Michael Kinsley on Entitlement Myths

Michael Kinsley argues in Time Magazine that we should reconsider our views of the "entitlement crisis." While always interesting, I'm not sure Kinsley's arguments really hold up to scrutiny – but see my comments below and judge for yourself.

The Peter G. Peterson foundation, a new and welcome arrival on the national scold scene, announced in a December press release that the U.S. is bankrupt. Not the government but the whole country and everyone in it. As of Sept. 30, the PGP folks reported (using figures from the Federal Reserve), the value of everybody's assets was $56.5 trillion. The value of our liabilities (public and private) was $56.4 trillion. Given what has happened to real estate and the stock market since Sept. 30, it seems certain that we now owe more than we are worth.

It seems certain, that is, if the PGP folks are correct. Now, I'm all for doom 'n' gloom--they've done very well for me in the journalism business over the years--but this struck me as too bad to be true. And on closer examination, it is. About $40 trillion of PGP's $56 trillion in liabilities is its calculation of future Medicare and Social Security benefits ($34 trillion of it is Medicare alone), which Congress has promised to future senior citizens but has made no provision to pay for. This is the entitlements nightmare we hear so much about. Trouble is, the PGP folks seem to have forgotten about this $40 trillion of dubious promises when totting up the assets of people who will (or possibly won't) get the benefits. If these entitlement promises are real government debts, they are also real assets for the people who will enjoy them. If (as we gloomsters suspect) they aren't real for the future recipients, then they aren't real for the government either.

American families may have borrowed irresponsibly, and may have elected politicians who borrow even more irresponsibly on their behalf, but the typical American family is not bankrupt. The average couple age 65-74 has accumulated a net worth (not counting entitlement promises as either assets or liabilities) of $691,000, according to the Federal Reserve in 2004. Shortly thereafter, of course, they start to die in large numbers. And what happens to the $691,000? Generally it goes to the children and grandchildren.

It's often said, on the subject of underfunded entitlements, that we are "robbing future generations." This is not completely true. You can't literally steal, say, a vacation home from the year 2050 and plant it next to a beautiful lake in 2009. Nor can you beg, borrow or steal money in 2050 and spend it in 2009. But you can reduce your savings rate in 2009, spend the money instead and leave a less prosperous country in 2050. And if you borrow money from foreigners in 2009, as we have been doing more and more, they can indeed come knocking in 2050 and demand their money back. With interest.

Meanwhile, though, families--middle-class families, not just rich ones--are passing hundreds of thousands of dollars on to the next generation in their wills. Fair enough, if they worked for the money and saved it. In fact, wonderful. But much of this generosity, it turns out, is made possible by Social Security and Medicare. How much? Hard to say. What is easier to say with certainty is that most people today and in the future will get more back from these entitlement programs in retirement than they put in during their working lives.

Medicare and Social Security are supposed to be insurance against the perils of old age: poverty and illness. They are not supposed to be gifts or subsidies to the children of retirees. Yet that is what, in large part, they have become. The reason for insurance is that you can't predict the future. If an elderly woman has diabetes and her husband needs heart surgery, then dies anyway, leaving her impoverished, Medicare and Social Security should be there for her. And if it all costs far more than she ever put into the system, that's O.K. too.

But if our elderly woman dies with $691,000 in the bank, it's evident that she didn't need the government money to pay for her health care or to avoid plunging into poverty. She wasn't lying or cheating--she might have been legitimately worried--but her worries turned out to be unnecessary. And society, having kept its promise to her, should get at least part of that money back. Oh, yes, designing a system to achieve this would be a nightmare--maybe impossible. The incentive for old folks to squander their savings would be enormous. Maybe it can't work. But the point is worth keeping in mind as we enter President Obama's "new age" of "hard choices."

And the children? Let them rob their own children, just as their parents did.

Some thoughts: First, while Kinsley's point regarding the Peterson Foundation's account seems correct – a debt to someone has to be an asset to someone else – transferring massive amounts of resources through Social Security and Medicare entails significant efficiency losses. Social Security contributions are regarded as taxes by workers in ways that contributions to personal saving are not, and therefore reduce incentives to work. So while the accounting may net out, there are economic costs in getting from here to there.

Second, Kinsley may exaggerate the size of inheritances that will be passed on to Baby Boomers and younger cohorts. This paper by Kotlikoff and Gokhale concludes that the bequest boom is likely overstated.

Third, even if households continue to pass on significant bequests to their heirs, this won't be – as Kinsley claims – due to the generosity of Social Security. For early generations of beneficiaries, Social Security provided benefits well in excess of contributions, which – assuming seniors didn't just consume this extra income – allowed for larger inheritances. But as this memo from the SSA actuaries shows, Social Security can afford to pay a typical couple retiring in 2008 benefits and interest equal to only around 75 percent of the taxes the couple paid in over their lifetime. Social Security imposes a net tax on current and future retirees and, if anything, reduces the amount of wealth they'll have to leave to their kids.