Ignoring entitlements
Candidates fall short on huge spending programs
Rocky Mountain News
Published October 5, 2008 at 11:18 p.m.
Once the nation digs its way out of the current financial crisis, another fiscal landslide looms: the entitlement crunch.
Without structural reforms in Medicare, Medicaid and Social Security, the Congressional Budget Office estimates those three programs - which guarantee benefits to anyone who meets eligibility requirements - will rise from 18 percent of GDP today to 28 percent by 2050 and even more as time goes by.
That means either crippling tax increases that will smother economic vitality or painful benefit cuts that will hit low- and middle-income retirees hardest.
Neither candidate has fully confronted this reality. Still, John McCain has a better handle on it than Barack Obama, especially regarding Social Security.
McCain hasn't talked much about his longstanding support for personal Social Security retirement accounts. That may be understandable, given the stock market's volatility.
He has, however, backed "progressive price indexing," a significant reform that would increase Social Security benefits of high- and middle-income retirees based on prices rather than wages.
Wages grow faster than prices over time. Under a price-based index, higher-earning retirees could keep up with inflation and yet the savings to the system would be huge. This shift alone, forecasters say, may let Social Security surpluses resume in about 50 years. And low-income retirees would not lose any benefits.
Obama has never backed personal accounts and opposes price indexing. His solution is higher taxes: Increase Social Security payroll taxes on anyone earning more than $250,000, and perhaps boost Social Security tax rates on those same top earners by another two to four percentage points.
Not only is that a truly heavy tax hike on high earners, it wouldn't come close to closing the revenue gap.
Both candidates' Medicare and Medicaid proposals are less specific, and harder to evaluate, with one exception - Obama wants to sign up a lot more people for both programs.
As part of his overall medical plan, Obama would enroll all children who don't have private insurance in either Medicaid or the State Children's Health Insurance Program; other low-income workers who don't get coverage at their jobs could sign up for Medicaid, Medicare or SCHIP. This would place millions more Americans on public assistance.
McCain's plan would have upper- income seniors pay higher premiums for the Medicare drug benefit. He would also let states give Medicaid recipients vouchers to purchase private insurance.
Perhaps the only way to keep these programs from growing out of control is to dramatically increase premiums for high-income Medicare patients - or fully convert Medicare to a voucher program, giving patients the means to purchase their own health coverage and no other subsidies.
No candidate is going that far. Nor are they talking about raising the retirement age, and that's understandable. Lower-income elderly employees are more likely to work in retailing, food service and other occupations that are physically demanding. It's difficult to expect people who will most heavily depend on a social safety net to work more years before earning their benefits.
The first boomers will reach full retirement age during the next presidency. Gradual but meaningful changes need to be made soon. From what we've seen so far, McCain is the only candidate willing to make at least some moves in that direction.
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October 6, 2008
9:06 a.m.
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mmannino writes:
I have never understood the lack of support in the general public for private social security accounts. I think there was reasonable support for partial privatization but not enough to overcome the fanatical opposition on the left. I understand the left's agenda. Social security is massive government and the left wants massive government.
The debate about Social Security is about public versus private control of retirement savings. Public control has failed miserably. Politicians have spent the vast sums contributed to Social Security. There are no funds to support baby boomer retirement. If the money had been privately invested, most of the money would be available to support boomer retirement. Private markets are volatile but at least with private accounts there would be actual investments to support retirement. It is not possible for public investment of Social Security. Federal investment of payroll taxes (as opposed to spending the payroll taxes on other programs) would mean federal control of private enterprise. Even if federal control of private enterprise was a good idea, Congress has demonstrated an addiction to spending so public investment is not feasible.
Social Security is a generational Ponzi scheme with the force of government to enforce the scheme. Early retirees paid very little in payroll taxes in comparison to benefits obtained. If Social Security was made voluntary, it would collapse overnight. Every other Ponzi scheme collapses because there is no force to compel individuals to remain in the scheme.
Drastic benefit reductions and payroll tax increases are coming. The Democrats already put in place a substantial benefit reduction in 1993 when taxes were increased on social security benefits. This tax increase is a benefit reduction on benefits that are just returning payroll taxes. Income taxes have already been paid on payroll taxes. The 1993 law is a form of double taxation of some benefits. The 1993 law is just a warmup. Benefit reductions can be direct through increases in the retirement age and means testing or indirect through slower economic growth through the impact of higher payroll taxes and higher government spending. The game is already set. The only question is the degree of pain. Social Security is a miserable failure, mismanaged and demagogued by the left for many generations. The impact will be much more severe and prolonged than the current mortgage situation.
October 6, 2008
9:30 a.m.
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xeeian writes:
Privatizing social security, by throwing the 1.6 trillion dollars into the market?
Sounds like a good idea to me.
I mean, why would the CEOs of those investment banks screw us a second time?
October 6, 2008
9:42 a.m.
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mmannino writes:
xeeian,
You are not evaluating the alternatives. You are simply spouting anti capitalist rhetoric. The alternatives are allowing politicians to spend your payroll taxes on other programs or allowing individuals to save at least part of their contributions. You can save it as desired. If you do not trust any investments, you can retain your contributions in a safety deposit box. Giving your contributions to the politicians ensures that your contributions will be spent on other programs and not available to fund your retirement.
October 6, 2008
11:21 a.m.
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KelcyCo writes:
Social Security privatization as a concept just took a huge hit, don`t you think? I`ve never supported it as it violates the basic SS tenants as a last ditch insurance program that provides the bare minimum for day-to-day living for older Americans. Having seen my Dad subsist on SS I can see that it works. Had he had the money in investments that provided that same $1000 per month amount then he would have almost nothing today, wouldn't he? He would be homeless. Is that what all these privatizers want? As is, that $1000 per month is a bare minimum that has to cover housing, utilities, food, medicine, etc. I think you can toss privatization in the trash can for a few decades as the baby boomers who have seen their investments go down the trash chute will be most unhappy to see anyone mess with SS now. Oh, and if the government had not been "borrowing" from the SS accounts like they were not supposed to be doing then we wouldn't be worrying about the government now not having the money to pay back those accounts to pay for the baby boomers. Vicious, greedy circle.
As for Medicare. The problem is with us. We are the enemy here. Study after study shows that we spend exorbitantly in our last year of life trying to hold onto life. These are not dollars spent on palliative care but on actively trying to keep us alive or delaying that last moment (most often in ICU). Almost all of those last years are spent while we are on Medicare. From watching Dad die, numerous other friends/family going through the same, we know they are going to die, they may know they are going to die, but we are all unwilling to accept it. The doctors are unwilling to say we can spend $500K but you will still die soon. If it were really our money would we do that? I got an e-mail from a friend today whose mother-in-law is dying. However, in a last ditch effort not to die she insisted on going to a transplant hospital to get all the medical tests and such to see if she could be cured. No. She is too sick. Her doctors at home had already told her that. I wonder what the bill to Medicare will be for that one. If we were multi-millionaires then that amount of money would be paltry but for 98 percent of the rest of us these are significant costs. But it is the "government" money so we don't care. Although that isn't true, is it? It is our money that we spend so frivolously. I'm not saying life is not precious. It is. However, life is deadly. If we accepted death (as many other cultures do) then maybe we could cut the costs to Medicare by doing more palliative care and less last ditch care. What I find sad is that for a society that claims we are oh so religious and where the majority claim to believe in an afterlife people are so afraid of testing their beliefs and letting go.
October 6, 2008
11:36 a.m.
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mmannino writes:
KelcyCo,
You are probably right that privitization is off the table. The public has become deeply distrustful of the private sector. This distrust will have disasterous consequences.
As far as SS, you are confusing a welfare program with a retirement program. I admit that we should have a welfare program for seniors like your father although I would also say that first responsibility is family, not government. Still, I am willing to support a welfare program for seniors funded by a small payroll tax that everyone (including government workers) must pay. The welfare program for seniors would be carefully means tested.
You like the other poster are just spouting anti capitalist rhetoric rather than considering the actual alternatives. Here are the alternatives:
- Allow partial privatization with individuals allowed to give up benefits for a reduced level of payroll taxes.
- Drastically cut benefits either directly or indirectly.
Unfortunately, the second alternative seems to be the only one on the table. The economic consequences of indirect benefit reductions through payroll tax increases, money supply increases, and increased government spending may be devasting.
October 6, 2008
12:50 p.m.
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thats_just_me writes:
KelcyCo - you nailed the medicare problem!
This is the most intelligent thing I've read here in a long time
October 6, 2008
2:29 p.m.
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mmannino writes:
thats_just_me,
Socialized medicine will fulfill your wish. In every country with socialized medicine, the government rations health care with the elderly deemed less worthy to receive health care than the young. Unfortunately, the idea of rationing will not stop just at end-of-life decisions. The elderly will bear the blunt of rationing.
We have semi-socialized medical care now. Demand barely keeps ahead of supply now. In some areas of the country, demand exceeds supply. With fully socialized medicine, demand will increase substantially beyond supply. When everyone has a right to medical care and many do not have to pay for their medical care, demand has almost no bounds.
October 6, 2008
4:59 p.m.
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Bookem writes:
KelcyCO wrote:
"Having seen my Dad subsist on SS I can see that it works."
Glad to hear your dad was around when there was enough money in Social Security to take care of him.
What about when you need it? Or your kids? Or your grandkids?
Odds are when they need it there won't be enough money to pay out in order to cover their basic, preventative needs you speak of let alone the 'last ditch' efforts you seem to deomonize.
Maybe we should teach our kids to rely on themselves, save for rainy day and not look to government to bail them out? Just a thought.
Then again, we would have accept the consequences for our choices and accept responsiblity for the rights we so dearly claim to want.
October 6, 2008
7:26 p.m.
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HopiMedicineMan writes:
For every recipient of Medicare and Social Security, there will be two tax-payers in support when the boomers start retiring in numbers. That was then, this is now, mental illness will be treated as any other illness so the numbers will be two recipients for every one paying in. Most white people are crazy and will need significant help. These expenses will be unsustainable. The bigger failure is around the corner. The country has done nothing to prepare for these expenses. Revenue is necessary. We taught our children self esteem and about racism instead of math and respect for the capitalist system. Industry has been undermined by regulation as China has come on. We have no net revenue. The Nation is bankrupt and by not facing that fact heading toward it's economic and political extinction...or we'll become a plundering economy as ancient Rome became, first plundering it's productive classes. We'll be crossing that line in about a year.
October 7, 2008
10:09 a.m.
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FreeToChoose writes:
I love the lags in logic that are occuring across the economic analytical landscape these days.
Apparantly, many make the leap that the Bush Administration is proof that free markets don't work.
First of all, there is no such thing as a 'free market' in the modern economy. Markets work when there is the highest amount of transparancy, a highly developed system of property rights and a low amount of distortions caused by rent seekers. The government therefore has a huge roll to play in guaranteeing transparancy, property rights and minimizing rent seekers.
Unfortunately the current administration failed to guarantee transparant market conditions for SIVs and default credit swaps, the last two Administrations and Congress further distorted markets through policies to widen home ownership to riskier borrowers while the Fed/Greenspan distorted the calculation of risk through its easy money policies. Other REGULATORY distortions helped speed the squeeze along, such as mark-to-market accounting principals for illiquid markets.
Did oversight break down? Yes. Does that mean free mnarkets don't work? HARDLY!
That's a leap of logic that just can't be made based on what actually happened and merely exposes the people making such accusations as lemmings following a flawed (but resonant) party line.
October 8, 2008
10:55 a.m.
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KelcyCo writes:
The problem with social security, and this is something we can fix ourselves today, is that back in 1935 they didn`t put in a natural correction for the increase in life expectancy (which they didn`t do 30 years later when they created Medicare in 1965 either). When social security was created the life expectancy was less than the age of 65 (I think it was less than 60 for men, 64 for women). You were not expected to live long enough to collect any social security let alone all that you put into it. What you didn`t use others that lived past that point would. Just like any other insurance program. (Do you expect to collect back all you paid for car insurance if you never have a wreck? No.) The life expectancy for both men (75 yrs) and women (80) is now years beyond that so most collect all, even more, than they put into the system with nothing left over to support those beyond that age.
We recognize this is a problem but we, the People, are unwilling to recognize how the system was originally set up let alone allow for it to be corrected. Oh, we are tinkering with it. The age to begin collecting social security is being slowly raised to 67 over a long period of time but we are unwilling to raise it to the age where half the people die before they collect their benefits paid in......as was the original design. This action would take acceptance on our parts that we cannot collect social security at 65 or even 67. It was painful as I recall even making the change to age 67 and it has been implemented at a snails pace. We, collectively, are unwilling to take even that first step.
After that no doubt there are other tweaks to ensure that the amount taken in for each individual over their working lives is such that if they lived to the average life expectancy they would have enough in the bank so to speak to live on for that time period. It may mean raising the rate or raising the upper limit it is applied to. But, again, we are unwilling to take the first step.
We also refuse to recognize this program as an insurance, fall back program. FICA--Federal Insurance Contributions Act. We figure social security into our retirement planning. We can`t allow for it to become needs based as we all now need it to complete our financial planning goals. Doesn`t mean however that we can`t raise the age to begin collecting it to more closely align to the original intent of the program.