Tuesday, October 29, 2013

The Menu of Pain

The first step in solving a problem is acknowledging it exists. The growing fiscal gap is a problem that needs to be acknowledged.

The U.S. fiscal gap is 222 trillion dollars and growing.

How can we close it? For me,  Laurence Kotlikoff is the go-to economist on fiscal issues in the United States.  Kotlikoff's menu of pain contains a lot of sobering options of either renegotiating our promises or paying for them.

  • Closing the fiscal gap through tax increases alone would require an immediate and permanent 64 percent increase in ALL federal taxes.

  • Closing the fiscal gap through spending cuts alone would require an immediate and permanent 35 percent cut in ALL federal outlays (including welfare and payments on interest and principle of existing debt). 

These numbers get worse every year the problem is not addressed. 

Solving the problem requires first that people acknowledge the severity of the problem -- that our promises far exceed our ability to deliver on them. A little extra growth won't close the gap. Modest immigration reform and a small increase in the birthrate won't do it. Cutting all federal discretionary spending including defense to $0 won't do it. Even a 100% tax and enslavement of the richest 1% wouldn't be enough to close the fiscal gap. 

Why is it so hard to acknowledge the severity of the problem? I think a lot of it comes from a misunderstanding of how most welfare programs work (they're complicated, and change over time). Many people, especially current seniors, have this impression that they have paid into a system all their lives and are getting a fair return on their investment and benefits based on what they paid into it. 

The reality is that most large welfare programs are pay-as-you-go which rely on an ever-increasing pool of workers paying into them -- and that pool of workers is not getting big enough fast enough. There is no personal bank account with your name on it accumulating market interest and protecting your principle. Current and past seniors have gotten a fantastic deal, getting much more out in benefits than they paid in:
According to the [Urban Institute]'s data, a two-earner couple receiving an average wage — $44,600 per spouse in 2012 dollars — and turning 65 in 2010 would have paid $722,000 into Social Security and Medicare and can be expected to take out $966,000 in benefits. So, this couple will be paid about one-third more in benefits than they paid in taxes.
If a similar couple had retired in 1980, they would have gotten back almost three times what they put in. And if they had retired in 1960, they would have gotten back more than eight times what they paid in. The bigger discrepancies common decades ago can be traced in part to the fact that some of these individuals’ working lives came before Social Security taxes were collected beginning in 1937.
Some types of families did much better than average. A couple with only one spouse working (and receiving the same average wage) would have paid in $361,000 if they turned 65 in 2010, but can expect to get back $854,000 — more than double what they paid in. In 1980, this same 65-year-old couple would have received five times more than what they paid in, while in 1960, such a couple would have ended up with 14 times what they put in.
Such findings suggest that, even allowing for inflation and investment gains, many seniors will receive much more in benefits than what they paid in.

This is why public benefits programs (which are actually at their heart, just transfers) are so popular. It's also why Detroit's pensions have collapsed so spectacularly and why Social Security is going to "run out of money." 

I think as people realize how the programs actually work and the strain on workers of having to pay for unreasonable promises grows, people will be willing to talk about ways of making transfer programs work by funding a responsibly-sized pot (or a personal account) before taking from it. 

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