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The inevitable fiscal train wreck
Posted by: mcq on Tuesday, March 21, 2006

The San-Diego Union-Tribune has a warning in an editorial today. It's not a new warning. Heck, we, among a multitude of others, have been saying it for years. It is the elephant in the room to which no one will admit.
[T]he vast cost of Social Security, Medicare and Medicaid for the 77 million baby boomers who will begin retiring in 21 months. We are moving inexorably toward a nation in which there will be only two workers paying Social Security and Medicare taxes for every retiree getting government checks.
And when you can get anyone in government to admit to the problem, they'll never take it to the consequential level. If we keep on as we are now, the economic impact is going to be devastating:
Unless the system is fixed, this will spell fiscal ruin. Ever-higher deficits will mean more and more of the budget is devoted to interest on the debt; attempts to cut deficits with sharply higher taxes will drive investment to India's and China's waiting arms, causing revenues to plunge and making the deficits even worse.
What's unique about the Union-Tribune's editorial is it combines the consequences of proceding with the status quo in Social Security, Medicare and Medicaid with status of electoral politics today. You might recall my post on the Fred Barnes article outlining the election strategy for the Republicans. Change the subject and toss out the red meat. Well the Union-Tribune noticed it as well and feels it is that strategy which spells doom in terms of ever addressing the looming fiscal ruin of this country:
Something miraculous happened in the 2004 presidential campaign. Democratic candidate John Kerry beat Ronald Reagan's record for most votes (54.5 million in 1984) by 4.5 million votes – and lost by 3 million votes to Republican incumbent George W. Bush. What prompted such enormous GOP turnout? Bush's chief strategist, Karl Rove, credited it to an intense push to draw marginal voters to the polls by stressing hot-button social issues. That 11 states – including pivotal Ohio – had referendums on gay marriage on Nov. 2, 2004, was no coincidence.

Now it appears this strategy has become the GOP's permanent playbook. The current issue of The Weekly Standard details party Chairman Ken Mehlman's plan to ensure wedge issues dominate the national debate before November's congressional elections. Republicans will use their control of the House to keep the headlines coming “on measures such as the Bush-backed constitutional amendment banning gay marriage, a bill allowing more public expression of religion, another requiring parental consent for women under 18 to get an abortion, legislation to bar all federal courts except the Supreme Court from ruling on the constitutionality of the Pledge of Allegiance, a bill to outlaw human cloning, and another that would require doctors to consider fetal pain before performing an abortion.”

Perhaps this will help ensure short-term electoral success. Perhaps it will haunt the GOP by driving away many voters. But whatever the plan's strategic merits or demerits, substantively, it is a disaster.
The rule of politics is a corollary on the "if it ain't broke don't fix it" rule. In politics, if it works, repeat it. And repeat it until it doesn't work. I think its pretty clear that is precisely what the Republicans plan on doing. And the Democrats?
What's stunning is that Democrats have managed to stake out a position on entitlements that is even more irresponsible: They pretend there is no problem. Just last week, Sen. Charles Schumer, D-N.Y., vowed to make Social Security “one of the big issues in 2006.” How? Essentially, by demagogically defining any call for change as an attempt to end the entitlement altogether.
What's disheartening about this is the only real hope of addressing entitlements and trying to fix the problem was the Republicans. But two things have happened to them. They've gotten themselves into a political mess with Iraq and they've come to consider power more important than principle. So their focus is on doing whatever is necessary to retain power.

With a proven electoral formula and their change in focus, the strategy makes perfect sense. The future? Well, as I mentioned on the podcast, sometimes it takes a complete catastrophe to change a political culture.

The trick, however, is surviving the catastrophe.

Considering the magnatude of what we're facing in terms of fiscal reckoning, it's not at all clear we will.
 
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Comments
Easy to solve. Nationalize health care. With the government running the health care industry, we will no longer have to worry about people living as long as they do now. Old will die sonner, and not collect the the SS for 20 years.
 
Written By: John
URL: http://
No the real problem with Social Security is that it is already too late. We needed to be doing something about this in Bush Senior’s presidency. When the Cold War ended he should have turned around and restructured Social Security while the Boomers were still young enough that their retirement was far off. But he didn’t. He just taxed more under the current system, like that was going to solve anything.

Part of W’s problem with Social Security is that the boomers are planning to retire in short order. You can’t go changing their benefits 21 months before the deadline. They don’t have enough time to react appropriately with their personal finances (like saving more). Sorry, but you can’t do it. If for no other reason, they’re a huge voting block and they won’t let you.
 
Written By: Jeff the Baptist
URL: http://jeffthebaptist.blogspot.com
I’m somewhat more sanguine about the potential contributions of Social Security to the coming fiscal trainwreck. As the Social Security adminstration has noted, "according to the Trustees’ standard low-cost projection, the trust funds are not exhausted by 2076, the end of the 75-year projection period."

The Low-Cost projection has been historically very accurate — much moreso than the intermediate or high cost projections. When the year-to-year surpluses run out and the general fund stops getting goosed by an extra hundred billion or so a year, SS will represent a sharp and immediate reality check on our discretionary budget. But it’s pretty unlikely to be "broke" from an actuarial standpoint.
 
Written By: Jon Henke
URL: http://www.QandO.net
I have a hunch that it will be the meltdown of the European welfare states that panics US citizens into doing something about entitlements. Of course, that assumes our media will actually report it...
 
Written By: Billy Hollis
URL: http://
the trust funds are not exhausted by 2076
Sweet Jesus.

What trust fund? There’s no bleeping bank vault buried in the mountains piled high with dollar bills to pay for Social Security.

The SSA has a buttload of T-bills which will become due to pay for all that. How will the T-bills get paid off? Why, by taxing the current workforce.
 
Written By: Mark A. Flacy
URL: http://
You know what’s in that "lockbox"? An IOU from Uncle Sam, to Uncle Sam....and that clip od the Dems applauding inaction on Social Security reform at the SOTU will be their defining nadir
 
Written By: shark
URL: http://
What trust fund? There’s no bleeping bank vault buried in the mountains piled high with dollar bills to pay for Social Security.
That’s why I said it would be "unlikely to be "broke" from an actuarial standpoint" and why SS would "represent a sharp and immediate reality check on our discretionary budget."

We will essentially have to switch from spending the SS Surplus to paying it back. Since neither party has been particularly interested in locking up the SS surplus — or at least keeping it out of the general fund — that’s a pain of our own making. We’ve just been paying ourself today out of tomorrow tax hikes.
 
Written By: Jon Henke
URL: http://www.QandO.net
You can’t go changing their benefits 21 months before the deadline. They don’t have enough time to react appropriately with their personal finances (like saving more). Sorry, but you can’t do it. If for no other reason, they’re a huge voting block and they won’t let you.
There are some relatively small changes that can be made that, while not single-point fixes in of themselves, would go a long way towards improving the situation. Things like changing the COLA formulas to restrict growth of the program to more reasonable levels, for example, is one change that would go relatively unnoticed by most people.

Means testing would also help, which would probably be palatable to average voters, but less so to the political interests involved. Democrats seem threatened by the notion that the universality of the system would be questioned, even if it is the more well off who would be cut-off. Republicans seem reluctant because it makes what is already seen as a bad deal for upper-income contributors made even worse. In reality though, it probably makes the most sense, as it would restore the notion that social security is social insurance, rather than a universal entitlement. For the well off, it isnt as though they really need the paltry SS check anyways.
 
Written By: Rosensteel
URL: http://
Still waiting for Pogue to admit the government activity which will destroy this nation, barring drastic change, is Social Security and that it was born from the Democratic Party.

Yours, TDP, ml, msl, & pfpp
 
Written By: Tom Perkins
URL: http://
I think Bush and the Congressional Republicans have been taught a lesson about Social Security.

It’s a lesson they’ve been taught by (mostly) a media that has alternately ignored the populace, ignored or lied about details of plans and reality, and pretended that the people don’t want Social Security Reform hard enough to convince the people that they don’t.

They learned their lesson and they learned it well: Any attempts to improve the lot of Social Security will be met with obstructionism, calumny, and lies, until the would-be reformer either gives up or is painted beyond redemption as Completely Evil.

And so they focus on what they think people already have decided upon and favor them for, because they can’t get anywhere on the big things even when they DO try.

Or at least, that’s how I interpret what I’ve seen since the attempt to push SS Reform.
 
Written By: Dave
URL: http://
Since neither party has been particularly interested in locking up the SS surplus — or at least keeping it out of the general fund — that’s a pain of our own making.
Honest question: Where is this ’lock box’ kept? I’m a big proponent of not allowing the SS surplus being used to mask the size of defecits, and in theory I’m a proponent of the lock box type reforms. However I have never actually seen anyone suggest how this would actually work.

If SS does not place its surplus in T-bonds, where precisely will it put it? I can’t imagine it would be feasible to just have a trillion dollar bank account sitting out there labeled "Social Security".
Still waiting for Pogue to admit the government activity which will destroy this nation, barring drastic change, is Social Security and that it was born from the Democratic Party.
Well, to be fair, Medicare is more likely to bankrupt the government than Social Security is. If you look at the projected shortfalls, they absolutely dwarf those of social security. Of course, noone really has any clue how to actually fix the problem it seems.

I suppose your point still stands, insofar as Medicare is also a Democrat created program. Then again, with the prescription drug expansion Republicans can hardly claim innocence.
 
Written By: Rosensteel
URL: http://
Rosensteel there can be NO LOCKBOX... IF the money is in D.C. it will be spent or used to mask the budget deficit or BOTH. Congress can NOT lock money away from itself, 1st under the theory that one Congress can not bind ANOTHER Congress and 2ndly any lock box simply is the codification of law in the U.S.C. and the next Congress would simply amend the U.S.C. and end the lock box. The ONLY way Congress CAN lock money away from itself, and even then it’s not truly safe, if BY GIVING THE MONEY TO YOU, in the form of a private account. Then the money is YOURS, but as long as it sits in an government accounting system it will ALWAYS be subject to Government pilferage.
 
Written By: Joe
URL: http://
Rosensteel, the Medicare crisis is both more amenable to a technological solution—better medical technology—and still by far more a Democratic program than a Republican one, Pres. Bush’s additions notwithstanding.

And again there, the Democrat’s chief complaint about Bush’s changes to Medicare were how stingy he was. It is the Democratic Party/FDR/Johnson originated approach to entitlements which drives even Republican administrations, it is that approach the American public largely supports, and it is that approach which will bury this nation.

I challenge Pogue to acknowledge this nation faces death by Democrats—and that generally by 2045 or so.

Yours, TDP, ml, msl, & pfpp
 
Written By: Tom Perkins
URL: http://
Rosensteel,

I agree that there are changes which can and will be made. They have to be. But serious systematic reform of Social Security is going to have to wait at least a generation.
 
Written By: Jeff the Baptist
URL: http://jeffthebaptist.blogspot.com
Jeff we probably can’t WAIT a generation... If you mean after the Baby Boomers use up the SS Trust Fund and require a tax rate of 70% to pay for their benefits, THEN there’ll be change, you’re right... but I think the patient will be dead by then, though dead is a change too.
 
Written By: Joe
URL: http://
I don’t think that Social Security will ever be fixed; neither will Medicare. There are so many reasons not to fix it while the fix is relatively small, and so many reasons to fight even harder as the fix gets harder, and no politician gets rewarded for trying (see George Bush and the Democrat reaction). So the problem will build, with each Congress and each President pushing the problem off on the next while making political points off of it. Until the crisis...

At some point, there will come a day when the payers outnumber the payees and realize that no matter what they pay, they won’t get it back because the system will be broke. If we don’t have a tax revolt at that point, as people hide their money to care for their own parents and themselves, we will likely get to the point of defaulting on a debt for the first time in our history. Either way, the situation is untenable, and the only rational reforms (guaranteed investment rather than guaranteed payout) are either too unpopular, or too expensive to switch over to.

No good can come of this one.
 
Written By: Jeff Medcalf
URL: http://www.caerdroia.org/blog
I think yhou all do not realize the real way this crisis will be handled.
1) tinker around the edges - helps a little
2) restructure COLA’s so they dont go up as much
3) inflate the economy. all debtors are helped while all working people are harmed.
Inflation is how they will deal with it. To those of you too young to remember it inflation is quite the wild animal, it bites everyone.
 
Written By: kyle N
URL: http://impudent.blognation.us/blog
there will come a day when the payers outnumber the payees
And presto-chango a new set of laws will be passed which will pretty much gut Medicare/Social Security. Tough noogies if you’re dependent on either one of the two when that happens, but them’s the breaks.

I’m almost 47 and I’m not planning on either one of those two to be around when I’m old and feeble. Assuming that I live long enough to be old or feeble.
 
Written By: Mark A. Flacy
URL: http://
Rosensteel there can be NO LOCKBOX... IF the money is in D.C. it will be spent or used to mask the budget deficit or BOTH. Congress can NOT lock money away from itself, 1st under the theory that one Congress can not bind ANOTHER Congress and 2ndly any lock box simply is the codification of law in the U.S.C. and the next Congress would simply amend the U.S.C. and end the lock box.
I’m not talking about politics. I’m talking about actual policy. By your logic there is no such thing as an ’entitlement’ because congress can simply legislate it away, but here we are.

What I am referring to is how such a system, in theory, would actually be constructed. Everybody loves talking about their personal political feelings. Lockboxes, private accounts, etcetera. When the actual issue of reality and actually creating and implementing the system come into question, noone is anywhere to be found.

It may be nice to advocate a system based on your particular political viewpoint, but ultimately reality cares not for such things. Liberals thought that Social Security and Medicare were wonderful ideas too. We can clearly see what happens, though, when reality is ignored in favor of political feelings.

If you can come up with a system for implementing personal accounts that dosent involve hastening the financial collapse of social security, and dosent require borrowing trillions of dollars, I’ll be listening. Unfortunately, some of us have reality to worry about.

Anybody can offer their opinions regarding the ideal state of things. Coming up with a method of putting that ideal into action is often the tricky part.

Back to my original question: Is there, political issues notwithstanding, actually any way to implement a sort of ’lock box’ type system? I am not aware of any government mechanism by which to save billions, or trillions, of dollars without investing in debt instruments.
There are so many reasons not to fix it while the fix is relatively small, and so many reasons to fight even harder as the fix gets harder, and no politician gets rewarded for trying (see George Bush and the Democrat reaction).
While Bush certainly gets an A for effort for raising the issue of social security reform, he fell flat on his face with regard to substance. From a balance sheet perspective, allowing millions of younger workers to divert their contributions away from SS is effectively identical to adding millions of young people to the SS rolls along with an aging population.

There is of course the "its their money!" morality argument, unfortunately it means little when trillions of debt is being accumulated in order to allow people to keep their own money. It may be our money, but unfortunately it is also our debt to repay as well.

Borrowing to finance personal accounts is about as stupid as taking out a second mortgage to invest it in the stock market.
 
Written By: Rosensteel
URL: http://
Still waiting for Pogue to admit the government activity which will destroy this nation, barring drastic change, is Social Security and that it was born from the Democratic Party.
I challenge Pogue to acknowledge this nation faces death by Democrats—and that generally by 2045 or so.
Heh. Sorry to disappoint you Tom, but I lack the soothsayer skills that you have.
(in a fightin’ mood again, are we Tom?)

You once again cast assertions upon me that do not exist. I have never claimed that the Dem’s haven’t brought about policy, economically, culturally, or socially, that is detrimental to liberty. To do so would be idiotic.
Where we differ, is that you believe the policies of the Democrats, past and present, are far worse than anything the Republicans have done. I strongly disagree. I believe that there is plenty of blame to go round. It seems that your radar is tuned solely to what the Dem’s have done. Mine sees blips all over the freakin’ place.
There are so many reasons not to fix it while the fix is relatively small, and so many reasons to fight even harder as the fix gets harder, and no politician gets rewarded for trying (see George Bush and the Democrat reaction).
Truer words are rarely stated, Jeff. Except that I would also add … (See George Bush and the Democrat reaction … umm, and the Republican reaction as well.)
The proverbial third rail, and what not.

Cheers.
 
Written By: PogueMahone
URL: http://
Borrowing to finance personal accounts is about as stupid as taking out a second mortgage to invest it in the stock market.
Where do you propose to get the money if you don’t intend to borrow it? Personal accounts or no personal accounts the cost is about the same.

Borrowing is the only way forward.
 
Written By: unaha-closp
URL: http://warisforwinning.blogspot.com/
Where do you propose to get the money if you don’t intend to borrow it? Personal accounts or no personal accounts the cost is about the same.
That is certainly not true. Without personal accounts, social security begins to run modest deficits around the middle of the next decade. With personal accounts, at least the way that the administration has proposed they be structured, the deficits are immediate and their size large.

The personal accounts scheme, at least as it has been proposed by this administration, essentially involves adding millions of younger taxpayers onto the roles of social security. Obviously, that is only going to ADD cost to an already overburdened system, not reduce it. Furthermore, what is the value to these younger taxpayers of having more money in a personal savings account when there is an equally large and growing liability in their name in terms of the national debt?

Besides, the entire argument is a non sequitur. Allowing younger taxpayers to direct some of their social security payments to personal accounts is certainly not the only way to finance those accounts. They can be financed the way that they already by millions of people, by tax-free contributions out of workers incomes. Any young worker who is smart, and knows about the challenges that social security is facing, should be socking away money into their own retirement savings regardless of whether some politicians in Washington allow them to divert their social security contributions or not.

As a younger person myself (I’m 21) let me speak for myself: Don’t pretend to be doing me any sort of favors by ’giving’ me my own money while racking up the national credit card in my name. okay? My generation will already be doubly burdened by the fact that we will likely receive little from social security and will also be called upon to pay for the debt of earlier generations. We don’t need some idiots in Washington making it worse than it already is. Either come up with some real solutions that don’t involve stealing from one pocket in order to put a dime in the other pocket, or don’t bother at all.
 
Written By: Rosensteel
URL: http://

 
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