A new US Census Bureau report provides more evidence for how well our rulers get paid. 5 of the top 10 counties for household median income are situated around Washington DC and the top 3 are DC suburbs.
Falls Church city, Va. — $113,313
Loudoun County, Va. — $112,021
Fairfax County, Va. — $104,259
No Silicon Valley county (or any California county) makes this top 10 list. New Jersey occupies a few spots. I wonder if this is in part due to smaller counties. Another federal county: Los Alamos County New Mexico (where the US government runs a big weapons lab) makes the top 10 list. You can understand why the Democrats want to swell the ranks of government workers: It will raise the incomes of those who get government jobs. There's an obvious scaling problem with trying to apply this strategy to the whole country though.
“The dispersion of income is larger than it’s ever been,” said Douglas Besharov, a professor at the University of Maryland’s School of Public Policy. “There used to be a much wider spread of incomes within geographic areas than there is now. There’s much more of a clumping together.”
One of the selling points for super dense New York City is supposed to be shorter distances to work,right? Some NYC boroughs have the highest commuting times in the nation.
Four counties, all in New York, had mean travel times to work in excess of 40 minutes: Richmond, Queens, Kings and Bronx.
So pay really high taxes and spend 400 minutes per week commuting.
Update: When the US and state governments reach crisis stage with their debts the knowledge that government workers have it better than most private sector workers is going to bring out extremely unsympathetic reactions from the body public. People aren't going to support the very large tax increases needed to keep public sector pension funds solvent. We are witnessing the early stages of a slow moving fiscal train wreck. It is going to get quite dramatic as it unfolds.
Tony trains each rich and powerful people that my guess is he's fairly well connected at this point. So worth listening to. Tony sees a big market dip on the horizon.
Tony makes the accurate point that has the Baby Boomers move thru their lives at different stages their earning, spending, and investment patterns change. Edward Yardeni famously called the 1990s bull market based on the stage of life of the Baby Boomers. Tony is right about that. The Boomers are downshifting on housing and other forms of spending heading into retirement. That big shift is coming on top of the end of the housing bubble (and the housing bubble was partly caused by Baby Boomer stages of life in the first place). So housing demand looks set to stay low. Great news for buyers btw. Lower prices are good for buyers.
We face a long term financial crisis. Check out this Bloomberg News opinion piece by Laurence Kotlikoff who explains just how financially f**ked Americans are.
Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.
Cuts in old age retirement programs will cause people to spend less and save more. This will depress demand further. Kotlikoff expects benefit cuts.
Mr. Kotlikoff’s calculations looked at how a couple’s spending and saving patterns might have to change if the government raised the full retirement age to 70 (we assumed it was imposed right away, though such a change would probably be phased in over many years). That would essentially translate to a 19 percent cut in monthly benefits, according to Mr. Kotlikoff. He performed the calculations using his company’s retirement planning software, ESPlanner, which shows what people need to save to ensure a consistent standard of living over the course of their lives.
Can other parts of the world basically decouple from the US while the US economically stagnates for several years? What are the global implications for the American economy's problems?
Update Steven Abrahams, an analyst at Deutsche Bank AG, says real estate prices in the US will fall another 5% in 2011 and a third to a half of all mortgages will be underwater. That's an amazing claim. How vulnerable are the big banks to a more defaults?
Andy Xie, who some of you may recognize as formerly an economist for Morgan Stanley, writes that the stock market rally of recent months comes from investors getting tired of fear. Given the poor fundamentals this argument is at least plausible.
Regardless of what investors or speculators say to justify their punting, the real driving force is the return of animal spirit. After living in fear for more than a year, they just couldn't sit around any longer. So they decided to inch back. The resulting market appreciation emboldened more people. All sorts of theories began to surface to justify the market trend. Now that the rising trend has been around for three months globally and seven months in China, even the most timid have been unable to resist. They're jumping in, in droves.
Fear drove the market too far down after greed drove it too far up. Now fear fatigue has set in and investors have gotten tired of sitting on the sidelines.
Xie also believes that foreign buying of US Treasury bonds will decline and therefore Treasury interest rates will return to historic patterns of being about 2.5% above inflation.
The 10-year Treasury yield historically averages about 6 percent, with about 3.5 percent inflation and a real yield of 2.5 percent. This reflects the preferences of marginal buyers in the United States. Foreign central banks have pushed down the yield requirement substantially over the past seven years. If marginal buyers become American again, as I believe, Treasury yields will surge even higher from current levels.
So shy away from longer term bonds right now. You'll be able to earn much better yields if you wait.
If Xie is correct then there are some bigger consequences in store. First off, government debt servicing costs will soar and therefore the US government (as well as state and local governments) will have less money to spend on services and will be looking much harder at ways to raise taxes.
Higher interest rates will raise the cost of capital for the private sector too. But I'm not so sure about the impacts on private sector growth. If the national savings rate continues to rise then households might have more money available to invest.
On the plus side, net additions to household debt began to slow in 2007, and since the third quarter of last year liabilities have shrunk by $421 billion. For the first time ever, households have paid off more debt than they took on for two quarters in a row.
On the other hand, the Chinese might feel compelled to continue to buy Treasuries. The high savings rate in China might be driven by selective abortion of female fetuses and the resulting greater competition to attract wives.
In 2007, Chinese household savings as a share of disposable income was 30%, up from 16% in 1990. One possible reason for the jump in savings: The dearth of women is making China’s marriage market extremely competitive, and families with boys are accumulating wealth to make their sons more attractive matches.
Selective abortion increased savings in China, drove Chinese to buy more American bonds, and then this helped cause the real estate and debt bubble in the United States.
While the high savings rate in China has global impact, existing explanations are incomplete. This paper proposes a competitive saving motive as a new explanation: as the country experiences a rising sex ratio imbalance, the increased competition in the marriage market has induced the Chinese, especially parents with a son, to postpone consumption in favor of wealth accumulation. The pressure on savings spills over to other households through higher costs of house purchases. Both cross-regional and household-level evidence supports this hypothesis. This factor can potentially account for about half of the actual increase in the household savings rate during 1990-2007.
This has implications that go beyond China since selective abortion for sex selection is practiced in Vietnam, India, and other countries.
The U.S. recession is wreaking havoc on yet another front: the Social Security trust fund.
With unemployment rising, the payroll tax revenue that finances Social Security benefits for nearly 51 million retirees and other recipients is falling, according to a report from the Congressional Budget Office. As a result, the trust fund's annual surplus is forecast to all but vanish next year -- nearly a decade ahead of schedule -- and deprive the government of billions of dollars it had been counting on to help balance the nation's books.
Plan for a longer working career. Save more for your old age. Expect to get less from government. Expect to pay more to government. Think about how to shelter your income from the higher taxes which governments will levy to pay for some of their liabilities.
Trust fund? Surely those government jokers jest. Mish Shedlock argues Social Security: There Is No Trust; There Is No Fund.
Can we stop with the nonsense? Revenues exceed payouts but that does not mean there is a fund. Every penny and then some has been borrowed and spent. And even the so called surplus is falling like a rock, a decade faster than expected.
Maybe the surplus will come back for a few years. But the US government will come out of this deep recession with a much heavier debt burden. Americans will pay for this with benefits cuts and higher taxes.
In the context of writing about Peak Oil Gail the Actuary points out that it is much harder to repay debt in a shrinking economy. Debt becomes a larger percentage of output and income even if total debt is held even. The same holds true for unfunded liabilities. I see some fundamental reasons why US economic growth isn't going to be strong in the 2010s and 2020s. We have an aging and dumbing population. Plus, natural resource supply limitations are going to make themselves felt. We are already living beyond our means (chronic trade and budget deficits and huge increases in all forms of debt - really, lots of debt) even before these problems become severe.
The Dow Jones Industrial Average plunged 250 points Monday to close at 7114.78, a nearly 12-year low. The last time the stock index closed below that level was May 7, 1997.
The S&P 500 also effectively erased more than 11 years of gains Monday, falling 26.7 points to close at 743.33. The technology-heavy Nasdaq index dropped 53.5 points to close at 1387.72 points, a level not seen since the dot-com bust of 2003.
Someone who started investing in a 401k or IRA starting in 1997 using actively managed mutual funds or index funds is much worse off than if they'd just put their money in bonds and certificates of deposit. In fact, their money is worth less than it was in 1997 once inflation adjustments are considered. The stock market is not always the best place to invest.
My worry is that we do not have good enough ways to save for retirement. If people become more determined to save will we end up in a Japanese style vicious circle of frugal saving and economic stagnation? My guess is that the American people aren't going to become as frugal as the Japanese.
The economic malaise that plagued Japan from the 1990s until the early 2000s brought stunted wages and depressed stock prices, turning free-spending consumers into misers and making them dead weight on Japan’s economy.
Today, years after the recovery, even well-off Japanese households use old bath water to do laundry, a popular way to save on utility bills. Sales of whiskey, the favorite drink among moneyed Tokyoites in the booming ’80s, have fallen to a fifth of their peak. And the nation is losing interest in cars; sales have fallen by half since 1990.
We need more productive ways to defer consumption. One of the appeals to me of rooftop home solar panels is that they provide a way for individuals to basically build up capital that will generate wealth for them in future years. Instead of buying consumer goods a person can buy solar panels that will pay back as electricity in the future. Home insulation serves a similar function as an expenditure that reduces future costs.
We need more ways to spend now to provide ourselves with goods and services in the future. People need ways to spend money in the present that creates demand in the present but less immediate benefit to the buyer and more long term benefit for the buyer. The financial markets are not secure enough as a way to do this.
Neil Howe and Richard Jackson argue that the demographics of aging populations will cause political conflicts as the young and old battle over how much the young will fork over to support the old.
For the world's wealthy nations, the 2020s are set to be a decade of hyperaging and population decline. Many countries will experience fiscal crisis, economic stagnation and ugly political battles over entitlements and immigration. Meanwhile, poor countries will be buffeted by their own demographic storms. Some will be overwhelmed by massive age waves that they can't afford, while others will be whipsawed by new explosions of youth whose aspirations they cannot satisfy. The risk of social and political upheaval and military aggression will grow throughout the developing world -- even as the developed world's capacity to deal with these threats weakens.
High taxes to pay for huge increases in old age entitlements will cut living standards for younger workers. They do not mention this but those taxes will also cut economic growth by reducing investment and in some cases by reducing labor force participation.
Graying means paying -- more for pensions, more for health care, more for nursing homes for the frail elderly. Yet the old-age benefit systems of most developed countries are already pushing the limits of fiscal and economic affordability. By the 2020s, political warfare over brutal benefit cuts seems unavoidable. On one side will be young adults who face declining after-tax earnings, including many who often have no choice but to live with their parents (and are known, pejoratively, as twixters in the United States, kippers in Britain, mammoni in Italy, nesthocker in Germany and freeters in Japan). On the other side will be retirees, who are often wholly dependent on pay-as-you-go public plans. In 2030, young people will have the future on their side. Elders will have the votes on theirs. Bold new investments in education, the environment or foreign assistance will be highly unlikely.
At first glance the US looks in better condition than the European countries because the US has a higher overall fertility rate. But immigration of low wage earning and low education achieving ethnic groups is setting up the US for a substantial decline in average per capita income and greater demand for social services for poorer ethnics. But Howe and Jackson do not recognize our second demographic problem and claim we are in much better shape.
America's economic problem due to immigration will become too noticeable to miss in the 2010s. US states with declining per capita income will be hard to explain away any other way. California per capita GDP will decline 11% by 2020. Texas will decline as well. The US entitlements financial crisis will be much larger than the 2008 crisis. While many libertarians like open borders America will become less libertarian as a result of immigration. The libertarians are wrong on immigration.
The twilight of the US baby boom generation is approaching, and with it deep, structural economic shifts whose impact will be felt for decades to come.1New research from the McKinsey Global Institute (MGI) shows that there is only one realistic way to prevent aging boomers from experiencing a significant decline in their living standards and becoming a multidecade drag on US and world economic growth. Boomers will have to continue working beyond the traditional retirement age, and that will require important changes in public policy, business practices, and personal behavior. These adjustments have become even more urgent with the recent financial turmoil, which has sharply reduced the home values and financial investments of millions of boomers just as they approach retirement.
Underlying the need for change is a reversal of trends that have been in operation since the 1960s. For decades, boomers swelled the ranks of the US labor force, driving up economic output as they earned and consumed more than any other generation in history. Now, as the boomers age and retire, US labor force participation rates are declining. Without an unexpected burst of productivity growth or a significant upsurge in investment per worker, the aging boomers’ reduced levels of working and spending will slow the real growth of the US GDP from an average of 3.2 percent a year since 1965 to about 2.4 percent over the next three decades. That long-term growth rate is 25 percent lower than the one the United States and the world have long taken for granted.
I think this is just one of the reasons American economic growth will slow.
MGI research highlights a further problem: two-thirds of the oldest boomers are financially unprepared for retirement, and many are not even aware of their predicament.2 This lack of sufficient resources will not only mean a less comfortable retirement for tens of millions of households but also depress spending in the overall economy.
Yet the boomers’ retirement need not be such a major dislocation. We estimate that a two-year increase in the median retirement age over the next decade would add almost $13 trillion to real US GDP during the next 30 years while cutting roughly in half the number of boomers who would be financially unprepared for retirement.
Our research shows that many boomers actually do want to continue working. Nonetheless, a number of institutional and legal barriers—health care costs, labor laws, pension regulations, and corporate attitudes toward older workers—could prevent them from prolonging their careers. Overcoming these barriers will require the government to reallocate health insurance costs for older workers, businesses and boomers to agree on more flexible work arrangements, policy makers to reform private pensions, and Social Security to remove disincentives to remaining in the workforce.
Some of those corporate attitudes toward older workers are, unfortunately, quite rational. Older workers have more physical disabilities and are less able to learn and remember. Aging brains lower productivity. We really need oligodendrocyte cell therapy to repair our aging myelin sheaths and reverse at least part of brain aging.
They see declining labor force participation as a cause of slower economic growth. That's incredibly important. A more rapidly expanding economy will generate more tax revenues at lower tax rates. A slower economy will require much higher taxes to meet the same entitlements commitments.
Labor force participation has declined to 66 percent today and is headed, according to our research, toward 60 percent by 2035—a level not seen since the 1960s. If labor productivity and capital growth continue on current trends, declining labor force participation will knock real GDP growth down to 2.6 percent from 2007 to 2016, to 2.4 percent from 2017 to 2026, and to 2.2 percent from 2027 to 2035. A slowdown of this magnitude would represent a structural shift for the US economy and leave it with growth rates typical of Europe’s in recent decades.
The labor force problem is even worse than that because of other demographic changes to the American workforce. Academic performance is on the decline. More schooling isn't helping. This problem will not improve with time.
David M. Walker, former Comptroller General of the U.S., argues that the current financial crisis is small potatoes compared to the coming unfunded entitlements US financial crisis.
At the dawn of the 21st century the U.S. had $5.7 trillion in total debt. As we approach the end of George W. Bush's presidency only eight years later, that sum has nearly doubled, thanks to war costs, tax cuts, spending increases, expanded entitlement programs, and now a welter of government bailouts and rescues.
This year was particularly bad. The federal budget deficit for fiscal 2008 hit $455 billion, up from $162 billion last year. That figure does not include the cost of the Emergency Economic Stabilization Act of 2008, which has an initial pricetag in the hundreds of billions of dollars. In fairness, some of that money presumably will come back to the Treasury, since the new rescue-related sums will be used to acquire preferred stock, mortgages, and other assets that someday could be sold at a profit.
Yet any such calculations are penny ante compared with the fiscal disaster that is bearing down on America.
The US old age entitlements are underfunded.
The U.S. Government Accountability Office (GAO), noting that the federal balance sheet does not reflect the government's huge unfunded promises in our nation's social-insurance programs, estimated last year that the unfunded obligations for Medicare and Social Security alone totaled almost $41 trillion. That sum, equivalent to $352,000 per U.S. household, is the present-value shortfall between the growing cost of entitlements and the dedicated revenues intended to pay for them over the next 75 years.
Do not plan on retiring at age 65. Here's why:
Today we are headed toward debt levels that far exceed the all-time record as a percentage of our economy. In fact, by 2040 we are projected to see debt as a percentage of our economy that is double the record set at the end of World War II. Based on GAO data, balancing the budget in 2040 could require us to cut federal spending by 60% or raise overall federal tax burdens to twice today's levels.
My guess is that the problem is much bigger than Walker expects. Calculations of the size of the unfunded liability are based on assumptions about future economic growth. These assumptions seem excessively optimistic for a couple of reasons. First off, Peak Oil is coming. That's going to cut into per capita GDP and cause the US economy to shrink for several years. Second, the aging of the US population is not the only large demographic crisis we face. Poorly performing Hispanic immigrants will cause declining per capita income in California The economy in Texas will become more like the Third World as well. The lagging groups will not get better with time. So declining per capita GDPs seem inevitable - at least until either artificial intelligence or genetic engineering overwhelm this trend. The libertarian view of immigration is deeply flawed. This means that the leftist welfare state and the libertarian dreams for a smaller government will both take big hits. So will your living standard. Plan and work accordingly.
More than one in five workers at companies that offer 401(k)’s do not even sign up. A study by the Congressional Research Service found that the median amount that workers age 55 to 64 have in their 401(k)’s is just $61,000; another study by the Employee Benefit Research Institute found that 43 percent of workers age 55 and over have less than $50,000 in their 401(k)’s and other savings and investments. Moreover, the institute found that 27 percent of workers in that age group invest more than 90 percent of their 401(k)’s in stocks, a comparatively volatile investment.
Stocks are a good investment right now for the long term (unless Peak Oil trashes the economy in the 2010s).
You are going to have to work longer.
Professor Munnell of Boston College said that staying in the labor force longer is the key to retirement security.
“The reason is you will not get reduced benefits under Social Security,” she said. “Two, you allow your 401(k) assets a chance to bounce back, and you can contribute more. Three, it reduces the period during which you have to support yourself.”
Retirees receive reduced Social Security benefits if they retire at 62, but benefits rise by 8 percent a year for every year a worker delays retirement until age 70. To maintain living standards after they retire, workers need post-retirement income of 70 to 80 percent of their income before retiring, many experts say.
The rise in life expectancies will accelerate once stem cell therapies and gene therapies become commonplace. This will necessitate people working into their 70s and eventually into their 80s and beyond.
A growing percentage of the population continues to work after age 65.
Mr. VanDerhei, of the Employee Benefit Research Institute, said, “For the vast majority of people, if they think they have enough to get out of the work force at age 65, they’re fooling themselves.” More and more workers apparently agree, because the percentage of workers age 65 and over in the labor force has climbed to 17.3 percent in 2008, from 12 percent in 1999.
I expect this trend to continue because the ratio of workers to retirees can't drop too low without crushing taxes.
Rare are the people who recognize that some are winners in the financial crisis. People who still have lots of stock buying ahead of them can now buy stocks for much cheaper.
Kevin Dorwin is a principal financial advisor with Bingham Osborn & Scarborough. He has been on the phone all weekend with clients. He's answering questions and telling them age should determine how they approach their 401K retirement accounts.
He said investors in their 20s are the biggest winners in recent stock market losses.
"They are buying stock at much lower prices than a year ago and right where they were 10 years ago. So, they should be happy," said Dorwin.
The continuing decline in housing prices similarly produces many winners: all those people who haven't bought yet or who intend to buy something much bigger. Low prices are good, not bad.
Last week the American Academy of Actuaries issued a rare "public interest" statement advocating raising Social Security's age when an eligible retiree receives full pension benefits another two years to 69. (A 1983 law boosted the age gradually from 65 to 67.)
An increase in retirement age delivers a double benefit. First off, people start collecting later and so they collect less money total. Second, since they work longer they pay more in taxes.
"Holding the retirement age constant is a certain prescription for future financial problems," the 16,000-member academy stated. "Raising it to reflect increasing longevity would contribute to solving those problems."
Such a change would be equivalent to about a 14 percent average cut in Social Security retirement benefits.
For a few reasons I think the US government's Social Security old age retirement entitlement program is in worse shape than the actuaries imagine. First off, other demographic changes will lower the earning potential of younger generations. Less earnings means less taxes collected to pay for the retirees. Peak Oil will also cut economic growth and declining oil production will cause a long recession when the oil decline really starts to bite. So the revenue expectations for Social Security seem excessively optimistic to me.
Third, advances in medicine will raise life expectancies a lot faster than the actuaries assume. The advances in microfluidics, stem cell research, gene therapy, and other areas of biotechnology are going to lead to the ability to replace and repair old body parts. Full body rejuvenation will become possible at some point in the 21st century. We will accelerate past the historic rate of life expectancy advance as new treatments reverse the changes caused by aging.
The tallest female econ blogger (and smart and charming in person) Megan McArdle is appalled about Medicare spending.
Our nation's lack of action on Social Security is appalling. Not because it is going to bust the budget--it is going to become a very large, but still supportable, drain on resources. No, the reason it is appalling is that the structural incentives built into Social Security substantially depress labor force participation in a way that makes it harder to pay for Social Security, and especially health care.
But if Social Security appalls, Medicare quite stops the heart. We've seen this moment coming for twenty years and done nothing. Now it's here, folks: Medicare goes into deficit this year. For the first time, the general fund will be sending money to the entitlement programs, not the other way around. And that deficit will keep growing, and growing, and growing . . .
Megan is upset that George W. Bush has done so little about the approaching financial catastrophe. But if we'd had a Democrat in the White House the last 7 years I doubt the outcome would have been any better. The Democrats don't want to admit to the size of the problem because to do so brings up the possibility of scaling back the entitlements commitment. Well, the Democratic Party defines itself as the defender of necessary and justified and just totally beneficial entitlements spending. Megan acknowledges the assortment of forces that come together to cause this clusterfrack. Click thru and read about it.
The fact of the matter is that the currently old oppose reforms because they don't want to see their benefits cut or taxes raised. They figure they can get what they want and leave the bill for latter generations. Their voting power has been strong enough for enough years to assure that they get to shift huge costs onto later generations.
But I think the outlook for the entitlements programs is worse than most of the serious analysts believe. Rising energy costs could hold back economic growth for much of the next 10-15 years. The entitlements costs will then become a larger percentage of the overall pie as the absolute pie slices for Social Security and Medicare grow while the pie size stays the same.
Clive Crook points to a study that shows average educational levels in America have peaked and are declining.
For the first time in decades, and probably ever, workers retiring from the US labor force will be better-educated on average (according to one measure anyway) than their much younger counterparts. Some 12 per cent of 60-64 year olds have a master's degree or better; less than 10 per cent of 30-34 year olds do. More generally, the decades-long rise in the educational quality of the labor force is coming to an end. This is important, because that rise has been one of the principal forces driving American economic growth.
These findings are from a new study by Jacob Funk Kirkegaard of the Peterson Institute for International Economics: "The Accelerating Decline in America's High-Skilled Workforce: Implications for Immigration Policy". If you are interested in the prospects for American competitiveness and continued economic leadership, Jacob's study is mandatory reading.
The demographic change is a reason to be very bearish on the US economy. We can't grow if we don't have enough brains to do all the intellectually difficult jobs. Our immigration policy for the last few decades has dumbed down the population. That dumbing down will weigh down the economy in coming decades.
Crook and Kirkegaard favor letting in more skilled immigrants. But what we really need to do is to stop letting in all but the highly skilled. It is the ratio of skilled to unskilled (which is a proxy for the ratio of smart to dumb) that determines living standards more than any other factor. Verbal IQ is most important in determining the wealth of nations.
Using restricted-access Census data, a new study examines a quarter-million households on a block-by-block basis to yield new results about the correlation between household attributes and school quality. The researchers find that, conditional on income, households prefer to self-segregate on the basis of both race and education.
“Economists have long been interested in estimating household preferences for school and neighborhood attributes, given their relevance to many central issues in applied economics,” write Patrick Bayer (Duke University and NBER), Fernando Ferreira (University of Pennsylvania), and Robert McMillan (University of Toronto and NBER) in the forthcoming issue of the Journal of Political Economy.
Specifically, while all households prefer to live in higher-income neighborhoods, college-educated households are willing to pay $58 more per month than those without a college degree to live in a neighborhood that has 10 percent more college-educated households. In fact, the researchers find that households without a college degree would actually need compensating to live in a neighborhood with 10 percent more college-educated neighbors.
Similarly, blacks are willing to pay $98 more per month to live in a neighborhood that has 10 percent more black households, compared to a negative willingness to pay on the part of white households to live in a similar neighborhood. Perhaps unsurprisingly, increases in household income and education also lead to a greater willingness to pay for better schools.
These results are not particularly surprising to those familiar with Robert Putnam's research on how highly diverse communities are low trust communities. People like to be around their own kind. Well, they are willing to pay for that privilege. Why is it that academic advocates of diversity and immigration argue for changing society in ways that will decrease people's perceived sense of well being?
Population growth is the biggest threat to stability in the Middle East today, according to a new report from MEED released this week.
Europeans beware, unless you close your borders to Muslim immigration the pressure from growing populations and stagnant living standards will drive tens or hundreds of millions of Musims into Europe.
Whilst the last 50 years has seen the Middle East experience unprecedented growth in wealth, with record levels of investment in infrastructure, industry, technology, education and health, The 50:50 Report highlights the region’s population boom - which has seen the number of people rise to 377 million today from 162 million in 1957. By 2030 it is estimated to reach 524 million.
The oil sheikdoms in particular are going to see a further decline in per capita GDP as oil revenues must get split among more people.
Industrialized countries need to isolate themselves from growing populations in the less developed countries. The open borders advocates do not appreciate just how much our societies would be changed for the worse if billions of people from less developed countries were allowed to immigrate to the developed countries. First off, land would become very expensive. Second, crime rates would skyrocket. Third, environments would greatly deteriorate. Fourth, incompatible cultures would displace our own culture. Why inflict this upon ourselves?
Update: Also see Audacious Epigone on Muslim hostility toward the United States.
The coming collision of 77 million retiring baby boomers with Social Security, Medicare, and Medicaid represents the greatest economic challenge of our era. What Federal Reserve Chairman Ben Bernanke has recently called the "calm before the storm" will end abruptly on January 1, 2008—less than one year from now—when the first baby boomers become eligible for early Social Security benefits. Three years later, they will become eligible for Medicare. Over the following decades, the cost of these programs will leap from 8.7 percent of GDP to 19.0 percent. Without reform, this 10.3 percent of GDP cost increase would require either raising taxes by the current equivalent of $11,651 per household or eliminating every other government program. Even these changes would not solve the problem over the long term as Social Security, Medicare, and Medicaid spending continues to grow.
How much of the gap between taxes collected and promises made will be closed by raising taxes versus cutting back on the promises? Any guesses?
I went looking for Ben Bernankey's speech. The "calm before the storm" phrase seems to capture so well the moment in time we are at right now. Bernanke sees serious financial problems on the horizon.
Official projections suggest that the unified budget deficit may stabilize or moderate further over the next few years. Unfortunately, we are experiencing what seems likely to be the calm before the storm. In particular, spending on entitlement programs will begin to climb quickly during the next decade. In fiscal 2006, federal spending for Social Security, Medicare, and Medicaid together totaled about 40 percent of federal expenditures, or roughly 8-1/2 percent of GDP.2 In the most recent long-term projections prepared by the Congressional Budget Office (CBO), these outlays are projected to increase to 10-1/2 percent of GDP by 2015, an increase of about 2 percentage points of GDP in less than a decade. By 2030, according to the CBO, they will reach about 15 percent of GDP.3 As I will discuss, these rising entitlement obligations will put enormous pressure on the federal budget in coming years.
WASHINGTON, Feb. 3 — More and more Medicare beneficiaries would have to pay higher premiums for coverage of prescription drugs and doctors’ services under President Bush’s 2008 budget, to be unveiled on Monday.
Single people with annual incomes over $80,000 and married couples with incomes over $160,000 already have to pay higher premiums for the part of Medicare that covers doctors’ services. The income thresholds rise with inflation.
At least these tax increases would be on the actual benefits recipients rather than on the younger people who are getting the shaft for the benefit of older people.
Did you know that in percentage term Medicaid spending is growing more rapidly than old age spending?
“Our budget reduces Medicare’s average annual growth rate over five years to 5.6 percent, from 6.5 percent,” Mr. Bush said, while Medicaid would grow 7.1 percent a year, instead of 7.3 percent.
This is partially a result of the rise of Hispanics as a percentage of the US population. Hispanics are medically uninsured at two and half time the rate of whites. You see, we do not have enough of a financial problem already from an aging population. We need to add to the ranks of the welfare state recipients by importing lots of low skilled workers who, in turn, have lots of children who grow up to be low skilled workers. I'm thinking our elites are sort of like the Manchurian Candidate but on a massive scale. They are doing more damage by supporting mass immigration than all the convicted traitors in US history.
We need to stop the immigration of all lower IQ people. The threshold should be set at 120 IQ or even higher. Also, we should raise retirement ages. One problem with a higher age of retirement: We do not all age at the same rate. Maybe age of eligibility for government retirement benefits should be set according to a test that measures your biological age. Tests for telomere length might serve as part of a test for estimating longevity to determine benefits eligibility.
U.S. Comptroller General David Walker says the retirement of the baby boomers combined with the huge entitlements promised to them are a demographic tsunami and fiscal cancer that could lead to economic disaster for the United States.
WASHINGTON — The comptroller general of the United States is explaining over eggs how the nation's finances are going to hell.
"We face a demographic tsunami" that "will never recede," David Walker tells a group of reporters. He runs through a long list of fiscal challenges, led by the imminent retirement of the baby boomers, whose promised Medicare and Social Security benefits will swamp the federal budget in coming decades.
Walker is right of course. I expect this problem to go unaddressed until the boomers start retiring and the budget deficit becomes huge.
Walker is touring the United States with a bipartisan group of economists policy specialists in a "Fiscal Wake-Up Tour" to try to alert the American public to the scale of the problem. One of the members of this tour, Alison Fraser, director of economic policy studies at the Heritage Foundation, points out that eliminating the Department of Defense would not save enough money to pay for the entitlements.
Project out 75 years, and the magnitude of the problem is stunning. In those projections, "we have gone from $20 trillion to $50 trillion in total liabilities and unfunded commitments in six years, primarily because of unfunded entitlements," says Walker, the nation's chief public accountant. That translates to $440,000 per current US household.
"If we eliminated the entire Department of Defense, it would not solve this problem," notes Fraser.
The relative power of the United States has peaked and will decline for years to come. The demographic trends due to aging and immigration both will cut into per capita GDP and economic growth.
Walker talks to 60 Minutes correspondent Steve Kroft this Sunday, March 4, at 7 p.m. ET/PT.
"The prescription drug bill is probably the most fiscally irresponsible piece of legislation since the 1960s," says Walker, "because we promise way more than we can afford to keep."
A wave of retiring workers will weigh down economic growth in the coming years unless Americans save more and employers take steps to hang on to more of their older employees, experts said.
How the nation responds is a "critical question," said Donald L. Kohn, vice chairman of the Federal Reserve, warning that the costs could "fall entirely on future generations."
A study by Fed economists projected that economic growth would slip toward the 2% range after 2010, about a point lower than the rate of the last decade, largely the result of meager growth in the future labor force, Kohn testified.
The slower economic growth could feed a vicious cycle. Increases in taxes could slow growth. That would reduce tax revenue which could lead to higher taxes to make up for the lost revenue.
Touring with Mr. Walker are: Alice Rivlin, budget director under President Clinton and now a fellow at the moderate-to-liberal Brookings Institution; Alison Fraser, an economic policy specialist at the conservative Heritage Foundation; and Harry Zeeve, a director of the bipartisan Concord Coalition that advocates fiscal reform and balanced budgets. While the foursome, which spans the political spectrum, doesn't agree on solutions, its members acknowledge that nothing can be done politically if Americans remain ignorant of the problem.
The Clinton and Bush Administrations have been years of tremendous wasted opportunity to deal with America's demographic problems. The dumbing down and the aging problems are obvious to anyone who doesn't mind thinking taboo thoughts (i.e. most of the upper half of the IQ Bell Curve when they choose schools and places to live).
What should we do about the demographic problems? I have several suggestions:
We need practical solutions to our huge demographic problems. Do you have any suggestions?
The Wall Street Journal explores some basic facts on tax revenue and wages.
Before taxes, the bottom 40% of U.S. households got 13% of the nation's income in 2004; after federal taxes of all sorts they got about 15%, according to the Congressional Budget Office's latest estimates. Because of the Earned Income Tax Credit, a cash bonus the government offers low-wage workers, many Americans at the bottom get money from the government, rather than having to pay income taxes; they still face payroll taxes on their wages.
Before taxes, the top 1% got about 16% of income; after taxes they ended up with 14%. (Yes, you read that right: The 1.2 million best-off households got about as much income, even after taxes, as the 45.5 million worst-off.) That top 1%, by the way, pays about a quarter of all federal taxes.
If the wealthy produce more new technology, goods, and services then the rest of us benefit from that. Plus, if they make more the rest of us get our government paid for by them. How much of income inequality is due to differences in productivity? How much is due to parasitism? I figure the parasitism argument is equally applicable to the lower classes who contribute little in the form of new designs and methods of production and who make an outsized contribution to total crime and other costs.
We've been seeing news reports on how the US government's revenues are surging and that surge is reducing the deficit more than expected. Why? The more rapid growth in income for the upper few percent means that the government is collecting much more revenue than it would if the people at the bottom were experiencing a big surge in income.
It's simple: Taking all federal taxes into account -- including payroll as well as income taxes, and allocating corporate profits and taxes paid on them to those who hold shares -- the CBO says those in the bottom fifth pay an average of $4.50 in taxes for every $100 they take in. Those in the top 1% pay $31.10 in taxes for every $100 they take in.
The US government makes more money if the wealthy continue to make a growing percentage of total income. But the government then also faces higher costs to subsidize medical care and other costs that the poor are too poor to pay for. Plus, the growing income inequality might cause more crime and the costs such as prisons and police that come as a result. My guess is the government comes out ahead if income inequality continues to rise. But I'm not certain on that point.
The real problem is the tsunami of retirement spending about to engulf us as the Baby Boomers begin to retire over the next few years. The cost of Medicare and Social Security will surge from about 7 percent of GDP today to almost 10 percent by 2020 and to 14 percent of the entire economy by 2050, when today’s college students retire.
That is why the President’s call for confronting these unsustainable entitlements is so important. He and Congress must begin to take action now, before the problem gets worse.
Bush wasted his political capital on entitlements reform by trying to turn Social Security into a private retirement accounts program. I do not expect the Democrats in Congress to go along Bush efforts to slow the rate of growth of old age retirement entitlements.
Will the coming increase in taxes produce a taxpayer revolt that'll provide the political support needed to raise retirement ages and to make Medicare at least partially needs-based?
The President thus must also be clear that raising taxes to reduce the deficit is unacceptable. One reason for drawing this line in the sand is that insufficient tax revenue is not the problem—spending is. The new Congress is itching to spend money on new programs that its Members committed themselves to during the election. Accepting tax increases will merely finance that new spending.
Another reason is that the Bush Administration’s tax cuts only slightly slowed a long-term rise in federal taxes as a percent of the economy. Today the federal government takes about 18 percent of GDP in taxes, roughly the average for the last 50 years. Yet under current law, thanks to tax hikes enacted before Bush came into office, taxes are slated to rise to a record high of over 20 percent within a decade and to over 22 percent within 20 years. So Americans are scheduled for massive tax increases if Congress does nothing. Thanks in part to the Alternative Minimum Tax, and in part to tax bracket creep, even extending the Bush tax cuts shaves only one percentage point off this tax increase.
I predict the federal government's take on the US economy will rise because retiring baby boomers will support tax hikes to pay for their living standards and medical care. Instead we ought to gradually rase the retirement age. If we are going to live longer then we are going to have to work longer as well.
What I'd like to know: Will the growing ranks of retirees manage to get higher taxes enacted on those still working in order to pay for continued old age entitlements hand-outs at plusher levels? Or will working taxpayers get too angry at rising taxes and push back hard enough to cancel out the power of the lobby of those who near and already retired?
What I fear: Rising taxes that choke off economic growth and by doing so cut collected tax revenue, making the old age retirement financing crisis even worse. Will that happen?
About 13 percent of American men in this age group are not working, up from 5 percent in the late 1960’s. The difference represents 4 million men who would be working today if the employment rate had remained where it was in the 1950’s and 60’s.
Most of these missing men are, like Mr. Beggerow, former blue-collar workers with no more than a high school education. But their ranks are growing at all education and income levels. Refugees of failed Internet businesses have spent years out of work during their 30’s, while former managers in their late 40’s are trying to stretch severance packages and savings all the way to retirement.
What percentage of the officially non-working are earning a living with under-the-table work? Is that percentage rising or dropping? The rise in the number of illegals and of men who are not officially working has created a glut of those who are willing to do work off the books. So I would expect off-the-books jobs to be in short supply.
Government has served as an enabler of some of this trend toward not working. About a quarter of the men who aren't working and not looking for a job collect disability benefits from the US government's Social Security program.
But the fastest growing source of help is a patchwork system of government support, the main one being federal disability insurance, which is financed by Social Security payroll taxes. The disability stipends range up to $1,000 a month and, after the first two years, Medicare kicks in, giving access to health insurance that for many missing men no longer comes with the low-wage jobs available to them.
No federal entitlement program is growing as quickly, with more than 6.5 million men and women now receiving monthly disability payments, up from 3 million in 1990. About 25 percent of the missing men are collecting this insurance.
The ailments that qualify them are usually real, like back pain, heart trouble or mental illness. But in some cases, the illnesses are not so serious that they would prevent people from working if a well-paying job with benefits were an option.
The disability program, in turn, is an obstacle to working again. Taking a job holds the risk of demonstrating that one can earn a living and is thus no longer entitled to the monthly payments. But staying out of work has consequences. Skills deteriorate, along with the desire for a paying job and the habits that it requires.
The decline in availability of well paying blue collar jobs leaves a lot of men feeling that work brings in too little money to be worth it. But how are they surviving?
Non-working men have become less likely to be married.
The missing men are also more likely to live alone. Nearly 60 percent are divorced, separated, widowed or never married, up from 50 percent a decade earlier, the Census Bureau reports.
By contrast, only 30% of the working men are not married.
Non-working men sleep too much.
He also gets more sleep, regularly more than nine hours, a characteristic of men without work. As the months pass, they average almost nine-and-a-half hours a night, about 80 minutes more than working men, according to an analysis of time-use surveys by Harley Frazis and Jay Stewart, economists at the Bureau of Labor Statistics.
The best survival rates were found among those who slept 7 hours per night. The study showed that a group sleeping 8 hours were 12 percent more likely to die within the six-year period than those sleeping 7 hours, other factors being equal. Even those with as little as 5 hours sleep lived longer than participants with 8 hours or more per night.
Stay busy. It is good for your health.
While it has been well-known that homebuyers pay attention to schools when considering which house to buy, this research shows how potential buyers are evaluating school quality, said Donald Haurin, co-author of the study and professor of economics at Ohio State University.
The study of Ohio school districts showed that an increase of about 20 percentage points in the proficiency test “pass rate” increased house values in a district about 7 percent, even after taking into account other factors that impact house values.
Higher performance of kids in public schools mean that more affluent parents do not have to spend big money to send Jill and Johnnie to private school to escape the local schools. $10,000 per year in private school tuition counts up year after year and with multiple kids gets incredibly expensive. Paying more for a house makes much more sense. First, you avoid the cost of private school. Plus, the house will probably maintain its value. So the money you put in will come back to you if you sell. Not so with the money you spend on private school tuition. Plus, by living in a more upper class neighborhood you lower your risk of getting victimized by criminals. I wonder if these researchers controlled for crime rates when comparing housing prices.
Parents were not much interested in relatively higher performance of 9th graders versus 4th graders.
Another measure of school quality – how proficiency test pass rates improved between the 4th and 9th grades – didn’t have such a strong impact on house values.
But higher scoring 9th than 4th graders could be a sign that lower IQ people are moving into an area and having more kids.
Home buyers are interested in the bottom line.
The results suggest that, when evaluating school districts, homebuyers are looking at the end result of education – overall test scores – and not a value-added approach that considers how well schools do in improving students, Haurin said.
These findings add another factor to consider in the debate about whether proficiency tests are good for students, schools and communities.
“If parents and residents are paying attention to test outcomes, and not a value-added approach, that means school boards need to pay attention to outcomes too,” Haurin said. “But focusing on test scores may not be the best way to achieve the goal of educating students to the best of their abilities.”
You can understand from this data why the middle and upper classes have so opposed the libertarian dream of school vouchers. What good is the premium the buyers paid for houses in better districts if the rabble can send their kids to schools in good neighborhoods using vouchers? The libertarians are trying to undermine the ability of the middle class to defend their territory. That's just not going to fly politically.
“In Ohio, there are districts with 20 percent pass rates and some with 85 percent pass rates, so based on our findings that would result in about a 23 percent difference in house values solely because of the schools. It is not trivial amount,” he said.
One problem for school districts is that the value-added approach is difficult for researchers to measure, and difficult for the public to understand. Proficiency test scores, however, are readily available and easy to understand, which makes them more influential with the public, Haurin said.
These results suggest that some school boards may have a difficult time convincing residents, as well as potential homebuyers, that they have good schools in their district.
“The disadvantage that some school districts have is that they may be doing very well in terms of adding value to their students’ education, but still may not be among the top scorers in the state. And the reason may not be because of the schools but because their students don’t have the parental advantages that students in other districts have.”
That "parental advantage" translates from dishonest politically correct liberal-speak into English as "genetic advantage".
How much is the Hispanic influx depressing housing prices in some neighborhoods?
INDIANAPOLIS -- Middle-class neighborhoods, long regarded as incubators for the American dream, are losing ground in cities across the country, shrinking at more than twice the rate of the middle class itself.
In their place, poor and rich neighborhoods are both on the rise, as cities and suburbs have become increasingly segregated by income, according to a Brookings Institution study released Thursday. It found that as a share of all urban and suburban neighborhoods, middle-income neighborhoods in the nation's 100 largest metro areas have declined from 58 percent in 1970 to 41 percent in 2000.
We have less and less in common.
The analysis attributed the shrinking number of middle-income communities to, among other factors, gentrification of more marginal neighborhoods and a bunching of high-income families in more homogenous surroundings.
"It sounds like it's a function of changing income distribution," said John H. Mollenkopf, director of the Center for Urban Research at the Graduate Center of the City University of New York. "What happened between 1990 and 2000 in metropolitan New York and especially New York City was that the number of really high-income households went up, and low-income went up and the middle shrank."
"What looks like a shrinking middle is partly an upgrading of income," he added.
The hollowing out was most pronounced in Manhattan, where 51 percent of neighborhoods were identified as high-income, 40 percent as low-income and only 8 percent as middle-income. Long Island ranked second only to Scranton with the highest proportion, 65 percent, of middle-income neighborhoods of any metropolitan areas in the nation.
People are more likely to live in homogeneous neighborhoods. All this talk about diversity is just babbling. People are living near people more like themselves.
This sorting of society by class reminds me of The Bell Curve book's observations about cognitive sorting. The Brookings writers observe that neighborhoods are becoming less middle class even more rapidly than the middle class is shrinking. This is a very important observation.
Although middle-income families have declined considerably as a share of the overall family income distribution, it is noteworthy that middle-class neighborhoods have disappeared even faster in metropolitan areas, especially in cities. This trend suggests increased sorting of high- and low-income families into neighborhoods that reflect their own economic profiles, and increased vulnerability of middle-class neighborhoods "tipping" towards higher- or lower-income status. The resulting disparities among neighborhoods create new challenges for policies to enhance household mobility, improve the delivery of key public services, and promote private-sector investment in struggling locales.
The increase on racial heterogeneity of the United States is contributing to the shrinking of the portion that is middle class. Instead of a single bell curve of abilities with a center representing the majority we now have an increasing number of separate bell curves by racial and ethnic groups with each curve for number of people on the y axis peaking at a different point for IQ on the x axis.
Also the differences between the races contributes to a flight into neighborhoods of more economically similar residents as people react to not just cognitive but racial differences between themselves and people of other economic classes. America is becoming less and less like Mayberry RFD.
Update: An article in The Economist about income trends paints a bleak picture. While most Americans still believe that poor people can strike it big the rising tide in productivity growth no longer lifts the salaries of most workers.
Eight out of ten, more than anywhere else, believe that though you may start poor, if you work hard, you can make pots of money. It is a central part of the American Dream.
The political consensus, therefore, has sought to pursue economic growth rather than the redistribution of income, in keeping with John Kennedy's adage that “a rising tide lifts all boats.” The tide has been rising fast recently. Thanks to a jump in productivity growth after 1995, America's economy has outpaced other rich countries' for a decade. Its workers now produce over 30% more each hour they work than ten years ago. In the late 1990s everybody shared in this boom. Though incomes were rising fastest at the top, all workers' wages far outpaced inflation.
But after 2000 something changed. The pace of productivity growth has been rising again, but now it seems to be lifting fewer boats. After you adjust for inflation, the wages of the typical American worker—the one at the very middle of the income distribution—have risen less than 1% since 2000. In the previous five years, they rose over 6%. If you take into account the value of employee benefits, such as health care, the contrast is a little less stark. But, whatever the measure, it seems clear that only the most skilled workers have seen their pay packets swell much in the current economic expansion. The fruits of productivity gains have been skewed towards the highest earners, and towards companies, whose profits have reached record levels as a share of GDP.
Lots of Americans have noticed their stagnant incomes and are not happy about it.
According to the latest Gallup survey, fewer than four out of ten think it is in “excellent” or “good” shape, compared with almost seven out of ten when George Bush took office.
More of wealth comes from paid work as compared to almost a century ago.
In 1916 the richest 1% got only a fifth of their income from paid work, whereas the figure in 2004 was over 60%.
But I wonder how much of this trend is due to CEOs getting paid well by boards of directors who they chose.
The financial troubles daunting the Medicare system have deepened during the past year, according to a government forecast that says the federal fund that pays for hospital care for older Americans will become unable to cover all its bills a dozen years from now.
The annual report, issued yesterday by the trustees who monitor the fiscal health of the Medicare and Social Security programs, said the trust fund for the health insurance system for the elderly will run out of money in 2018 -- two years sooner than predicted a year ago and 12 years sooner than had been anticipated when President Bush first took office.
That is one very fast deterioration. Bush and Congress helped that deterioration along a great deal by passing the Medicare drug benefit.
The article cites rapid increases in hospitalization costs as the major reason for the most recent two year shift toward an even earlier bankruptcy.
Medicare and Social Security will require growing amounts of federal income tax revenue. Today, 6.9 percent of federal income taxes go towards the two programs. Dr. Thomas Saving of Texas A & M University, a public trustee of the Medicare and Social Security trust funds, estimates that, in 2020, 26.6 percent of all federal income taxes will go to paying for Medicare and Social Security. By 2030, that number will increase to 49.7 percent.
The United States will not be able to afford much of a military, let alone foreign adventures.
The drug benefit added $8.7 trillion to the unfunded Medicare liability. So why do the Democrats think that Bush is a conservative?
Medicare’s Financial Crisis
Of the two programs, Medicare presents the greatest challenge to Congress and taxpayers. The Hospital Insurance Trust fund is projected to be exhausted by 2018, a change from the previous date of 2020, and the cost of the Supplemental Medical Insurance program (SMI) is increasing faster than Medicare trustees had projected. According to the trustees, Medicare’s long-term debt, based on a 75-year actuarial projection, is now estimated to be $32.4 trillion. Of that amount $8 trillion is directly attributable to the Medicare prescription drug entitlement. The trustees did revise the size of the Medicare portion of the debt, which was estimated at $8.7 trillion in 2005, because the drug costs have risen more slowly than projected, as have the rates of enrollment. What is unknown is the extent to which employers, who now get federal subsidies for maintaining approved drug coverage for retirees, will continue to maintain that coverage or drop it with the passage of time. Accordingly, the cost of Medicare’s drug entitlement remains a huge uncertainty.
We need to raise the retirement age and make more old age benefits need-based.
Medicare accounts for about three quarters of the federal taxes that will go to the combination of Medicare and Social Security
Current and future taxpayers will be faced with enormous burdens in trying to sustain the Medicare program as it is today. According to Dr. Saving, without any change in the program, Medicare will consume a larger share of federal income taxes, rising to 23.1 percent of all federal income taxes by 2020 and 37.5 percent of all federal income taxes by 2030.
We will feel a big financial pinch long before Social Security or Medicare run out of money because the Social Security surpluses used to fund deficits in the regular budget won't be there anymore.
What most reports will miss is that Congress will have to start to deal with reduced surplus Social Security tax collections much faster than it or the public expect. Starting in 2009, the roughly $100 billion annual Social Security surpluses that Congress has been borrowing and spending on other programs will begin to shrink. From that point on, Congress will have to find other sources to replace the money that it annually borrows from Social Security or reduce spending. The surpluses will end completely in 2017, the year when Social Security begins to spend more than it takes.
In a little more than 15 years, today’s $100 billion annual Social Security surplus will turn into a $100 billion annual deficit—a $200 billion change. From 2017 on, Social Security will require large and growing amounts of general revenue money in order to pay all of its promised benefits. Even though this money will technically come from cashing in the special issue bonds in the trust fund, the money to repay them will come from other tax collections or borrowing. Moreover, the billions that go to Social Security each year will make it harder to find money for other government programs such as Medicare.
The pressure to cut spending in other areas will become intense. Want a manned space program to Mars? Fuggedaboutit.
The worsening finances of the US federal government is going to become the biggest cause of political battles in the United States in the next decade. The conflict will sharpen conflicts along racial, class, and generational lines. The younger generation of Hispanics won't rise to white levels of income. So they won't be providing the tax revenue needed. At the same time, they will be making bigger demands on entitlements programs due to their lower levels of income, higher rates of illegitimate births, lower rates of medical insurance coverage, and other problems. As the older whites retire the average level of productive capability of American workers will decline and the retirees will go from net taxpayers to net benefits receivers.
Forget about our elected "leaders" trying to get ahead of this problem. They'll continue in their reactive mode and respond only when they can't avoid responding any longer.
We need to deport all the illegal aliens and adopt a restrictive immigration policy that allows in only highly productive people who will earn high incomes and pay far more in taxes than they receive in benefits. We also need to accelerate the development of rejuvenating medical treatments that will slow and reverse aging so that people can work many more years. Treatments to enhance cognitive function would also help boost economic growth and make the unfunded old age entitlements liabilities more affordable.
Taxes will not go up enough to pay for all the promised benefits. The existing entitlements programs will see benefits reductions. The working age taxpayers will oppose tax rises large enough to pay for the promised benefits. But taxes will go up some. It is not clear to me how high taxes will go. Expect to see a big push for value added taxes as a way to fund the old age entitlements. My advice is to vigorously oppose the VAT since it will not replace income taxes but rather will function to increase the total percentage of output diverted into government treasuries.
In an article entitled "Curse of the Young Old: Why Should We Pay For Them" William Saletan argues that the unfunded old age pension liabilities crisis should be solved with tougher benefits eligibility requirements.
To keep the system afloat for the next seven decades, its trustees say the Social Security tax rate will have to reach 19 percent. And if life expectancy keeps rising over that period, academics project a tax rate of 27 to 32 percent.
We are about the enter the age of the battle over tax increases or benefits cuts.
Money for basic living expenses isn't even the biggest problem. Medical care costs are going to cost more than basic expenses like food, utilities, and rent.
Healthy aging is increasing too.
Now for the good news. We're not just living longer; we're staying healthy longer. From 1982 to 1999, the percentage of senior citizens who had chronic disabilities dropped from 26 percent to less than 20. Active-life expectancy at age 65--the average number of additional years a person could expect to live free of chronic functional impairment--rose from fewer than 12 years to nearly 14. That's a five-year gain from what a 65-year-old could expect in 1935, according to Kenneth Manton, a leading scholar of old age. The experience of being 65 to 74 has changed so radically that the Census Bureau now calls this group the "young old."
They could still be working and paying taxes instead of sucking on the teat.
Even as health on old age has improved labor market participation among the elderly has declined. This is clearly not sustainable.
So all these young old folks are working longer, right? Wrong. In 1950, more than 45 percent of men 65 or older were still in the labor force. By 2003, that percentage had plunged below 20. Five years ago, a study showed that men and women were retiring five and six years earlier, respectively, than their predecessors did 45 years earlier. Why? Because they could. Pensions helped, but the bigger factor was Social Security.
By reducing labor market participation Social Security reduces tax revenues needed to pay for the truly old and frail.
Saletan says the most obvious response to the inaffordability of Social Security and the rising number of healthy elderly is to raise the retirement age.
Last year, Manton calculated that if you were designing a system in 1999 for people who could expect as many active years as a 65-year-old could expect in 1935, you'd set the retirement age at 70. And by 2015, you'd raise it to 73.
When the biotech revolution starts to have a large effect on health even these projections will seem too conservative. When will solutions come for how to grow replacement organs? Solutions for cancer and Alzheimer's Disease combined with cheap organ replacements (maybe grown in genetically engineered pigs) will eliminate a lot of causes of death. Crestor will prevent artery plaque build-up. So what's going to kill you? Perhaps infection due to an aged immune system.
Saletan says that since we age at different rates eligibility for Social Security should be based on disability.
The third objection is that people don't age at the same rate. While true, it's not an argument for a low benefits-eligibility age. It's an argument for ending the link between age and benefits. Social Security actually consists of three programs. One pays benefits based on age; another pays if you lose your spouse; a third pays if you become disabled. As of 2002, 70 percent of the money paid out was based on age; only 15 percent was based on disability. That's insane. Inequality of aging means that age is a bad proxy for disability, which is a good proxy for need. If you turn 65 on the same day as your neighbor, but she's disabled and you aren't, we should pay her, not you.
I emphatically agree with Saletan. People could still save their own money if they wanted to retire sooner. But right now Social Security and Medicare are a massive and morally unjustifiable forced wealth transfer from the young to the old.
A larger working population would both reduce the outflow of money to pay for old folks and also increase tax revenues. Plus, this would reduce tax increases. Big tax increases to pay for an old population will reduce labor market participation of younger folks. Faced with higher taxes people will choose leisure time over working and having most of their money go to taxes. Plus, people will do more work for themselves. Rather than hire repairmen or painters they'd do their own repair and painting. This will reduce the efficiency of the economy by causing people to spend less time doing the tasks they are most efficient at doing. A higher tax society means lower living standards for a multitude of reasons.
A new survey shows that median incomes fell for householders under 45, even as they rose for older ones, between 2001 and 2004.
Income fell 8 percent, adjusted for inflation, for those under 35 and 9 percent for those aged 35 to 44. The numbers add new weight to longstanding concerns about whether younger generations of Americans will achieve living standards that are better - or at least equal to - those of their parents.
I'd really like to see these numbers broken out by race. The United States is becoming less white. The rising fraction that is Hispanic is causing some of the decline in income. About half of all Hispanics do not even graduate from high school. They aren't going to earn as much as older whites.
From 1970 to 1997 men under 35 experienced a 19% decline in income.
• The median income for men under age 44 was significantly lower in 1997 than in 1970, after adjusting for inflation, according to a long-term analysis by the Census Bureau in the late 1990s. For those over 45, incomes barely held their own during that period.
• The entry of women into the workforce in those decades has helped push median family incomes up over time. But even when men and women are included together, younger workers (age 25-34) are earning well below what they did in 1970. And at all ages, evidence suggests that families are putting in more hours of work to make their household incomes rise.
• Even with extra time at work, median family income has barely budged since 1995 for householders below 45, up about 5 percent after inflation through 2004.
Some libertarians argue that a rising tide lifts all boats. Well, wrong. A large proportion of the boats have leaks and are sitting rather lower in the water. Think of all the technological advances that have boosted productivity since 1970 and then consider these results. Something is going terribly wrong.
Jail time - Initial plans were completed for a $153 million North County Jail to alleviate years of severe overcrowding at the Santa Barbara County Jail near Goleta. The proposal calls for an 808-bed facility between Santa Maria and Guadalupe.
A couple of books, Generation Debt by Anya Kamenetz and Strapped by Tamara Draut, are drawing attention to the intergenerational change in economic outcomes. Another problem is the rising cost of the education racket.
The dropout rate has risen, while those who earn a degree are taking longer to do so. In 1983, 52 percent of students entering college graduated within five years; in 2005, the figure was 39.5 percent.
The average student-loan debt for graduates of four-year colleges is pegged at $17,600 to $23,485, depending on which study you consult. College costs rose an average of 7.3 percent a year from 1979 to 2001, compared with a 4 percent rise in U.S. prices over the period, according to the U.S. Bureau of Labor Statistics.
Kids are taking longer to get educated in part due to the need to work. But since they make so little when so unskilled their capacity to work through college is less than it used to be when college cost much less in inflation adjusted terms and the minimum wage was higher in inflation adjusted terms. Plus, the kids have to compete with low skilled illegal aliens for the bottom level jobs.
To repeat a suggestion I've made many times: We need a system of standard tests that people could take to earn degrees without ever enrolling in colleges. See my previous posts Accelerate Education To Increase Tax Revenue, Reduce Costs and Walter Russell Mead For Standard National Tests.
The Texas of that jerk George W. Bush shows us the demographic future of America. See my post "Texas Has Lowest High School Graduation Rates" and behold the wonders of open borders libertarian free market immigration policies.
The Wall Street Journal reports on the causes of the large increases in real estate prices in recent years.
America still has lots of wide-open spaces, but many of them aren't where people want to live. And builders are finding it more difficult to get permits to put up new houses in many of the more economically vibrant metropolitan areas, particularly along the East and West coasts.
"The housing supply has been constrained by government regulation as opposed to fundamental geographic limitations," concludes a paper released in December 2004 by Edward L. Glaeser, an economics professor at Harvard University, and two colleagues.
Homeowners share the blame. Prof. Glaeser's paper says they have grown savvier about organizing themselves to block proposals that would bring new and more densely packed housing to their neighborhoods -- something that they fear could reduce the value of existing homes.
Think about this argument. It sounds like a complaint against people who oppose high density building. Economists argue that housing wouldn't cost as much if it was built more densely. True enough. But isn't higher density housing undesirable for most people. Doesn't the higher density also translate into lower perceived value by most potential buyers?
Consider the interests of existing homeowners. Why are homeowners fearful of higher density housing? The economists say the homeowners fear declining housing prices. But the declines in prices are due to declines in perceived value. Higher density housing lowers quality of life of lower density housing owners living in the same area. If a neighborhood gets more houses built on smaller lots then suddenly more cars are parked on the street, more cars are going by all hours of the night and day, noise levels are higher, and there's more pollution.
Higher density housing mixed with larger and more expensive houses is also redistributionist. The houses that have fewer occupants per dollar of assessed value end up paying more taxes per occupant and therefore those houses effectively subsidize the occupants of higher density housing. Why should homeowners want to subsidize the living standards of other people in the name of the free market?
The classic libertarian economic argument against building regulations just plain ignores the external cost problem. People who organize to resist new building are organizing to avoid external costs that lower their quality of life. They also avoid higher taxes. The higher taxes subsidize people in higher density housing who demand as much or more public services while paying less in taxes.
But why the increased demand for housing? More people. Imagine the United States with half its current population. Housing costs would be much lower in desirable locations for living because lower demand would lower land costs. Of course immigration is driving America in the opposite direction. We are long past the age of unexplored frontiers or sparsely populated coastlines. Every addition to the total population is another person to compete for limited land resources in the most desirable areas. Worse yet, the average immigrant is a member of the recipient class and makes less money, pays less in taxes, and generates more demand for government services and taxes than the white and Asian American populations.
The editors of the Christian Science Monitor argue for a rise in retirement ages in order to better cope with the rapidly decreasing ratio of nonworking retirees to workers.
In a little-noticed news item last week, the Organization for Economic Cooperation and Development, the think tank for 30 industrialized nations, warned that world economic growth will decline to 1.7 percent over the next 30 years if older people aren't encouraged or allowed to work. If nothing is done, the OECD stated, the ratio of nonworking retirees to workers will nearly double in those countries by mid-century.
This demographic reality usually draws a simple political response: raise taxes or lower benefits, or both. In Congress, that way of thinking has led to stalemate on revising Social Security. Both political parties need to discuss a retirement age of at least 70 for both Social Security and Medicare for the next generation.Better yet, it should index the age requirement to rising longevity so this issue can be done with.
All the Western developed countries face very similar demographic problems due to aging populations. We collectively need to admit that as people live longer and have fewer children they are going to have to work longer.
The number of years spent working could be increased at both ends of the working period. Older adults most obviously could work more years. But also children could be educated more rapidly so that they could enter the workforce at younger ages. Recording of high resolution college course lectures and the development of standard tests for highly quantitative college course subjects could provide opportunity for students under the age of 18 to earn credit for many college courses. This would enable them to finish college years sooner and therefore to enter the labor force years sooner.
Developed countries also need to stop the influx of low skilled and low paid immigrants. People who earn low wages pay less in taxes. Therefore they receive more in benefits than they pay in taxes. Immigration eligibility criteria should be designed to allow in only people who are likely to pay far more in taxes than they will receive in benefits over their entire working lives.
Writing for Forbes Dan Seligman reports that inequality in the United States has been rising steadly for almost 30 years and during every US presidency regardless of party in power.
The standard measure of inequality is the Gini coefficient, signifying the extent to which a society deviates from absolute equality. If everybody has the same income, the coefficient is 0; if the entire GDP belongs to one person, the coefficient is 1. In the U.S. the latest reported coefficient is 0.466. In case you are wondering, it rose more under Clinton--from 0.433 to 0.462--than under any of those other chaps. It rose by only 0.004 during George W. Bush's first four years. In case you are also wondering how many times Times editorialists complained about Clinton's inequality record, the answer is zero. The Washington Post has been equally tendentious, and at one point (Sept. 25, 1998) it ran a front-page story on the 1997 income report in which it stated firmly that the census data showed "income inequality did not increase," even though the data clearly pointed to a substantial one-year increase of 0.004. There was no correction.
Compare the total rise in income inequality of 0.004 during five and a half years of George W. Bush's presidency to the 0.029 rise under Clinton. Under Clinton inequality rose about 5 or 6 times faster, and as Seligman notes, yet the New York Times and Washington Post found nothing to complain about as long as a Democrat was in the Oval Office. There's a simple lesson here for rich people: support Democrats as Presidents since the liberal press will not complain regardless of how much richer you become.
But perhaps matters are not so simple. A Republican president is more likely to cut taxes. So while the press will complain during a Republican presidency the upper income will get to keep more of what they make (at least until the financial burdens of an aging population create big pressures for tax increases).
The slower rise in the Gini coefficient under Bush is probably a reflection of two macroeconomic changes. First the burst of the dot com stock bubble obviously hit stockholders most of all and higher income people owned more stocks. Also, the replacement of the stock bubble with the real estate bubble increased the wealth of a much larger portion of the populace than the stock bubble which preceded it.
The Gini coefficient rose under a succession of tax regimes and through many social policy changes. Seligman argues the best explanation for the sustained rise of the Gini coefficient over such a long period of time comes from Richard J. Herrnstein and Charles Murray's book The Bell Curve. The economic value of greater smarts keeps rising. Hence the smarter people make more relative to the rest. This makes sense. Advances in technology enable smart people to do more things. Smart people can coordinate and orchestra more complex arrangements of capital and labor. They can, just working on their own or with other like minds design and develop software, and create building designs, mechanical designs, and electrical designs. They can create complex contracts and negotiate agreements incomprehensible to lesser minds. They can navigate through complex government regulatory systems and find legal ways to circumvent governments.
The computer revolution has reduced the extent to which smarter people rely on the labor of lower IQ workers. For example, where in an earlier era higher IQ engineers also needed lots of moderately high IQ draftsmen to translate their designs into drawings today engineers increasingly can interact with design and engineering software and lay out their own designs in many cases more rapidly than it would take them to explain the designs to draftsmen. Or look at the white colllar workers who used to rely on typists who now type their own reports and documents. It is quicker to type up a report as one thinks of it than to write the report with pen and paper and then have someone else type up drafts. Successive drafts are easier to make if thinkers interact with computers directly.
Another factor at work that relates to IQ and inequality comes from increasing international trade. The liberal enforcement of taboos against discussions of IQ causes one glaring fact about rising trade to be missed: As a larger portion of the world's population gets drawn into a larger international economy the IQ of the average worker whose work gets traded has dropped. Why? Because most countries in the world have populaces with lower average IQs than the averages in the most industrialized countries. So upper class cognitive elite people in the United States and other already industrialized countries do not face as much competition from abroad due to international trade as the lower classes in those same countries.
One of the biggest obstacles facing President Bush’s Advisory Panel on Federal Tax Reform is the fact that America has become divided between a growing class of people who pay no income taxes and a shrinking class of people who are bearing the lion’s share of the burden.
Despite the charges of critics that the tax cuts enacted in 2001, 2003 and 2004 favored the “rich,” these cuts actually reduced the tax burden of low- and middle-income taxpayers and shifted the tax burden onto wealthier taxpayers. Tax Foundation economists estimate that for tax year 2004, a record 42.5 million Americans who filed a tax return (one-third of the 131 million returns filed last year) had no tax liability after they took advantage of their credits and deductions. Millions more paid next to nothing.
As Figure 1 and Table 1 show, the number of Americans who paid no income taxes because of the preferences in the tax code has varied greatly since 1950. While the number of these “non-payers” has averaged about 22 percent of all filers over the past five decades, it has spiked to record levels in recent years and the trend line does not appear to be slowing.
In addition to these non-payers, roughly 15 million individuals and families earned some income last year but not enough to be required to file a tax return. When these non-filers are added to the non-payers, they add up to 57.5 million income-earning people who will be paying no income taxes.
Even 57.5 million is not the actual number of people because one tax return often represents several people. When all of the dependents of these income-producing people are counted, roughly 120 million Americans – 40 percent of the U.S. population – are outside of the federal income tax system.
A lot of people are eligible for credits that effectively give them negative tax rates. So they get a "refund" check far greater than any tax paid.
In 1997, Congress enacted a new $500 per-child tax credit and expanded the Earned Income Tax Credit (EITC) for low-income workers. The 2003 tax cuts increased the value of the child credit to $1,000. These two tax credits – especially the child credit – have had a powerful effect on reducing, and many cases eliminating, the income tax liability for millions of Americans.
These two credits are unique in that a taxpayer can receive the full value of the credit even if they have no tax liability. To see how this works, consider, for example, a family that has three children (and thus should receive $3,000 in tax credits), but only has a tax liability of $1,505. Under the rules of most tax credits, this family would only be allowed $1,505 in tax relief – an amount equal to their tax liability. But a “refundable” tax credit gives this family the full amount they are eligible for -- $1,505 toward their tax liability, and the remaining $1,495 in the form of a refund check. (See Table 2.)
The percentage of non-payers who are white is exaggerated by the inclusion of Hispanics with whites. If I understand this data correctly the 79% of the total non-payers who are listed as white include the 15% who are Hispanic. So really only 64% of the non-payers are white and that is a much lower percentage than they are of the population as a whole.
The racial or ethnic composition of the 42.5 million non-payers roughly mirrors the demographics of American tax filers as a whole. For example, white Americans are 83 percent of total taxpayers, and the percentage of zero-tax filers who are white is 79 percent. African Americans are roughly 13 percent of total taxpayers and 16 percent of zero-tax filers. Asian Americans comprise 3.6 percent of total taxpayers and 3.2 percent of zero-tax filers.
That said, the percentage of non-payers within each ethnic or racial group does vary: 28.6 percent of Asian Americans tax filers get back every dollar withheld, 31.1 percent of white American tax filers will owe nothing, and 41.7 percent of African Americans will file a tax return with no liability.
Absent from these categories are Hispanic Americans. Within Census data, race and ethnic Hispanic origin are not comparable concepts because a Hispanic individual can be of any race. As a result, Hispanics Americans must be considered separately from racial characteristics. Hispanics make up 15 percent of the 42.5 million individuals or households that paid no income taxes in 2004. In contrast, they made up roughly 10 percent of all 131 million taxable American households.
Are they saying that 131 million taxpaying households or 131 million households that in theory could pay taxes? 6.375 million Hispanic households pay no income taxes. What percentage are they of the total number of Hispanic households? Are there 13.1 million total or 13.1 million plus 6.375 million?
These figures understate the size of the problem. Even many of those who pay some taxes pay far less than they cost the government and do not pay enough to fund basic government functions like basic research and defense. Check out a table on the Recipient Class to get an idea of how much money is shifted from higher income earning groups to lower income groups.
The fraction of the US population that does not pay income tax is growing rapidly.
In 2004, a record 42.5 million tax returns – one-third of all returns filed – had no income tax liability because of the available credits and deductions in the tax code. This is a 42 percent increase in the number of zero-tax filers in just four years. In addition to these zero-tax filers are the 15 million individuals or households who do not earn enough to file a tax return. Overall, nearly 58 million taxable households are outside of the income tax system.
A shrinking portion of the population supports the rest of the population. A combination of immigration and aging strongly contribute to this trend. We should stop the flow of low-skilled immigrants both legal and illegal and we should deport all the illegal aliens along with legal aliens who have low skills and low incomes. Also, we should raise the retirement age.
Tyler Cowen of Marginal Revolution points to a story in the NY Times about how the growing burden of paying for the old is being partially offset by the declining burden of paying for children.
The overall burden on the employed will grow, but not to unprecedented levels. The ratio of people of working age to those either under 20 or over 65 will decrease to 1.2 in 2050 from about 1.5 today. But this is still an easier load than in 1965, when the country was awash with children, and the ratio of the working-age population to each dependent was only 1.1.
True, the young are cheaper to maintain than the old. In 1990, economists at Harvard and M.I.T., including David M. Cutler and Lawrence H. Summers of Harvard, estimated that people over 64 consume 76 percent more than children.
Still, Mr. Burtless estimated that in 2050 a worker will have to sacrifice 49.6 percent of his or her wages - through taxes or other means - to maintain society's dependents. That is nearly 6 percentage points more than in 2000, but it is merely 0.8 percentage points more than 1965. And the percentage could well be smaller if people work later in life to pay for more of their keep.
My guess is that the cost of paying for each child is growing for a few reasons. First off, the tax burden for each child has risen in part due to the futile pursuit of improvements in educational outcomes by throwing more money at children who are simply not bright enough to meet expectations. Also, the rise in illegitimacy (see the first graph here) means fewer men are paying for their children and hence more funding for child raising (especially medical costs through Medicaid) is coming via the tax man.
The rising tax burden for child care will have the same effect as the rising tax burden for elder care: People will work less at paying jobs in order to spend more time doing work for themselves. High marginal tax rates to pay for old folks means the harder you work the less you get out of each additional dollar earned. How depressing. I see this as having an opposite effect on motivation than having a newly born baby. In the case of the costs of the new born baby suddenly Dad (at least in intact families) feels the urge to work harder. Got to keep that job. Got to get that raise. The costs for the pediatrician and dentist stretch into the future and more money is needed.
Mom and Dad working for the baby have an incentive to work much harder because with enough hard work so those baby costs can be paid for. The more successful workers can earn enough income that after paying the fixed costs there can still be money left over to pay for enjoyable things. The fact that child costs are more typically fixed costs and not a percentage of income motivates parents to earn more than the fixed costs of child care. This is an incentive for greater economic activity, not less.
Another important difference between paying for child care and for elder care is that a much larger fraction of child-rearing costs are borne by those who have the children. People are more willing to spend on that which is in some sense theirs than on that which is for strangers. Granted, a lot of people are not thrilled to spend time with their kids. But most of those same people are motivated to go to work to earn money for their children. Whereas taxes exacted on them to pay for old folks are not earmarked specificially for their parents. So the incentive to work harder to pay for the elderly is just not there the way it is to pay for one's own children. For someone whose parents have already died no taxes they pay will go to their parents. Similarly, if one's parents are still working one knows that one's taxes for old folks are going to pay for other people, few if any of whom are closely related to you.
Rising illegitimacy, rising uninsurance of children, and the rising number of children of poor illegal immigrants who pay little in taxes are all increasing the fraction of child care that is paid for via taxes. Therefore on average children are not as much a motivation to work as was previously the case pre-welfare state. This partially offsets the declining costs of smaller families and makes the financial outlook for the future bleaker still.
Thanks to Dan Vanzile for pointing me to Tyler's post.
Robert Samuelson worries that tax increases for the aging population may cause wage stagnation or worse.
The great danger of an aging society is that the rising costs of government retirement programs -- mainly Social Security and Medicare -- increase taxes or budget deficits so much that they reduce economic growth. This could trigger an economic and political death spiral. Our commitments to pay retirement benefits grow while our capacity to meet them shrinks. Workers and retirees battle over a relatively fixed economic pie. The debate we're not having is how to avoid this dismal future. President Bush's vague Social Security proposal, including "personal accounts," sidesteps the critical issues. His noisiest critics are equally silent.
Here are the basic numbers, as calculated by Elizabeth Bell, a research assistant to Steuerle. In 2005 Social Security and Medicare are expected to cost $822 billion (that's net of premiums paid by recipients); by 2030 the costs are projected to increase to $4.640 trillion. That's an increase of $3.818 trillion. Over the same period, annual wages and salaries are projected to rise from $5.856 trillion to $17.702 trillion -- an increase of $11.846 trillion. Despite the big numbers, the arithmetic is straightforward: The increases in Social Security and Medicare represent 32 percent of the increases in wages and salaries.
Note that these numbers are based on assumptions about economic growth rates, labor market participation rates, productivity growth rates, and rates of growth of costs of medical care for old folks. Any of the assumptions might be excessively optimistic or pessimistic. My fear is that future tax increases will make the assumptions excessively optimistic.
I know a wealthy venture capitalist who likes to argue that higher taxes would be ruinous to economic growth. This is the argument that Stephen Moore and the Club for Growth use in lobbying and fund raising for Republican primary challengers against any Congresscritters who vote for tax increases. I keep asking these people a basic question: If the argument that high taxes will choke off economic growth is right then won't the tax increases which will be enacted to pay for old age benefits for an aging society lead to economic stagnation?
Why would higher taxes reduce economic growth? Taxes decrease the incentive to engage in work for pay. For example (and this is a hypothetical just to illustrate a point), imagine you needed to get your house painted, a house painter would cost you $10 per hour, in your regular job you made $20 per hour, that your employer offers you overtime hours, and that you were just as productive at painting as the $10 per hour painter. Either you or the painter could paint your house in 100 hours. If you hire the painter then you would pay the painter $1000 to paint your house.
Does it make sense to hire the painter? On the surface it does. In a system where there are no taxes you could work 50 hours in your day job to make the money to pay the painter to work 100 hours. You save yourself 50 hours of time. If your tax rate was 25% you would still be better off paying the painter. You would have to work 66.7 hours to earn $1000 in after-tax income to pay the painter. But you would still save yourself 33.3 hours. So working to earn money to pay someone else would still make sense. But raise the tax rate to 60%. Suddenly even though your time is valued by the job market as twice as valuable as the time of the painter you'd have to work 125 hours in your day job to earn enough money to pay the painter to work 100 hours to save you 100 hours painting your house. With a high enough tax rate it becomes more sensible for you to work less in your day job and to paint your house yourself.
Here's the problem: If you paint your house yourself and work less then you earn less and therefore you pay less in taxes. At the same time the painter does not earn money painting your house and so the painter does not pay taxes on that $1000 he no longer earns. If people react to a tax rate increase by working less the net effect can be a decrease in total revenues collected. This may explain why even the most advanced European nations have much lower per capita GDPs than America.
Worse yet, keep in mind that the reason you as the hypothetical $20 per hour worker would be worth twice as much per hour as the $10 per hour painter is typically (and there are exceptions) because you are more productive and generate more wealth in the form of goods and services per hour worked. But if tax rates cause you to shift from your paid job to a task that commands less per hour the productivity of the economy as a whole declines. Instead of your doing a job for which you are more productive you do a job for which you are less productive.
This shifting of labor out of the paid workforce as a result of high taxes is my nightmare scenario for the future of the American economy. We might get into a vicious cycle where politicians keep raising taxes to pay for medical care and other expenses for old folks while American workers chooses to do less paid work. They might do less paid work and instead go camping or to fix their own car, paint their own house, cook their food from scratch with raw ingredients, or grow their own food. Or they might just go to the beach or go hiking in the mountains rather than work harder to earn the money to pay for a trip abroad or a bigger house.
For more on this see Tyler Cowen's post "Why don't the French work more?" and Alex Tabarrok's post "The Microeconomics of Social Security Privatization".
Update: In a research paper about Social Security privatization Martin Feldstein says tax increases decrease the size of the tax base. (PDF format)
The elasticity of taxable labor income with respect to the net-of-tax share, i.e., to one minus the marginal tax rate on labor income, is much greater than the traditional elasticity of labor supply as measured by labor force participation and average hours worked. Estimating this elasticity is now a subject of very active research among public finance economists. Although a wide range of estimates has been produced, some studies are more reliable than others. I believe that a conservative estimate is that the compensated elasticity of taxable income with respect to the net of tax rate is one-half.
Using this elasticity and the 2004 size of the taxable payroll implies that a rise in the effective marginal tax rate from 37.7 percent to 44.2 percent increases the annual deadweight loss by $96 billion or nearly one percent of GDP.11 Since the 6.5 percent increase in the marginal tax rate applies only to taxable labor income (about 40 percent of GDP), the deadweight loss is equal to about one third of the incremental tax revenue. Even this understates the relative size of the deadweight loss because it ignores the reduction in the tax base and therefore in the tax revenue that results from the higher marginal tax . When that reduction in taxable income is taken into account, the incremental deadweight loss is nearly 50 percent of the incremental revenue.12 The true cost per additional dollar of payroll tax revenue is there $1.50.
Note that this is just the deadweight loss or excess burden – i.e. the pure waste – associated with the incremental tax. It does not include the deadweight loss of the existing tax or the direct burden of the taxes themselves. And it does not include the deadweight loss caused by the program distortions.
At the end of the next to last paragraph I think he meant to say "is therefore $1.50.".
My guess is his estimate for the economic loss from taxes underestimates the cost because it is a static snapshot. The rate of growth will slow and therefore the amount of the loss will become steadily larger in the out years.
A rise in the retirement age is one way to reduce the extent of future tax increases. If people work longer they will pay in for a longer period of time and receive benefits for a shorter period of time. Feldstein argues for private accounts as a partial replacement for Social Security so that people view the money they put into the accounts as savings rather than as taxes. The thinking is that people will be more willing to work to build up savings than to pay taxes and therefore under a private accounts system labor market participation rates will be higher and the economy will grow more rapidly.
Americans, that is, residents of the United States, work much more than do Europeans. Using labor market statistics from the Organisation for Economic Co-operation and Development (OECD), I find that Americans on a per person aged 15–64 basis work in the market sector 50 percent more than do the French. This was not always the case. In the early 1970s, Americans allocated less time to the market than did the French. The comparisons between Americans and Germans or Italians are the same. Why are there such large differences in labor supply across these countries? Why did the relative labor supplies change so much over time? In this article, I determine the importance of tax rates in accounting for these differences in labor supply for the major advanced industrial countries and find that tax rates alone account for most of them.
This finding has important implications for policy, in particular, for financing public retirement programs, such as U.S. Social Security. On the pessimistic side, one implication is that increasing tax rates will not solve the problem of these underfunded plans, because increasing tax rates will not increase revenue. On the optimistic side, the system can be reformed in a way that makes the young better off while honoring promises to the old. This can be accomplished by modifying the tax system so that when an individual works more and produces
Using per capita GDP measured in purchasing power parity terms France and Germany have 73% of the per capita income of the United States. The reason the gap is not larger is probably because the Europeans also have disincentives in their labor markets for hiring people who are less productive. So some of the labor that is not being used in Europe would be less productive if it was used. However, even among those who do work the Europeans work far fewer hours per year.
Because of the effect that higher taxes have on labor market participation rates the option to raise tax rates to fund retirement may not exist. But that doesn't mean that politicians won't try raising taxes to get the money. This is my fear: Politicians will raise tax rates, lower living standards, slow the economic growth rate (or even reverse it), while not solving the problem of unfunded liabilities in retirement programs. In fact, if economic growth is sufficiently slowed then the tax increases may even make the problem worse.
Thanks to crush41 for finding the Prescott paper.
The trust fund for Social Security will go broke in 2041 -- a year earlier than previously estimated -- the trustees reported Wednesday. Trustees also said that Medicare, the giant healthcare program for the elderly and disabled, faces insolvency in 2020.
But the real financial crisis will come much sooner.
Equally important are when benefits paid to the elderly start exceeding the payroll taxes designated to support the two programs. That's when the government will have to increase its borrowing on financial markets, raise taxes or divert money from other government programs to sustain Medicare and Social Security at current levels.
For Medicare, the threshold when benefits exceed program income occurred last year. For Social Security, that threshold will be crossed in 2017, one year earlier than the 2018 date projected in last year's report.
In 2004, combined benefits paid out by Social Security and Medicare exceeded the programs' tax revenues by less than $50 billion. By 2017, that shortfall is projected to hit $515 billion, or 2.3% of GDP.
While Medicare outlays currently equals 2.6% of GDP and Social Security is 4.3% at some point in the future the more rapid growth of Medicare will make Medicare a larger percentage of GDP than Social Security. Medicare's unfunded liabilities are several times the size of Social Security unfunded liabilities. This is, parenthetically, one reason why I'm far more interested in health policy than I am in Social Security reform.
To pay all scheduled benefits over the next 75 years, the government would have to raise an additional $4 trillion in today's dollars, $300 billion higher than the figure projected last year.
I think these projections understate the size of the problem because medical science is going to advance more rapidly and extend life expectancy more rapidly than the actuaries are assuming. We need to raise the retirement age. We need much more medical research aimed at developing treatments that will delay the onset of deterioration and diseases that reduce the ability of people to work in late middle age.
One way to measure that shortfall is to calculate how much you would need to raise payroll taxes to keep the system solvent for the next 75 years. Based on the latest numbers, the payroll tax would have to be raised 1.92 percentage points to 14.32 percent of wages. Currently, the payroll tax rate is 12.4 percent, half of which is paid by employers and half by employees.
Another way to measure it is in terms of benefits, which would need to be cut by 13 percent to achieve solvency over 75 years.
I think the voters are too ignorant and lazy to think their way through the choices and trade-offs. Most people don't want to accept that they must either get less benefits or pay more in taxes. So demagogues in Congress will probably manage to derail any reforms.
Indeed, a new Pew Research Center survey released on the same day as the President's announcement finds that backing for new accounts has dipped to 46%, from 58% in December, an ominous sign for the traveling Salesman-in-Chief.
Bush Administration Treasury Secretary John Snow says that the Administration is willing to consider private retirement accounts that would be funded by an increase in Social Security taxes or as a new separately named tax.
Mr. Snow said the administration wanted to encourage the development of as many ideas as possible and that it was open to looking at personal accounts that would supplement Social Security rather than, as in the plan President Bush has proposed, replace a portion of the traditional government-paid benefit.
Treasury Secretary John Snow said he, Bush and other administration officials will spend the next two months barnstorming the country to try to build support for Bush's plan to allow younger workers to divert some payroll taxes into stocks and bonds.
"I don't want to take something to the Senate floor where I've got every one of the members across the aisle saying there's a problem," Senate Majority Leader Bill Frist, R-Tenn., said Tuesday. "In terms of whether it will be a week, a month, six months or a year as to when we bring something to the floor, it's just too early (to tell)."
Some Republican politicians believe that it is a mistake to lead with a proposal built around private accounts using existing Social Security tax revenue. Such a proposal puts Democrats in the position of being able to demagogue by claiming that Republican financial interests are conniving to rip off Social Security for the benefit of rich people. So Senator Charles Grassley wants to shift the focus of the debate toward Social Security solvency.
Like other GOP leaders, Sen. Charles Grassley said he personally supports Bush's plan to divert payroll taxes into personal accounts. But Grassley, who chairs the Senate Finance Committee that would consider Social Security legislation, added that the controversy surrounding it is giving Democrats an excuse to ignore the program's serious financial problems.
"Maybe we ought to focus on the solvency and bring people to the table just over what do you do for the solvency for the next 75 years," Grassley, R-Iowa, said Wednesday.
Grassley said "personal accounts don't have a lot to do with solvency," a distinction that Bush glosses over but that his advisers concede.
"It really has given the Democrats an opportunity to focus on the personal accounts and avoid the responsibility that we all have about the solvency of it," Grassley said in an interview with Iowa reporters.
One quibble with Grassley's argument: To the extent that personal accounts are used to replace current uses of Social Security tax revenue the personal accounts will raise labor market participation rates and economic growth. Therefore they could contribute to lessening of the Social Security funding crisis. See below for more on labor market participation rates as a key but rarely mentioned element on the old age retirement funding debate.
But what date that Social Security Trust Fund theoretically runs out of money is not the first moment of crisis. The crisis will be begin as the baby boomers start to retire. In order for Social Security to be able to pay future retirees it must take back money it loaned to the US Treasury and getting that money back is going to be hard to do. The US Treasury will need to borrow enormous amounts of money on the open market to raise the funds. Plus, the Treasury is already running a large deficit which is partially hidden by the amount it borrows from Social Security. When the Trust Fund starts spending as much as it takes in (en route toward spending much more than it takes in) Treasury will have to start borrowing much larger sums on the market for its own needs. That increase in Treasury borrowing will come even before it starts to borrow even greater sums to pay back the Trust Fund. Massive borrowing on top of the existing federal debt could drive up US interest rates and choke the economy. Bush's private accounts proposal falls far short of addressing the borrowing problem.
Plus, Social Security is not even half the old age retirement benefits cost problem. Medicare is in even worse financial shape and Bush helped make Medicare's financial condition worse by supporting a huge expansion of Medicare liabilities with his support for the addition of an expensive drug benefit to Medicare.
My take on financial changes of the sort that Bush is proposing is that they fail to address the deeper root problem: The ratio of workers to retirees is going to become too low.
In 1950, there were 16 workers paying taxes into the system for every retiree who was taking benefits out of it. Today, there are a little more than three. By the time the baby boomers retire, there will be just two workers who will have to pay all the taxes to support every one retiree.
Fewer workers for more retirees mean each worker bears an increasing financial burden to pay the benefits that Social Security has promised. The original Social Security tax was just 2 percent on the first $3,000 that a worker earned, a maximum tax of $60 per year. By 1960, payroll taxes had risen to 6 percent. Today's workers pay a payroll tax of 12.4 percent.
It is going to get much worse. In order to continuing funding retiree benefits, the payroll tax will have to be raised to more than 18 percent. That's nearly a 50 percent increase.
Shifting money into new accounts and investing more money in the stock market will not make that dependency ratio problem go away. The stock market can not generate enough wealth to pay for the coming increase in the number of retirees. If the dependency ratio reaches 2 to 1 then the taxes needed to pay for Social Security and Medicare will shift the American economy toward the European model of lower labor market participation rates, slower growth, lower per capita GDP, and lower living standards. Our financial problems will grow worse as workers work fewer hours and therefore earn less and pay less in taxes. Therefore a big hike in taxes can not solve the problem either. What we need is for people to work longer and to be physically able to work longer. Already disability is coming a decade later for those born in the early 20th century as compared to those born in the early 19th century. The Bush Administration is making a big mistake by causing biomedical research funding to fall behind the rate of inflation. We need to accelerate research in biomedical sciences to produce more treatments that slow and delay aging and disability. Then people could work longer and the worker dependency ratio could be higher and less burdensome. Even with today's average level of health of people in their 60s the retirement age could be raised with the addition of early retirement for the small fraction of the population who have aged more rapidly and become unable to work.
Reacting to the news that the new Medicare drug benefit cost has risen to $724 billion for the next 10 years David Brooks of the New York Times is predicting the rise of a young millionaire in Ross Perot's mold to make a run at the White House on the platform of cutting back old age retirement entitlements.
That means we're going to be spending the next few months bleeding over budget restraints that might produce savings in the millions, while the new prescription drug benefit will produce spending in the billions.
That means that as we spend the next year trying to get a grip on one entitlement, Social Security, we'll be launching a new one that is also unsustainable.
Over the next few months we will be watching a government that may be millions-wise, but trillions-foolish. We will be watching a government that sometimes seems to have lost all perspective - like a lunatic who tries to dry himself with a hand towel while standing in a torrential downpour.
It is refreshing to read in the New York Times that old age entitlements programs are going to eat the federal budget and that passing more big entitlements under these circumstances is irresponsible.
Brooks says the well organized old folks are screwing over the young and unborn.
We may as well be blunt about the driving force behind all this. The living and well organized are taking money from the weak and the unborn. Over the past decades we have seen a gigantic transfer of wealth from struggling young families and the next generation to members of the AARP. In 1990, 29 percent of federal spending went to seniors; by 2015 roughly half of all government spending will go to those over 65. This prescription drug measure is just part of that great redistribution.
We ought to be treating the physical aging of the US population as a huge economic problem that should be solved rather than serve as an occasion to further expand the already unsustainable entitlements programs. The population needs to spend more years working and to save more money while working.
To enable people to work longer we need a much more rapid rate of medical advances to produce treatments that will slow the rate of aging and delay the onset of debilitating medical conditions. A more rapid rate of advance in medical research would produce cheaper and better treatments and also allow people to work longer.
Another way to increase the size of the working age population would be to accelerate the rate at which children - especially adolescents - are educated. Video recordings of college level lectures and lectures on useful job skills should be made available to all late grade school and high school students. Standardized tests for college-level courses should be available to allow high school students to get college credit for mastery of subjects. Students should be able to learn 12 months a year at their own pace watching lectures any time of the day or night. If kids could do this then some would take the opportunity to shave years off the time it takes to get a higher education or to gain specific skills useful in the job market. Earlier entry into the job market would increase the size of the skilled labor pool and increase the tax revenue available to fund old age entitlements.
Military hawks who want a large aggressive US military out there in the world please read my lips: Your beloved military is going to be cut down to feed the monstrous old age entitlements programs. The United States is going to cease to be a global power because it is not going to be able to afford to maintain a large navy and bases all over the world. Hawks ought to treat the aging of the US population as a national security threat and measures to accelerate medical research and education should be seen as important to American national grand strategy.
The White House has crafted a clever bit of intellectual camouflage to do what's politically convenient: create a new government benefit at no obvious cost. True, borrowing is a cost, but it's largely hidden from the public. It's not as conspicuous as a tax. What we have here is an exercise in mass deception that, in a weird way, is encouraged by a public that prefers to be deceived rather than face the difficult choices posed by Social Security or the government's budget.
If personal accounts are worth having (they're not), then they're worth paying for through taxes or cuts in other government spending. Perish the thought. The administration created a massive Medicare drug benefit (estimated 2006-15 cost by the Congressional Budget Office: $795 billion) without new taxes, and why shouldn't it do the same for personal accounts? The White House estimates the needed borrowing at $754 billion in the next decade. Democrats on the House budget committee put the first full decade of borrowing at $1.4 trillion.
On the subject of cost estimates of entitlements program changes keep in mind that the historical record has been that the low estimates are usually wrong and greatly so. Though in this case the Democrats certainly have motive to inflate the costs because most of them want to maintain the current entitlements system and gradually increase taxes to pay for it. So it is not clear that their estimate can be trusted.
Entitlements programs can have their benefits cut. It can be argued that it is necessary to cut the entitlements programs for old age in America. Looked at from this perspective the biggest problem with Bush's proposal for private accounts is that he proposes to convert legislatively reducible promises to pay future benefits into legally firmer promises to pay back debts (i.e. US Treasury bonds). So Bush's proposal limits the extent to which benefits cuts (whether by raising retirement age or means testing or changing the formula for yearly increases in payment amounts) can be used as a way to reduce the size of the unfunded liabilities for old age entitlements.
A conservative can plausibly view Bush's proposal as an attempt to ensure the continuation of high tax big government. After all, the Bush proposal would greatly increase government debts and therefore increase the pressure to raise taxes even higher in order to pay down the debt. This would have the effect of racheting up the size of government once the debts have been paid down because taxes increased to pay for the transition costs to a private system would be hard to scale back after privatization costs were paid.
We have to reform the system. There is no free lunch. Private accounts are a fine idea for other problems, such as dependency and transferability to heirs. They are irrelevant to the solvency problem. We would have to raise taxes or cut benefits -- or borrow, endlessly and ruinously.
What, we face only unattractive choices? Then why aren't our leaders presenting those choices to us? Well, democracy is only as good as the voters.
Faced with little support for his proposal Bush is putting forward the idea to increase the Social Security salary cap (currently at $90,000) to raise taxes only on upper income taxpayers.
Marshall Wittmann, a senior fellow at the Democratic Leadership Council, says Bush is testing the waters to see if there's any way to salvage his proposal. But "so far, not so good," he says. "That's why he floated the idea of raising the salary cap, to see if that would fly. He's desperate to find Republican votes as well as Democratic votes."
But, as expected, economic conservative activists such as members of Club for Growth are set against raising the salary cap. The president can't afford to lose that constituency - or worse, have it working against him. So, analysts say, by floating the salary cap increase, he has effectively killed the idea.
The best argument I can see in favor of Bush's proposal is that people would probably be more willing to work long hours to pay high and rising percentages of their incomes into a personal retirement accounts which they think of as their own than pay that same amount of money into the Social Security Trust Fund. Though it must be admitted that money earned that is put into a forced savings account is unlikely to provide as much of an incentive to work as money that is paid into a regular checking account and available for immediate spending. How much of a difference in incentive comes from forcing some portion of income into a personal savings account? I'd love to know the answer to that question.
The biggest problem we face from the Democratic Party's preferred solution of higher taxes is that peoples who pay high tax rates generally work fewer hours per year and their national economies do not grow as rapidly. To the extent that a partial privatization of Social Security would cause workers to think a larger fraction of their paycheck is for themselves this would avoid some of the decrease in incentives for work that will come as taxes are raised to pay for aging populations.
My own favored proposal for attempting to solve the fiscal problems caused by an aging population is to provide much higher government funding to develop better and cheaper medical treatments. More effective medical treatments that attack the underlying mechanisms of disease development will be cheaper than today's less effective treatments and also will increase health so much that people will be able to work longer and pay taxes longer before starting to collect old age entitlements.
Update: For those who are skeptical that medical advances can solve the Western nations' developing old age entitlements funding crisis See William Saletan's Slate essay Biology can solve the Social Security debate.
The decline of physical labor is only one reason why older Americans can work more easily. The other reason is that these people are healthier than folks their age used to be. Last year, Johnson analyzed data on 55- to 60-year-old workers who said their jobs always required physical effort. In 1992, a plurality of these workers said they were in excellent health, and 17 percent said they were in fair or poor health. By 2002, a majority were in excellent health, and less than 11 percent were in fair or poor health. Over the long term, the changes in onset of disease are amazing. Two years ago, economist Lorens Helmchen compared American men born between 1830 and 1845 to those born between 1918 and 1927 (they would be 78 to 87 years old today). On average, the latter group got arthritis, heart disease, or respiratory disease a decade later in life than the former did.
An acceleration of the rate of advance of biomedical sciences would allow us to find ways to push out the onset of disability by still more years. Then people could work longer, pay taxes longer, and start collecting retirement benefits later. This would increase tax revenue while simultaneously decreasing outflows to pay for entitlements.
Pay is rising more than twice as fast for the top fifth of wage earners as it is for all others, and the pace of gains at the high end is quickening, according to economists' analyses of government income data through September.
Meanwhile, the top 20 percent of households, ranked by income from all sources and earning $127,000 or more as of 2003, accounts for more than 40 percent of all consumer spending, according to Labor Department figures.
While the size of wage increases is accelerating at the top end it is slowing for workers earning smaller incomes.
The rate of wage increases for the higher-paid group had risen for four consecutive quarters through early this year, Stone found. Meanwhile, the pace of wage increases for the lower-paid workers slowed over the same period.
While technological trends that place a higher value on brains and international trade are both contributing to the trend of greater inequality these are not the only causes. The United States has an immigration policy that is letting in millions of people who are going to be found disproportionately in the lower income groups not just in the first generation but among their descendants as well.
Immigration is putting pressure on wages at the bottom end as immigrant total employment increases at the bottom while native born employment decreases as natives get out-competed by people willing to work for even lower salaries and under the table in low-paying and lower skilled jobs.
As intuition would suggest and as Steve Sailer has shown widening inequality is bullish for the Democratic Party. Some (though not all) business interests may benefit in the short term from cheap labor. But in the longer run the businesses will be under the whip of Robin Hood tax-and-spend Democrats elected by swelling ranks of lower class immigrants and their descendants. The American middle class will be big losers as they are forced to pay more taxes to support people who are not capable of earning higher salaries.
Open Borders libertarians and free market conservatives need to think about the long term consequences of the immigration policies that they support. The nation is going to be become less libertarian and less free market as a result of policies that they defend and promote.
The mostly party line, 52-44 vote was expected to be followed by House passage Thursday. Enactment would raise the government's borrowing limit to $8.18 trillion - $2.23 trillion higher than when Bush became president in 2001, and more than eight times the debt President Reagan faced when he took office in 1981.
Democrats complained that the bill - which will let non-defense, non-domestic security programs grow by about 2 percent next year - was too stingy. They said that clean water grants, the National Science Foundation and federal subsidies for hiring local police officers were all being cut from last year and that funds for education, biomedical research and veterans health care were inadequate.
Local governments can afford to hire their own police officers. Though I would like to see more science funding since I think the money will be paid back by the economic benefits we will get from biomedical advances that will eventually lower the cost of health care while simultaneously allowing people to work longer and therefore to pay more in taxes before becoming financial liabilities.
The federal government hit the $7.384 trillion debt limit on Oct. 14, forcing the Treasury Department to begin taking extraordinary actions to avoid breaching the limit.
But America's financial problem is far larger. The current debt and deficit are nothing compared to the unfunded old age entitlements liabilities.
WASHINGTON - (KRT) - Comptroller General David Walker's most troubling briefing paper shows the federal budget growing progressively larger until spending reaches nearly half the economy's total output in 2040.
...According to Walker, who heads the Government Accountability Office, the fiscal time bomb awaiting the United States could mean that taxes would have to be raised 250 percent, government programs would have to be sharply curtailed, and the U.S. would turn into a Third World country with enormous debt. If nothing is done, he said, the U.S. economy would be at risk - and in hock to the rest of the world. Interest on the debt alone would total nearly half of all federal spending in 2040. Liberal and conservative economists alike say the United States must address its long-term spending and deficit problems, and that would mean reducing Social Security and Medicare benefits along with raising taxes - all unpopular proposals.
One reason that I'm pessimistic about the prospects of our political system addressing the problem of unfunded old age retirement liabilities is that a lot of Democrats are in denial about the old age retirement entitlements programs. There are some exceptions among the Democrats to that denial, including some smart Democrat economists. But among the politicians and their more ideological supporters the denial is a lot more extensive. For example, The Century Foundation, a liberal democrat thinktank, has just published a report by Bernard Wasow that sees the complaints about Social Security's financial unsoundess as part of a Republican plot to cut back on the size of government. The report is entitled Reality Check: Scare Tactics: Why Social Security Is Not in Crisis. (reminding me of the Supertramp album Crisis? What Crisis?)
Opponents of Social Security have been striving to convince American workers, especially young adults, that Social Security will no longer exist by the time they retire. Phrases such as "imminent crisis" and "unmanageable costs" lace this rhetoric. To a large extent, this alarmism is voiced by those who are hostile to government and therefore favor replacing all or part of one of this nation’s most successful and essential programs with private investment accounts. Bernard Wasow demonstrates why the "crisis" in Social Security is actually quite manageable.
Wasow sees Social Security as stronger than ever. (PDF format)
Social Security is stronger today than it has been at any time in its history.The program had a major boost in 1983,when policies were implemented that had been recommended by a commission appointed by President Ronald Reagan and headed by Alan Greenspan.As result,since 1983,the Social Security trust fund reserves have risen from essentially zero to more than $1.6 trillion.
Wasow ignores that the "Trust Fund" is just money that the federal government has already spent on other things. There is no bank account with a huge balance or a pot of gold worth $1.6 trillion dollars. The federal government will have to raise taxes or cut spending or borrow money from the public to get the $1.6 trillion to pay back the Social Security program the money that it borrowed from Social Security.
Making this picture far worse is Medicare. Medicare's expenses will grow more rapidly and its unfunded liabilities are far larger. So the federal government will not only need to come up with the money to pay back Social Security.
We are in a position where the Democrats are going to demagogue Republican attempts to address the old age retirement funding crisis before the crisis becomes acute. It is just too easy to deny the scale of the problem and label more responsible politicians as cruel, heartless, mean, and selfish and get enough oldsters worked up to vote against anyone who tries to act like a grown-up. Optimistic assumptions about economic growth rates, labor market participation rates, and other factors can be made by the defenders of the status quo direction of the Titanic. Iceberg? That's just moonlight reflecting off the water.
The costs in taxes and benefits cuts are far more immediate than the benefits of addressing the problem now. The benefits flow mostly to younger people and the longer the reforms are put off the more the benefits can flow to the older people. I just do not see the political system coming to grips with the problem and taking the steps necessary to solve it. The economic-demographic perfect storm looks like it will continue to build in strength. Sure hope I'm wrong...
For more on this problem see my previous posts Retirement Of Baby Boomers To Bring Enormous Fiscal Crisis and On The Medicare And Social Security Unfunded Liabilities and Social Security And Medicare Headed For Bankruptcy Sooner and Robert J. Samuelson On The Coming Federal Spending Expansion.
USA Today has an excellent article on the approaching fiscal crisis that will happen when the baby boomers start to retire. (same article here)
A USA TODAY analysis found that the nation's hidden debt — Americans' obligation today as taxpayers — is more than five times the $9.5 trillion they owe on mortgages, car loans, credit cards and other personal debt.
This hidden debt equals $473,456 per household, dwarfing the $84,454 each household owes in personal debt.
The $53 trillion is what federal, state and local governments need immediately — stashed away, earning interest, beyond the $3 trillion in taxes collected last year — to repay debts and honor future benefits promised under Medicare, Social Security and government pensions. And like an unpaid credit card balance accumulating interest, the problem grows by more than $1 trillion every year that action to pay down the debt is delayed.
“As a nation, we may have already made promises to coming generations of retirees that we will be unable to fulfill,” Federal Reserve Chairman Alan Greenspan told the House Budget Committee last month.
The oldest baby boomers start qualifying for Social Security in 2008 and Medicare in 2011. The need to increase taxes and cut spending will grow very rapidly after that.
Comptroller General David Walker, the government's chief accountant, travels the nation warning of the impending crisis. “I am desperately trying to get people to understand the significance of this for our country, our children, our grandchildren,” Walker says. “How this is resolved could affect not only our economic security but our national security. We're heading to a future where we'll have to double federal taxes or cut federal spending by 50%.”
The sooner people are told they are going to have to delay their retirements the sooner they will be able to start trying to earn more and save more to prepare for delayed old age benefits. But today the emphasis in public discourse is still on how benefits ought to be extended even further. The irresponsibility and audacity of both the politicians and the old people who ask for increased benefits is thoroughly disgusting. Our supposedly Republican President supported the big Medicare drug benefit that now makes the unfunded liability about 15% larger than it otherwise would have been.
The article uses the term "Greatest Generation" in an extemely irritating way:
The heart of the problem is that the Greatest Generation and baby boomers have promised themselves retirement benefits so generous — and have contributed so little to financing them — that even the most prosperous economy in history cannot pay the bill.
Well, since the "Greatest Generation" have been fiscally irresponsible on such a massive scale how can they possibly be considered "Greatest"? Even most of those who served in WWII never came under enemy fire. The size ot the support units was far larger than the size of the front line units.
The old age retirement funding debacle underscores the problem with low skill and low wage immigrants (illegal or otherwise). Anyone who is not earning a very high salary is not paying enough into Social Security and Medicare to pay for their own retirement benefits. Many illegal immigrants even cost more than they pay in taxes while they are still working. So they don't even help to delay the old age funding crisis.
Politicians in Washington DC are going to continue to ignore the unfunded liabilities until an acute funding crisis is upon us. The Democrats will call the Republicans cold hearted meanies if the Republicans try to cut benefits and delay retirement. Old folks will ignore the crisis too and continue to demand more benefits.
So what to do about it? The most cost-effective policy I can see is to start working seriously on treatments to reverse aging. If people could stay younger and work decades longer then there'd be no financial crisis. See my FuturePundit Aging Reversal archive for more on the possibility that focused intense scientific research could save us from fiscal disaster while also making our lives richer, healthier, and longer.
Update: One other point: What is US foreign policy going to be like 5 and 10 years from now? Cheaper. We aren't going to have the money to fund invasions or occupations of countries. Expect to see an end to US support for Israel, Egypt, Jordan, and still other countries. The pressure to cut spending to pay for old folks benefits will be immense. Right now we are witnessing the high point of post-Cold War US power. A second Bush Administration might be able to pull off one more regime change. But I'm betting against it.
Some countries, including Australia, Ireland, Sweden, and the U.K., are expected to do considerably better than the sample average and will be able to keep their general government debt burden below 70% of GDP even by 2050. On the other hand, some continental European countries such as France, Germany, Portugal, Greece, Poland, and the Czech Republic are projected to post debt burdens well above 200% of GDP by 2050, as will New Zealand. Predictably, Japan will continue to have the highest debt burden, which, at current trends, could reach an implausible 400% of GDP as early as 2030, according to the study. Canada's general government debt could climb to 136% of GDP by 2050.
S&P's analysts do not predict that the debts of these countries will absolutely get so large. The analysts are basically arguing that unless benefits are cut and taxes are raised that this is how big the debt burdens will become.
For more on the financial problem the United States faces from an aging population start at my previous post On The Medicare And Social Security Unfunded Liabilities. Also, read through the exchange by Alex Tabarrok and Tyler Cowen on this topic by clicking back from the links at Alex's And So It Begins post (the title of which sounds suspiciously like Alex is a Babylon 5 fan who likes Kosh's famous B5 line). I basically side with Alex, Laurence Kotlikoff, and Niall Ferguson in seeing huge approaching financial problems due to population aging which threaten to take a lot of the growth potential out of industrialized economies. What remains to be seen is whether living standards will decline in absolute terms due to high taxes or whether enough technological advances will happen to provide ways to lower the costs of taking care of such large aged populations.
To place this problem in a larger context of world demographic trends a good place to start is Nicholas Eberstadt's Power and Population in Asia. Surely East Asia has some big demographic problems coming up.
I think one of the most sensible things we should do in response to this problem is to change our immigration policy to keep out people who have low productivity and low earnings potential and to concentrate on letting in immigrants who can earn so much and pay so much in taxes that they will make our financial outlook better rather than worse. Currently our immigration policy is letting in too many low skill, low income, and low taxpaying immigrants. This policy is monumentally stupid. We can not afford it with now that the burden of an aging population is going to start to weigh so heavily.
Another very sensible response would be to accelerate research in biomedical areas that show promise of producing rejuvenation therapies that could extend the working lives of significant portions of the population. If people could work longer they'd be net taxpayers for longer and would become net tax benefit receivers later. Such treatments would have a bigger impact on our long-term financial outlook than any other policy options that can be imagined.
Transparency International's latest report includes a table of the most corrupt leaders of the modern era.
Where did the money go? - The top 10
Head of government Estimates of funds allegedly embezzled GDP per capita (2001) 1. Mohamed Suharto President of Indonesia, 1967-98 US$ 15 to 35 billion US$ 695 2. Ferdinand Marcos President of the Philippines, 1972-86 US$ 5 to 10 billion US$ 912 3. Mobutu Sese Seko President of Zaire, 1965-97 US$ 5 billion US$ 99 4. Sani Abacha President of Nigeria, 1993-98 US$ 2 to 5 billion US$ 319 5. Slobodan Milosevic President of Serbia/Yugoslavia, 1989-2000 US$ 1 billion n/a 6. Jean-Claude Duvalier President of Haiti, 1971-86 US$ 300 to 800 million US$ 460 7. Alberto Fujimori President of Peru, 1990-2000 US$ 600 million US$ 2,051 8. Pavlo Lazarenko Prime Minister of Ukraine, 1996-97 US$ 114 to 200 million US$ 766 9. Arnoldo Alemán President of Nicaragua, 1997-2002 US$ 100 million US$ 490 10. Joseph Estrada President of the Philippines, 1998-2001 US$ 78 to 80 million US$ 912
Now, you might be expecting me to join in the chorus of those who cheer the overthrow of all corrupt leaders. Surely in some cases the overthrow of corrupt leaders is a net benefit to the country in question. But resist embracing the popular myth that democracy always produces the better outcome and consider just one country from that list above and ask whether it is better off now that its wicked corrupt leader has been replaced by a democratically elected leadership.
Yale law professor Amy Chua, author of World on Fire: How Exporting Free Market Democracy Breeds Ethnic Hatred and Global Instability, has pointed out that the democratically elected government of Indonesia stole $58 billion in assets from ethnic Chinese Indonesians and then proceeded to mismanage the properties it seized.
When Indonesians ousted General Suharto in 1998, the poor majority rose up against the Chinese minority and against markets. The democratic elections that abruptly followed 30 years of autocratic rule were rife with ethnic scapegoating by indigenous politicians and calls for the confiscation of Chinese wealth. Today, the Indonesian government sits on $58bn worth of nationalised assets, almost all formerly owned by Chinese tycoons. These once productive assets lie stagnant, while unemployment and poverty deepen, making Indonesia a breeding ground for extremist movements.
Suharto's corruption is perhaps less than half the size of the massive theft perpetrated by the democratically elected government that came to power following his ouster. Suharto's corruption was spread out over decades and probably had a less disruptive impact as it still allowed the Indonesian economy to grow. Consider Suharto's corruption as compared to Indonesia's total GDP of $714.2 billion in 2002. Suharto stole about 5% of one year's GDP. It is a lot of money. But it represents a very small portion of the total economic output of Indonesia during his rule.
In the mid-1980s, the government began eliminating regulatory obstacles to economic activity. The steps were aimed primarily at the external and financial sectors and were designed to stimulate employment and growth in the non-oil export sector. Annual real GDP growth averaged nearly 7% from 1987-97, and most analysts recognized Indonesia as a newly industrializing economy and emerging major market. The Asian financial crisis of 1997 altered Indonesia's political and economic landscape. Since 1997, Indonesia has had three presidents, and as of mid-2002, its economy is only just recovering to pre-1997 levels. Seven percent GDP growth is the level most economists consider necessary just to absorb new job seekers, but the Indonesian Government estimates growth in 2002 of 4% and in 2003 of less than 5%. The number of unemployed and underemployed (working less than 15 hrs/week) is currently estimated at 40 million.
Problems that developed under Suharto's rule may have been responsible for at least part of the lower growth in the post-Suharto era. Also, some of the economic problems in Indonesia can be attributed to the 1997 Asian financial crisis. But Malaysia weathered that crisis much better under its own strongman Mohamed Mahathir who has managed Malaysia in a way that has made it more like a managed partial democracy.
Chua points out that in economies which have market dominant minorities the introduction of democracy will create a situation where the vote produce politically dominant majorities which will use the power of the state against the market dominant minorities. If the market dominant minorities are far more productive and can manage assets more efficiently then government seizures of their assets will lead to lower growth rates or even stagnation and economic decline. If Chua is correct (and ParaPundit thinks she's obviously correct) then there can be circumstances where corrupt dictators are a lesser of two evils with the other evil being majority rule. Another obvious conclusion from this line of argument is that countries which currently have market dominant majorities (e.g. the United States of America) should not pursue immigration policies that demographically transform their dominant majorities into minorities. For more on this argument start at my previous post Prospect Of Democracy Breeding Ethnic Hatred In Iraq.
There are two reasons why the era of the United States as most prosperous and dominant world power is going come to an end in the first half of the 21st century. One obvious reason is the continued rapid economic growth in the far more populous China. The other reason is that the United States internally faces very unfavorable demographic trends. The two biggest unfavorable trends are in the pattern of immigration and the aging of the population. Robert E. Moffit, Ph.D., and Brian Riedl of the Heritage Foundation provide a good overview of the grim financial outlook for Social Security and Medicare.
Title I of the Medicare Prescription Drug Improvement and Modernization Act of 2003 creates a new and complex universal prescription drug entitlement. According to the latest Medicare trustees report, the Medicare hospital insurance program will be exhausted in 2019, seven years earlier than the past year’s estimate. But that is just the tip of the iceberg. The hospital insurance trust fund does not include the new drug entitlement, and that alone will add $8.1 trillion to the program’s long-term unfunded liabilities over the next 75 years.
Medicare’s massive costs will result in huge tax increases. According to Medicare Trustee Thomas R. Saving, a professor of economics at Texas A&M University and senior fellow at the National Center for Policy Analysis, the Medicare program is now projected to consume:
- 24 percent of all federal income taxes by 2019 and
- 51 percent of all federal income taxes by 2042.
The true cost of the drug entitlement expansion is unknown, and the trustees could be understating the real cost. When the new Medicare law was enacted in 2003, the Congressional Budget Office (CBO) estimated the 10-year cost at $395 billion. Less than three months later, the White House Office of Management and Budget (OMB) revealed that it estimated the 10-year cost at $534 billion.
As irresponsible and deceitful (see below) as the Bush Administration has been while getting the Medicare drug benefit bill enacted the Democrats wanted something that was even worse:
Ironically, the entire financial situation could be far worse. During the debate on the new drug entitlement, Democrats offered proposals that would have cost nearly $1 trillion in the first 10 years, far in excess of anything proposed by the Administration or the congressional leadership. Many critics of the new drug program actually want a more expensive program.
Keep this in mind as we hear Democratic Party Congressional figures criticize the Bush Administration on Medicare. There's no good side in this fight.
As recently as 2002, Medicare's projected insolvency date was 2030 and trustees said the program wouldn't need to tap its reserves until 2016. Last year, trustees advanced the dates to 2026 and 2013, respectively.
Now the bankruptcy is expected in 2019 and Medicare is already dipping into its reserves this year.
The government health care program for older and disabled Americans will have to take $7.5 billion from its reserves this year to meet its expenses, government trustees said Tuesday in their annual report.
In a briefing Tuesday on Capitol Hill, NCPA Senior Fellow and Social Security and Medicare Trustee Thomas R. Saving reported that:
- Social Security faces an unfunded liability of $10.4 trillion.
- Medicare's unfunded liability is $61.6 trillion - six times greater than Social Security's.
- The prescription drug benefit alone faces a funding gap of $16.6 trillion - more than 50 percent greater than Social Security's.
- By 2020, the combined deficits in these programs will consume more than one-fourth of all federal income taxes.
- By 2030, about the midpoint of the baby boomer retirement years, deficits in the two programs will consume more than half of all federal incomes taxes.
- By 2050, when today's college students will reach retirement age, Social Security and Medicare will require more than three- fourths of all income taxes just to pay benefits currently promised.
"The new Medicare projections underscore the extent to which short-sighted fiscal policies tend to ignore ballooning long-term costs. Arguing over whether the prescription drug benefit will cost $400 billion or $530 billion in the next 10 years diverts attention from the fact that Congress and the President have added a massive new obligation to a program that already had a serious long-term funding problem," said Bixby.
In total, Medicare and Social Security are now projected to cost nearly 15 percent of GDP by 2040. To put that number in context, if we spent 15 percent of GDP on these two programs today they would consume 95 percent of all federal revenues.
Bush is trying to get reelected by buying the support of old folks using our money.
The full report on Medicare is available on-line here as the 2004 Annual Report of the Boards of Trustees of the Hospital Insurance and Supplementary Medical Insurance Trust Funds.
Serving as a backdrop of the new report on Medicare and Social Security financial problems is the Medicare drug benefit bill cost scandal.
Richard S. Foster, the chief actuary for the Centers for Medicare and Medicaid Services, which produced the $551 billion estimate, told colleagues last June that he would be fired if he revealed numbers relating to the higher estimate to lawmakers.
He said Thomas A. Scully, then administrator of the HHS agency that oversees Medicare, repeatedly told him last spring and summer that Foster would be fired if he complied with requests from Republican and Democratic lawmakers to provide cost estimates of aspects of the prescription drug legislation. Although other HHS officials ultimately assured him his job was safe, Foster said, the administration's practice of withholding budget predictions continued until the legislation was enacted in November.
In classic MRD "Well, he would say that, wouldn't he?" (which is apparently an enhanced misquote) fashion Department of Health and Human Services Secretary Tommy G. Thompson says the buck stops at Thomas A. Scully and not higher up at his desk or in the Oval Office.
"There seems to be a cloud over the department because of this," Thompson said. He predicted the agency would be exonerated. But he also lashed out at a recently departed top assistant, blaming the episode on Thomas A. Scully, who ran the Medicare program for three years and was a key administration negotiator on changes to the program that narrowly passed Congress in November.
Joining in with the MRD style is an off-the-record White House official who has the temerity to call Richard Foster irresponsible.
A Bush administration official suggested this week that it was irresponsible for Foster to make such assertions without proof. The official added that actuaries must support their cost estimates with a clear rationale, but maintained that Foster’s claims about the White House were based on sheer speculation.
The Bushies have no shame. Why would Scully take it upon himself to suppress Foster's numbers? What would be his motive? White House and Thompson claims about this sound very implausible.
Deroy Murdock sees the deception and attempted bribery associated with the passage of the Medicare drug bill as a sign that the United States is sliding toward higher levels of official corruption.
The Tanzanianization of America proceeds apace.
This word encapsulates Washington's steady slide from transparency, the rule of law, and first-world political norms toward an equatorial standard of public integrity. Tanzania, among Earth's most corrupt nations, foreshadows the ultimate destination of America's government.
The leaders of the United States lack a sufficient amount of virtue to face and competently deal with the biggest problems facing the republic and the US is going to decline as a result.
Does a united Europe have a future as a world power? How can it? Demographics is destiny. Niall Ferguson points out that many European countries face both aging and shrinking populations.
The fundamental problem that Europe faces is senescence. By the year 2050, which is less remote than it may sound, current projections by the United Nations suggest that the median age of the current fifteen European Union countries will rise from thirty-eight to forty-nine.
Over the same period, the German population will decline--absolutely, not in relative terms--from 82 to 67 million. Falling populations will characterize the hitherto dominant societies of Western Europe. An increase in retirement ages would not suffice to alter the problems that will beset the social security systems of Western Europe. Immigration is the only way out for that continent. Europe holds an obvious source of youthful workers who aspire to nothing more than a better standard of living. All around Europe are countries whose birth rate is more than twice the European average.
I disagree with Ferguson about the inevitable need for immigation as a solution. First of all, it is not a solution. How can the importation of a hostile culture and religion solve any problems? If the Europeans could only find the will to do so they could control their borders and stop the influx of illegal aliens. While open borders advocates try to get people to accept mass immigration by arguing that it can not be stopped immigration law really could be enforced if politicians only wanted to enforce it.
Ferguson sees Europe as decadent by a few different measures.
Europeans inhabit a post-Christian society that is economically, demographically, and culturally decadent. Europe can-not resist forever the migration that must inevitably occur from the south and from the east. Indeed, they try even now to resist the migration that really ought legally to be permissible from the new member states to the old member states after ten more countries join the European Union on May 1.
Increasingly, European politics is dominated by a kind of dance of death as politicians and voters try desperately and vainly to prop up the moribund welfare states of the post-Second World War era, but above all to prop up what little remains of their traditional cultures.
This is no reason for Americans to crow about their relative good fortune. The US also has very serious demographic and cultural problems of its own. The average skilll level of Americans will probably decline as a result. Plus, the US is facing huge unfunded pension liabilities. In spite of the rancor that has come to characterize relations between the United States and Europe these two poles of Western civilization need each other and both are in trouble.
A new government report to be released to Congress next week will show that the long-term outlook for Medicare is extremely bleak and that the program is heading for insolvency earlier than previously forecast.
Last year, the trustees estimated the Medicare trust fund would go bankrupt in 2026. This year, the insolvency date will be moved up by a couple of years. The estimate has little to do with the new drug benefit, which is not financed out of the trust fund.
The annual reports on Social Security and Medicare will include new estimates showing that the total gap between the cost of promised benefits and the revenues to pay for them is close to $50 trillion, the experts said. By contrast, the Bush administration estimated last year that the long-term gap was $18 trillion over the next 75 years.
These revision in the estimates of unfunded liabilities by Social Security and Medicare trustees amounts to a catching up with another bleak estimate made by Jagadeesh Gokhale of the Cleveland Federal Reserve Bank and Kent Smetters who began working on the estimate with Gokhale when Smetters was still with the US Treasury under former Treasury Secretary Paul O'Neill. You can see more from Alex Tabarrok on the Gokhale-Smetters estimate here and here.
The only way to avoid this looming financial disaster is to develop rejuvenation therapies that will reverse aging and allow people to live and work decades longer.
Another way to reduce the size of the coming financial train wreck is to change our immigration policy in ways aimed to reduce the number of low income and therefore low taxes paid immigrants.
In 1999, 74 percent of households headed by natives had to pay at least some federal income tax, compared to only 59 percent of Mexican immigrant households. Even if one confines the analysis to legal Mexican immigrants, the gap between their tax contributions and those of natives remains large. Using the same method as before to distinguish legal and illegal Mexican immigrant households, the estimated federal income liability of households headed by legal Mexican immigrants in 1999 was $2,538. Thus, the very low tax contribution of Mexican immigrants is not simply or even mostly a function of legal status, but rather reflects their much lower incomes and larger average family size.
Immigration policy could be changed to slow the financially unfavorable demographic changes caused the influx of low skilled workers who are another part of the growing Recipient Class of people who get more in benefits from the government than they pay in taxes. It is possible to gradually deport all the low-skilled illegal immigrants and immigration eligibility could be changed to require all immigrants to have high levels of skills and intellectual ability. We could also Accelerate Education To Increase Tax Revenue, Reduce Costs.
If we stopped allowing in immigrants who have less than a college education and if we accelerated education of our own youth we'd be in a much better financial position than we will be otherwise. However, those two changes by themselves are still not sufficient to solve the problem caused by the increasing average age of the population. It would make sense to start raising retirement ages right now. But do not expect this to happen. Most people and most politicians do not want to think about this problem. It is unlikely any President or Congress will try to seriously tackle the problem before they have to. Once it is no longer possible to delay then at that point dealing with the problem will be more expensive and painful for those still alive.
Demographic trends matter. America is far weaker than it looks because demographic trends are so unfavorable. Generations of neglect of slowly developing demographic problems has allowed those problems to develop to a point where they look set to gradually rob the American economy of a considerable amount of its future potential for growth in per capita income.
The Pentagon won't seek more money from Congress this year to pay for operations in Iraq and Afghanistan. But in early 2005, shortly after Bush or a new president is sworn in, the Defense Department likely will seek additional money — as much as $50 billion — to finance the war.
The Bush Administration revenue projections are not to be trusted. Daniel Gross lays out the history of Bush Administration overestimates of expected tax revenues.
In February 2002, the administration projected that revenues for Fiscal 2003, which ran from October 2002 to September 2003, would be $2.048 trillion—5 percent higher than the by-then reduced estimate for 2002. (See Table S-1 on Page 395.) Instead, as shown in the tables accompanying today's budget message, they came in at $1.782 trillion—13 percent below the estimate.
In February 2003, the administration predicted that Fiscal '04 revenues would grow from an estimated $1.836 trillion in Fiscal 2003 to $1.922 trillion in Fiscal 2004—up 4.6 percent. (See Table S-1.) But today, the estimate for Fiscal 2004 was cut by 6.5 percent, to $1.798 trillion. Detect a pattern?
Bush's revenue projections are at least as optimistic as those for spending. The White House expects revenue gains of 13.3% in 2005, a pace not matched even in 2000, when the capital-gains tax windfall reached its zenith. Thereafter, Team Bush projects a steady slowing in revenue growth. But the projected 8.3% gain in 2006 is still well above average -- and over twice the forecasted pace of GDP growth.
They claim, of course, that they will eliminate up to 65 federal programs and cut many others. But the White House has already announced the National Endowment for the Arts has escaped the budget axe because of its importance to the nation. Frankly, if there are 65 less important programs, I’d like to see them.
Let us be realistic. When is the last time (if ever) that a single federal budget eliminated even two dozen programs let alone over five dozen? Bush has proposed many savings that will not be enacted by Congress. So his budget estimate is also worse than it looks for that reason as well. How many of the proposed funding reductions or outright cancellations will be passed by Congress?
Sixty-three other programs would receive reduced funding under the Bush proposal. In addition, 65 government programs — 38 of them education-related, including those focused on alcohol abuse, the arts, dropout prevention, school counselors and school leadership — would be terminated for a savings of $4.9 billion.
The short term budget outlook is pretty bad. The long term outlook is horrible. The trend toward an aging population makes the long term US federal budget outlook one of large increases in taxes to pay for old folks.
SOCIAL INSECURITY. Americans might worry less about the federal deficit if the well-publicized Social Security problem were close to being solved. But that one hasn't even begun to be tackled. Here's the problem in a nutshell: In 1960, there were 16 workers for every Social Security recipient. Now, that ratio is 3.3 to 1, and by 2030 it will be 2 to 1. Since current workers fund payments to current recipients, "Social Security taxes are going to have to be raised," says Edward Deak, an economics professor at Fairfield University.
While the Democrats are demogoguing about drug company profits the Republican leaders are attempting to bribe old folks to vote Republican. But the cost of bribing the old folks with drugs has just risen by a third and will likely go much higher.
One way we could improve our longer term national financial outlook would be to reform immigration policy to stop the influx of low skilled workers who are part of a growing Recipient Class of people who get more in benefits from the government than they pay in taxes.
The Republican In Name Only (a.k.a. Rino) currently serving as the President of the United States of America has just increased his ten year estimate of the new Medicare drug benefit by another $140 billion just two months after the benefit was signed into law.
Congressional Republicans say privately President Bush "lied through his teeth" over the cost of his prescription drug program and Medicare overhaul that new budget numbers show will cost one-third more than previously estimated.
The increased cost will drive the projected deficit to more than $500 billion this year, GOP aides confirmed today.
This new estimate puts the cost to be at $54 billion per year. Previous estimate had the annual cost rising to $110 blllion per year by 2030. But with the new estimate for the shorter term going up by a third it seems reasonable to expect at least that level of increase in the longer term. So the Medicare drug benefit should rise to approximately $148 billion by 2030 if not much higher as Congress responds to a series of requests for small extensions of the program as the years pass by.
The Congressional Budget Office said in November and again this week that the cost was about $400 billion for the 10-year period 2004 to 2013, the amount originally proposed by Mr. Bush. But White House officials said Thursday that the president's budget would put the cost at $530 billion to $540 billion.
At the same time, the officials said that the overall budget deficit for the current fiscal year would exceed $500 billion.
But the White House is using information from Medicare actuaries to come up with the higher estimate. My guess is that the Medicare actuaries have better data on which to base their estimates. Though wouldn't it have been a good idea to work with that better data to come up more accurate cost estimates before signing into law the biggest increase in entitlements programs in decades?
Historically the cost estimates of the various previous Medicare extensions of benefits have been off by multiples. So Shadegg's lack of surprise shows he's familiar with the historical record of too low estimates of actual Medicare costs.
"I'm not the least bit surprised," said conservative Rep. John Shadegg, R-Ariz., who voted against the Medicare bill in November and who said he had heard that the cost estimate would rise. "Historically, our estimates of what these programs will cost have been so far off as to be meaningless."
Also see my previous post on the Medicare drug benefit: Medicare Drug Benefit: A Strange Sort Of Republican Victory.
In 2002 total federal spending (except interest on the debt) was 17.8 percent of GDP. Under one CBO projection, that increases almost two-fifths, to 24.5 percent of GDP, by 2030. Another projection shows an increase of only a sixth, to 20.8 percent of GDP. The main difference between the two projections involves assumptions about higher health costs, but unfortunately both projections may be optimistic. Why? Well, the CBO offsets some of the higher spending for the elderly by assuming modest reductions in other federal spending as a share of GDP from 2002 levels.
Under both projections, defense spending declines to its lowest share of GDP since 1940. And then there's the rest of government: homeland security, national parks, health research, school aid, highways, food stamps, meat inspections -- and much more. This spending also drops as a share of GDP.
In the face of this worsening economic picture for the federal budget the Rino (Republican In Name Only) Republicans passed a Medicare drug benefit bill (see Medicare Drug Benefit: A Strange Sort Of Republican Victory) that will cost $110 billion per year by 2030 and probably even more since Congress will likely increase the size of the benefit in future years.
If the government takes a larger percentage of the GDP then of course the economy will not grow as rapidly and therefore the government will not collect an amount of money that will scale up as tax rates increase. This will further increase the burden that falls on workers because their gross incomes will be lower than would have been the case had the economy grown faster. At the same time they will face higher taxes and hence less take-home pay. But as the taxes rise the opposition to tax increases will rise as well. This will translate into increasing support for raising the minimum age for eligibility for Social Security and Medicare.
Research aimed at developing techniques to slow the rate of aging could help to deal with the economic problem of an aging population. If people could stay youthful enough to work for more years then they could spend more years as taxpayers rather than living of the taxes of those still working.
Another idea for trying to increase the ratio of workers to retirees would be to accelerate the education of the young in order to get them into the labor market sooner to start paying taxes sooner. For more on this proposal see my previous post: Accelerate Education To Increase Tax Revenue, Reduce Costs.
Another policy area that ought to be changed to make the burden of the elderly more bearable would be to reduce the influx of immigrants who are so low skilled that they earn low salaries, pay little in taxes, and use far more in government services than they pay in taxes. Reduce that burden on government and there will be more money available to pay for the elderly. But instead of moving to raise the average skill level requirement for immigrants our very lousy President George W. Bush is trying to grant work amnesties in his quest to get more Hispanic voters for his own personal reelection and to win support from rich people who want cheap domestic servants and gardeners. America has some serious problems and would benefit from wise leadership from a serious President. It is really a shame that we have a Bush instead.
Robert Samuelson sees the Medicare drug benefit as making a bad situation even worse as old age retirement entitlement costs will saddle younger generations of Americans with much higher taxes and fewer government services for themselves.
Almost everyone ignores the long-term consequences of short-term actions. Even without a drug benefit, Medicare spending is projected to more than double by 2030 -- the result of more retirees and persistent increases in health costs. The new drug benefit adds roughly another 20 percent by 2030, says economist Jeff Lemieux, who did forecasts for the National Bipartisan Commission on the Future of Medicare.
Unfortunately, this estimate too is probably low. The congressional drug plans are so confusing -- and possibly unworkable -- that they invite future expansion.
The big inter-generational shafting is something that is rarely discussed in American political debates. The pyramid scheme has run so long that many liberals have decided that it must be indefinitely sustainable and that to think otherwise and impose reductions in future benefits now is heartless and cruel. Also, the liberal press loves medical entitlements because they favor nationalized health care. Most old folks and most of those soon to be retired are more worried about what they will get than what the long term consequences will be.
Am I being unfairly harsh to liberals and old folks? I don't think so. Most of the arguments that seek to defend the current course we are on with old age entitlements have at their base the assumption that the will of the people as expressed thru elections in representative democracies can not possibly be incredibly wrong. If the elected officials grant some desire the wisdom of the people has spoken. It is acceptable in our era's political discourse to say that this or that dictator is evil and doing terrible things. It is fair game to find huge character flaws and misjudgements in individual elected officials (especially if they belong to the opposite political party). But the voters as a whole manage to avoid the amount of criticism they deserve mostly because of a widely embraced mystical belief in the wisdom of the masses. Surely the masses couldn't be incredibly wrong or incredibly unfair could they? Yes, they could and they are.
There will be no big reform of Social Security or Medicare. These programs will be managed in crisis mode with growing numbers of retirees voting to increase taxes on those who are still working each time either program starts to run out of money. There will be rises in the eligible retirement age. But those rises will come too late to prevent a long running crisis in old age retirement program funding as the pyramid scheme becomes unsustainable.
Richard Jackson, adjunct fellow at the Center for Strategic and International Studies, has written a report for Citigroup Asset Management enitled "The Global Retirement Crisis".
He painted a picture of a world within just 20 years in which European economies had not grown for a decade and Japan, the world's largest debtor, has to ask the International Monetary Fund (IMF) for a bailout -- and is turned down by, yes, China.
"Global ageing threatens to bankrupt the developed countries, destabilise the global economy, and even overturn the geopolitical order," he told a seminar in Singapore.
"Within the next five to 10 years, the demographics will shift -- and the window of opportunity will close," he wrote. "Leaders need to act before it's too late."
The costs in public pensions and health care for the growing ranks of retirees will be immense.
According to his calculations, overall spending on public pensions is on track to practically double to 16 per cent of gross domestic product in the developed world by 2050.
The burden will be felt most in Japan, Italy, Germany and France. The rise there will begin as early as 2010 and climb rapidly for two to three decades.
Throw in health benefits for the elderly and the figure rises to an even more astonishing 23.4 per cent.
“Global ageing may also usher in an era of greater instability for world financial markets”, Jackson indicated.
“As retiring baby boomers begin cashing out assets, some economists predict that the markets will experience a great depreciation.
“At the same time, government borrowings to finance retirement benefits could wreak financial havoc, widening pension deficits could shatter regional economic and monetary unions like the EMU [European Monetary Union]”.
Technological progress in biotech could change this picture as a result of the development of rejuvenation therapies that could allow people to work many more years at high levels of productivity.