Arnold Kling  

The $44 trillion shortfall

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'Jane Galt' links to a paper that was notorious before it was released. Some news outlets reported that the measures of fiscal imbalance created by Jagadeesh Gokhale and Kent Smetters were suppressed by the Bush OMB department because they showed such a large present value shortfall: $44 trillion.

Ironically, however, one of the main purposes of their fiscal imbalance measure is to support privatization.


Suppose...a person’s Social Security benefit is reduced one dollar in present value for each payroll tax dollar that the person is allowed to invest in his or her personal account. The retirement benefits of those who participate in such a system would consist of reduced traditional Social Security benefits plus income derived from their personal account assets. But to pay current retiree benefits, the federal government would have to borrow an additional dollar for each dollar invested in a personal account rather than paid to the government as payroll taxes. This would drive up annual deficits and public debt. Under traditional accounting, therefore, this reform does not look favorable.

In economic terms, reducing payroll taxes and future benefits by equal present-value amounts is a wash. The fiscal imbalance measure reflects this economic treatment.

My initial reaction to their fiscal imbalance measure is that it makes sense. The concept is to take the present value of future government obligations under current law and subtract the present value of future tax receipts under current law to arrive at the measure.

However, one of the sensitivity analyses that they conduct gives results that I find confusing. They say that if productivity growth were higher, this would raise the fiscal imbalance in Medicare "because greater productivity growth also occurs in the Medicare sector." It seems to me that they assume that Medicare payments are driven by wage growth, which may be a reasonable way to do a forecast but strikes me as a peculiar approach for sensitivity analysis.

For Discussion. Under the fiscal imbalance measure, privatization neither bankrupts Social Security nor saves it. Does that mean that both Democrats and Republicans will seek to suppress this study?


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CATEGORIES: Social Security



COMMENTS (5 to date)
Eric Krieg writes:

>>My initial reaction to their fiscal imbalance measure is that it makes sense. The concept is to take the present value of future government obligations under current law and subtract the present value of future tax receipts under current law to arrive at the measure.

Eric Krieg writes:

>>“Fiscal Imbalance” adds to the federal government’s current public debt the present value of the difference between all projected federal non-interest spending and all projected federal revenue.

Matt Young writes:

Republicans have made no effort to conceal the possibility that entitlements have a medium and long term problem.

Democrats are have conflicting goals: protecting the current beneficiaries, giving the low wage worker a break on payroll taxes, and not turning social security into welfare.

Between these positions there is quite a bit of room for partial privatization proposals and I don't see why Republicans are so sensitive to proposing them outloud.

Eric Krieg writes:

>>I don't see why Republicans are so sensitive to proposing them outloud.

John Mcdonough writes:

Paul O`Neill recentaly wrote that him and Greenspan were sitting in a room with the Bush people discussing the Irregularalities of the bookkeeping of Enron, Global-crossing, Tyco ete etc. Outraged at the lack of concern Greenspan slapped the table and shouted out, "There is too much gaming of the system, Capitalism is broke". Personally I dont think bush was unconcerned I think he was nervous, How are they going to get me out of this one, About 10+ years ago the S&L failure was the big news and the Bush family involved, but the Iraq invasion of Kuwait ant all the flags waving the Public lost sight of the scandal, one trillion dollars added to the debt and I dont think anybody went to Jail. My point being, how could they say the can`t pay back the social security system when they bail-out the risky private system. Of course they didnt put the money away for our future so the only way to repay it is to raise taxes or borrow it. God please tell me I`m wrong about this. John-Pittsburgh

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