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Posts Tagged ‘Entitlements’

When I write about poorly designed entitlement programs, I will warn about America’s Greek future. Simply stated, we will suffer the same chaos and disarray now plaguing Greece if we don’t engage in serious reform.

Ideally sooner rather than later.

But when I write about state governments, perhaps it would be more appropriate to warn about a Brazilian future. That’s because many American states have made unaffordable and unfunded promises to give lavish benefits to retired bureaucrats, a topic that I’ve addressed on numerous occasions.

And why does that mean a Brazilian future? Because as Greece is already suffering the inevitable consequences of a bloated welfare state, Brazil is already suffering the inevitable consequences of a pension system that treats bureaucrats as a protected and cossetted class. Here are some excerpts from a sobering report in the Wall Street Journal.

Twenty years before Michel Temer became president of Brazil, he did something millions of his compatriots do, at great cost to the country’s coffers: He retired at age 55 and started collecting a generous pension. Delaying that moment until age 65 is at the center of Mr. Temer’s proposed economic overhaul. …making that happen is seen as a make-or-break test of whether the government can get its arms around mounting economic problems like rising debt, low investment and a stubborn recession now entering its third year. New pension rules are considered central to fixing an insolvent system.

It’s easy to understand why the system is bankrupt when you read the details.

…some retirees receive pensions before age 50 and surviving spouses can receive full pensions of the deceased while still drawing their own. The generosity of Brazil’s pension system is legendary—and, economists say, troubling as the country’s fertility rate plummets and life expectancy climbs. João Mansur, a long-time state legislator in Paraná state, served as interim governor there for 39 days in 1973, a stint that qualified him to retire with a $8,000 monthly pension. …Other former public workers who retire not only reap nearly the same income they got while on the job, but also see their checks get bumped up whenever those still working in the same job category get raises. …Retirement outlays will eat up 43% of the $422-billion national budget this year. …Demographics are playing against a generous system created in great part to bridge Brazil’s infamous social gap. Official statistics say there are 11 retirees for every 100 working-age Brazilians; that will rise to 44 per 100 by 2060.

Fixing this mess won’t be easy.

Brazil’s constitution must be amended to allow its pension system to be restructured… Mr. Temer has already been forced to make a series of major compromises, including exempting state and local government employees from the overhaul. …legislators have sought to further water down Mr. Temer’s proposals, by for instance maintaining the lower retirement ages for women and dragging out the transition from the old social-security regime to the new one.

In other words, Brazilian politicians are in the same position Greek politicians were in back in 2003. There’s a catastrophically bad fiscal forecast and the only issue is whether reforms will happen before a crisis actually begins. If you really want to be pessimistic, it’s even possible that Brazil has passed the tipping point of too much government dependency.

In any event, it appears that legislators prefer to kick the pension can down the road – even though that will make the problem harder to solve. Assuming they ever want to solve it.

Which is exactly what’s happening at the state level in America.

Consider these passages from a recent Bloomberg column.

Unfunded pension obligations have risen to $1.9 trillion from $292 billion since 2007. Credit rating firms have begun downgrading states and municipalities whose pensions risk overwhelming their budgets. New Jersey and the cities of Chicago, Houston and Dallas are some of the issuers in the crosshairs. …unlike their private peers, public pensions discount their liabilities using the rate of returns they assume their overall portfolio will generate. …Put differently, companies have been forced to set aside something closer to what it will really cost to service their obligations as opposed to the fantasy figures allowed among public pensions. …many cities and potentially states would buckle under the weight of more realistic assumed rates of return. By some estimates, unfunded liabilities would triple to upwards of $6 trillion if the prevailing yields on Treasuries were used.

But this looming disaster will not hit all states equally.

Here’s a map from the Tax Foundation which shows a tiny handful of states actually have funded their pensions (in other words, they may provide extravagant benefits, but at least they’ve set aside enough money to finance them). Most states, though, have big shortfalls.

The lighter the color, the bigger the financing gap.

To get a sense of the states that have a very good economic outlook, look for a combination of zero income taxes and small unfunded liabilities.

South Dakota (best tax system and negative pension liability!) gets the top marks, followed by Tennessee and Florida. Honorable mention for the state of Washington.

And is anyone surprised that Illinois is tied for last place? Or that Connecticut and New Jersey are near the bottom? Kentucky’s awful position, by contrast, is somewhat unexpected.

P.S. Brazil’s government may kick the can down the road on pension reform, but at least they added a spending cap to their constitution.

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I sometimes feel like a broken record about entitlement programs. How many times, after all, can I point out that America is on a path to become a decrepit European-style welfare state because of a combination of demographic changes and poorly designed entitlement programs?

But I can’t help myself. I feel like I’m watching a surreal version of Titanic where the captain and crew know in advance that the ship will hit the iceberg, yet they’re still allowing passengers to board and still planning the same route. And in this dystopian version of the movie, the tickets actually warn the passengers that tragedy will strike, but most of them don’t bother to read the fine print because they are distracted by the promise of fancy buffets and free drinks.

We now have the book version of this grim movie. It’s called The 2017 Long-Term Budget Outlook and it was just released today by the Congressional Budget Office.

If you’re a fiscal policy wonk, it’s an exciting publication. If you’re a normal human being, it’s a turgid collection of depressing data.

But maybe, just maybe, the data is so depressing that both the electorate and politicians will wake up and realize something needs to change.

I’ve selected six charts and images from the new CBO report, all of which highlight America’s grim fiscal future.

The first chart simply shows where we are right now and where we will be in 30 years if policy is left on autopilot. The most important takeaway is that the burden of government spending is going to increase significantly.

Interestingly, even CBO openly acknowledges that rising levels of red ink are caused solely by the fact that spending is projected to increase faster than revenue.

And it’s also worth noting that revenues are going up, even without any additional tax increases.

The bottom part of this chart shows that revenues from the income tax will climb by about 2 percent of GDP. In other words, more than 100 percent of our long-run fiscal mess is due to higher levels of government spending. So it’s absurd to think the solution should involve higher taxes.

This next image digs into the details. We can see that the spending burden is rising because of Social Security and the health entitlements. By the way, the top middle column on “other noninterest spending” shows one thing that is real, which is that defense spending has fallen as a share of GDP since the mid-1960s, and one thing that may not be real, which is that politicians somehow will limit domestic discretionary spending over the next three decades.

This bottom left part of the image also gives the details on built-in growth in revenues from the income tax, further underscoring that we don’t have a problem of inadequate revenue.

Here’s a chart that shows that our main problem is Medicare, Medicaid, and Obamacare.

Last but not least, here’s a graphic that shows the amount of fiscal policy changes that would be needed to either reduce or stabilize government debt.

I think that’s the wrong goal, and that instead the focus should be on reducing or stabilizing the burden of government spending, but I’m sharing this chart because it shows that spending would have to be lowered by 3.1 percent of GDP to put the nation on a good fiscal path.

Some folks think that might be impossible, but I’ll simply point out that the five-year de facto spending freeze that we achieved from 2009-2014 actually reduced the burden of government spending by a greater amount. In other words, the payoff from genuine spending restraint is enormous.

The bottom line is very simple.

We need to invoke my Golden Rule so that government grows slower than the private sector. In the long run, that will require genuine entitlement reform.

Or we can let America become Greece.

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I’ve looked at some of the grim fiscal implications of demographic changes the United States and Europe.

Now let’s look at what’s happening in Asia.

The International Monetary Fund has a recent study that looks at shortfalls in government-run pension schemes and various policies that could address the long-run imbalances in the region. Here are the main points from the abstract.

Asian economies are aging fast, with significant implications for their pension system finances. While some countries already have high dependency ratios (Japan), others are expected to experience a sharp increase in the next couple of decades (China, Korea, Singapore). …This has…implications. …pension system deficits can increase very quickly, limiting room for policy action and hampering fiscal sustainability. …This paper explores how incorporating Automatic Adjustment Mechanisms (AAMs)—rules ensuring that certain characteristics of a pension system respond to demographic, macroeconomic and financial developments, in a predetermined fashion and without the need for additional intervention— can be part of pension reforms in Asia.

More succinctly, AAMs are built-in rules that automatically make changes to government pension systems based on various criteria.

Incidentally, we already have AAMs in the United States. Annual Social Security cost of living adjustments (COLAs) and increases in the wage base cap are examples of automatic changes that occur on a regular basis. And such policies exist in many other nations.

But those are AAMs that generally are designed to give more money to beneficiaries. The IMF study is talking about AAMs that are designed to deal with looming shortfalls caused by demographic changes. In other words, AAMs that result in seniors getting lower-than-promised benefits in the future. Here’s how the IMF study describes this development.

More recently, AAMs have come to the forefront to help address financial sustainability concerns of public pension systems. Social insurance pension systems are dominated by defined benefit schemes, pay-as-you-go financed, with liabilities explicitly underwritten by the government. …these systems, under their previous contribution and benefit rules, are unprepared for population aging and need to implement parametric reform or structural reforms in order to reduce the level or growth rate of their unfunded pension liabilities. …Automatic adjustments can theoretically make the reform process politically less painful and more likely to succeed.

Here’s a chart from the study that underscores the need for some sort of reform. It shows the age-dependency ratio on the left and the projected increase in the burden of pension spending on the right.

I’m surprised that the future burden of pension spending in Japan will only be slightly higher than it is today.

And I’m shocked by the awful long-run outlook in Mongolia (the bad numbers for China are New Zealand are also noteworthy, though not as surprising).

To address these grim numbers, the study considers various AAMs that might make government systems fiscally sustainable.

Especially automatic increases in the retirement age based on life expectancy.

One attractive option is to link statutory retirement ages—which seem relatively low in the region—to longevity or other sustainability indicators. This would at the very least help ameliorate the impact of life expectancy improvements in the finances of public pension systems. … While some countries have already raised the retirement age over time (Japan, Korea), pension systems in Asia do not yet feature automatic links between retirement age and life expectancy. …The case studies for Korea and China (section IV) suggest that automatic indexation of retirement age to life expectancy can indeed help reduce the pension system’s financial imbalances.

Here’s a table showing the AAMs that already exist.

Notice that the United States is on this list with an “ex-post trigger” based on “current deficits.”

This is because when the make-believe Trust Fund runs out of IOUs in the 2030s, there’s an automatic reduction in benefits. For what it’s worth, I fully expect future politicians to simply pass a law stating that promised benefits get paid regardless.

It’s also worth noting that Germany and Canada have “ex-ante triggers” for “contribution rates.” I’m assuming that means automatic tax hikes, which is a horrid idea. Heck, even the study acknowledges a problem with that approach.

…raising contribution rates can have important effects on the labor market and growth, it would be important to prioritize other adjustments.

From my perspective, the main – albeit unintended – lesson from the IMF study is that private retirement accounts are the best approach. These defined contribution (DC) systems avoid all the problems associated with pay-as-you-go, tax-and-transfer regimes, generally known as defined benefit (DB) systems.

The larger role played by defined contribution schemes in Asia reduce the scope for using AAMs for financial sustainability purposes. Many Asian economies (Hong Kong, Singapore, Australia, Malaysia and Indonesia) have defined contribution systems, …under which system sustainability is typically inherent.

Here are the types of pension systems in Asia, with Australia and New Zealand added to the mix..

For what it’s worth, I would put Australia in the “defined contribution” grouping. Yes, there is still a government age pension that serves as a safety net, but there also are safety nets in Singapore and Hong Kong as well.

But I’m nitpicking.

Here’s another table from the study showing that it’s much simpler to deal with “DC” systems compared with “DB” systems. About the only reforms that are ever needed revolve around the question of how much private savings should be required.

By the way, even though the information in the IMF study shows the superiority of DC plans, that’s only an implicit message.

To the extent the bureaucracy has an explicit message, it’s mostly about indexing the retirement age to changes in life expectancy.

That’s probably better than doing nothing, but there’s an unaddressed problem with that approach. It forces people to spend more years working and paying into systems, and then leaves them fewer years to collect benefits in retirement.

That idea periodically gets floated in the United States. Here’s some of what I wrote in 2011.

Think of this as the pay-for-a-steak-and-get-a-hamburger plan. Social Security already is a bad deal for workers, forcing them to pay a lot of money in exchange for relatively meager retirement benefits.

I made a related observation about this approach back in 2012.

…it focuses on the government’s finances and overlooks the implications for households. It is possible, at least on paper, to “save” Social Security by cutting benefits and raising taxes. But such “reforms” force people to pay more and get less – even though Social Security already is a very bad deal, particularly for younger workers.

The bottom line is that the implicit message should be explicit. Other nations should copy jurisdictions such as Chile, Australia, and Hong Kong by shifting to personal retirement accounts

P.S. Speaking of which, here’s the case for U.S. reform, as captured by cartoons. And you can enjoy other Social Security cartoons here, here, and here, along with a Social Security joke if you appreciate grim humor.

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We have reached the 50th full day of the Trump Presidency.

In that span of time, we’ve had lots of political wrangling between Trump and the media. We’ve been introduced to the concept of the “Deep State” (yes, there is a permanent bureaucracy that acts to protect its own interests, but it’s silly to call it a conspiracy). There have been some controversial executive orders. And Trump made his big speech to Congress.

Lots of noise, though, does not mean lots of action. The President hasn’t signed any big legislation to repeal Obamacare, or even any legislation to tinker with Obamacare. There haven’t been any big changes on fiscal policy, either with regards to spending or taxes.

Heck, Trump hasn’t even told us what he really thinks on some of these issues.

In other words, the biggest takeaway after 50 days is that we still don’t know whether Trump is going to make government bigger or smaller.

I address some of these issues in two recent interviews. We’ll start with this discussion on the day of Trump’s Joint Address. I mostly focus on the need for entitlement reform and explain how Trump could do the right thing for America…if he wants to.

You’ll also notice, right at the end of the interview, that I made sure to sneak in a reference to fiscal policy’s Golden Rule. Gotta stay on message!

In this second interview, which occurred a couple of days later, I start the conversation by fretting about how the border-adjustable tax could kill the chances of getting good tax policy.

In the latter part of the interview, the discussion shifts to infrastructure and I make the rare point that we should copy Europe and get the private sector more involved (it’s generally a good idea to do the opposite of Europe, to be sure, but there are a small handful of other areas – including corporate tax rates, Social Security, and privatized postal services – where various European countries are ahead of us).

The bottom line is that we didn’t know before the election whether Trump wants to limit the burden of government, and we still don’t know today. My guess last year was that we’ll get the wrong answer, though I confess that the jury is still out.

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The tax-and-transfer welfare state is in deep trouble. I explained last year that the United States faces a very serious long-run challenge.

Many of our entitlement programs were created based on the assumption that we would always have an expanding population, as represented by a population pyramid. …however, we’ve seen major changes in demographic trends, including longer lifespans and falling birthrates. The combination of these two factors means that our population pyramid is slowly, but surely, turning into a population cylinder. …this looming shift in America’s population profile means massive amounts of red ink as the baby boom generation moves into full retirement.

In other words, in the absence of genuine entitlement reform, America will have a Greek-style fiscal mess at some point in the future. Or, as I wrote yesterday, maybe we should call it a Japan-style mess.

Demographic 2030Simply stated, we’re going to have too many people collecting benefits and too few people generating income.

The outlook is even worse in Europe. Indeed, the fiscal crisis has already started in many nations in Southern Europe. And the crisis will spread to many countries in Northern Europe. And it will hit Eastern Europe as well, notwithstanding some good economic reforms in that region.

Unfortunately, most politicians are reluctant to undertake the entitlement reforms that would avert this crisis.

So what’s their alternative solution? In many cases, they don’t have one. In other cases, they act as if higher tax burdens can solve the problem, even though that probably means even more people will be discouraged from productive lives and instead decide to ride in the wagon of government dependency (higher taxes also would enable even more spending, but that’s a separate story).

Another potential answer is sex. To be more specific, governments around the world are urging people to procreate more so that there will be additional future taxpayers to finance the welfare state.

I’m not kidding.

Let’s start with the new effort in Spain.

Europeans across the continent are having so many fewer babies that national populations from Scandinavia to the Mediterranean are skewing towards the older end of the spectrum, with not enough young, productive people to keep economies thriving and to look after the rest of the aging population. Spanish women have 1.3 children on average. In 2015, Spain’s death rate outstripped the birth rate… Edelmira Barreira Diz was appointed as “commissioner for the demographic challenge” last month.

I think “sex commissioner” would have been a better title. Heck, that probably would have enticed a certain former American president to apply for the position.

Here’s a chart from the story showing declining fertility rates.

There’s a similar effort for government-encouraged babies in Italy.

Italy is facing a dramatic demographic change, with increasingly fewer children being born. So the Health Ministry recently launched an ad campaign to remind people of Sept. 22 being “fertility day.” …another ad claiming that fertility was “a common good” — a comparison that reminded some of fascist propaganda from the 1920s which urged women to have more babies to support the nation. …As a social welfare state, Italy’s pensions system and economy relies on a certain number of younger people joining the workforce every year.

The Danish government also wants women to think they have an obligation to produce future taxpayers.

In Denmark, for instance, schoolchildren are now taught in class that they should have more babies. “…we just thought, maybe we should actually also tell them about how to get pregnant,” Marianne Lomholt, national director of Sex and Society, told the New York Times. …Denmark’s Education Ministry now has teachers talk not only about the dangers of sex and pregnancies, but also about their benefits.

Also in Denmark, private companies are jumping on this bandwagon (sexwagon?) of more sex as a solution to demographic-entitlement crisis.

Denmark has a sex problem. …not exactly a sex problem, per se. It’s more like a baby problem. …Denmark’s perennially low birth rate…has left people worried… “We are concerned. The fewer Danes means fewer people to support the aging population…” …can vacation sex save the Kingdom of Denmark? Spies thinks it can, so the company has sweetened the deal. According to its promotion, the company will give prizes to couples who get pregnant while on vacations purchased through them.

Given the grim demographic outlook in Japan, nobody should be surprised that the government there is agitating for more future taxpayers.

A comprehensive plan to reverse Japan’s crashing population numbers was unveiled on Thursday by a government task force… Shigeru Ishiba, minister in charge of overcoming population decline and reviving local economies, was more blunt. “Japan will die off” without proper countermeasures, he warned. …The strategy outlined in the government plan is to encourage young people to relocate to areas outside the major metropolitan regions by fostering jobs and economic growth in small local communities that are now in danger of simply disappearing for lack of inhabitants.

Huh?!? Japan’s repeated forays into Keynesian economics haven’t generated good results nationally, so I’m not holding my breath that this new campaign will be “fostering jobs and economic growth” in targeted communities.

For a final example, let’s shift to China, where a government that formerly forced women to have abortions is suddenly looking at ways to subsidize an extra child.

China is considering introducing birth rewards and subsidies to encourage people to have a second child… the country issued new guidelines in late 2015 allowing all parents to have two children amid growing concerns over the costs of supporting an aging population. …China began implementing its controversial “one-child policy” in the 1970s in order to limit population growth, but authorities are now concerned that the country’s dwindling workforce will not be able to support an increasingly aging population.

Since coerced redistribution isn’t nearly as odious as coerced abortion, I guess this is another sign of progress in China.

But I’m not sure that will be enough to produce enough future taxpayers for China. Or any other nation.

The only sustainable welfare state, given modern demographics, is no welfare state.

Or, to be more accurate, the right approach is to start with the default assumption that people are responsible for saving and investing to support themselves in retirement. There are lots of nations that now have systems of personal retirement accounts, and this puts them in much stronger position than nations that rely solely on tax-and-transfer entitlement schemes. Hong Kong is a good example, as are Chile and Australia.

By the way, countries with private social security systems have safety-net programs for destitute seniors, but that’s far more affordable than automatic payments to everyone in retirement.

P.S. On a related note, there’s a big debate in academic circles about whether the welfare state (specifically young-to-old redistribution) actually sows the seed of its own destruction by inducing lower fertility rates. Ramesh Ponnuru of National Review summarized some of the evidence for this hypothesis back in 2012.

A 2005 paper for the National Bureau of Economic Research by economists Michele Boldrin, Mariacristina De Nardi, and Larry E. Jones points out that “the size and timing of the growth in government pension systems” matches up nicely with fertility trends in the U.S. and Europe. They expanded on both sides of the Atlantic Ocean, and fertility fell on both sides, after World War II; and they expanded more in Europe, where fertility fell further. In their model, entitlements account for roughly half of the decline in fertility, and 60 percent of the difference between European and American fertility. When a pension system expands by 10 percent of GDP, the average number of children per woman drops by 0.7 to 1.6. “These findings are highly statistically significant and fairly robust to the inclusion of other possible explanatory variables.” A 2007 paper by Isaac Ehrlich and Jinyoung Kim, also for the NBER, reached similar conclusions, finding that pension programs explained a little under half of the decline in fertility rates, and a little more than half of the decline in marriage rates, in developed countries between 1965 and 1989. One implication of this finding is that pension programs have contributed to their own financial woes by suppressing fertility.

Some researchers have concluded that other types of redistribution spending can boost fertility, though other scholars are more skeptical.

I haven’t studied this literature on subsidized babies enough to have a strong opinion.

For what it’s worth, I suspect the government can provide enough handouts to induce motherhood (heck, one of the motives for the welfare reform that was adopted during Bill Clinton’s presidency was a concern that the old system was encouraging women to have children out of wedlock).

But I’m very doubtful that such policies would fix the demographic/entitlement crisis that threatens most nations. In part, because I’m skeptical about the ability of governments to cause large shifts in fertility, but also because recreating a population pyramid only works if the additional children wind up being productive workers in the private sector.

In other words, the goal isn’t really a population pyramid as much as it’s a shift in the ratio of producers versus dependents in a nation.

As such, if many of the babies induced by handouts come from mothers that rely on welfare, and if those children are less likely to grow up to be net payers of tax rather than net consumers of tax, then baby subsidies are not going to solve the problem.

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When I warn about the fiscal and economic consequences of America’s poorly designed entitlement programs (as well as the impact of demographic changes), I regularly suggest that the United States is on a path to become Greece.

Because of Greece’s horrible economy, this link has obvious rhetorical appeal.

But there’s another nation that may be a more accurate “role model” of America’s future. This other country, like the United States, is big, relatively rich, and has its own currency.

For these and other reasons, in an article for The Hill, I suggest that Japan is the nation that may offer the most relevant warning signs. I explain first that Japan shows the failure of Keynesian economics.

…ever since a property bubble burst in the late 1980s, Japan’s economy has been in the doldrums, and its politicians deserve much of the blame. They’ve engaged in repeated binges of so-called Keynesian stimulus. But running up the national credit card hasn’t worked any better in Japan than it did for President Barack Obama. Instead of economic rejuvenation, Japan is now saddled with record levels of debt.

In other words, Japan already is a basket case and may be the next Greece. And all this foolish policy has been cheered on by the IMF.

I then highlight how Japan shows why a value-added tax is a huge mistake.

Japan’s politicians also decided to impose a value-added tax (VAT) on the nation. As so often happens when a VAT gets adopted, it turns into a money machine, as legislators start ratcheting the rate higher and higher. That happened in Europe back in the 1960s and 1970s, and it’s happening in Japan today.

And regular readers know my paranoid fear of the VAT taking hold in the United States.

But here’s the main lesson in the column.

The combination of demographic changes and redistribution programs is a recipe for fiscal crisis.

…the biggest economic threat to the country is the way Japan’s welfare state interacts with demographic changes. It’s not that the welfare state is enormous, particularly compared with European nations, but the system is becoming an ever-increasing burden because the Japanese people are living longer and having fewer children. …America faces some of the same problems. …if we don’t reform our entitlement programs, it’s just a matter of time before we also have a fiscal crisis.

To be sure, as I note in the article, Japan’s demographic outlook is worse. And that nation’s hostility to any immigration (even from high-skilled people) means that Japan can’t compensate (as America has to some degree) for low birth rates by expanding its population.

Indeed, the demographic situation in Japan is so grim that social scientists have actually estimated the date on which the Japanese people become extinct.

Mark August 16, 3766 on your calendar. According to…researchers at Tohoku University, that’s the date Japan’s population will dwindle to one. For 25 years, the country has had falling fertility rates, coinciding with widespread aging. The worrisome trend has now reached a critical mass known as a “demographic time bomb.” When that happens, a vicious cycle of low spending and low fertility can cause entire generations to shrink — or disappear completely.

Though I guess none of us will know whether this prediction is true unless we live another 1750 years. But it doesn’t matter if the estimate is perfect. Japan’s demographic outlook is very grim.

By the way, the problem of aging populations and misguided entitlements exists in almost every developed nation.

But I mentioned in the article for The Hill that there are two exceptions. Hong Kong and Singapore have extremely low birthrates and aging populations. But neither jurisdiction faces a fiscal crisis for the simple reason that people largely are responsible for saving for their own retirement.

And that, of course, is the main lesson. The United States desperately needs genuine entitlement reform. While I’m not overflowing with optimism about Trump’s view on these issues, hope springs eternal.

P.S. In yesterday’s column about Germany, I listed bizarre policies in Germany in the postscripts. My favorite example from Japan is the regulation of coffee enemas. And the Japanese government has even proven incompetent at giving away money.

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The United States is going to become another Greece, and it’s largely because of poorly designed entitlement programs. As the old saying goes, demography is destiny.

Let’s look at just one piece of that puzzle. James Capretta of the American Enterprise Institute has a very sobering summary of how Medicaid has metastasized into one of the largest and fastest-growing entitlement programs.

You should read the entire article, but if you’re pressed for time, I’m going to share two grim charts that tell you what you need to know.

First, we have a look at how the burden of Medicaid spending, measured as a share of national output, has increased over time.

What makes this chart particularly depressing is that Medicaid was never supposed to become a massive entitlement program.

It was basically created so the crowd in Washington could buy a few votes. Yet the moment politicians decided that it was the federal government had a role in subsidizing health care for the indigent, it was just a matter of time before the program was expanded to new groups of potential voters.

And every time the program was expanded, that increased the burden of spending and further undermined market forces in the health sector.

This is why entitlement programs are so injurious to a nation.

But Medicaid isn’t just a problem because of its adverse fiscal and economic impact.

The program also is exacerbating the redistribution culture in the United States as more and more people get trapped in the web of dependency.

Which brings us to our second chart from Capretta’s article. Here’s a look at the share of the population being subsidized by Medicaid.

As a fiscal wonk, I realize I should care more about the budget numbers, but I actually find this second graph more depressing. In my lifetime, we’ve gone from a nation where the federal government had no role in the provision of low-income healthcare, and now nearly one out of every five Americans is on the federal teat.

Even though we’re far richer than we were in the mid-1960s when the program was created, which presumably should have meant less supposed need for federal subsidies.

For further background on the issue, here’s a video I narrated for the Center for Freedom and Prosperity.

I urge you to pay close attention to the discussion that starts at 1:48. I explain that programs with both federal and state spending create perverse incentives for even more spending. This is mostly because politicians in either Washington or state capitals can expand eligibility and take full credit for new handouts while only being responsible for a portion of the costs. But it also happens because the federal match gives states big incentives to manipulate the system to get more transfers.

P.S. All of which explains why I think Medicaid reform should be the first priority when looking at how to fix the entitlements mess, even before Medicare reform and Social Security reform.

P.P.S. I’m not overflowing with optimism that Trump will tackle the issue, but there is a feasible scenario for him fixing the program.

P.P.P.S. Regardless, one would hope all politicians would agree that it’s time to tackle rampant Medicaid fraud.

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