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4. Social Security and Medicare Are Not the Problem
A repeated theme from certain quarters holds that the financial meltdown is only a side-show, that the real “super sub-prime crisis” is in the federal budget, and that the most urgent need today is “entitlement reform,” which is code for cutting Social Security and Medicare, in the guise of saving those programs. Some of this was heard earlier this week at the White House meeting on “fiscal responsibility.”
These arguments are both mistaken and dangerous.
By long-standing political convention Social Security and Medicare are attached to designated funding streams – portions of the payroll tax. It was the original intent that Social Security benefits would be largely matched by these taxes, but this was never true for Medicare, and as the aging population grows and lives longer it has become contentious for Social Security as well. Thus we have frightening estimates of “unfunded liabilities” running to the scores of trillions of dollars over long or infinite time horizons, with dire warnings that these will drive the entire government of the United States into bankruptcy, whatever that means.
These arguments are testimony to the power of accounting to cloud men’s minds, and not much else. Let me make some obvious points.
First, a transfer program reassigns claims to output. It neither creates nor destroys production. What comes from somewhere, goes somewhere else. Thus Social Security liabilities to the government are matched by assets in the hands of the aged and those who will become aged -- that is to say, in the hands of citizens of the country. From the standpoint of the country, the two sides of the balance sheet necessarily balance. Talk about “unfunded liabilities” without discussing the corresponding assets is intrinsically misleading: the liabilities in question are owed to citizens of the United States, and represent to them a very modest degree of income security and as well as access to medical care in old age.
There is no operational reason why the country cannot transfer income to its elderly, as a group, as much or as little as it wishes. The supposed inter-temporal aspect of this transfer is meaningless, for two reasons. First, the goods and services actually provided to the elderly at any point in time are always produced only shortly before they are used. Second, the workers on whom the liabilities supposedly fall today, are the same people who accrue the assets that they will enjoy later. It is true that Social Security’s real burden will rise as the population ages: from about 4.5 percent to about 6.5 percent of GDP over the century ahead. There is no reason to be afraid of this, it is simply the mechanical consequence of the fact that there will be more old people to care for. Those people would exist, and would be cared for to some degree, without Social Security. But the process would be much more erratic, much less fair, and subject to the neglect and petty cruelties of private financial relations.
The only issue posed by a deficiency of payroll taxes, now or later, is whether the funds devoted to Social Security and Medicare might be described as coming, in part, from other sources: from the wealthy, or from bondholders. So what if they are? There is no reason in principle why income or estate taxes (as the late Commissioner Robert Ball suggested), or a financial transfer tax, could not be assigned to cover Social Security and Medicare costs. The Social Security compromise of 1983, which raised payroll taxes on my generation, plainly envisaged that the obligations to cover my generation’s retirement would come, in due course, from somewhere else. That is what “paying back the Trust Fund” is all about.
Part of the worry about “entitlements” relates to borrowing, and thus to future deficits. Are these “unfunded liabilities” so large as to threaten the creditworthiness of the government? Clearly this is not the case. Despite immense efforts by the gloom-and-doom chorus on this question, the government of the United States is today funding itself, long term, for less than it did in the 1950s. Solvency was not a question then and is not a question now. This also suggests that the long-term deficit projections for the government as a whole, though much discussed at the fiscal responsibility summit, are not a worry for the financial markets, either.
The preoccupation with Social-Security-and-Medicare is actively dangerous to the prospects for economic recovery. Why? Because it raises concern and anxieties among today’s working population, who have been told repeatedly that these programs will not be present for them when they will need them. The rational individual response, in that case, is to save more and spend less. I don’t think this effect is very large, right now, but it is a risk. There are cases in the world (notably in China) of distressed populations over-saving obsessively, to try to provide for security that could be provided much more cheaply by social insurance.
More immediately, our elderly population is under a tremendous squeeze, from the stock market collapse, from falling house prices and from falling interest rates. It has already lost, through these channels, a major part of its wealth. The economist Mark Zandi told the House Democratic Caucus in December that this alone could subtract around $200 billion per year from total spending, and the situation is worse now than it was then.
Talk about the supposed need to cut back on Social Security and Medicare thus gets in the way of the discussion we should be having. This is over how to use these programs to get us out of the hole we are in. Each them could be powerful and useful. To wit:
– a permanent increase in Social Security benefits would help offset the losses that the elderly population, as a group, is suffering on its equity investments and its cash holdings. A thirty percent increase in Social Security benefits would not repair individual losses, but it would keep the elderly out of poverty as a group, and relieve severe difficulties in many individual cases.
– a payroll tax holiday would powerfully ease the financial situation of America’s working families, giving them roughly an 8.3 percent pay increase and their employers a comparable reduction in the cost of keeping them on the job. Many mortgages would be paid, and many cars purchased, that otherwise would default or go unsold.
– a reduction in the age of eligibility for Medicare would be a powerful response to the industrial crisis, permitting many older workers who would like to retire but who cannot afford to lose health insurance to do so. This would relieve health burdens from private industry, while not infringing on the employer-insurance systems still in effect for the prime-age workforce. Note that transferring workers from private health care to Medicare in this age bracket has no real economic cost: the same health care is provided to the same people. In fact, the reduction in private insurance claims and bookkeeping constitutes a real saving.
These measures are among the most promising available at this moment. Congress should be prepared to use them if and when it becomes clear that the present policies are insufficient. And the historical linkage between Social Security and Medicare benefits and the payroll tax should then be broken. Social Security and Medicare obligations should be treated, henceforward, as simply the bonded obligations of the government – like net interest, backed by the full faith and credit – thus making explicit what is obvious to any careful observer, which is that these programs cannot go “bankrupt” anymore than the government of the United States can go bankrupt, which it cannot.
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