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SS and Medicare: The Truth Stinks
When the subject of debt and deficits comes up in polite conversation — with its progenitor, entitlements — and I respond, I often feel like the dog who passed gas under the Thanksgiving dinner table. Sometimes, weakness shows and the “we all paid in” defense is presented with resounding harrumphs exchanged in agreement. If it gets this far, there is the assurance that the trust fund, while depleted, remains to cover our obligations. When I proceed to point out that this piggybank is filled with IOUs, not cash (and even if it were filled with appreciating assets, it contains far less than what will be needed to cover the actuarial obligation) I am summarily labeled as an un-American, naysaying, and unbelieving apostate. Who am I to denigrate the “full faith and promise of the USA?” To preserve the peace, I relent and agree to be muzzled.
The underlying and accepted conceit here is quite simple: wealth must find its origin in the bowels of Washington, DC. The corollary conceit is that the free marketplace perverts wealth and provides the means for its corruption. Thus, Washington not only creates wealth out of sheer political will, but it must counter the corrupting influence of the free market.
To be clear, I don’t argue that the federal government can’t create wealth. Of course it can by, for instance, sponsoring a successful enterprise. But the relevant question shouldn’t be whether government can create wealth, but whether it is empowered to do so or is any good at it. There is nothing in our founding documents that says that the government shall fund mortgages or student loans, shall subsidize favored businesses, or be in the pension and health insurance businesses. Moreover, all enterprise, whether governmental or private, is governed by economic principle. If efficient and competitive, an enterprise may consume less in capital than it produces. That is the creation of wealth. If, however, an entity consumes more than it produces it eventually fails. In the free marketplace, these failures can be dramatic. In government, however, taxpayer subsidies and regulatory protections mask economic failure and allow it to persist or expand. This allows the misconception that government can eliminate market risk. It can’t. It can simply afford to fail continuously by funding its red ink from the wealth of taxpayers, the regulated, and willing lenders.
Before we can tackle persistent deficits and the growing public debt, we must first debunk the notions that the government is the source and arbiter of wealth and that it can somehow defy economic gravity; that is, suspend economic risk and fund endless deficits. It can’t do any of those things. No armies of government economists, central bankers, or federal bureaucrats can create wealth or guarantee the “full faith and credit” of the USA through force of will. The federal government’s economic future is entirely dependent on tax receipts which are, in turn, dependent on private wealth creation.
It is the government that perverts and corrupts the creation of wealth in America. When the government monopolizes mortgage and student loan finance, it perverts the housing and lending markets, creating potentially catastrophic housing valuation, interest, and loan default bubbles. Moreover, Social Security and Medicare have evolved to become pay-as-you-go pension and medical insurance programs, even though such programs were outlawed in the private sector decades ago. These programs are so irresponsible, they border on criminal; in the private sector, SS and Medicare would be fraudulent and their promoters thrown in prison.
The private sector is hardly a community of angels, and competition and survival are hard masters. But government’s claims that lack of a profit motive somehow inoculates it from economic risk, corruption, and the possibility of failure are specious and contrary to the facts. The evidence surrounding the viability of SSI and Medicare — unlike the so-called evidence surrounding so-called man-made global warming — are empirical and undisputed. The federal government’s forays into the national pension and retiree insurance businesses are catastrophically ill-constructed and doomed to fail as demographic trends play out. Promises made to retirees cannot be kept and benefits will have to be restricted (especially for the so-called wealthy). Service providers will be forced to provide services as well as to accept fixed prices. The retirement age will rise, as will taxes. And even then, deficits will still persist.
It’s not rising oceans or rising temperatures that threaten America. No, it is a rising debt that presents our biggest threat. And we cannot begin to address this threat until we accept the fact that government does not have an endless spigot of wealth it can tap to keep the irresponsible entitlement promises made to a now ill-prepared populace. Although the government’s pension and insurance endeavors may survive for now, the demographic iceberg has been sighted straight ahead; it is only a question of time before the unsinkable entitlement Titanic sinks.
I may be the odiferous dog under the table, but unless we change course, we will all end up drowning in icy waters.
Published in General
I had this conversation with an aging in-law recently. She was upset at having Social Security called an “entitlement,” as people are simply getting back the money they have paid into the system. It’s a delicate subject, so I was content to only address it in the macro, making the point that Americans draw much more out of the Social Security system than they contribute.
She was having none of that, until I shared with her this article. It’s a short article, but makes the point very well, using examples of people of various ages and incomes and family situations. It actually convinced her of the point, at least in the macro. Her response was, “That may be true for everyone else, but I have paid in a lot more than I’ve gotten back!”
And that’s the problem. I have no idea if she’s paid in more than she’s taken out; and neither does she. But such a claim wins the day, because who’s going to press an aging widow on such a claim? Certainly not this man.
And so it goes…
But in contrast you have people like my father who are still required to pay into the system well into his 90s. Someone like that may be of a generation that has generally benefited from social security, but he will never see a fraction of the total amount of money he has paid in, let alone what he could have gotten if he had invested the money in a real investment instead.
Thank you, Doug Kimball.
I have a mostly conservative uncle who posts things on Facebook very much as you describe. “It’s our money, because we paid into it.” Once he posted a meme claiming that the money spent on the Iraq war would have been enough to fund Social Security for the next 75 years. Wow.
People on both ends of the political spectrum want to find the moochers that create the debt. Progressives think CEOs and millionaires and billionaires get all the money, which is preposterous. Many conservatives seem to think that welfare recipients get all the money, which on the federal level is also preposterous. In reality, the moochers are all of us. SSI and Medicare go to basically every family. I don’t personally collect SSI or Medicare, but my parents do and that flows to me through gifts and inheritance. If the debt was being driven by a narrow, profligate group, the majority could cut them off. But the profligate group is all Americans, so there’s no one on the outside to intervene and cut us off, other than our creditors.
Your article assumes that if the person had not put their money into social security, they’d have put it into a savings account earning 2%! That’s the tortured assumption you have to make to imply that people are benefiting on net from social security. If Politifact would try those numbers again, using a reasonable return rate from investments over that time, I suspect the numbers would be rather different.
And that was the whole point. When everyone ends up dependent on the government, the program can never be destroyed.
Of course, if it had started off as a fiscally sound program with people literally setting up retirement accounts, then it would have stayed fiscally sound. The rot started at the very beginning, and the idea that we can somehow catch up and make it right is unrealistic.
I’ve heard some liberals defend SS on the grounds that it unites us because everyone is in it. It occurs to me now that this is exactly the problem.
That was 2% above inflation which is not unreasonable for a “risk-free” investment. Of course, SS was supposed to be risk-free until it wasn’t.
Exactly. When everyone is convinced it’s okay to get a monthly welfare check from the government if it says “Social Security” on it, it’s a lot harder for the small-government, self-and-community-reliant, freedom message to get traction.
Since 1981, Chilean investment accounts have achieved an overall real rate of return of about 10.5 percent per year before administrative fees. Obviously, it’s been lower in recent years, which only meant that it was higher in earlier years. Averaged out over a lifetime, that’s a ridiculous difference from 2%.
Doug Kimball
“It is the government that perverts and corrupts the creation of wealth in America.”
That’s another point I wanted to highlight from this great post. Progressives continually talk about about private money corrupting government. They are completely missing the point. Government corrupts the private sector, not the other way around. The federal government has access to money and power on a level that dwarfs any private individual or corporation. No one can “buy” the government. No one is rich enough to buy the government. The government is the one that does the buying.
From the article: “The authors note that different assumptions for long-term returns on investment would change the results.”
Again, the Chilean system has averaged around 10.5% since 1981. I’m not asking to see the results with that number, although I don’t see why investment accounts in the US should necessarily do much worse than the Chilean system. But 2% strikes me as a rate chosen to make SS look good. Lots of people on the Left (Politifact?) have an interest in lying to people about how great SS is for them.
Prosperity would give our country the means to address all of these problems. We’ve been experiencing a slow economy for so long now that we can’t remember what prosperity feels like. We are looking at a finite-pie economy rather than an expanding economy.
This is good, as far as it goes. In saying many receive much more than they pay in, though, it understates the effect of inflation. I haven’t the time to quantify this, but the purchasing power of the dollar has fallen much more than rigged CPI figures suggest.
Also, it neglects the effect of taxes. Most people are not aware that their adjusted gross income, on which they pay their taxes includes their Social Security and Medicare taxes. That is, they are taxed on this money they do not presently receive at their marginal rate. And those dollars have more purchasing power that the ones they will subsequently receive.
Then, 85% of the Social Security income is taxed again at their marginal rate when received as income. If a private entity tried to pull this off they wouldn’t get away with it. If you doubt this assertion, take a close look at the fine print of a mortgage and the pages and pages of disclosures which accompany it. No such understanding is imparted to “beneficiaries” of Social Security. So the fix will be via inflation and taxes.
The fix for Medicare will be government price fixing and non-coverage of many services via the IPAB (“independent” payment “advisory” board, which will be dependent on politics and coercive, not advisory).
These agencies will simply cut benefits.
SS will reform disability and compress top end benefits, that will buy a fair amount of time, and eventually there will be more personal accounts funded by add-on taxes taking up the slack. The only reason we don’t have a Swedish system now is because every Republican tends to reinforce the “kill all the entitlements!” impression that make the public mistrustful of good reform proposals.
The 75 year Medicare projection is just as dumb as every Malthusian projection ever made, because it assumes that current trends will go on and things will be done forever exactly as they are now. How much does medicine today- all aspects, both content and delivery- resemble medicine in 1940?
You will cut Medicare costs in half with better care when you institute changes to care delivery- for example, the current licensing regimen that guarantees comfortable six-figure incomes to docs, change the current billing/reimbursement game, begin using information technology (e.g., IBM’s Dr Watson), reform of scanning/screens, etc.
Duane,
Thanks for being the optimist!
Mr. Lee, that’s why I have savings, both taxable and tax-deferred. My husband is 9 years my junior and makes over twice what I do, so he could help too. I know life is uncertain, but I think I have prepared well, and I don’t have kids who need an inheritance. And I do pay through the nose for long-term-care insurance (last year, my premium went up by 44%, and I was able to cover it).
Social Security is often thought of as an earned benefit for this very reason. The belief that everyone pays in and then gets out what they need. Changing this attitude is going to be difficult.
Growing up military, then living military, we didn’t have any money to save (25 moves in 21 years and the government never pays for everything). I never even thought about retirement planning beyond what I’d earn in the military. Then I retired and reality hit me right in the wallet. So did ill health. My plans, such as they were, went into the toilet. Such is life.
The point I want to make here is we could do a lot more toward educating people about thinking to their future. The military now briefs new service members about planning for retirement. Yet I think if you ask the average high school graduate what his plans are, all you get will be a blank stare.
Just out of curiosity, do you plan to pay cash for all your medical needs after age 65? Because you wont have any other option if you refuse to participate in Medicare. Well you have 2, one is to leave the country the other is to ……
How about this deal. I’m 60, I’ve paid the maximum almost all my live (frequently both employee and employer parts ) into SS and Medicare. Y’all keep the benefits. Let me keep what I earn from here on and hands off my IRA the small private pension I’ve earned. I won’t bother you for a penny.
There should be some compression at the top end; for example, switch to a program where higher income people get the rate of return on 2/3 of actual paid in benefits, the other third is allocated to the pension subsidy of the poor. That would be (just guessing) around a 20% chop (which I myself would experience in a couple of years), while reforming the other structure to be more like the Swedish system.