Social Security – Page 4 – The Radford Free Press

Peter Radford / Economics / deficits, monetary policy, recovery, Social Security /

Social Security and Deficits: Bad Analysis

May 25, 2009

Sometimes you come across really silly commentary and allow it to slip by because it doesn’t seem worth the time to say anything. I must admit that has been a very frequent occurrence during the past few months. Especially so with respect to two favorite topics of the conservative politicians: Social Security and Federal Deficits.

I’ll keep this brief, so let’s take them one at a time.

Social security is not about to go belly up. It will survive. Many generations of Americans can look forward to receiving their payments.

There I said it.

Every time an opportunity presents itself to cry doom and the end of the world, right wing politicians and their economist allies kick up a huge cloud of dust full of foreboding and angst. They tell us in very studious and serious tones of the impending bankruptcy of the Social Security system, and how we might just as well ditch it since it is about to cave in under its own weight. The recent report by the system’s trustees analyzing the recession’s impact was just another such opportunity.

Gasp!

Wow. The recession actually made the finances of the Social Security system worse. Who’d have thought? You mean when the economy tanks financial stuff like Social Security receives a negative impact? No! Well than we might as well shut the thing down. After all its as good as bankrupt.

Rubbish.

The trustees report shows that the surplus runs out in about three decades from now. Three decades. The surplus runs out. Surplus. That’s not going bankrupt. It means that we revert to a pay-as-you-go system. The right wingers have been crying wolf on this one for years. Decades actually. Ronald Reagan called the system bankrupt over forty years ago. He called a team of ‘experts’ in to tinker with it, which they did, and now it still runs an annual surplus. That would be surplus as in more money comes in than goes out.

Reagan is famous for calling the system ‘socialist’ and for thinking it undermined the moral fiber of the American public. he wanted us all to rely on our savings for retirement. There’s probably plenty of folks who had their pensions eliminated by the likes of IBM who thank their lucky stars they ignored Reagan. And what about all those people unlucky enough to retire last year when the market had hammered their 401k’s? Think they look at Social Security and thank their lucky stars the doomsayers didn’t win the argument? I do.

Yes there are issues with the system. The problem is that we live far too long after retirement. Most pension plans, including Social Security, didn’t take into account our increasing life expectancy. They are all underfunded as a result. The days of retiring at fifty-five are long gone. Society can’t afford it anymore. The fix is to make up some of the under-funding, in Social Security we can do that by lifting the ceiling on contributions, and to raise the retirement age in line with life expectancy. When Social Security was introduced the average person collected for only a few years, typically between five and ten. Nowadays some people collect for over twenty years. These two actions solve any funding issues we might have. Both are completely politically feasible.

End of Social Security problem.

We should have learned long ago to ignore the doomsayers. Like Reagan their agenda is political, not economic.

Which connects nicely with my other bete noir. Federal deficits.

It was Ronald Reagan who plunged us into the huge deficits we now see as commonplace. He sought to cover up his profligacy, and his debasement of conservative ‘values’, by combining the Social Security budget and the government’s Operational Budget [defense spending etc]. This combined budget, what he called the ‘Unified Budget’, has a deficit much lower than the operational budget by itself. Why? Because Social Security runs a huge surplus. So here we have Reagan decrying the imminent collapse of Social Security while at the same time using its surplus to hide his own ruinous fiscal policies.

It is hard to find a better example of cynical and hypocritical politicking than Reagan’s attitude towards the ‘unified budget’.

The funny thing is that we have not learned much about deficits.

In general I would decry deficit spending. That’s why I spent so much time criticizing Reagan and then Bush. They both perverted the word ‘conservative’ and ended up running the largest peacetime deficits the country has seen. Neither cut government spending, yet both ran as fiscal conservatives. Their respective legacies are the deplorable shape they left the country’s finances in. They both enacted unaffordable tax cuts that were touted to stimulate the economy. Neither did.

Which brings us to the debate about today’s crisis.

There are many who are tearing their hair out over the massive run-up in the national debt that all the various bail-outs and stimulus policies are causing. By the time the crisis abates we are likely to have a debt to GDP ration of well over 80% maybe much more. The last time we approached those levels was 1945, and the debt was war-time induced. These naysayers presumably want us to let the ‘markets’ take care of themselves and to keep government frugal.

I most recently came across this lunacy during the excellent debate sponsored by the New York Review of Books. It was Niall Ferguson defending the Hooverites in that discussion, during which he faced off famously with Paul Krugman.

It was Brad DeLong who quipped recently that there are two rules to follow in economics right now:

Paul Krugman is correct; and
If you disagree with Paul Krugman, please refer to Rule # 1.

Ferguson’s defense of a purely monetarist approach to our problems places him at odds with Krugman. And it makes him wrong.

It is lamentable that we have collectively forgotten the salutary lessons of the Great Depression, and in particular the analysis of Keynes. Markets sometimes need help getting back on their feet. In fact markets are highly dysfunctional under the circumstances we now find ourselves in. This is not new thinking. It harkens back to the 1930’s. The Depression was made worse by the very policies that those afraid of deficits and debt now advocate. It is senseless to inflict ruin on ourselves purely because certain ideologically motivated analysts cry foul at rising debt levels. My own belief, as you know, is that we have not gone far enough: we should have spent even more.

This is not to say that fiscal policy should always be loose and woolly the way that Reagan and Bush seemed to think was OK. Not at all. We will need to deal with the debt quickly if we are to avoid damaging side effects such as lowered debt ratings and high interest rates.

But that does not mean we should not pull out all the stops to right the ship now. We can worry about the debt later. We have the capacity to raise debt, so we should use it to save ourselves.

Arguing, as Ferguson does, that the stagflation of the 1970’s is an inevitable result of Keynsian policy is nonsense. The circumstances of the two eras are entirely different. Plus the success of the Freidmanite monetarist revolution that many believe ‘solved’ the stagflation of the Carter years now appears to have been more a happy coincidence and perhaps an illusion: other factors played a key role too.

Bad analysis is rife. In more normal times we can laugh it off or engage in polite rebuttal. These are not normal times and so bad analysis should be called to task more aggressively.

People’s livelihood’s depend upon it.

Peter Radford / Economics / health care, Medicare, retirement, Social Security /

Social Security and Medicare: Silly Season

May 13, 2009

One of the victims of this recession apparently is the media’s incapacity for sorting out what are longer term and therefore structural problems from those that are simply temporary and whose existence is co-terminus with the downturn itself. Yesterday’s New York Times provides us with a classic example. It contained a breathless article about the ‘fragility’ of the Social Security and Medicare programs. The conclusion of the author: that the ‘draining’ of the trust funds for these two programs presents an ‘immense difficulty’ as we try to ‘shore them up while also extending health care to millions of Americans’. The article also contains a couple of fancy charts, neither of which has any particular relevance. But they look nice.

Here we go again with the hand wringing and angst. The sky is falling in on our socialized safety net. Oh my. We had better just give in and let the market solve all our problems. Because we clearly can no longer afford Social Security or Medicare.

And the news is?

I apologize for my snark, but this is getting so old. If we are going to discuss the retirement and health care ‘crises’ we should focus on the longer term.

Let me try to explain:

I suppose it would be too obvious to remark that the recession has drained quite a few things of resources. Like the entire planet. The IMF has calculated the banking system will lose about $4 trillion as a consequence of the downturn. American households have seen trillions cut off from their home equity and retirement funds. And yes we have seen lots of articles about this horrendous ‘drainage’. So what’s special about either Social Security or Medicare? Nothing. The funds flowing into the two programs has been severely reduced because we pay for them from employment taxes. If unemployment goes up then those taxes go down. And, boy, has unemployment gone up. But does this represent a fatal blow to the social programs? Not at all. The current negative shift in funding is cyclical. When employment recovers so will the funding. So, perhaps, we can look forward to a follow-up article in late 2010 or early 2011 that talks in equally breathless language about the sudden surge of cash flowing into the system. Presumably then there will be no difficulties with either system.
Not. Both systems do indeed have long term issues. But those issues have absolutely nothing to do with the temporary shortfall in income due to this recession. There is no news in the cyclical problem, but there is plenty to chew on with respect to the longer term problems. And the two programs have very different problems. Social Security was designed as a pay-as-you-go system. The surge in the trust fund is a result of the demographic bulge caused by the baby boom. That population ‘cohort’ is so large that its payments more than cover the expense needed to pay for today’s current retirees. So a surplus has accumulated. But we knew all along that this surplus was an illusion. It would start to be eliminated as the baby boomers all retired. Eventually it will disappear altogether, and the program will return to its pay-as-you-go roots. The original intent of the program was that it would have a fund invested in assets just like a normal retirement fund. But New Deal politics killed that idea. Notably the Republicans back then wanted to prevent the government accumulating a substantial investment portfolio – they feared it would be so large that it would dominate the stock market – so they forced the current cash based funding onto FDR. The real issue with Social Security is that we all live longer but the program’s retirement age is still fairly low by comparison. So in the long term, about thirty years from now, the program will be threadbare. This can be fixed fairly easily by changing the rules for funding, an example would be eliminating the cap on contributions, or moving the retirement age out to a more realistic seventy years old.
Medicare’s problems are far more serious. They have more to do with the antiquated and fragmented nature of our overall health care system. The cost of health care, and especially end of life health care, has risen dramatically. Costs are raging way above the general inflation rate, and the industry is incapable of bringing those costs under control: the market system breaks down for services like health care where incentives and costs are decoupled. We have a quasi free market for health care: consumers are shielded from the full cost of health insurance because most employers subsidize them – health insurance is regarded as a ‘benefit’ in business – with the result that the usual market disciplines are removed from the system. Since no one bears the true cost of the service no one has the incentive to control costs. Doctors can continue to dabble in high cost tests and ‘cures’ without any push back from consumers as to the true value those things represent. Insurance companies niggle about everything, but their incentive is to avoid making any payments at all so as to boost profits. So they annoy both consumers and doctors while adding enormous costs to the system without adding any benefit. Medicare exists as a social program within a dysfunctional world and cannot be sustained or fixed without fixing the wider health care system. We could abandon Medicare as being too expensive, but that would not reduce the amount of GDP we expend on health care by much. Besides any such reduction would simply be due to people not getting any health care and so would represent a significant reduction in our standard of living. This is why radical surgery on the health care system is now long overdue. At the current rate of cost inflation in health care we will be spending over one fifth of our entire wealth on it, to the exclusion of investing or saving for the future. That burden is untenable. The private parts of the system: doctors, insurers, drug companies, and so on have failed to deal with inflation and remain mired in old fashioned technology – think of all the times you have filled the same form out, doctors seem unable to share simple data. And the social parts have ben hobbled by partisan politics: the deliberate prohibition against using mass purchasing power to lower drug costs is an example.

So why do we get a breathless article now?

Shoddy analysis. The downturn in money going into our big social programs should come as no surprise. It is hardly worth noting because it is so obvious.

In a way the social programs help support the economy: we don’t cut spending when the money coming in is reduced. This automatic shift to a deficit acts as a ‘stabilizing’ force during a downturn. Indeed, some European countries have argued, rightly, that they should not use as much fiscal stimulus as we need to here precisely because their social programs provide this automatic stabilization.

“Medicare is caught in the middle of this mess. We need to extricate it quickly.”

Our problems are far more structural than cyclical. An interesting discussion is about to take place as the administration starts to get to grips with the disfunctionality of the currents system. Driving costs out of health care means less cash to go around. That should spark plenty of debate. I would have preferred the article to have focused on that. Maybe the author thought he was laying out some background for that debate. If so, he failed.

So allow me to end by highlighting what I see as a major problem we all have when we get into a health care debate. Eventually the nub of the problem is our decision as to how to allocate resources. How do we ration using a government system? Or do we ration using the market system? The outcome depends upon your faith in markets. Those of us who are pure free market believers will want to eliminate company subsidies for health care benefits to make consumers responsive to cost. They think that this will force consumers to haggle better for prices and avoid the use of unnecessary tests. As a result, such folks argue, costs will come down. The outcome of a market process, they say, will reveal to us what we collectively wanted by way of health care consumption. Those who want health care will have it, and those who don’t want it will not have it.

Those of us who have less faith in markets – chastened as we are by the banking system debacle – think the government should be more heavily involved. The consequence will be a more limited, but ‘fairer’ system that has application to a wider population.

The current hybrid system, it is neither pure market nor purely government run, is failing us and has been proven as the worst of both worlds. It is the most expensive system in the world with much of that cost absorbed by administration not the provision of care. As a consequence we do not reap the benefits of the resources we allocate to it.

Medicare is caught in the middle of this mess. We need to extricate it quickly.

How we do that iswhat I hope we will be reading about in future articles.