Friday, May 13, 2011

Thoughts on Entitlement Programs for the Elderly

Here are some thoughts about entitlement programs, prompted by reading this piece in the WSJ by John Cogan. (Brought to my attention by RecessionCone.)
  1. Social Security and Medicare are really separate issues.
    • SS needs some changes, but it could be tweaked into solvency fairly easily (given the political will.) The shortfall is not projected grow explosively. (See here:
    • Medicare, on the other hand, is projected to grow grow and grow, like The Blob, until it eats the entire economy.
  2. So always remember that it is the growth of Medicare that is the big problem. We could absolutely "afford" to continue to pay for the care that Seniors receive now; it's the extra care they are supposed to get in the future that is the problem. We could even "afford" to have expenditures grow along with GDP.
  3. The fact that Medicare is projected to grow and grow, and we are simply cursed to accept this, seems strange. There is much disagreement (as well as much misinformation) about what is causing this and what can be done about it. Unfortunately doing anything about it at all can be politically unpopular, as both Obama and Paul Ryan have found out. This is a really tricky problem, both as a policy problem and a political problem.
  4. Social security is and has always been a transfer program, where the young transfer income to the elderly. It's not, and has never been, a funded savings program, like a private pension. People often seem confused about this.
  5. Don't forget that in any system at all where there are retired people, it is the young who produce what the old consume. When you remember that, transfers from the young to old don't seem that outrageous. It's all a question of how we set things up to make those transfers, how big those transfers will be, and how those things affect overall efficiency and growth.
  6. Some of Cogan's points seem off:
    • Talking about what we "cannot afford" can be misleading. Taxes could be a lot higher. That may or may not be a good thing, but it is not impossible.
    • Cogan seems to imply that it is somehow unfair that the people who put in $500K are getting $1M in benefits. But that is a pretty low rate of return. These people would have done much better buying long term treasury bonds, let alone investing in stocks.
    • Cogan goes on to say:
      But regardless of how much they have contributed, the hard reality is that the federal government has already spent it. No matter how deserving they are, it is younger generations of workers who have to come up with the money.
      But that is equally true of someone who is redeeming government bonds! I doubt Cogan would use this as a reason for the US to default on our debts.
    • Cogan seems to call for a system of private accounts, invested in stocks and bonds. I have grave reservations about such a system, which I will leave for another time.
  7. Cogan is also right about some things
    • Cogan says the current system is "not the result of elected officials carefully weighing the needs of senior citizens against the financial ability of younger workers to meet these needs." That's right: it is the result of a political process. Like everything the governement does. Always a good thing to keep in mind.
    • He's right that reform is needed. His proposals for reform are not all what I would choose, but at least they are serious proposals.
The most important thing to me is that we need to get the long term fiscal picture in order, as soon as possible. This will require reductions in the growth of spending (sometimes misleadingly called "cuts") as well as tax increases.