10 Truths About Entitlements

The U.S. Chamber of Commerce has launched a new initiative on entitlement reform, highlighting the growing costs of entitlement programs and pushing the need to fix Social Security and Medicare promptly.

Their whole page is worth checking out, especially for more details on these 10 truths about entitlements:

Truth #1: Entitlement programs are huge, expensive, and reach into every corner of American life. 

Truth #2: Entitlement programs are not self-funding and are a main driver of deficits.

Truth #3: Entitlement costs are growing at an alarming rate.

Truth #4: Longer life expectancies, changing demographics, and soaring costs explain why entitlements as we know them today are unsustainable.

Truth #5: Not a single major entitlement program is projected to be financially solvent 20 years from now.

Truth #6: The cost to make these programs financially solvent for the next 75 years is almost $40 trillion.

Truth #7: Mandatory spending—entitlement programs and interest on the debt—are already squeezing out important investments in other essential programs.

Truth #8: We have nothing to fear from carefully crafted, phased-in adjustments to our entitlement programs.

Truth #9: We can reform entitlements without baseline cuts and without breaking our commitment to the nation’s seniors, disabled, and poor.

Truth #10: The biggest threat imaginable to Medicare or Social Security as we know them will be if we do nothing at all.

 

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Shiller: Pay COLAs that are larger than inflation

Economist Robert Shiller writes in the New York Times that Cost of Living Adjustments, rather than being indexed to the ‘chained CPI’, should instead rise at the faster rate of GDP growth. I make a similar argument in my new National Affairs article, albeit for somewhat different reasons.

Well worth a look.

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A New Vision for Social Security

I have a long article in the new issue of National Affairs that pretty much sums up the work I’ve done on Social Security over the past several years. The article (ungated!) outlines both what I would do to reform the program and, more importantly, why.

One of the themes of the piece is that reformers focus excessively on the details of the tax and benefit formulas without thinking enough about the big picture goals of reform: why we have a Social Security program in the first place and how we want it to accomplish its goals. I don’t expect anyone to adopt these ideas en masse, but that’s not the point. The goal is to encourage people to think about the program and reform in a slightly different way, to focus more on the ends of reform and less on then means.

Some of the proposals are pretty far out, but that’s the luxury of working at a think tank. Enjoy!

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Why the Government Needs to Budget over the Infinite Horizon

From the NCPA’s daily policy digest.

 

Why the Government Needs to Budget over the Infinite Horizon

June 19, 2013

How far into the future should governments budget? Economic theory has a clear and rigid answer. But it's not one economists like to give, because it's not one people easily comprehend and it's not one that politicians, whose attention most economists covet, like to hear. The answer is that governments need to budget out to infinity, says Laurence Kotlikoff, a senior fellow with the National Center for Policy Analysis and economist at Boston University.

Infinity is a very long time. But economic theory also tells us that in budgeting out to infinity, we should place less weight on distant government expenditures and tax receipts. Specifically, we should include in our budgeting not actual future expenditures and taxes, but their present values.

• Present value stands for the value right now, in the present. And the value right now of getting $1 in the future is smaller the longer you have to wait for it.
• Take the just-released 2013 Trustees Report on Social Security's long-run finances. They claim an infinite horizon fiscal gap of $23.1 trillion separating the system's projected costs and taxes net of its trust fund.
• This massive shortfall, which grew a whopping 8 percent last year, is 50 percent larger than U.S. gross domestic product and almost twice the federal debt held by the public.
• Social Security began reporting its infinite horizon fiscal gap 2003. Back then it was $10.5 trillion. On an inflation-adjusted basis, the gap's risen 74 percent leaving the system in far worse shape than when the 1983 Greenspan Commission "fixed" it.

The Greenspan Commission, like the current Trustees, looked out only 75 years. In so doing, it ignored not just the 30 years between 2057 and 2087 now in the current 75-year window, but all the years after 2087, when today's and tomorrow's children will be alive.

• For the U.S. government as a whole, the infinite horizon fiscal gap is a whopping $222 trillion.
• Its elimination requires not a 32 percent immediate and permanent tax hike in Social Security FICA taxes or a 22 percent immediate and permanent cut in Social Security benefits, but either a 64 percent immediate and permanent tax hike in all federal taxes or a 40 percent immediate and permanent cut in all expenditures apart from servicing official debt.

So, Social Security's enormous fiscal problem is just a molehill in front of a mountain of horrendous obligations our politicians and their "trustees" are ignoring with their careful choice of words and their finite budgeting horizons.

Source: Laurence Kotlikoff, "Why the Government Needs to Budget over the Infinite Horizon," Yahoo! Finance, June 13, 2013.

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New paper: “The Impact of Interest Rates on the National Retirement Risk Index”

The Center for Retirement Research at Boston College has released “The Impact of Interest Rates on the National Retirement Risk Index,” by Alicia H. Munnell, Anthony Webb, and Rebecca Cannon Fraenkel.

The brief’s key findings are:

• The National Retirement Risk Index shows that changes in interest rates have only a modest effect on retirement preparedness for three reasons:
  • Most households have relatively little financial wealth to annuitize.
  • The effect on annuity income is muted, because the principal portion of the annuity payout is unaffected by interest rates.
  • Changes in the annuity income from a reverse mortgage are partly offset by changes in the amount that can be borrowed.

This brief is available here. Read more!

Is the Social Security shortfall overstated?

PBS’s Paul Solmon talks to Boston College economists Alicia Munell. With video! Check it out here.

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New papers from the Social Science Research Network

"The Relationship between Job Characteristics and Retirement Savings in Defined Contribution Plans During the 2007-2009 Recession"
Monthly Labor Review, 136(5), pp.3-16, 2013

CHRISTOPHER R. TAMBORINI, U.S. Social Security Administration
Email: Chris.Tamborini@ssa.gov
PATRICK PURCELL, Government of the United States of America - Social Security Administration
Email: patrick.purcell@ssa.gov
HOWARD IAMS, U.S. Social Security Administration
Email: Howard.m.iams@ssa.gov

Pension trends in the United States, marked by the movement toward defined contribution (DC) plans, raise questions about the individual characteristics that influence retirement saving behavior. This study examines how DC participants’ industry and employer characteristics relate to the prevalence of reduced retirement account contributions in a time of severe recession (2007-2009). Data come from a restricted-use file that matches workers in the 2008 Survey of Income and Program Participation (SIPP) to their W-2 tax records received by the Social Security Administration. Multivariate probit models indicate several job-related factors, most notably a decline in real earnings, were linked to declines in participants’ contributions to defined contribution retirement plans during the recession of 2007–2009; employer size, occupation, and industry-specific employment losses, among other characteristics, were also associated with changes in retirement plan contributions.

"Sharing High Growth across Generations: Pensions and Demographic Transition in China"
UBS Center Working Paper Series, Working Paper No. 1, November 2012

ZHENG MICHAEL SONG, Fudan University - School of Economics
Email: zsong@fudan.edu.cn
KJETIL STORESLETTEN, Stockholm University - Institute for International Economic Studies (IIES), University of Oslo - Department of Economics, Centre for Economic Policy Research (CEPR)
Email: KJETIL@IIES.SU.SE
YIKAI WANG, University of Zurich
Email: yikai.wang@iew.uzh.ch
FABRIZIO ZILIBOTTI, University of Zurich, Centre for Economic Policy Research (CEPR), CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Email: zilibott@iew.uzh.ch

Intergenerational inequality and old-age poverty are salient issues in contemporary China. China’s aging population threatens the fiscal sustainability of its pension system, a key vehicle for intergenerational redistribution. We analyze the positive and normative effects of alternative pension reforms, using a dynamic general equilibrium model that incorporates population dynamics and productivity growth. Although a reform is necessary, delaying its implementation implies large welfare gains for the (poorer) current generations, imposing only small costs on (richer) future generations. In contrast, a fully funded reform harms current generations, with small gains to future generations. High wage growth is key for these results.

"Don't Raise Social Security Taxes: But If It's Necessary, Here's How"
American Enterprise Institute for Public Policy Research, No. 1, January 2013

ANDREW G. BIGGS, American Enterprise Institute
Email: andrew.biggs@aei.org

As the debt-ceiling debate begins, congressional Republicans will demand spending cuts to counter any increase in the debt limit. These spending cuts are likely to include entitlement reforms, with Social Security, particularly, as a prime target. Most congressional Democrats might favor payroll tax increases to make Social Security solvent. But higher taxes discourage work and personal saving and encourage early retirement, with negative consequences for the economy. Although these increases clearly are not the best way to solve America’s overall entitlement problem, they may be necessary to consider if an agreement is to be reached. If so, payroll tax increases should be levied across the board, not merely on high earners, to reduce the economic impact and make all Americans aware of the costs of the benefits they all receive.

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