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Posts Tagged ‘Entitlements’

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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I feel a bit schizophrenic when people ask me my opinion of Republicans on Capitol Hill.

When I’m in a good mood (or being naively optimistic, some might argue), I applaud them for blocking Obama’s spending agenda. The fights over sequestration, debt limits, and government shutdowns have made a real difference. The burden of government spending has dropped significantly since 2009.

But when I’m in a bad mood (or being too demanding, some might say), I get very agitated that Republicans seem unable to achieve easy victories, such as doing nothing and letting the corrupt Export-Import Bank disappear. And it makes me think they’re a bunch of big-government hacks.

The bottom line is that GOPers are both good and bad. Here’s what I wrote back in 2011 and it still applies today.

It’s almost like they have an angel on one shoulder and a devil on the other. They usually have some underlying principles, and they would like to do the right thing and make America a better place. Yet they also want to get reelected and accumulate power, and this lures them into casting votes that they know are bad for the country. Sometimes the devil has the most influence. During the Bush years, for instance, most Republicans on Capitol Hill went along with Bush’s bad proposals… Yet every so often the angel gets control. All Republicans, including the ones who were in office and doing the wrong thing during the Bush years, …vote for…budget[s]…which would limit the growth of federal spending and fundamentally reform Medicare and Medicaid.

So are the angels or devils winning?

That’s a judgement call, but here’s a slide I’ve shared in some of my speeches. It shows three issues that will get decided in 2015 and asks whether Congress will make the right choices.

The jury is still out on all three of these tests, but there are many reasons to worry.

I’ve already written about GOP flirtation with the gas tax, which is very disturbing since a decision not to raise the tax automatically reduces federal transportation spending, so it should be a win-win situation (assuming, of course, that Republicans believe in federalism and a smaller central government).

Now let’s look at the other two items on my list.

Republicans achieved a big victory with the sequester in 2013, but then gave Obama a big win by cancelling the sequester for 2014 and 2015.

Well, now they have to decide what to do for the 2016 fiscal year, which starts October 1. And there’s already pressure from the White House, as you can see from this news report, to replace real spending restraint with gimmicks and back-door tax hikes.

White House Budget Director Shaun Donovan said Thursday he sees a “hopeful possibility” that Congress and the White House will agree later this year to update the Ryan-Murray budget agreement of 2013 which increased the discretionary spending ceilings set in the Budget Control Act. …Donovan declined to say if any preliminary talks have begun to renew Ryan-Murray, but declared that President Barack Obama will insist the sequestration process be “reversed.” “We will not accept a budget that locks in sequestration,” Donovan said. …The White House budget calls for FY 2016 discretionary spending that is about $75 billion above the spending ceiling set by the 2011 law after the sequester was triggered.

You may be asking yourself why Republicans would consider – even for a nanosecond – giving Obama all that new spending?

Well, the problem is that some GOPers are big defense hawks and they complain, accurately, that Defense is less than one-fourth of the budget yet is has to absorb one-half of the sequester.

But considering that the United States and its allies still account for the overwhelming share of global defense outlays, I nonetheless think sequestration is a far better outcome than giving Obama carte blanche to squander and extra $75 billion.

But it remains to be seen what will happen.

Now let’s contemplate the third test for the GOP.

Will the Senate commit to entitlement reform? The answer is…not really, but maybe.

Here’s what The Hill has reported.

Senate Republicans will not include detailed plans to overhaul entitlement programs when they unveil their first budget in nearly a decade this week, according to GOP sources. The decision would break from Rep. Paul Ryan’s (R-Wis.) House budgets from recent years, which Democrats used to pound Republican candidates in the 2012 and 2014 elections. …The GOP budget would balance in 10 years, according to GOP lawmakers familiar with the document, but it will only propose savings to be achieved in Medicare and Medicaid, without spelling out specific reforms as Ryan and House Republicans did in recent budgets.

In other words, the bad news is that Senate GOPers are not going to embrace the specific Medicare and Medicaid reforms that have been included in House-passed Republican budgets.

But the good (or hopeful, to be more accurate) news is that the Senate budget will call for a somewhat similar level of spending restraint. So that means the possibility of good entitlement reform will still exist.

By the way, the reason this is so important is that we may have a once-in-a-lifetime opportunity to actually enact desperately needed fiscal reforms in 2017. This is why it’s so critical that GOPers not get wobbly and regress into being Bush-type big-government conservatives.

I explain further in this interview I had with the Institute of Economic Affairs on my most recent trip to London.

Incidentally, I’m not exaggerating in the interview when I warn that the United States may turn into Greece if we don’t seize the opportunity to make reforms and slow the growth of government. If you don’t believe me, check out these sobering estimates of long-run fiscal chaos from  the IMF, BIS, and OECD.

P.S. I’m sometimes asked whether the GOP leadership is part of the problem or part of the solution. That’s not my area of expertise, but I will say that Boehner and McConnell basically represent the consensus of their respective members, so it’s unrealistic to expect them to vote or behave like Justin Amash and Rand Paul. Sure, I wish they would be more aggressive on certain issues, such as killing the Export-Import Bank or ending subsidized terrorism insurance. And I wish they weren’t so timid about confrontations with Obama since there’s a strong argument to be made that they wound up as winners from the 2013 shutdown battle. That being said, what really matters if what they would do in 2017 if there was a President who wanted real reform. And on that score, I have confidence that Boehner and McConnell would do the right thing, twisting arms and knocking heads if necessary to get their colleagues to save America from becoming Greece.

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Bad ideas definitely have the ability to cross borders.

The income tax first appeared in England, on a temporary basis during the Napoleanic wars and then permanently in 1842. It then spread like a cancer to other parts of the world, eventually reaching – and plaguing – the United States starting in 1913.

Government-run Social Security schemes were started by the Germans in 1889 under Chancellor Otto von Bismarck. Similar programs then were adopted elsewhere, including the United States as part of FDR’s misguided New Deal in 1935.

Now we have another example.

I wrote last month about how the State Department’s refugee program is a trainwreck because it is bringing Somalis (many of whom have an anti-Western ideology) to America and trapping them in government dependency with a plethora of handouts (and also creating a breeding ground for terrorists).

Well, our cousins in the United Kingdom also have a refugee program that is similarly counterproductive.

I don’t know which country was dumb enough to first create its program, but the Brits win the prize for subsidizing the most infamous terrorist (and new member of the Moocher Hall of Fame).

Here are some excerpts from a story in the U.K.-based Daily Mail.

Jihadi John and his asylum-seeking family have milked the British benefits system for 20 years, the Mail can reveal today. Housing the Islamic State executioner and his relatives in affluent parts of London has cost taxpayers up to £400,000. One landlord said Mohammed Emwazi’s family were ‘parasites’ and ‘tenants from hell’. Incredibly, they are still believed to be pocketing £40,000 a year in handouts despite there being no sign of them in Britain. …Westminster City Council is still paying the rent on the family’s £600,000 flat even though the rules say housing benefit should normally be stopped after 13 weeks.

So did all these handouts to the Emwazi family turn them into good citizens?

Hardly. One of the kids, Mohammed Emwazi has gone to the Middle East to fight for ISIS and is now infamous at “Jihadi John,” the psychopath that beheads innocent people.

MPs said they were horrified that the child of a family given refugee status, citizenship and benefits had returned the favour by orchestrating the murder of two of its citizens. …In sickening propaganda videos, his son led the beheadings of Britons Alan Henning and David Haines.

But even if Jihadi John hadn’t turned into a nutjob, British taxpayers still got a very bad deal from the Emwazi clan.

The family apparently is still on the dole, continuing an unbroken 20-year tradition of mooching off British taxpayers.

During their time in Britain, neither Jasem nor Ghaneya officially worked. …With a 12-year-old daughter, Hana, they are still believed to be claiming an estimated £7,821 a year in child benefits and child tax credits. That is on top of annual claims of about £23,400 in housing benefit, £678 in council tax support and £5,929 in jobseeker’s allowance.

Looking at this result, logical people might be tempted conclude that it’s time to rethink refugee programs.

Or, at the very least, change the rules that funnel these people into government dependency.

But since many politicians aren’t logical, there are probably British versions of Barack Obama who are urging job training programs or similar nonsense (for a humorous take on that topic, see the cartoons at the bottom of this post).

P.S. Jihadi John featured in one of the most effectively snarky anti-Obama cartoons I’ve ever seen, which is at the end of this post.

P.P.S. Switching to a different topic, I’ve written (some would say ad nauseam) about disproportionately generous pay and benefits for government bureaucrats. Particularly for the gilded class in Washington.

I think the evidence for excessive bureaucratic compensation is ironclad, particularly if you look at “quit rates” by sector.

But now we have yet another piece of evidence that the federal workforce is living on Easy Street. Check out this new polling data from Gallup.

Remember, this is polling data with federal workers describing their own status, not what taxpayers think.

So let’s give 44 percent of bureaucrats credit for honesty, which is ironic because bureaucrats in polls have acknowledged they’re more likely to be dishonest! And lazy as well.

Though the real moral of the story is not compensation. As I explain at the end of this video, the real problem is that many government jobs shouldn’t exist in the first place.

P.P.P.S. If you want to enjoy bureaucrat humor, click here, here, here, here, here, here, here, here, here, and here.

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Since I’m in the United Kingdom, it’s appropriate to announce that another Briton has been elected to the Moocher Hall of Fame.

Ms. Kay Bird deserves this “honor” because it takes a very reprehensible entitlement mentality to brag about taking a global holiday with welfare cash.

And we’re talking about a global holiday that appears to be far more extravagant than the foreign trips enjoyed by Natalija, another member of the Moocher Hall of Fame.

Here are some of the jaw-dropping details from a report in the U.K.-based Daily Mail.

A single mother on benefits has admitted spending £3,000 of taxpayers’ cash on a dream round-the-world trip to far flung destinations with her 10-month-old baby daughter. ...she still receives more than £8,500 a year in child benefit, income support and tax credits as it is considered that she has a low income. …she visited places such as Australia, Bali and Dubai. Miss Bird says she could work but chooses not to… She said: ‘No, I don’t need the money as such and I didn’t need to go travelling either but I wanted to so I did. ‘If someone’s offering you free money and telling you to take it, you’d have to be a fool not to – that’s all I did. …‘I don’t feel guilty and I don’t regret it. It started off just as a ­holiday to Athens, then things started to fall into place.

Let’s think through her statement about “free money.” Is she really so clueless that she doesn’t realize that her handouts are only possible because other people are actually working and producing?

She says “I don’t feel guilty,” which is remarkable because I doubt taxpayers who financed her jaunt have ever been to Dubai and Bali.

‘Each time some more money landed in my account, I booked something. ‘I started booking flights and accommodation in Europe in October and was booking something with every payment until a few days before I went.’ …She also visited Athens, Istanbul, Dubai, Colombo in Sri Lanka, Kuala Lumpur, Jakarta, Bali and Darwin before returning home via Amsterdam. In total, she spent four months worth of her benefits cash on the trip, paying for 13 flights, travel visas, accommodation and spending money. Her benefits continued to be paid into her bank account while she was away and she returned to the UK just before the five-week travel limit imposed on people claiming Jobseekers’ Allowance.

I have to confess that I’m mystified how someone who chooses not to work can get a handout called “jobseekers’ allowance.” I wonder if MHoF members Danny and Gina are benefiting from the same scam?

In any event, the bureaucrats seem more concerned with enabling welfare fraud than in protecting the interests of taxpayers.

She added: ‘I went to the job centre and told them I wanted to go travelling and they told me there was a five-week limit. I came home just within those five weeks so my benefits didn’t get cut off.’ …she was claiming £90 a week income support, £90 a month child benefit and £230 a month in tax credits. She said: ‘I told them I wanted to register back in the country and they told me I was already eligible for Jobseekers’ Allowance. ‘Then a couple of weeks later they said I could switch to income support which meant I didn’t even have to apply for jobs. ‘Then I was told I could get tax credits, too. I was really shocked at how generous it was but I wasn’t going to turn it down.’

I’m sure British taxpayers will be delighted to learn that Ms. Bird is already planning her next welfare-financed overseas holiday.

Now she says she is planning her next luxury trip for herself and daughter which will be to New Zealand. …She explained: ‘I’m not your regular single mum on benefits who spends it all in McDonald’s and never leaves the town they were born in. ‘I’m changing the image of what it is to be a benefits mum and proving that if you do it the right way, you can have ­anything you want. …’Of course people are negative and many people get very jealous. ‘But I had only been out of Europe once before I went on benefits and now I’ve had the chance to see some incredible things from tropical beaches to the ­skyscrapers of Dubai. ‘I never would have been able to afford it without benefits.’

Gee, doesn’t that warm your heart. She’s a trailblazer, showing other deadbeats how you can live like a jet-setter with other people paying the bills!

Yes, Ms. Bird definitely deserves to be in the Moocher Hal of Fame.

P.S. Since we’re talking about reprehensible welfare moochers, let’s shift from the U.K. to Australia.

It appears that there are lots of Aussie Muslims who want to join the “Terror Wing” of the Moocher Hall of Fame.

Here are some excerpts in a story from the Aussie-based Daily Telegraph.

A federal investigation into the welfare status of Australian foreign fighters, prompted last year by revelations in The Telegraph, shows 96 per cent had been on welfare benefits when they fled to the Middle East. Most had continued to collect payments from Australian taxpayers while training with Islamic State to become terrorists intent on wanting to kill Australians. The investigation has captured the records of 57 Australians who left the country before October last year to fight with the Islamic State. Of that number 55 have been confirmed to have been on welfare payments.

Wow, 96 percent of the identified terrorists who came from Australia were subsidized by taxpayers.

And there are more welfare-fueled terrorists on the way, perhaps recruited by Abdul, who’s been sponging off Australian taxpayers for about two decades.

Since then, an estimated 50 more Australians have ­illegally travelled to the Middle East to join IS, with most believed to have been claiming some form of benefit. A subsequent audit of this group confirmed that most had been at one time in ­receipt of benefits such as Newstart, sickness, youth and carer’s allowances, as well as the Disability Support Pension.

So let’s summarize. Able-bodied young men who are healthy enough to join a fight in the Middle East somehow were somehow so helpless that they needed welfare handouts to survive in Australia.

In reality, of course, these low-life deadbeats surely were capable of working, but they doubtlessly thought it was wonderful that the people they hate were subsidizing their sloth.

All the more reason why policymakers in all nations should reduce the size of the welfare state.

But it’s equally important to decentralize so that local and regional governments are responsible for redistribution programs. Under such an approach, I suspect we’d be far more likely to see the imposition of standards to preclude mooching by able-bodied adults, whether they’re run-of-the-mill moochers or terrorists-in-training.

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Last month, I posted “the cartoon argument” for Social Security reform.

My main goal, as an American, is to achieve this important reform in the United States.

And I’ve tried to bolster the argument by citing lots of hard data, including the fact that “funded” accounts already exist in nations such as Australia, Chile, Sweden, and the Netherlands.

In this spirit, I wrote an article for the most recent issue of Cayman Financial Review, and I looked at the issue from a global perspective. I first explained that demographics are destiny.

It is widely believe that aging populations and falling birth rates represent one of biggest global challenges for long-term economic stability. How can a nation prosper, after all, if there are more and more old people over time and fewer and fewer workers? Don’t these demographic changes put every-growing fiscal burdens on a shrinking workforce to support the elderly, leading to crippling tax burdens and/or enormous levels of debt? In most cases, there are no good answers to those questions. So it is quite likely that many nations will face serious economic and fiscal challenge… Here are some charts showing the age profile of the world’s population in both 1990 and 2100. As you can see, demographic changes are turning population pyramids into population cylinders. …virtually every industrialized nation is undergoing demographic changes that will produce some very painful fiscal consequences.

But not all nations are in trouble.

there are jurisdictions, such as Singapore and Hong Kong that are in reasonably good shape even though their populations rank among the nations with the lowest levels of fertility and longest life expectancies. And other nations, including Sweden, Australia, Switzerland, and the Netherlands, have much smaller long-run challenges than other industrialized countries with similar demographic profiles.

Why are these jurisdictions in stronger shape?

Simply stated, they have personal retirement accounts.

Mandatory pension savings is a key reason why some jurisdictions have mitigated a demographic death squeeze. Whether they rely on occupational pensions, individual accounts, or even central provident funds, the common characteristic is that workers automatically set aside a portion of current income so it can be invested in some sort of retirement vehicle. Over several decades, this results in the accumulation of a substantial nest egg that then is used to provide retirement income.

And there are now about 30 nations that have implemented this critical reform…though that number unfortunately is dwarfed by the number of countries that haven’t modernized their tax-and-transfer schemes.

For advocates of funded pension systems, there is good news and bad news. The good news is that there has been a dramatic increase in jurisdictions that have adopted some form of private retirement system. …the bad news is that mandatory private retirement systems still only cover a small fraction of the world’s workers. The vast majority of workers with retirement plans are compelled to participate in pay-as-you-go government schemes.

Unsurprisingly, I explain why personal retirement accounts are much better for the overall economy.

Economists have been concerned about a triple-whammy caused by traditional tax-and-transfer retirement schemes. First, payroll taxes and other levies discourage labor supply during peak working years. Second, the promise of retirement benefits undermines a very significant incentive to save. Third, the provision of retirement benefits discourages labor supply once a worker reaches retirement age. …Systems based on private savings, by contrast, have very little economic downside. Workers are compelled to save and invest some portion of their income, but all of that money will be correctly seen as deferred compensation. …Perhaps equally important, second-pillar systems boost national savings, which means more funds available to finance productive private-sector investment.

Though I bluntly admit that there will be a significant transition cost.

The…common critique of mandatory retirement savings is that…if younger workers are allowed to shift their payroll taxes into personal accounts, policy makers would need to find lots of money over several decades (trillions of dollars in the American example) to fulfill promises made to existing retirees as well as workers that are too old to get much benefit from personal accounts. This critique is completely accurate. …But here’s the catch. While trillions of dollars are needed to finance the transition to a system of personal accounts, it’s also true that trillions of dollars are needed to bail out the current system. …The real question is figuring out the best way to climb out of that hole. From a long-term fiscal and economic perspective, personal accounts are the more attractive option.

To elaborate, it’s better to somehow find $5 trillion over several decades to finance the shift to personal retirement accounts than it is to somehow find $30 trillion over a longer period of time to bail out the current system.

For more information on personal accounts, you can click here for my video on the topic.

And to learn about Obama’s supposed solution, watch (with horror) this video.

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. While I’m a very strong advocate of personal retirement accounts (my Ph.D. dissertation was about Australia’s very good system), I’ll be the first to admit that it’s even more important to modernize Medicare and Medicaid.

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The Obama Administration has already announced a bunch of tax increases that will be part of the President’s soon-to-be-released budget.

But, in a remarkable development, the White House has preemptively thrown in the towel and said that it will no longer pursue a proposed tax hike on 529 plans (IRA-type vehicles that allow parents to save for college education without being double taxed).

It’s obviously good news any time a tax hike is very unpopular, but this victory over Obama’s 529 plan has enormous implications.

Simply stated, it underscores a point I’ve been making for a long time about why opposing all tax hikes – particularly levies on the middle class – is critical if we want to have any chance of reforming and restraining the welfare state.

The Washington Examiner explores this development.

Obama’s abandonment of this relatively minor middle class tax-hike proposal suggests that liberals lack the spine to pursue their own long-term vision for America. …They have supported tax hikes on the wealthy to make deficits a bit smaller, but there are not enough wealthy people in America to fill the gap, nor can they be taxed at a high enough rate to pay for all the entitlement and social spending the Democrats want. Thus, Obama Democrats need large middle class tax hikes to sustain their vision for America’s future. Nothing else will work. And so if Obama is too scared to touch the favorite deductions of the middle class — whether it be the mortgage interest deduction or the 529 plan — then he is too scared to make his own long-term worldview a reality.

In other words, so long as we don’t give Washington any new sources of revenue, the left won’t be able to turn the United States into a European-style welfare state.

Peter Suderman of Reason has a similar assessment. Indeed, the title of his article is “How Obama’s 529 College Tax Plan Debacle Proves the Welfare State is Doomed.”

Here are some relevant passages.

…this is the sort of plan than inevitably follows from the long-term fiscal logic of the welfare state. …the existing welfare state is unaffordable. Either it will have to be cut, or reformed, or paid for—by someone, somehow. The administration and its allies would like to reassure you that the someones who will pay for all of this will be limited to the richest of the rich, but in practice there’s only so much money that can be squeezed out of the extremely wealthy. Which means that eventually, anyone looking for ways to keep the welfare state afloat will have to go after the middle class.

Writing for The Federalist, Robert Tracinski echoes these sentiments.

…this is a desperate move by those who need to finance ever bigger government and are simply going where the money is: the vast American middle class. …There have already been trial balloons about raiding 401(k)s and IRAs. The truly committed leftist looks upon our private savings as a vast reserve of capital unfairly withheld from its proper function of servicing the needs of the state.

By the way, just in case you think Tracinski is exaggerating, just look at how governments in nations such as Poland and Argentina have seized private pension assets.

Returning to the topic at hand, here’s some of what Megan McArdle wrote for Bloomberg.

…the administration has started scraping the bottom of the barrel when seeking out money to fund new programs. …We are simply running out of room to pay for generous new programs with higher taxes on the small handful of people who make many hundreds of thousands of dollars a year. I’m not saying that it’s impossible, politically or otherwise, to further raise their tax rates. I’m just saying that there’s not all that much money there left to get. …politicians will need to reach further down the income ladder in order to fund new spending — indeed, to fund the spending we’ve already done, in the form of entitlement promises. Where will they go for that money? Once you’ve hit your fiscal capacity to tax the rich,  a few big sources of tax revenue are left: 1) A value-added tax.  …2) Raising income taxes on the middle class. …3) Tax the savings of the middle class.

Last but not least, Ramesh Ponnuru of National Review reiterated his view that the welfare state desperately needs tax money from the middle class.

…everyone who has looked at the budget projections for the next few decades understands that, absent a sudden reduction in Americans’ life expectancy or other shocking development, middle-class -benefits are going to have to be cut, middle-class taxes are going to have to be raised, or both. The war between liberals and conservatives over the future of the welfare state is largely a matter of how much of each will be done. …government cannot realistically make up much of its long-term financing gap by raising taxes on the rich. A tax-heavy solution to that gap will eventually have to rely on much higher taxes on the middle class. That’s how they finance large welfare states in other developed countries. European social democracies don’t generally have much higher taxes on corporations or high earners than the United States. The chief difference between their tax policies and ours is that they levy value-added taxes that hit consumption.

Having cited several astute writers, let’s now draw the appropriate conclusion.

Without question, the moral of the story is that anybody who genuinely and seriously favors limited government should be unalterably opposed to any and all tax hikes.

And if you don’t believe all the folks cited above, perhaps because most of them lean to the right, then maybe you’ll be convinced by the fact that many leftists agree that you can’t finance big government without big tax hikes, particularly on the middle class.

The one big difference is that they want those tax hikes because of their support for bigger government.

Which should be added evidence about the importance of resisting all tax increase. Heck, the no-tax-hike pledge is an IQ test for Republicans.  Those that fail – such as Jeb Bush – should not be promoted to positions where they can cause damage.

Here’s what I wrote about this issue earlier this month. I was commenting on proposals for a new energy tax, but my analysis applies to any scheme for more revenue.

…the left understands very well that their spending agenda requires more revenue. That’s why Obama is relentless in urging more revenue. It’s why the leftists at the Paris-based OECD endlessly urge higher taxes in America (even to the point of arguing that tax-financed redistribution is somehow good for growth). And it’s why the DC establishment is so enamored with “bipartisan” tax-hiking budget deals, which inevitably lead to bigger government and more debt. Honoring the no-tax-hike pledge isn’t a sufficient condition to rein in big government, but it sure is a necessary condition. Amazingly, top Democrats even admit that their top political goal is to seduce Republicans into supporting higher taxes.

Let’s close with some thought experiments.

American needs genuine entitlement reform. But how likely is it that we’ll see the right kind of changes to programs such as Medicare and Medicaid if politicians instead manage to impose a value-added tax? What incentive would they have to do the right thing if they instead have the option of constantly increasing the VAT rate, as we’ve seen in Europe?

Or what are the odds of good Social Security reform if politicians enact some sort of energy tax. Why improve America’s retirement system, after all, if they have a new source of revenue and they have the option of continuously tweaking the rate upwards to prop up the current system?

What are the chances of getting a good spending cap, something akin to the Swiss debt brake, if politicians succeed in getting some sort of financial transactions tax? Why deal with the problem of excessive government if there’s a new revenue source that can be periodically increased.

The left certainly understand that new revenue is necessary for their agenda. But does the right grasp the obvious implications?

This post already is very long, so I’m going to stop here. But those who are interested in more information should check out the postscripts below.

P.S. Some folks argue that Bill Clinton’s 1993 tax hike is “evidence” that higher taxes can lead to deficit reduction rather than higher spending, but Clinton’s own Office of Management and Budget produced data in early 1995 showing that assertion is false.

P.P.S. In my lifetime, there’s been a Democratic President with sensible views on tax policy.

P.P.P.S. It’s theoretically possible to put together a good fiscal deal involving more revenue, but only in the sense that it’s theoretically possible that I’ll be offered a $5-million contract to play for the Yankees next year.

P.P.P.P.S. The only exception to my no-tax-hike views is that I’m willing to allow higher taxes that are targeted solely on people who endorse higher taxes.

P.P.P.P.P.S. It’s nice to see that lots of people now agree with my starve-the-beast hypothesis. Even if some of them (including Republicans!) learn the wrong lesson and endorse higher taxes for the explicit purpose of financing bigger government.

P.P.P.P.P.P.S. Cartoonists have a good understanding of the tax-hike issue.

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