it existed before the 1830s, obviously), which was much more generous.

Here’s some of what Franklin wrote, as cited by West.

I am for doing good to the poor, but I differ in opinion of the means. I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. In my youth I travelled much, and I observed in different countries, that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer.

This was not an unusual perspective.

Franklin’s understanding of the welfare paradox—that aid to the poor must be managed carefully lest it promote indolence and therefore poverty—was shared by most Americans who wrote about and administered poverty programs until the end of the 19th century. …policies were intended to help the poor in ways that did not violate the rights of taxpayers or promote irresponsible behavior.

Thomas Jefferson definitely agreed, as seen in this quote included in Professor West’s analysis.

To take from one, because it is thought his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, the guarantee to everyone the free exercise of his industry and the fruits acquired by it.

If you remember the discussion of “indoor” and “outdoor” relief from the video about the English welfare system, you won’t be surprised to learn similar issues were present in the United States.

As the poor population grew, many concluded that “outdoor relief” was leading people to look on welfare as an entitlement and creating a class of permanent dependents. Consequently, the emphasis soon shifted to “indoor relief”—almshouses and workhouses.

Professor West also cites the strong role of private charity, which also was based on tough-love compassion.

After the Revolution and throughout the 19th century, hospitals for the poor, educational institutions, YMCAs, and Salvation Army branches were established in growing numbers all over America by public-spirited citizens. Like the public workhouses, these private charities distinguished between deserving and undeserving poor. Good character, it was thought, would enable most people to become self-sufficient. These agencies tried to build the character of their recipients through education, moral suasion, religious instruction, and work.

Now let’s see what West says about the effectiveness of the tough-love approach from America’s past with the entitlement approach used today.

If we rank poverty and welfare policies in terms of quantity of money and material goods given to people who are poor, then today’s policies are far more effective than the Founders’. Benefit levels are much higher, and far more people are eligible for support. …However, if poverty and welfare policies are judged by their effectiveness in providing for the minimal needs of the poor while dramatically reducing poverty in a society over time, then America before 1965 could be said to have had the most successful welfare policy in world history. By the same benchmark, post-1965 poverty programs have failed.

In other words, if the goal is to make people comfortable in dependency, the current system is a big success.

But if the goal is self reliance and reduced poverty, than the current system is a terrible failure.

Professor West has some great data on how a combination of long-run growth and a sensible welfare system combined to dramatically reduce destitution between the nation’s founding and the 1960s.

Two centuries ago, most Americans—at least 90 percent—were desperately poor by today’s standards. Most houses were small, ill-constructed, and poorly heated and insulated. Based on federal family income estimates, 59 percent of Americans lived in poverty as late as 1929, before the Great Depression. In 1947, the government reported that 32 percent of Americans were poor. 

This is fascinating and valuable information. At least for those of us with a wonky interest in public policy.

Back in 2010, I shared a chart based on far more limited data to show the poverty rate consistently falling after World War II.

But only up to a point. Once the federal government declared War on Poverty in the mid-1960s, we stopped making progress.

Now, based on Professor West’s data, I can create a chart going back to 1815.

I arbitrarily connected the data points with straight lines for lack of any other obvious alternative, but that’s not important. The key point of the graph is to see that the level of poverty dramatically before Washington got involved.

Professor West puts 2 and 2 together and gets 4.

…before the huge growth in government spending on poverty programs, poverty was declining rapidly in America. After the new programs were fully implemented, the poverty rate stopped declining.

Let’s begin to wrap up our discussion.

West points out that Benjamin Franklin’s criticisms of the English welfare system apply even more so to the mess we have in America today.

And this is a very costly mistake.

The incentive structure of the modern welfare state is similar to the one that Franklin condemned in old England, except that ours is more generous and more tolerant of single motherhood. Since 1965, when President Lyndon Johnson inaugurated the modern War on Poverty, total annual government welfare spending has grown from less than $9 billion (1.3 percent of gross domestic product) to $324 billion (5 percent of GDP) in 1993 to $927 billion (6 percent of GDP) in 2011. Between 1965 and 2013, the government spent $22 trillion (adjusted for inflation) on means-tested welfare programs—more than three times the costs of all military wars in the history of the United States. …These figures do not take into account state, county, and municipal benefits. Nor do they take into account the massive use of Social Security Disability as a de facto welfare program (as of 2005, 4.1 percent of Americans between the ages of 25 and 64 were enrolled).

We had successful welfare reform in the 1990s, to be sure, but it dealt with just one program.

The overall trend, as discussed two days ago, is ever-growing levels of dependency.

The basic problem—that government makes it affordable for women to bear and raise children without husbands while living independently in households of their own—is still there. …High benefit levels and irresponsible attitudes toward sex and marriage create a world in which many children have few or no ties to their fathers; in which mothers, increasingly unmarried, are more often abused and exploited; and in which many men join gangs and take up crime as a way of life. …The contemporary outlook on welfare has both propelled the family’s disintegration and promoted vast dependence. …antipoverty programs can easily have a corrupting effect if they are not set up in a way that promotes rather than breaks down the morality of self-restraint and self-assertion that is a necessary foundation of what Jefferson called “temperate liberty.”

I guess what we have now in America is intemperate dependence.

Hmmm, maybe the solution is to go back to the system that worked. And that means getting Washington out of the business of income redistribution.

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Based on a new report from the Congressional Budget Office, I wrote two weeks ago about America’s dismal long-run fiscal outlook. Simply stated, we face a Greek-style fiscal future because of changing demographics and poorly designed entitlement programs.

But I was just looking at big-picture fiscal aggregates.

And while that was discouraging, it gets downright depressing when you look behind the numbers and consider how a growing share of Americans are getting lured into government dependency.

Nicholas Eberstadt of the American Enterprise Institute has a very grim analysis on the growth of entitlement dependency in the United States.

The American welfare state today transfers over 14% of the nation’s GDP to the recipients of its many programs, and over a third of the population now accepts “need-based” benefits from the government. This is not the America that Tocqueville encountered.

It wasn’t always this way.

The article looks at the history of the welfare state in America.

 In 1961, at the start of the Kennedy Administration, total government entitlement transfers to individual recipients accounted for a little less than 5% of GDP, as opposed to 2.5% of GDP in 1931 just before the New Deal. In 1963 — the year of Kennedy’s assassination — these entitlement transfers accounted for about 6% of total personal income.

But things began to deteriorate under LBJ.

During the 1960s, …President Johnson’s “War on Poverty” (declared in 1964) and his “Great Society” pledge of the same year ushered in a new era for America, in which Washington finally commenced in earnest the construction of a massive welfare state. … Americans could claim, and obtain, an increasing trove of economic benefits from the government simply by dint of being a citizen; they were now incontestably entitled under law to some measure of transferred public bounty, thanks to our new “entitlement state.”

And guess what? Once we started rewarding dependency, more and more people decided they were entitled.

Over the half-century between 1963 and 2013, entitlement transfers were the fastest growing source of personal income in America — expanding at twice the rate for real per capita personal income from all other sources, in fact. Relentless, exponential growth of entitlement payments recast the American family budget over the course of just two generations. In 1963, these transfers accounted for less than one out of every 15 dollars of overall personal income; by 2013, they accounted for more than one dollar out of every six. The explosive growth of entitlement outlays, of course, was accompanied by a corresponding surge in the number of Americans who would routinely apply for, and accept, such government benefits.

And how many people have been lured into government dependency? A lot, and mostly because of welfare spending rather than age-related social insurance programs such as Social Security and Medicare.

…the government did not actually begin systematically tracking the demographics of America’s “program participation” until a generation ago. Such data as are available, however, depict a sea change over the past 30 years. …By 2012, the most recent year for such figures at this writing, Census Bureau estimates indicated that more than 150 million Americans, or a little more than 49% of the population, lived in households that received at least one entitlement benefit….Between 1983 and 2012, by Census Bureau estimates, the percentage of Americans “participating” in entitlement programs jumped by nearly 20 percentage points….Less than one-fifth of that 20-percentage-point jump can be attributed to increased reliance on these two “old age” programs. Overwhelmingly, the growth in claimants of entitlement benefits has stemmed from an extraordinary rise in “means-tested” entitlements.

Ugh. I’ve previously written that getting something from the government doesn’t automatically turn somebody into a moocher or a deadbeat.

Nonetheless, it can’t be good news that 49 percent of U.S. households are on the receiving end for goodies from Uncle Sam.

Here’s a table from his article that should frighten anyone who thinks work and self-reliance are worthwhile values.

There’s lot of information, so I recommend just focusing on the numbers in parentheses in the first two columns. Those show how dependency is increasing by significant amounts for many programs.

Eberstadt highlights some of the worst numbers, most notably the huge growth in food stamps and Medicaid dependency.

…the rolls of claimants receiving food stamps (a program that was officially rebranded the Supplemental Nutrition Assistance Program, or SNAP, in 2008 because of the stigma the phrase had acquired) jumped from 19 million to 51 million. By 2012 almost one American in six lived in a home enrolled in the SNAP program. The ranks of Medicaid, the means-tested national health-care program, increased by over 65 million between 1983 and 2012, and now include over one in four Americans. …Between 1983 and 2012, the number of Americans in households receiving Federal SSI more than sextupled; by 2012, over 20 million people were counted as dependents of the program.

As bad as these numbers are, the most worrisome part of the article is when Eberstadt writes about the erosion of America’s cultural capital.

Asking for, and accepting, purportedly need-based government welfare benefits has become a fact of life for a significant and still growing minority of our population: Every decade, a higher proportion of Americans appear to be habituated to the practice. … nearly half of all children under 18 years of age received means-tested benefits (or lived in homes that did). For this rising cohort of young Americans, reliance on public, need-based entitlement programs is already the norm — here and now. It risks belaboring the obvious to observe that today’s real existing American entitlement state, and the habits — including habits of mind — that it engenders, do not coexist easily with the values and principles, or with the traditions, culture, and styles of life, subsumed under the shorthand of “American exceptionalism.”

And the erosion of cultural capital is very difficult to reverse, thanks in large part to the welfare-aided erosion of traditional families and falling levels of work among males.

The corrosive nature of mass dependence on entitlements is evident from the nature of the pathologies so closely associated with its spread. Two of the most pernicious of them are so tightly intertwined as to be inseparable: the breakdown of the pre-existing American family structure and the dramatic decrease in participation in work among working-age men. …the rise of long-term entitlement dependence — with the concomitant “mainstreaming” of inter-generational welfare dependence — self-evidently delivers a heavy blow.

Since this has been an utterly depressing analysis so far, let’s close with a vaguely optimistic look at the future.

While it may not be easy to reverse the erosion of cultural capital, it is simple (at least in theory) to reverse bad policies.

All we need to do is enact genuine entitlement reform and devolve all means-tested redistribution spending to the states.

P.S. This is some great work by AEI, which follows on the stellar analysis that organization recently produced on income inequality. Makes me almost want to forgot that AEI put together a somewhat disappointing fiscal plan.

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Last September, I wrote about some very disturbing 10-year projections that showed a rising burden of government spending.

Those numbers were rather depressing, but a recently released long-term forecast from the Congressional Budget Office make the 10-year numbers look benign by comparison.

The new report is overly focused on the symptom of deficits and debt rather than the underlying disease of excessive government. But if you dig into the details, you can find the numbers that really matter. Here’s some of what CBO reported about government spending in its forecast.

The long-term outlook for the federal budget has worsened dramatically over the past several years, in the wake of the 2007–2009 recession and slow recovery. …If current law remained generally unchanged…, federal spending rises from 20.5 percent of GDP this year to 25.3 percent of GDP by 2040.

And why is the burden of spending going up?

Well, here’s a chart from CBO’s slideshow presentation. I’ve added some red arrows to draw attention to the most worrisome numbers.

As you can see, entitlement programs are the big problem, especially Social Security, Medicare, Medicaid, and Obamacare.

Even CBO agrees.

…spending for Social Security and the government’s major health care programs—Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies for health insurance purchased through the exchanges created by the Affordable Care Act—would rise sharply, to 14.2 percent of GDP by 2040, if current law remained generally unchanged. That percentage would be more than twice the 6.5 percent average seen over the past 50 years.

By the way, while it’s bad news that the overall burden of federal spending is expected to rise to more than 25 percent of GDP by 2040, I worry that the real number will be worse.

After all, the forecast assumes that other spending will drop by 2.2 percent of GDP between 2015 and 2040. Yet is it really realistic to think that politicians won’t increase – much less hold steady – the amount that’s being spent on non-health welfare programs and discretionary programs?

Another key takeaway from the report is that it is preposterous to argue (like Obama’s former economic adviser) that our long-run fiscal problems are caused by inadequate tax revenue.

Indeed, tax revenues are projected to rise significantly over the next 25 years.

Federal revenues would also increase relative to GDP under current law… Revenues would equal 19.4 percent of GDP by 2040, CBO projects, which would be higher than the 50-year average of 17.4 percent.

Here’s another slide from the CBO. I’ve added a red arrow to show that the increase in taxation is due to a climbing income tax burden.

These CBO numbers are grim, but they could be considered the “rosy scenario.”

The Committee for a Responsible Federal Budget (CRFB) produced their own analysis of the long-run fiscal outlook.

Like the CBO, CRFB is too fixated on deficits and debt, but their report does have some additional projections of government spending.

Here’s the key table from the CRFB report. Not only do they show the CBO numbers  for 2065 and 2090 under the baseline scenario, they also pull out CBO’s “alternative fiscal scenario” projections, which are based on more pessimistic (some would say more realistic) assumptions.

As you can see from my red arrows, federal spending will consume one-third of our economy’s output based on the “extended baseline scenario” as we get close to the end of the century. So if you add state and local spending to the mix, the overall burden of spending will be higher than it is in Greece today.

But if you really want to get depressed, look at the “alternative fiscal scenario.” The burden of federal spending soars to more than 50 percent of output. So when you add state and local government spending, the overall burden would be higher than what currently exists in any of Europe’s welfare states.

In other words, America is destined to become Greece.

Unless, of course, politicians can be convinced to follow my Golden Rule and exercise some much-needed spending restraint.

This would require genuine entitlement reform and discipline in other parts of the budget, steps that would not be popular from the perspective of Washington insiders.

Which is why we need some sort of external tool that mandates spending restraint, such as an American version of Switzerland’s Debt Brake (which you can learn more about by watching a presentation from a representative of the Swiss Embassy).

Heck, even the IMF agrees that spending caps are the only feasible solution.

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The American Enterprise Institute has published a comprehensive budgetary plan entitled, “Tax and spending reform for fiscal stability and economic growth.”

Authored by Joseph Antos, Andrew G. Biggs, Alex Brill, and Alan D. Viard, all of whom I know and admire, this new document outlines a series of reforms designed to restrain the growth of government and mitigate many of the tax code’s more punitive features.

Compared to current law, the plan is a huge improvement.

But huge improvement isn’t the same as perfect, so here’s my two cents on what’s really good, what’s partially good, and what has me worried.

I’ll start with something that’s both good and bad.

According to the latest CBO estimates, federal tax revenues for 2015 will absorb 17.7 percent of GDP and spending will consume 20.4 percent of economic output. Now look at this table showing the impact of the AEI proposal. As you can see, the burden of taxes and spending will both be higher in the future than today.

That’s obviously bad. One would think a conservative organization would present a plan that shrinks the size of government!

But here’s the catch. Under current law, the burden of government is projected to climb far more rapidly, largely because of demographic changes and poorly designed entitlement programs. So if we do nothing and leave government on auto-pilot, America will be saddled with a European-sized welfare state.

From that perspective, the AEI plan actually is good since it is based on reforms that stop most – but not all – of the already-legislated expansions in the size of the public sector.

So here’s the bottom line. Compared to what I would like to see, the AEI plan is too timid. But compared to what I fear will happen, the AEI plan is reasonably bold.

Now let’s look at the specific reforms, staring with tax policy. Here’s some of what’s in the report.

The goal of our tax reform is to eliminate the income tax’s inherent bias against saving and investment and to reduce other tax distortions. To achieve this goal, the income tax system and the estate and gift taxes would be replaced by a progressive consumption tax, in the form of a Bradford X tax consisting of a…37 percent flat-rate firm-level tax on business cash flow and a graduated-rate household-level tax, with a top rate of 35 percent, on wages and fringe benefits.

At the risk of oversimplifying, the AEI folks decided that it was very important to solve the problem of double taxation and not so important to deal with the problem of a discriminatory and punitive rate structure. Which is sort of like embracing one big part of the flat tax while ignoring the other big part.

We’d have a less destructive tax code than we have now, but it wouldn’t be as good as it could be. Indeed, the plan is conceptually similar to the Rubio-Lee proposal, but with a lot more details.

Not that I’m happy with all those additional details.

To address environmental externalities in a more cost-effective and market-based manner, energy subsidies, tax credits, and regulations would be replaced by a modest carbon tax. The gasoline tax would be increased to cover highway-related costs.

I’m very nervous about giving Washington a new source of revenue. And while I’m open (in theory) to the argument that a carbon tax would be a better (less worse) approach than what we have now, I’m not sure it’s wise to trust that politicians won’t pull a bait and switch and burden us with both a costly energy tax and new forms of regulatory intervention.

And I definitely don’t like the idea of a higher gas tax. The federal government should be out of the transportation business.

There are also other features that irk me, including the continuation of some loopholes and the expansion of redistribution through the tax code.

Child and dependent care expenses could be deducted… A 15 percent refundable credit for charitable contributions… A 15 percent refundable credit for mortgage interest… A refundable credit for health insurance…the EITC for childless workers would be doubled relative to current law.

Though I should also point out that the new tax system proposed by AEI would be territorial, which would be a big step in the right direction. And it’s also important to note that the X tax has full expensing, which solves the bias against investment in a depreciation-based system.

But now let’s look at the most worrisome feature of the plan. It explicitly says that Washington should get more money.

… we also cannot address the imbalance simply by cutting spending… The tax proposals presented in this plan raise necessary revenues… Over time, tax revenue would gradually rise as a share of GDP… The upward path of tax revenue is necessary to finance the upward path of federal spending.

This is very counterproductive. But I don’t want to regurgitate my ideological anti-tax arguments (click here if that’s what you want). Let’s look at this issue from a strictly practical perspective.

I’ve reluctantly admitted that there are potential tax-hike deals that I would accept, at least in theory.

But those deals will never happen. In the real world, once the potential for additional revenue exists, the appetite for genuine spending restraint quickly evaporates. Just look at the evidence from Europe about the long-run relationship between taxes and debt and you’ll see that more revenue simply enables more spending.

Speaking of which, now let’s shift to the outlay side of the fiscal ledger.

We’ll start with Social Security, where the AEI folks are proposing to turn Social Security from a substandard social insurance program, which is bad, to a flat benefit, which might even be worse since it involves a shift to a system that is even more focused on redistribution.

The minimum benefit would be implemented immediately, increasing benefits for about one third of retirees, while benefits for middle- and high-earning individuals would be scaled down to the wage-indexed poverty level between now and 2050.

Yes, the system they propose is more fiscally sustainable for government, but what about the fact that most workers are paying record amounts of payroll tax in exchange for a miserly monthly payment?

This is why the right answer is personal retirement accounts.

The failure to embrace personal accounts may be the most disappointing feature of the AEI plan. And I wouldn’t be surprised if the authors veered in this unfortunate direction because they put the cart of debt reduction ahead of the horse of good policy.

To elaborate, a big challenge for real Social Security reform is the “transition cost” of financing promised benefits to current retirees and older workers when younger workers are allowed to shift their payroll taxes to personal accounts. Dealing with this challenge presumably means more borrowing over the next few decades, but it would give us a much better system in the long run. But this approach generally isn’t an attractive option for folks who fixate on near-term government debt.

That being said, there are spending reforms in the proposal that are very appealing.

The AEI plan basically endorses the good Medicare and Medicaid reforms that have been part of recent GOP budgets. And since those two programs are the biggest drivers of our long-run spending crisis, this is very important.

With regards to discretionary spending, the program maintains sequester/Budget Control Act spending levels for domestic programs, which is far too much since we should be abolishing departments such as HUD, Agriculture, Transportation, Education, etc.

But since Congress presumably would spend even more, the AEI plan could be considered a step in the right direction.

Finally, the AEI plan calls for military spending to consume 3.8 percent of economic output in perpetuity. National defense is one of the few legitimate functions of the federal government, but that doesn’t mean the Pentagon should get a blank check, particularly since big chunks of that check get used for dubious purposes. But I’ll let the foreign policy and defense crowd fight that issue since it’s not my area of expertise.

P.S. The Heritage Foundation also has thrown in the towel on personal retirement accounts and embraced a basic universal flat benefit.

P.P.S. On a completely different topic, here’s a fascinating chart that’s being shared on Twitter.

As you can see, the United States is an exception that proves the rule. I don’t know that there are any policy implications, but I can’t help but wonder whether America’s greater belief in self-reliance is linked to the tendency of religious people to believe in individual ethics and moral behavior.

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America has a giant long-run problem largely caused by poorly designed entitlement programs such as Social Security, Medicare, and Medicaid.

So when I wrote last month about proposals by some Democrats to expand Social Security, I was less than enthusiastic.

…demographic changes and ill-designed programs will combine to dramatically expand the size of the public sector over the next few decades. So it’s really amazing that some politicians, led by the clownish Elizabeth Warren, want to dig the hole deeper. …I’m surprised demagogues such as Elizabeth Warren haven’t rallied behind a plan to simply add a bunch of zeroes to the IOUs already sitting in the so-called Social Security Trust Fund. …If Hillary winds up endorsing Warren’s reckless plan, it will give us another data point for our I-can’t-believe-she-said-that collection.

But it turns out I may have been too nice in my analysis.

As reported by USA Today, independent researchers have discovered that Social Security is even more bankrupt than suggested by official estimates.

New studies from Harvard and Dartmouth researchers find that the SSA’s actuarial forecasts have been consistently overstating the financial health of the program’s trust funds since 2000. “These biases are getting bigger and they are substantial,” said Gary King, co-author of the studies and director of Harvard’s Institute for Quantitative Social Science. “[Social Security] is going to be insolvent before everyone thinks.” …Once the trust funds are drained, annual revenues from payroll tax would be projected to cover only three-quarters of scheduled Social Security benefits through 2088.

By the way, I’m not overly enamored with this analysis since it is based on the assumption that the Social Security Trust Fund is real when it’s really nothing but a collection of IOUs.

But if you don’t believe me, perhaps you’ll believe the Clinton Administration, which admitted back in 1999 (see page 337) that the Trust Fund is just a bookkeeping gimmick.

These balances are available to finance future benefit payments and other trust fund expenditures–but only in a bookkeeping sense. …They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.

In other words, what really matters is that Social Security spending is climbing too fast and consuming an ever-larger share of economic output.

That means – in the absence of reform – that more and more money will be diverted from the economy’s productive sector, in the form of taxes or borrowing, to finance benefits.

And when I write “more and more money,” that’s not a throwaway statement.

Returning to the USA Today report, academic experts warn that the long-term shortfall in the program is understated because it is based on 75-year estimates even though the program doesn’t have an expiration date.

The bigger problem with the Social Security Administration is not disclosure, it’s accounting, said Laurence Kotlikoff, a Boston University professor of economics… Kotlikoff…wants the agency to calculate its liabilities using fiscal gap accounting, which considers the difference between the government’s projected financial obligations and the present value of all projected future tax and other revenue. …Under this accounting system, SSA’s projected unfunded liabilities would be $24.9 trillion (instead of the $10.6 trillion projected in 2088). …17 Nobel Prize-winning economists have endorsed Kotlikoff’s push for the SSA and other government agencies to use the fiscal gap accounting method more broadly. “We have a situation that is like Enron accounting,” Kotlikoff said. “And the public doesn’t want to hear about it.”

At the risk of being pedantic, I’m also not enamored with either approach mentioned in the above passage.

Sure, we should acknowledge all expenses and not arbitrarily assume the program disappears after 75 years, but the approach used to calculate “unfunded liabilities” is artificial since it is based on how much money would need to be invested today to finance future promised benefits (whether for 75 years or forever).

Needless to say, governments don’t budget by setting aside trillions of dollars to meet future expenses. Social Security, like other programs, is funded on a pay-as-you-go basis.

That’s why the most appropriate way to measure the shortfall is to take all projected future deficits, adjust them for inflation, and calculate the total. When you do that, the Social Security shortfall is a staggering $40 trillion.

And that’s based on just a 75-year estimate, so the real number is much higher.

Though keep in mind that this is just an estimate of the fiscal shortfall. What really matters is the total level of spending, not how much is financed with red ink.

Which is why the only real answer is genuine reform.

For further information, here’s the video I narrated for the Center for Freedom and Prosperity on the need to modernize the system with personal retirement accounts.

But if you prefer to trust politicians, you can always support the left’s favored solution.

P.S. You can enjoy some previous Social Security cartoons here, here, and here. And we also have a Social Security joke if you appreciate grim humor.

P.P.S. The “Trust Fund” is real only in the sense that the government’s legal authority to pay benefits will be constrained when the IOUs are used up. That’s why the USA Today article says that the government at that point would be able to pay only about 3/4ths of promised benefits (though one imagines that future politicians will simply override that technical provision and require full payments).

P.P.P.S. Many nations have adopted genuine reform based on private retirement savings, including Australia, Sweden, the Faroe Islands, Chile, and The Netherlands.

P.P.P.P.S. Because of lower life expectancies, African-Americans are very disadvantaged by the Social Security system. A system of personal accounts presumably wouldn’t help them live longer, but at least they would have a nest egg to pass on to their kids.

P.P.P.P.P.S. And don’t fall for the false argument that financial markets are too unstable for personal retirement accounts

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What’s America’s main fiscal policy challenge, particularly in the long run?

Most sensible people will agree that our greatest threat is the rising burden of entitlement spending.

More specifically, demographic changes and ill-designed programs will combine to dramatically expand the size of the public sector over the next few decades.

So it’s really amazing that some politicians, led by the clownish Elizabeth Warren, want to dig the hole deeper.

Here are some excerpts from a recent article in the Washington Examiner.

Elizabeth Warren is pushing Democrats to expand Social Security rather than cut it, a move that could pressure presumed party frontrunner Hillary Clinton to move left. …”What Elizabeth Warren has done on pushing the ball forward on Social Security is another example of why she’s a bold progressive hero,” said T.J. Helmstetter, a representative for the Progressive Change Campaign Committee, an outside group that pushes for progressive causes. …In March, almost all Democratic senators voted for a symbolic budget amendment to express support for expanding Social Security. …The messaging amendment approved by most Senate Democrats also did not specify how benefits were to be expanded.

I discussed this topic in a recent interview.

Though I’m surprised that my head didn’t explode while discussing such a reckless idea.

I closed the interview by expressing a modest bit of optimism.

Surely (at least I hope) politicians won’t dig the hole deeper when we can see right before our eyes the fiscal chaos and economic disarray in Greece, right?!?

I’m surprised demagogues such as Elizabeth Warren haven’t rallied behind a plan to simply add a bunch of zeroes to the IOUs already sitting in the so-called Social Security Trust Fund.

Fortunately, not all politicians think it’s smart to accelerate as you’re driving toward a cliff.

Writing in the Washington Post, Charles Lane explains Governor Christie’s proposal.

New Jersey Gov. Chris Christie…wants to campaign on a sweeping proposal to rein in federal entitlement spending on the elderly. …he urged a phaseout of Social Security benefits for retirees with $80,000 or more in other income and backed a gradual upward adjustment of the retirement ages for Medicare and Social Security, which is also appropriate, given increased life expectancy. …Social Security…remains a non-trivial cause of the government’s long-term fiscal imbalance. Its trust fund, admittedly an accounting fiction of sorts, is on course to run out of cash by the early 2030s. Christie’s plan would provide three-fifths of the resources necessary to guarantee Social Security’s solvency for 75 years

Kudos to Governor Christie for recognizing that you can’t repeal mathematics with politics.

And this modest bit of praise isn’t based on policy. I’m not a big fan of means testing, which has some unfortunate economic effects.

And I also think that raising the retirement age is sub-optimal since it forces people to pay longer into an inferior system that already is giving them a very low rate of return.

The right approach is to transition to a system of personal retirement accounts, but at least Christie has an adult proposal based on real-world considerations.

Though, to be fair, many leftists claim we can afford higher benefits and also “fix” the system with a giant tax increase. So they sometimes recognize that math exists, even if they want us to believe that 2 + 2 = 7.

P.S. If Hillary winds up endorsing Warren’s reckless plan, it will give us another data point for our I-can’t-believe-she-said-that collection.

P.P.S. Is Elizabeth Warren more of a faux populist or more of a faux American Indian?

P.P.P.S. You can enjoy some previous Social Security cartoons here, here, and here. And we also have a Social Security joke if you appreciate grim humor.

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