Thursday, June 02, 2011

Road to nowhere

Here's Charles Krauthammer talking about the Obama-GOP debt "summit":
The president has chartered a course of remarkable cynicism in the way he attacked the Republican plan and presented none of his own. He hasn’t offered anything. And the Senate, for example, hasn’t even offered a budget - which is required to do by law. The Democrats are placing a bet on cynicism. They might win the election on that.
Businesses and the markets hate uncertainty and yet this is the modus operandi of the Obama Administration. There's been no budget from House Democrats, which sparked the drawn-out "continuing resolutions" of early 2011. There's been no budget from the Senate Democrats for 762 days, in violation of the law. And there's no budget from the President who is a thousand times more concerned with re-election than he is with dealing with the nation's problems.

Here's the cold fact: Medicare will go bust in 2024 and that's assuming that Congress will not pass the "doc fix" to cut payments to doctors; otherwise Medicare is broke in 2016, only five years away. Social Security goes belly up in 25 years. And by "broke" I mean the programs - by law - can only pay out what's coming in from payroll taxes meaning that either benefits will need to be slashed and/or taxes will go way up. Cold fact #2: only one political party seems willing to face up this reality, while the other wants to demagogue these entitlements into their respective graves.

More - As in more uncertainty.


Social Security is just arithmetic said...

Social Security goes belly up in 25 years. And by "broke" I mean the programs - by law - can only pay out what's coming in from payroll taxes meaning that either benefits will need to be slashed and/or taxes will go way up.

Kevin Drum:
"Medicare is a problem. But unless you believe that the United States is literally going to collapse in the near future, Social Security isn't. Period.

The weird thing about this is that Social Security isn't even hard to understand. Taxes go in, benefits go out. Unlike healthcare, which involves extremely difficult questions of technological advancement and the specter of rationing, Social Security is just arithmetic. ...Right now, Social Security costs about 4.5% of GDP. That's going to increase as the baby boomer generation retires, and then in 2030 it steadies out forever at around 6% of GDP.

That's it. That's the story. Our choices are equally simple. If, about ten years from now, we slowly increase payroll taxes by 1.5% of GDP, Social Security will be able to pay out its current promised benefits for the rest of the century. Conversely, if we keep payroll taxes where they are today, benefits will have to be cut to 75% of their promised level by around 2040 or so. And if we do something in the middle, then taxes will go up, say, 1% of GDP and benefits will drop to about 92% of their promised level. But one way or another, at some level between 75% and 100% of what we've promised, Social Security benefits will always be there.

This is not a Ponzi scheme. It's not unsustainable. The percentage of old people in America isn't projected to grow forever. Lifespans will not increase to infinity. Taxes go in, benefits go out. It's simple.

Now, Social Security is not a very generous program, so it's possible that you won't want to retire on its modest benefits. But short of some kind of financial apocalypse — in which case we've got way bigger things to worry about anyway — Social Security benefits will be there for everyone alive today. Why is it that so few people seem to get this?"

Eric said...

You and Kevin Drum are correct: Social Security is just arithmetic.

The rate of return on Social Security is close to zero and that's BEFORE the automatic benefit cuts mandated by current law.

Kevin Drum makes two statements here: let's just raise payroll taxes and SS will always be there. Well, payroll taxes have risen from 2% to 12.4% and now most Americans pay more in FICA taxes than they do federal taxes. Raise 'em some more - sure, why not, that's the answer.

Second, yes, SS will be around. Just at a reduced benefit rate which will make the rate of return even worse for a "nest egg" that can't be passed on to family survivors.

I'd like Kevin Drum to give me $100 every year for four decades and in 2050 or so I'll start paying him back $5 a month. "Hey! I'll say, "your benefit is right there, just like I promised!"

Anonymous said...

Shocking but true! Social Security is not a plan that will let your grandkids live it up on your share. It also doesn't let you ride Space Mountain for free. There's a whole lot of things Social Security doesn't do, and just one thing Social Security does do. If you wait until 65 to burn down your house, you won't get rich on your fire insurance, either.

The last year that the Social Security tax was 2%, Harry Truman had just won reelection. The last year it was under 12% (not counting this year's reduction), Ronald Reagan held the job.

Eric said...

It's true, there's just one thing that Social Security does do: transfer funds from younger workers to relatively more affluent seniors.

Don't worry, it'll "be there" for you in the future kids!

Professor Logic said...

Listen up, kids! The only sensible way to fix the impermanence of Social Security is... to abolish Social Security!