Cognitive Dissonance on McCain in Today’s Washington Post
July 12th, 2008 . by economistmomNo deep philosophical discussion; just wanted to point out that in my print copy of the Washington Post, I’m looking at this column by Amity Shlaes in defense of Phil Gramm’s “mental recession” comment, which segues into this praise for Senator McCain’s fiscal responsibility (my emphasis added):
Social Security and Medicare also need rewriting — and Gramm put forth one of the better proposals on Social Security in the 1990s.
In short, to fix it all, we need a frank conversation about the economy. McCain, in fact, inaugurated one back in 2006 when he gave a speech that was downright Gramm-like at the Economic Club of New York.
In that speech, McCain said that on entitlements, hard choices were necessary. He concluded: “Any politician who tells you otherwise, Democrat or Republican, is lying.”
This was McCain at his best. Many voters knew it, too.
The way to strengthen the economy right now is to elect leaders who dare to talk about problems in precise and even technical terms — and then act on them. McCain has that capacity, but only if he can transcend Campaign Econ.
And just to the left, on the same page of my print edition, this cartoon by Boston Globe cartoonist Dan Wasserman appears:
mom
i am assuming you agree with me that neither Schales nor McCain nor Gramm were talking in “technical” terms.
I’d be glad to take them on on technical terms. The problem would be to get them to stick to the technical terms and not sneak in wild eyed arm waving and doomspeak.
“technically” the cost of paying off the Trust Fund will amount to one dollar per week per worker starting in 2017
and adding a dollar per week each year until about 2037.
during this time the workers wages will be going up ten dollars per week per worker.
though it would be better to phase it in with the paying down of the Trust Fund, that 20 dollar per week increase in the tax…on a wage that is 300 dollars per week more than it is today… will need to be shifted from the income tax when the Trust Fund debt is paid down, to the payroll tax in order to pay for the increased number of retired workers, and that will happen because those same workers paying the tax will be living longer in retirement.
this can all be deduced quite simply from the Trustees Report if you are not commited to multiplyin 20 dollars per week times 200 million workers times 75 years and calling it a “15 Trillion Dollar Unfunded Deficit!”
it’s only unfunded because we haven’t raised the tax yet. and we haven’t raised the tax yet because it isn’t needed yet… unless for some reason we want to increase the size of the Slush Fund, as, sadly, Obama seems to want to do.
Medicare is a similar story… only about three times as expensive, unless we find a way to lower medical care costs.
if we don’t, it won’t matter whether we pay for it through Medicare or private insurance… but the good news is that by the time Medicare costs are 11% of payroll, payroll will be 232% of what it is today. so you should have some money left over for other things besides prolonging your life.
percents confuse people.. try this… average income today is 700 dollars per week or about 37,000 dollars per year (i may be a year or two out of date). In 2085, incomes will have gone up 232% (at 1.1% per year), so they will be 1600 dollars per week or about 85 thousand a year… this is real dollars. your medicare bill is expected to be 11% of that, or about 9 thousand a year, or about180 dollars a month. Remember your boss pays half of that.
Also remember this puts aside 370 thousand dollars for your medical care in old age by the time you are 65. Hopefully you won’t need that, but the Trustees are saying that “on average” you will. Meaning that if you are unlucky you could need a lot more than that.
And remember that after you have paid for your Social Security and your Medicare (at a whopping total of 30% of payroll… of which only 15% actually comes out of that payroll (if you think the other half is “really” your money, then you have to add that other half to your payroll before you subtract it … it comes to the same thing…. you get to keep 85% of that 85 Thousand a year for all the other things you like to buy while you are young, including paying your share for those golden toilet seats for the Pentagon.. or 72,000 a year. just about twice what you have today.
folks with more than average income would have to adjust their numbers accordingly.
is that technical enough for Amity?
or do we need to bring in Biggs to explain to us how unfair this all is to those people who are paying more than their grannies did for their social security. you remeber granny, the old lady who earned maybe ten thousand a year (real dollars) scrubbing floors to pay for your mom’s food and the taxes that paid for your school.
Coberly,
For these future workers paying the higher taxes out of a much larger income, how does inflation of living expenses during this time period play into this equation? Also, what if these workers also need to save and invest for additional future needs like higher education for their kids, an enjoyable retirement, or other national priorities that might require additional taxes like refurbishing bridges and roads?
I’m not sure if you are saying we can grow our economy fast enough to deal with this situation or something else. To my knowledge, there is near unanimous concensus that economic growth alone (although helpful) cannot close our projected funding gap.
Gillelan
these are all real dollars (constant dollars), inflation is factored out.
all those other things can come out of their new real after tax (payroll tax) income which will be twice as much as it is today.
the growth rate assumed by the Trustees to get these numbers is 1.7% real growth per year.
you will note that the growth did not close the funding gap without the small tax increase.
what i am pointing out is that it is the idiot idea of holding taxes constant as a percent of income, when income is rising and the conditions of life are changing — longer old age and more expensive medical care –.
it’s as if your car insurance went up because the cost of accidents and the number of accidents has gone up. but you said, no. i can only pay x percent of my income for car insurance so i won’t pay the increase so i will drive without insurance.
doesn’t make sense.
especially if it turns out the higher premium amounts to ten bucks a month and your income has meanwhile gone up a hundred bucks a month.
Just for accuracy sake. The $75 year unfunded liability for Social Security is $4.3 trillion. Infinite future horizion gives you $13.6 trillion. Both figures by the way down by $400 billion from the 2007 Report.
Not that $4.3 trillion is an insignificant number, but once you divide it by 75 and then discount each of those resulting numbers for inflation you can see why it is not as big a deal as they try to claim.
Which by the way is why I am convinced that the introduction of Infinite Future numbers with the 2003 Report was just a shoddy device to let them tag on $10 trillion to a price tag that was not in context particularly that large. I have seen no reasoned policy argument why it make sense to project out Medical expenses even 35 years in advance, still less 75 or God help us Infinite Future. I understand that SSA is pretty much mandated to project that 75 year number, but I find using it to propel current action kind of deceptive.
Bruce
the 4.3 Trillion is real inflation adjusted dollars. It is still not much when you divide by 75 years and 200 million taxpayers.
And when you remember that it is money that either does not have to be paid (the Rosser effect), or money that the “tax” payers get back in the form of not-reduced benefits over a longer life expectancy in retirement, it turns out be exactly nothing.
the “infinite horizon” not only gives you a scarier number, it gives you a meaningless number. not only do 99.9% of the people have no idea what “present value” means, the assumptions used to calculate it our just that, assumptions. To get a meaningful PV you need to have the person doing the calculation (buying the calculation) agree to the assumptions about interest rate, inflation and risks. The economists cannot guarantee the first two to any meaningful degree of accuracy, and “risks” over 75 years, let alone the infinite horizon, is a completely meaningless concept.
a ten year horizon is probably meaningful enough to justify small changes in the tax rate.. on the order of a tenth of a percent per year. and as long as people understand that they are paying for their own retirement benefits, there would not be any objection to such changes, even if they accumulated over time.
After some time of accumulations, it might be desirable to revisit the benefit schedule… but there is no need to anticipate such a change.
It’s like reacting to changes in food prices. Almost exactly… since what you are paying for is your food after you retire… you might not be glad to see a rising price for food, but you would be stupid to anticipate that food prices would go up, say fifty percent, over fifty years, and decide to stop buying food.
Coberly,
I’ve reflected a bit more on your proposal in Comment 1–the idea that some degree of higher tax rates incrementally going into the future on real income growth would be a relatively painless way to fund the social security gap (not sure if your approach would also address the medicare/medicaid gap—suppose it could with greater tax rate increases.)
Would this have the effect of keeping living standards in the future at or closer to where it is today for future generations (until the gap is resolved) instead of significantly increasing the way it has over the past 100 years?
With steadily higher tax rates on real income growth going into the future, folks can still afford to pay today’s living expenses (including the inflation of those expenses into the future) but not have much if any money left over for net new products and services that result in higher standards of living. It isn’t clear to me how much this approach would affect future increases in living standards but it looks like this would be an effect on today’s younger generations—but at least we’ve kept their social security, Medicare, and Medicaid in tact. In future hindsight, I wonder what their preference would be—as a generational cohort, will they be happy that we traded a large share of their future increase in standard of living for the preservation of these programs at the levels they are at today indexed to wages? (I realize that only social security is indexed as such.)
Another observation about the current structure of these programs, specifically the pay-as-you-go feature. Assuming no change in population trends (i.e., no new influx of young people to pay benefits to older people in the future) and we had a policy of always raising tax rates to pay for promised benefits then every time we have a demographic bulge or life expectancy increase (right now steadily increasing with no end in sight) social security would ratchet up (because current payors are promised commensurate future benefits.)