Full Version: Brother, can you spare 44 trillion dollars?
This is an excerpt from a recent article in Fortune. I think the full article is for subscribers only, but this part should give you the gist of it:
So in the mid-1980s Kotlikoff pioneered a new way of accounting that could do the math, and it quickly won the approval of his profession. (Jargon-loving economists call it "generational accounting.") Kotlikoff's work revealed the sheer enormousness of the financial hole the government would face. Back then it all seemed a long way off, but today, with the first boomers reaching retirement age in five years, his message has taken on new urgency. In the intervening years he's been writing books, testifying before Congress, and doing everything he can to get the message out, but still nothing has been done to resolve the problem. In fact, the way Kotlikoff sees it, we're making matters worse.
(edited for brevity)
Using the basic principles of Kotlikoff's generational accounting, they added up everything the government expects to spend—Social Security benefits, debt-service payments, salaries, and so forth—far into the future and put it in today's dollars. Then they added up all the income the government expects to earn—taxes, income from government assets—in the future in today's dollars. To perform the calculations, Smetters and Gokhale had to make certain key assumptions about the rate of growth in government spending, taxes, medical costs, and hundreds of other things. Since they wanted to be as conservative as possible, they took their numbers from the government's own budget. In one particular case—medical costs—they chose a much more optimistic number, opting for 1% growth above GDP rather than the historical rate of 3%.
The gap between payments and income came in at $44.2 trillion.
(edited for brevity)
Just to be clear, that number is not a bill that comes due on a certain date. What it shows is the debt that would accumulate over years of deficits if we continue as we are. It is an honest measure of the inexorable pressure on the government's future ability to spend. This amounts to a massive weight on the economy.
Worse than that, it's getting bigger. Every year the government sits on its hands, that $44 trillion grows by about $1.6 trillion. Remember, Kotlikoff's generational-accounting technique estimates the present value of our future needs. It's exactly like saving for retirement—the later you start, the more you have to save each year. So if nothing is done this year, the gap will widen to nearly $46 trillion next year.
Worse still, Smetters's and Gokhale's numbers may be on the low side. Take another look at how important the assumption about medical costs is. What Smetters and Gokhale discovered was that the two biggest factors making up the $44 trillion black hole were Medicare and Social Security. If they assumed a growth rate above GDP for medical costs of 1.5% instead of the 1% they used in their calculations, that $44 trillion gap would become $65 trillion.
Over 80% of the 44 trillion is from medicare. BTW, the new medicare bill added something like 6 trillion to this number. So do you agree that this is a looming time bomb and if so, what should be done about it?
Jeff
So in the mid-1980s Kotlikoff pioneered a new way of accounting that could do the math, and it quickly won the approval of his profession. (Jargon-loving economists call it "generational accounting.") Kotlikoff's work revealed the sheer enormousness of the financial hole the government would face. Back then it all seemed a long way off, but today, with the first boomers reaching retirement age in five years, his message has taken on new urgency. In the intervening years he's been writing books, testifying before Congress, and doing everything he can to get the message out, but still nothing has been done to resolve the problem. In fact, the way Kotlikoff sees it, we're making matters worse.
(edited for brevity)
Using the basic principles of Kotlikoff's generational accounting, they added up everything the government expects to spend—Social Security benefits, debt-service payments, salaries, and so forth—far into the future and put it in today's dollars. Then they added up all the income the government expects to earn—taxes, income from government assets—in the future in today's dollars. To perform the calculations, Smetters and Gokhale had to make certain key assumptions about the rate of growth in government spending, taxes, medical costs, and hundreds of other things. Since they wanted to be as conservative as possible, they took their numbers from the government's own budget. In one particular case—medical costs—they chose a much more optimistic number, opting for 1% growth above GDP rather than the historical rate of 3%.
The gap between payments and income came in at $44.2 trillion.
(edited for brevity)
Just to be clear, that number is not a bill that comes due on a certain date. What it shows is the debt that would accumulate over years of deficits if we continue as we are. It is an honest measure of the inexorable pressure on the government's future ability to spend. This amounts to a massive weight on the economy.
Worse than that, it's getting bigger. Every year the government sits on its hands, that $44 trillion grows by about $1.6 trillion. Remember, Kotlikoff's generational-accounting technique estimates the present value of our future needs. It's exactly like saving for retirement—the later you start, the more you have to save each year. So if nothing is done this year, the gap will widen to nearly $46 trillion next year.
Worse still, Smetters's and Gokhale's numbers may be on the low side. Take another look at how important the assumption about medical costs is. What Smetters and Gokhale discovered was that the two biggest factors making up the $44 trillion black hole were Medicare and Social Security. If they assumed a growth rate above GDP for medical costs of 1.5% instead of the 1% they used in their calculations, that $44 trillion gap would become $65 trillion.
Over 80% of the 44 trillion is from medicare. BTW, the new medicare bill added something like 6 trillion to this number. So do you agree that this is a looming time bomb and if so, what should be done about it?
Jeff
Tick Tick Tick....
There is not doubt that Social Security is a Ponzi scheme. One that will eventually bilk a large portion of its investors (i.e. future retirees).
Medicare is a bit different, but the problems are the same. Fixed payments into an exploding benefit program.
The ratio of workers to retirees is shrinking every year.
I, for one, never expect to see a DIME out of Social Security OR Medicare. To expect anything at this point is just plain ignorant.
These systems need to be severely overhauled. I am against outright cancellation, since so many people did, in good faith, "invest" in these schemes. To rob a 60 year old of everything they expected after hitting retirement age doesn't seem fair.
But to expect the next generation to pay 40 or 50% of their income to support retirees is also grossly unfair.
There is not doubt that Social Security is a Ponzi scheme. One that will eventually bilk a large portion of its investors (i.e. future retirees).
Medicare is a bit different, but the problems are the same. Fixed payments into an exploding benefit program.
The ratio of workers to retirees is shrinking every year.
I, for one, never expect to see a DIME out of Social Security OR Medicare. To expect anything at this point is just plain ignorant.
These systems need to be severely overhauled. I am against outright cancellation, since so many people did, in good faith, "invest" in these schemes. To rob a 60 year old of everything they expected after hitting retirement age doesn't seem fair.
But to expect the next generation to pay 40 or 50% of their income to support retirees is also grossly unfair.
QUOTE(Amlord @ Dec 4 2003, 02:46 PM)
Tick Tick Tick....
Who could have forseen back in 1930-something that the average age of dying would increase by nearly 12 years over the next 70 years and that it would uncover a whole list of new diseases related to aging and spawn a HUGE health care market for keeping people alive long past the retirement age?
Unfortunately, our politicians also don't want to realize it. And AARP helps keep politicians focused on shifting our tax dollars from the workers to the retirees. This will be the next "class warfare"... whenever younger folks get together to create a big enough PAC to combat AARP's multimillion-person database.
QUOTE(Amlord)
]To rob a 60 year old of everything they expected after hitting retirement age doesn't seem fair.
But to expect the next generation to pay 40 or 50% of their income to support retirees is also grossly unfair.
But to expect the next generation to pay 40 or 50% of their income to support retirees is also grossly unfair.
(My emphasis)
Reading this, you seem to be on the side of letting down retired people by welshing on what they were promised, rather than expecting the next generation to pay tax levels that are routinely paid in Western Europe.
By the way, Europe faces exactly the same problem, exacerbated by the fact that our taxes are already at about 40-50% and will have to rise to 60-70% if we keep our welfare systems as they are. Demography, huh?
There doesn't seem to be a conservative/liberal split in action here, because both types of elected leaders don't want to be the one left holding the ball when this becomes a problem. The problem is, the longer we wait to fix it, the worse it becomes. If we started overhauling the system now, there is a good chance that this looming disaster could be averted. The problem is, the real reform in the US is once again the corporate level- reigning in the power of the Pharm corps, the AMA, Jacho, insurance companies etc would probably cut this problem in half or more, but I don't see it happening until we at a real crisis, something at the level of the great depression.
I noted that JL in casual conversation mentioned about knowing escape routes etc out of cities- my belief that ragnorok for the US will come in the area we are debating right now- another reason I continue my medical training, as I think it will be the #1 most needed field in the future, and the only way for a middle class person to afford health care, as this will be a benefit of employment, as it is now. I really think this area will eventually create the next great depression, especially if some new epidemic, a very costly disease of one kind of another, that attacks all strata of citizen, only the rich will be guarunteed treatment, and this will cause our next social upheaval IMO. It may sound a little apocolyptic- but you see all the poeple dying in hospitals ICU of "virus of unknown origin" and it really shakes you up!
I noted that JL in casual conversation mentioned about knowing escape routes etc out of cities- my belief that ragnorok for the US will come in the area we are debating right now- another reason I continue my medical training, as I think it will be the #1 most needed field in the future, and the only way for a middle class person to afford health care, as this will be a benefit of employment, as it is now. I really think this area will eventually create the next great depression, especially if some new epidemic, a very costly disease of one kind of another, that attacks all strata of citizen, only the rich will be guarunteed treatment, and this will cause our next social upheaval IMO. It may sound a little apocolyptic- but you see all the poeple dying in hospitals ICU of "virus of unknown origin" and it really shakes you up!
Thanks to those who posted. I have posted this on several sites, curious about what the response would be. This site came the closest to honest to goodness debate and discussion and I appreciation all your answers.
Typically, the response has been low, and there has been nothing detailed on what should be done. I am not criticizing this because we all have different priorities and interests. But it does help explain to me why politicians have been reluctant to tackle this problem.
To summarize, the elderly don’t want anything touched and do not believe there is a long term major problem so there is a powerful incentive for politicians to keep quiet. For younger folks, we just don’t want to think about it (and the few responses to these threads prove it) and for those of us who do, we have very different ideas about what should be done so any politician bringing this up risks huge backlash from the elderly with little gain from younger voters.
My sense is that the SS deficit is relatively fixable. The problem is far smaller and there are some inherently politically easier ways to address the gap. I don’t have the numbers in front of me, but a three pronged approach implemented early next decade should work:
1) Increase the wage base (the longer we wait, the more it needs to go up. By the way, I am not in favor of this soak the rich approach to solving problems, but some tax increase is the most politically expedient thing to do. It also raises enormous amounts of money.)
2) Delay retirement age by 2 to 3 years.
3) Reduce the annual increase to CPI minus ½ percent. The theory is that CPI overstates the true change in cost of living. Do not underestimate the long term savings, within 20 years the annual savings would be 75B-100B or more from doing this.
Of course, there are other ideas such as means testing social security, but I think this would be a politically doable approach. I do think SS will be around 30 or 40 years from now, but it will look somewhat different than it does today. I do not believe that any of these changes is a "welshing" on a promise. SS was never meant to cover the full cost of retirement and the fairest thing to do is spread the pain over as many people as possible so it is not unbearable against a small group.
The real problem is Medicare and here dramatic changes will be needed. We already tax the entire wage base, so item #1 above will not work. My guess is that we will have a broad tax increase. Currently the rate is 2.45% for both employees and employers. While doing another 2-3% would help, I don’t think there is anyway to close the entire gap with just an increased Medicare tax rate. For one thing, employers will rightly point out that the huge cost of employees will discourage them from hiring workers. Europe was rightly mentioned as a comparison, but I am not sure if Americans will stomach that sort of tax increase.
Perhaps some sort of surtax on upper incomes or something else considered “bad” will also be implemented. Increased means testing and cost sharing are also inevitable changes that will be made over the years. Changes to prescription drug pricing will also be made, probably in the context of nationwide health care reform. I still don’t think it will be enough however.
I think the only way to drive down costs enough is to implement some version of government managed care. Of course the culture shock of waiting in lines and rationed health care will produce a backlash and will prove very unpopular with a group of people that are not used to being told “no”, but I think they will view the alternatives as being worse.
I am not sure what will get people to start debating this issue. Perhaps some arcane like the bond market, perhaps the media will step up, or perhaps there will be some bi partisan government commission that issues a report as a starting point for discussion.
As a side note, I am planning on printing this out and putting it in my kids’ memory boxes. I feel embarrassed that our whole society has been so gutless and short sighted in dealing with this issue. I truly believe this is a coming earthquake and the temptation will be to blame the other party or some specific group of people when the reality is that we are all to blame. I guess I am also curious if any of my predictions are halfway accurate.
Jeff
Typically, the response has been low, and there has been nothing detailed on what should be done. I am not criticizing this because we all have different priorities and interests. But it does help explain to me why politicians have been reluctant to tackle this problem.
To summarize, the elderly don’t want anything touched and do not believe there is a long term major problem so there is a powerful incentive for politicians to keep quiet. For younger folks, we just don’t want to think about it (and the few responses to these threads prove it) and for those of us who do, we have very different ideas about what should be done so any politician bringing this up risks huge backlash from the elderly with little gain from younger voters.
My sense is that the SS deficit is relatively fixable. The problem is far smaller and there are some inherently politically easier ways to address the gap. I don’t have the numbers in front of me, but a three pronged approach implemented early next decade should work:
1) Increase the wage base (the longer we wait, the more it needs to go up. By the way, I am not in favor of this soak the rich approach to solving problems, but some tax increase is the most politically expedient thing to do. It also raises enormous amounts of money.)
2) Delay retirement age by 2 to 3 years.
3) Reduce the annual increase to CPI minus ½ percent. The theory is that CPI overstates the true change in cost of living. Do not underestimate the long term savings, within 20 years the annual savings would be 75B-100B or more from doing this.
Of course, there are other ideas such as means testing social security, but I think this would be a politically doable approach. I do think SS will be around 30 or 40 years from now, but it will look somewhat different than it does today. I do not believe that any of these changes is a "welshing" on a promise. SS was never meant to cover the full cost of retirement and the fairest thing to do is spread the pain over as many people as possible so it is not unbearable against a small group.
The real problem is Medicare and here dramatic changes will be needed. We already tax the entire wage base, so item #1 above will not work. My guess is that we will have a broad tax increase. Currently the rate is 2.45% for both employees and employers. While doing another 2-3% would help, I don’t think there is anyway to close the entire gap with just an increased Medicare tax rate. For one thing, employers will rightly point out that the huge cost of employees will discourage them from hiring workers. Europe was rightly mentioned as a comparison, but I am not sure if Americans will stomach that sort of tax increase.
Perhaps some sort of surtax on upper incomes or something else considered “bad” will also be implemented. Increased means testing and cost sharing are also inevitable changes that will be made over the years. Changes to prescription drug pricing will also be made, probably in the context of nationwide health care reform. I still don’t think it will be enough however.
I think the only way to drive down costs enough is to implement some version of government managed care. Of course the culture shock of waiting in lines and rationed health care will produce a backlash and will prove very unpopular with a group of people that are not used to being told “no”, but I think they will view the alternatives as being worse.
I am not sure what will get people to start debating this issue. Perhaps some arcane like the bond market, perhaps the media will step up, or perhaps there will be some bi partisan government commission that issues a report as a starting point for discussion.
As a side note, I am planning on printing this out and putting it in my kids’ memory boxes. I feel embarrassed that our whole society has been so gutless and short sighted in dealing with this issue. I truly believe this is a coming earthquake and the temptation will be to blame the other party or some specific group of people when the reality is that we are all to blame. I guess I am also curious if any of my predictions are halfway accurate.
Jeff
From the AARP website:
Q. But isn't Social Security in financial trouble anyway?
A. Not for a long time. Social Security is projected to have enough assets to pay 100% of benefits until 2042. Even then, incoming revenues will be enough to pay more than 70% of benefits for decades to come. This isn't enough— we need to strengthen the system so that it remains strong for our children and grandchildren. And doing this will involve some hard choices. After all, there is no such thing as a "free lunch."
Q. Wouldn't I end up with more money for retirement if I could put my Social Security money into an individual account?
A. Maybe, but maybe not. Personal accounts come with a host of risks. The stock market goes down as well as up—and sometimes it stays down for quite awhile. Not every individual or every fund earns a lot of money; many have returns well below the average return. Administrative and management costs, much higher for individual investment accounts than for Social Security, would also reduce your balances. What happens if you have to retire when the market is down or choose investments that perform poorly?
In addition to the market costs and risks, you also would run the risk of outliving your retirement funds or seeing them depleted over time. Social Security offers a reliable benefit that increases every year to help meet rising costs of living. It doesn't matter if you live to be 70 or 107, you can't outlive your Social Security benefits. The government–not you–bears the risk of ensuring that Social Security benefits get paid.
Q. I have heard some people talk about the idea of investing part of the Social Security trust funds in something other than Treasury bonds. Is this the same thing as individual accounts carved-out of Social Security?
A. No. By law, Social Security must invest only in government backed securities. Some have proposed the Social Security Administration hire money managers to invest part of the trust funds in other assets, such as stocks or bonds, just like private pensions plans do. The key difference with this approach compared to carve-out individual accounts is that benefits would still be guaranteed and individuals would not bear risk. There are pros and cons to this type of plan—and they should be debated fully before such a change in Social Security's investment policy is enacted. (end of quotes)
My own position on SS is somewhere between the crisis scenario and the fully funded to 2042 *** NOTICE: THIS WORD IS AGAINST THE RULES. FAILURE TO REMOVE IT WILL RESULT IN A STRIKE. *** that the AARP suggests. What has to be done is to eliminate the law requiring SS funds to be invested in T-Bills. What should be done is privatization. The only real security an individual has from the whims of a temporary majority is his own guaranteed private account. I would not mind even restrictions that would insure the private account was properly diversified. We aren't in a crisis, we do have a problem.
What we have to get past is the paranoia over investing SS funds in the stock market. Relatively equal investments, on a monthly basis, are certain. in the mid to long-run, to bring returns higher than T-Billls
Q. But isn't Social Security in financial trouble anyway?
A. Not for a long time. Social Security is projected to have enough assets to pay 100% of benefits until 2042. Even then, incoming revenues will be enough to pay more than 70% of benefits for decades to come. This isn't enough— we need to strengthen the system so that it remains strong for our children and grandchildren. And doing this will involve some hard choices. After all, there is no such thing as a "free lunch."
Q. Wouldn't I end up with more money for retirement if I could put my Social Security money into an individual account?
A. Maybe, but maybe not. Personal accounts come with a host of risks. The stock market goes down as well as up—and sometimes it stays down for quite awhile. Not every individual or every fund earns a lot of money; many have returns well below the average return. Administrative and management costs, much higher for individual investment accounts than for Social Security, would also reduce your balances. What happens if you have to retire when the market is down or choose investments that perform poorly?
In addition to the market costs and risks, you also would run the risk of outliving your retirement funds or seeing them depleted over time. Social Security offers a reliable benefit that increases every year to help meet rising costs of living. It doesn't matter if you live to be 70 or 107, you can't outlive your Social Security benefits. The government–not you–bears the risk of ensuring that Social Security benefits get paid.
Q. I have heard some people talk about the idea of investing part of the Social Security trust funds in something other than Treasury bonds. Is this the same thing as individual accounts carved-out of Social Security?
A. No. By law, Social Security must invest only in government backed securities. Some have proposed the Social Security Administration hire money managers to invest part of the trust funds in other assets, such as stocks or bonds, just like private pensions plans do. The key difference with this approach compared to carve-out individual accounts is that benefits would still be guaranteed and individuals would not bear risk. There are pros and cons to this type of plan—and they should be debated fully before such a change in Social Security's investment policy is enacted. (end of quotes)
My own position on SS is somewhere between the crisis scenario and the fully funded to 2042 *** NOTICE: THIS WORD IS AGAINST THE RULES. FAILURE TO REMOVE IT WILL RESULT IN A STRIKE. *** that the AARP suggests. What has to be done is to eliminate the law requiring SS funds to be invested in T-Bills. What should be done is privatization. The only real security an individual has from the whims of a temporary majority is his own guaranteed private account. I would not mind even restrictions that would insure the private account was properly diversified. We aren't in a crisis, we do have a problem.
What we have to get past is the paranoia over investing SS funds in the stock market. Relatively equal investments, on a monthly basis, are certain. in the mid to long-run, to bring returns higher than T-Billls
To reiterate, I believe SS is relatively fixable; it is Medicare that is the main cause of the time bomb that will require far more drastic changes to keep going.
In any case, the AARP piece is a bit disingenuous since it implies the sort of “lock box” that does not actually exist. There is no trust fund in the traditional sense of the word and higher benefit payments will be required from the government and the funding for this will need to come from borrowings.
Regarding allowing private investments, how do you see a system working? Would you be in favor of government managing the assets or would you open it up to private companies like Merrill Lynch? One of the challenges is going to be the small account balances for most participants. Invariably, there will be high fees as a percentage to begin with and any handholding will just drive that number up. At the same time, I am concerned about government managing the amounts, it would be just too tempting to use the investments as political weapons for social engineering.
Philosophically, I like private accounts a lot because for fairness issues as well as the good it could do to help people take more personal responsibility for their retirement. I just have not seen the specifics of a plan that I am comfortable with.
Jeff
In any case, the AARP piece is a bit disingenuous since it implies the sort of “lock box” that does not actually exist. There is no trust fund in the traditional sense of the word and higher benefit payments will be required from the government and the funding for this will need to come from borrowings.
Regarding allowing private investments, how do you see a system working? Would you be in favor of government managing the assets or would you open it up to private companies like Merrill Lynch? One of the challenges is going to be the small account balances for most participants. Invariably, there will be high fees as a percentage to begin with and any handholding will just drive that number up. At the same time, I am concerned about government managing the amounts, it would be just too tempting to use the investments as political weapons for social engineering.
Philosophically, I like private accounts a lot because for fairness issues as well as the good it could do to help people take more personal responsibility for their retirement. I just have not seen the specifics of a plan that I am comfortable with.
Jeff
QUOTE(Jeff P @ Dec 9 2003, 01:37 PM)
In any case, the AARP piece is a bit disingenuous since it implies the sort of “lock box” that does not actually exist. There is no trust fund in the traditional sense of the word and higher benefit payments will be required from the government and the funding for this will need to come from borrowings.
To clarify so that everyone gets the full effect of this statement: the federal government has borrowed over $3.8 trillion from Social Security funds (another $3 trillion have been borrowed on the open market to fund the government's $6.8 trillion debt).
When those funds are needed to pay Social Security recipients, the government had either better be generating a surplus (hah!) OR they are going to have to borrow MORE money on the open market -- at higher rates -- to fund Social Security. Either way, the day when that happens is getting closer than anyone political will admit.
QUOTE(Hugo @ Dec 8 2003, 06:01 PM)
From the AARP website:
Q. Wouldn't I end up with more money for retirement if I could put my Social Security money into an individual account?
A. Maybe, but maybe not. Personal accounts come with a host of risks. The stock market goes down as well as up—and sometimes it stays down for quite awhile. Not every individual or every fund earns a lot of money; many have returns well below the average return. Administrative and management costs, much higher for individual investment accounts than for Social Security, would also reduce your balances. What happens if you have to retire when the market is down or choose investments that perform poorly?
In addition to the market costs and risks, you also would run the risk of outliving your retirement funds or seeing them depleted over time. Social Security offers a reliable benefit that increases every year to help meet rising costs of living. It doesn't matter if you live to be 70 or 107, you can't outlive your Social Security benefits. The government–not you–bears the risk of ensuring that Social Security benefits get paid.
Q. Wouldn't I end up with more money for retirement if I could put my Social Security money into an individual account?
A. Maybe, but maybe not. Personal accounts come with a host of risks. The stock market goes down as well as up—and sometimes it stays down for quite awhile. Not every individual or every fund earns a lot of money; many have returns well below the average return. Administrative and management costs, much higher for individual investment accounts than for Social Security, would also reduce your balances. What happens if you have to retire when the market is down or choose investments that perform poorly?
In addition to the market costs and risks, you also would run the risk of outliving your retirement funds or seeing them depleted over time. Social Security offers a reliable benefit that increases every year to help meet rising costs of living. It doesn't matter if you live to be 70 or 107, you can't outlive your Social Security benefits. The government–not you–bears the risk of ensuring that Social Security benefits get paid.
As if the government is a seperate entity from the people it represents....
The government bears the risk....
That is too funny for words...
The great benefit of private accounts is that the money is yours...whether you die before retirement, after retirement or during retirement. You always know exactly the amount you have. You can plan around that.
If you die before retirement age, every penny you paid into SS is wasted (actually, spent by someone else...) If you live 30 years passed retirement age, sure you will collect all of your contributions back, but you had better be sure you have another source of income, because SS certainly will not pay for a comfortable retirement.
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