Reason Magazine has a new poll on public opinion on entitlement reforms. Not surprisingly, the poll finds that most people don't want to see their benefits reduced. However, Americans are more open to reform if they're assured that they'll receive back everything they've paid in. This seems to point to an opening. However, two things stand in the way, in my view: First, if you include interest at a reasonable rate (say, the Treasury yield) then there's no way that Social Security reform can give everyone back what they paid in. The system's underfunded by somewhere around $17 trillion, so reform ultimately will pay participants – present and future -- $17 trillion less in benefits than they'll pay in taxes. Second, while it would be possible to reform Medicare in this way – Medicare is slated to pay people a lot more in benefits than those folks paid in taxes – the difference is so large that the cuts required to even benefits up to taxes would be pretty big. While people are open to simply receiving back what they paid I'm not sure they'll be as favorable when things are presented in a different context (such as the percentage benefit cut required to do that). I'm all for these kinds of changes, since ultimately taxes and benefits have to match up. But as a political matter I think it will be tougher than it looks.
Tuesday, September 6, 2011
Reason: Polling on Social Security and Medicare Reform
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I recently finished a review of the A ROADMAP FOR AMERICA’S FUTURE
Version 2.0, A PLAN TO SOLVE AMERICA’S LONG-TERM ECONOMIC AND FISCAL CRISIS, Representative Paul D. Ryan, Ranking Member, Committee on the Budget January 2010.
The increase in retirement age in essence mandates a limit on the number of years of benefits to 18.5 years. In simple terms a person who works one additional year, pays taxes on this one year, delays drawing benefits by one year and in essence reduces his benefit years by one year could theoretically draw 2.5 years in additional benefits. This is a 100% tax for simply living longer.
There is just one detail that is missing or not mentioned in the plan. In year 2061, the debt that SS-OASI has run up by diverting payroll taxes to personal accounts is $60.8 Trillion. This assumes 4% unemployment as well. In present value terms this is equal to $4.1 Trillion at 5.5%. The big problem is Treasury rates are low therefore the $4.1 Trillion could easily be $7 Trillion today. Who is going to loan Social Security this amount of money? What will it cost? If it costs more than 5.5%, the cost could be staggering and the SS-OASI tax even when no benefits are being paid may simply not be enough to pay the interest on this incurred debt. This debt is sometimes referred to as the “Legacy Debt.”
In the end I find the proposal cuts the current benefit by 29% to 40%.
A ROADMAP FOR AMERICA’S FUTURE meets the criteria it set out to by funding SS-OASI without tax increases, but not without significant benefit cuts to those under age 55. It did not solve the unfairness that boomers, generations X and Y will experience that was outlined on page 44. For a program in such dire straits, it is unfathomable that the burden is placed solely on those under age 55. This entire plan simply realigns the chairs on the Titanic. Workers will still pay 10.6% SS-OASI tax and their payable benefit will be reduced just as it was before. The method in which it is done is by Progressive Indexing."
Clearly those under 55 did not create the mess, but those who are currently responsible for voting for politicians who cantered to the whims of seniors did. The Bernie Maddoff Ponzi scheme brought forth a little used statute; money that was invested in a ponzi scheme that was paid excessive gains and the principal later withdrawn can be sued to recover the share of gains beyond what principal was invested. The reasoning is that ill gotten gains even if not known, can be returned to those who lost in order to pay the ill gotten gains. I believe that SS-OASI should incorporate this logic in solving the problem. Social Security is not going broke, it is broke. I believe current beneficiaries need to take substantial cuts in benefits so that substantial cuts in the payroll tax can be made, while enacting much of what this proposal plans. It is nothing less than thievery to not require current beneficiaries to pay to help clean up the mess they created.
Too many people think they have earned their SS-OASI benefit. My reply is this;
When a person says “We Earned it!” what exactly do they mean?
To me, this phrase is a righteous euphemism for making the more truthful statement: "We were snookered by this Social Security Ponzi scheme, and now we are going to snooker the next generation!"
If Social Security benefits have been "earned" who is obligated to pay benefits to those who "earned" them? Workers? On a regressive tax basis? Why? Why perpetuate a fraud upon the innocent? Who is responsible for bearing the burden of a fraud? The person defrauded? Or an innocent or unborn child?
Scrap it and be done with it!
SS is primarily insurance. We do not set aside an amount as an investment to "earn" interest. Rather we participate in providing a safety net for our parents and grandparents with the expectation that future generations will also participate.
Taking care of our elders has always been a part of civilized society.
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