1. First, on NOW, an interview with Michael Moore talking about his movie "Sicko" and the health care industry, in particular health care insurance. While the US system can provide excellent care, on a per capita basis it is roughly 50% to 100% more expensive than other major industrialized countries, with poorer health results; namely, life expectancy lower, infant mortality higher. We do lead in obesity!! (Check the OECD web site for the data).
2. Washington Week as usual covered several issues, but in particular they mentioned the demise of the immigration bill and in so doing referred to another major defeat for the Bush administration, social security reform in 2005. My own view on the immigration bill is that it was far from perfect but it was better than what we have. (Perfect would be open migration between countries on a world basis, no different than migration between states in the US. Of course that would require substantial changes in how the world operates, including an effective world govt., with nation state interests secondary, just as state interests in the US are secondary to the federal govt. Not highly likely to occur but just IMAGINE!!).
The debate on immigration was full of hubris and jingoism, but the debate over Social Security reform took the cake for irrelevant excess, on both sides of the fence. Fortunately the right result, dropping of Social Security changes, was obtained. More on Social Security later in this post.
3. Then on Bill Moyer's journal two items: An interview with Lori Wallach on Free Trade (she's awesome and a significant thorn in the side of the medical industry, dogmatic free trade advocates and in general neo-liberal econ types). Check her views at http://www.citizen.org/trade/. A lot more on "Free" trade in the future. A facet of it (Free Trade Zones) is my thesis topic.
Then there was Gretchen Morgenstern an NYT reporter, who talked about: the housing boom (now housing bust) and how it was driven in part by inappropriate mortgage schemes; the level of income inequality in the US recently matching our all-time worst level in the late 1920's, and how execs in the finance industry are the most egregious of the lot. Making money off of money, versus actually in an industry which produces something of tangible benefit (not to excuse the excesses of the Rockerfellers, Vanderbilts and other "Robber Barons" of the gilded age).
So a number of interesting and important issues which I'll be returning to at various times in the future. For excellent commentary on these and similar issues see Dean Baker's blog (of the Center for Economic Policy Research http://www.cepr.net/ ). His blog is at http://prospect.org/csnc/blogs/beat_the_press. For alternate views the Cato Institue web site usually has some interesting stuff, for a bunch of sniveling elitists (just kidding!!).
Analytical techniques:
But for now I want to use these issues, in particular Social Security, to introduce a couple of analytical techniques I tend to use (and have used for many years) when I evaluate what can be very complicated or complex issues. I often find that these techniques help me to strip away the irrelevant, focus on understanding the core problems and therefore provide a better opportunity for effective solutions.
1. The self-contained (self-reliant for the conservative reader) farm or small village. As self-contained communities, everything the farm family or village residents have, in terms of material goods and services, is what they produce or provide. Further no need for money (yep you can live without it) on the family farm since Mom and Dad, maybe even the entire family, decide how the goods (food, clothes etc.) are divvied up in some acceptable manner. Sort of a mini-commune. The village might or might not have money, depending on what level of complexity I want to introduce. But in any event, I find these simplifications useful since they allow a more direct focus on what people ACTUALLY do or NEED to do to provide for their economic existence. And no they do not for example NEED to shop until they drop at the malls.
One might think that a self-contained farm or small village is not a useful way of looking at the economic issues of the world. But realize that the world itself is a self-contained entity. I.e. everything the world has, in terms of material goods and services, is what it produces or provides. So size is the only real (albeit important) difference.
2. The Three Circles of people, goods and services, and money. One way of looking at the economic world is to divide it up into circles of:
a) People in their functions as consumers of goods and services as well as producers and providers of goods and services. Note that of the roughly (I'll keep it simple) 300 million people/consumers in the US (I am unclear whether this includes some estimate for "illegal" immigrants of perhaps 12 to 15 million) only about half or 150 million are actually in the US labor force, (and this includes 7 or 8 milion unemployed). See the US Bureau of Labor Statistics (BLS) monthly employment reports to get actual figures. Of the rest about 25% or 75 million are retired or under working age and another roughly 25% or 75 million are not in the work force (essentially working age but not seeking formal employment).
b) Goods & services produced or provided by the active work force, the sum total of which is the GDP (Gross Domestic Product) in a given year.
c) Money supply. That intangible symbol of value which in its most basic sense is used to divvy up goods and services produced to the people as consumers. Check the Federal Reserve web site for definition(s) of money supply.
So let's consider the Social Security reform debate. (As I go through the background you might try to consider the issue in terms of the Three Circles, which I will do at the end of this post). There are two main elements to SSO, medicare (including the recently added prescription drug benefit) and a pension for retirees (full pension beginning at age 65-67 depending on year of birth, partial at age 62-?) and disabled people. Given the rapid increase in the costs of health care over the past couple of decades, medicare is actually a much greater financial problem for the government than is the pension piece. But I will consider medicare later in a post on health care. For now I want to focus on the pension aspect (officially referred to as Old Age, Survivors and Disability Insurance - OASDI).
1. FUNDING. Simply stated while we are working the Govt deducts money (FICA) from our wages and puts it into a govt. Social Security trust fund. Currently the deduction rate is 15.3% in total, split equally between the worker and the employer. Further 12.4% is designated for pension and 2.9% for medicare. And finally the pension piece is taxed on a certain annual wage limit (over $90 thousand at present, increases annually with inflation). From the individual's point of view one is "saving" money for retirement through this "Govt" program. Many people (if they have enough income and are prudent) also save additional funds "privately" through various types of savings plans.
2. PAYMENT. As people retire at qualifying age limits (or become disabled) they begin to receive their Govt pension. The amount is based on a combination of the number of years worked and the amounts "saved/deducted" from wages during those years. This is then factored into the Govt determined "base" pension which is increased each year for inflation. So a person who earned at minimum wage during his working life and for whatever reason only worked 25 full years, will receive a lower Soc. Scrty. pension than someone who always earned at the maximum wage limit and worked for 40 years. But here the system has a progressive bent since the person at the low end of the wage/savings scale receives a higher pension as a % of his accumulated savings, than the person at the high end.
The payment of the pension is made out of the Soc Scrty trust fund. So every year money (the savings/deductions of people who are working) comes into the trust fund, and every year money comes out of the trust fund to pay the pensions of those who are retired. In effect the savings (wage taxes) of those who are working are used to pay for the pensions of those who are retired. This is referred to as a PAY AS YOU GO plan. It works fine as long as the working generation agrees to "pay" the pensions of the retired generation.
A key point here is that many individuals might think that the FICA or wage taxes they pay go into a personal Soc Scrty account to pay for their pesnion when they retire. This is not the case. These wage taxes are used to pay the pensions of those who are already retired. If an individual also has his/her own "private" savings plan such as an IRA or company 401-k, these funds accumulate, and at time of retirement can be used to provide an additional pension, solely for that individual. This is what is referred to as a "FUNDED" plan, in the sense that the amount of money which (with future interest on the funds) will be used to "fund" the payment of the private pension, is already accumulated in the individual's savings account when payments commence.
Regardless, as a result of changes enacted in the 1980's, including higher tax rates on wages, the amount paid into the Soc Scrty trust fund has for many years been exceeding the amount paid out for pensions, allowing a "surplus" to build. The surplus in 2006 was about $ 2 trillion (see the Social Security Administration trustees report
A side issue, but an interesting point, is that when the Govt announces the Federal budget deficit, it usually includes the current year surplus collected in Social Security (referred to as the "unified" budget deficit). For example, this year the "unified" deficit is expected to be around $220 billion. But this includes (I'm guessing but the magnitude is correct) about $150 billion of Social Security surplus. I.e. the "real" deficit (sorry I started as a bean counter) is around $370 billion. Yes this is partly semantics since it is all within the Fed Govt., but we can be sure that in the future when & if there is a Social Security deficit, the Govt will exclude this deficit from briefings on the "Federal" budget deficit.
SO WHAT'S THE PROBLEM WITH SOCIAL SCRTY.?
Well the main issue is that people are living even longer than envisioned in the 1983 reforms. Therefore, if current trends continue there will be more retirees than planned, with the amounts paid out in pensions exceeding the amounts (assuming no change in wage tax rates) paid in by those working. For example today there are about 3 workers for every retiree. But in 20 years or so, as the baby boomers fully retire there will be about 2 workers for every retiree. These issues are covered in the annual Social Security Trustees report (with the Congressional Budget office also doing an estimate). Presently the expectation is that in about 10 years, the annual pension payments will about equal the amounts of wage taxes paid in to the trust fund. After that the deficit (current year pensions paid vs. current year wage taxes received) will grow, until sometime in the 2040's the surplus in the trust fund will be eliminated. Subsequently there will be enough money coming in each year to pay only about 70-75% of the current year pensions. (Again this assumes no changes to current law governing the program and also assumes that all of the long-term estimates used to make the calculations are accurate).
The solution (to allow payment of full promised pensions beyond 2040) clearly would be some combination of retiring later (say 70 instead of 65-67), higher wage tax rates, higher wage bases or lower benefits. But as I said earlier, I agreed with not making any changes at present. This is because I don't see this as a pressing issue, rather something we will need to deal with in 5-10 years when the estimates are more current. For now the issues of Health care (which includes medicare), the environment, growing income inequality and our Foreign policy snafus are clearly more pressing.
But the President's proposal (never clearly delineated as I recall) centered around establishing "private or individual" savings accounts within the Social Security system. This would eventually turn the system into a "Funded" system, similar to private savings accounts described above, with individuals allowed to invest their funds in the stock market, and with their pension based on the balance in their "individual" Social Security account when they retire. This concept was coupled with a number of "talking points" to set the stage, briefly as follows:
1. This is your money for your retirement so you should be able to invest it as you want, and when you retire it should be there for you, or if you die early for your spouse or children. Do you really want 'big brother" to take care of your money?
2. The govt is using your money to help pay for their big spending ways and cover the deficit. All you have in Social Security is a piece of paper, an IOU, in some Govt beancounters ("ouch") account. Do you really think this will be worth something in 30 years?
3. If you had a personal account and could invest in America's growth, in the stock market, on average earnings have been 8-10% over many years. Or do you want to keep it in Social Security where on average the earnings on YOUR money is more like 2% per year?
All interesting issues, enlightening, aggravating and confusing at the same time (the essence of good talking points!). But time to wrap this post up, so on to the Three Circles, to consider the problem of Social Security from a somewhat different perspective.
THE CIRCLE OF PEOPLE. Recall that there are (were but don't quibble) about 300 million people in the US of which about half or 150 million actually work (according to the BLS definition). Also recall there are about 3 workers for every 1 retiree, meaning there are about 50 million retirees (evidently counting those receiving social security pensions). In 20 years this will presumably go to 2 workers for every retiree. Meaning if we freeze workers at 150 million, there would then be about 75 million retirees, or 50 PER CENT more for those workers to support with their wage taxes, in the pay as you go system.
A significant increase in the burden for workers, yes. But also consider that the workers TODAY actually support the total population, a total of 150 million non-workers (retirees, plus children, housepartners?, and others) or a ratio of 1 worker for each non-worker. Even if we add 25 million additional retirees in 20 years (all else frozen), this means an increase from 150 million non-workers to 175 million non-workers. Percentage wise this would be 16 2/3 % , still significant, but a heck of a lot less daunting than the 50% increase referred to above. Frankly Northern Europe and Japan already live with this type of demographic, and while whiners abound throughout the world, they seem to get along just fine.
THE THREE CIRCLES. One last angle. So the essence of the Social Security "crisis" was (is) given the changing demographics, how best to SAVE for the future so there will be enough "money" to go around. But remember that the number of workers will remain (in the above example) at 150 million and therefore the amount of goods & services they produce in that circle, is all that will be available for the total # of consumers in the people circle (325 million), REGARDLESS of how we save or how much we save. So how we save and who saves more only affects the money circle (with one big "if"), it does not mean there will be more goods and services to go around. To me its more of a big shell game, with the only obvious winners, if we go to private accounts, you guessed it WALL STREET! Why, becasue every year they would exact their 1% or so tribute from the bulk of us peons, further exacerbating the growing level of inequality in this country.
So the big "if" refers to investment. Way too much for this post, but briefly if people "save" it also means they are consuming less of the goods and services (because they are spending less). Logically this should mean that some of the workers could shift from producing "consumable" goods and services to producing new and more efficient plant and equipment, allowing future workers (the 150 million) to produce more (for the goods and services circle) in the future and thereby satisfy the growing needs of the population, without the workers sacrificing their own needs.
But that is enough for now. Suffice it to say that, even in the classical sense, there is enough money sloshing around these days for investment purposes. So changing the method of investing Social Security "savings" is highly unlikely to have any appreciable effect on the level of investment (in productive goods and services) in this country.
Hasta la proxima!
