Arnold Kling  

The Budget Debate

PRINT
Free-Market Health Care?... Energy Price Outlook...

Jagadeesh Gokhale and Kent Summers. point out that for entitlement programs, "pay as you go" is actually bad Budget policy.


Pay-as-you-go in this context usually implies benefit increases -- for which retirees obviously don't pay -- and tax increases for workers and future generations. ..

Pay-as-you-go, therefore, is precisely the approach that has created a financial mess in Social Security and Medicare. Our future benefit commitments now far exceed our ability to pay. The financial imbalance is now estimated by Social Security's independent actuary to equal $10.4 trillion. For Medicare, the overall shortfall is even larger -- $62 trillion. Using the official numbers, we estimate that rejecting an attempt to control the growth rate of costs implies an immediate and permanent tax hike of 17.4 percentage points. That would more than double the current payroll tax rate of 15.3%. Inaction over another four years will increase the required hike to 19.7 percentage points.


I would add that another canard that must be addressed is that there would be a "transition cost" to privatizing Social Security.

We could incur the "transition cost" without privatizing Social Security. It is simply a matter of being honest in our accounting. Let us suppose that when I pay $5000 in Social Security taxes that in return the government owes me, in present value terms, $5000 in retirement benefits. As the government spends that money, it could issue debt of $5000 to cover my future benefits. If it were to do so, then its balance sheet would reflect its future obligations. This would be a "transition" to transparent accounting, rather than the Ponzi methodology employed today. As it stands now, the government is incurring future obligations without putting them on the balance sheet.

For Discussion. Do you think that doubling the payroll tax will bring in enough revenue to pay for Social Security benefits in the future?


Comments and Sharing


CATEGORIES: Social Security



COMMENTS (14 to date)
L.F. Brown writes:

I'm not a WSJ subscriber so I haven't seen the whole article, but I would say that for a start an increase in the gross wage would conceivably put a dent in the intake of payroll taxes. All things being equal, if the payroll tax was doubled and there was not a corresponding decrease in the take home pay of employees, there would be unemployment as a result.

L.F. Brown writes:

Just to clarify, if the projections do not take into account a possible increase in unemployment, then the projected intake of payroll taxes would be lower as a result.

Lawrance George Lux writes:

Doubling of the Payroll tax will not even cover Social Security benefits over the next ten years. No one in the discussion of Social Security considers the exorbitant increases in health care costs, the ever more omnipresent need to devalue the Dollar, or the never-ending additions of medical procedures to the insured list of Medicare (all high-end cost at that).

A law mandating all Drug and Medical Equipment patents will be limited to a decade period of duration upon award, would probably curtail half the expected deficit in Benefits. Another law stating medical personnel, Clinics, and Hospitals could charge no more that 'Cost plus 12%' would eliminate the other half of the Social Security deficit. A final law could state that Insurers (Private and Public) could pay no greater amount for any medical procedure than does Medicare (this insuring some Federal program had some control over escalating health care costs).

The first law would stop government welfare to the Drug companies. The second law would place Federal law enforcent and IRS officials in charge of eliminating price-gouging in health care provision, and also insure that trained health care professionals serve sufficient patients. The third law would force the health care industry to get it's Price increases past a review procedure.

I always thought I was a Libertarian, until I met an unusual number of Corporate Executives, who have induced myself to adopt a more totalitarian approach. lgl

Robert writes:

Doubling the payroll tax, besides being a quite massive tax increase and a job-killing measure, would be an inefficient means of paying for future benefits. For one, since Social Security is currently in a surplus, the increased tax funds would just be siphoned off to the "Trust Fund" (i.e., the general budget) for current consumption. Second, with increased contributions comes increased benefits down the road, so one is perhaps only shifting the burden on to future generations.

p writes:

Lawrance,

Cutting time of patent reduces ROI for investments by what %? How will this impact investment levels?

What would it cost to enforce? Who would pay for enforcement?

How mucg would this cost? Who would select peers? What would be criteria?

shamus writes:

I read a good analysis in the WSJ of why Americans work more hours than Europeans. The piece contended that since Europeans pay so much more in taxes, it simply wasn't worth it to them to work as many hours. This wouuld imply that raising wage taxes wouldn't bring in as much money as expected. Raising taxes decreases economic activity, making the entire society poorer. A better solution would be to cut benefit levels, or at least use some sort of means test to limit benefit increases.

Sam Jew writes:

I agree with the previous posters that cutting benefits would be preferable to raising taxes. The only way to deal with the scheme of social security (and it is a Ponzi scheme) is for the house of cards to fall.

Since this would be politically-unpopular, (we aren't dealing with an economic vacuum here) cutting benefits is the best solution.

One may make the argument that people who paid into the system their entire lives deserve some type of payout and I am sympathetic to this argument in this interest of fairness.

Therefore, my proposed solution is to reduce medicare levels until social security takes care of itself. Furthermore, by reducing demand for health care, (not increasing by constantly adding new publicly-funded benefits as the current administration does) we can also reduce costs that will spill over to the private sector and remove what is the largest barrier to the creation of decent jobs.

Mark writes:

I presume that you actually meant to say "Social Security and Medicare benefits in the future," Arnold. Social Security has, at most, a modest long-term financing problem that could be cured by a 1 percentage point increase in the payroll tax, or, likely, by eliminating the earnings ceiling on the payroll tax. Moreover, it is pretty likely that future economic growth will exceed the conservative estimates of the SSA trustees, and therefore that future SS revenues will be sufficient, without any tax increases, to get the program over the demographic "hump" of the baby boom generation.

Medicare is another matter. It does have a significant long-term funding problem. I'm not as knowledgeable about Medicare as I am about Social Security, so I don't have any solutions to offer on that issue right off, but I think it is important to keep the issues separated. Much rhetoric on this issue speaks of "Social Security and Medicare" having a severe long term problem. Well, you can do that with any government program--just say "X and Medicare have a long term funding problem." Whatever X is, if you lump its long-term financing with Medicare, the combined programs have a long-term financing problem. But such exercises are meaningless, whether X is Social Security or anything else. Medicare's long-term financing problems are not an argument for revising any program other than Medicare. The case for turning Social Security over to Wall Street will have to stand or fall on its own merits.

Lawrance George Lux writes:

p,

Cutting time of patent reduces ROI for investments by what %? How will this impact investment levels?
What would it cost to enforce? Who would pay for enforcement?
How mucg would this cost? Who would select peers? What would be criteria?

R&D investment is threatened by the limitation of Patent duration? I don't think so. The business is too lucrative. The limited Patent length would simply lead to lower Drug price, as total Profits would be long from utilized by Patent end, and original and after-Patent price would be set to compete effectively with generic competition.

The cost of enforcement of the 'Cost plus 12%' would be minimal, mandating local jurisdiction law enforcement procure all documentation upon complaint, and forwarding to the Justice Dept. for evaluation. Estimated cost per year: $50m, Estimated benefit per year: $250b.

The Bonding process would probably cost as much as Malpractice insurance now does, and the law can be written that Bond Lenders and medical personnel are responsible for all Tort injuries. lgl

Boonton writes:
Doubling the payroll tax, besides being a quite massive tax increase and a job-killing measure, would be an inefficient means of paying for future benefits. For one, since Social Security is currently in a surplus, the increased tax funds would just be siphoned off to the "Trust Fund" (i.e., the general budget) for current consumption. Second, with increased contributions comes increased benefits down the road, so one is perhaps only shifting the burden on to future generations.

Let's assume constant benefits for the sake of the argument. Increasing revenue today makes sense for paying future benefits.

Let's pretend you have some obligation in the future. Suppose, for example, you are required to pay for your child's college tuition as part of some divorce agreement. Does it make sense to pay off your credit cards today? Of course! Reducing your balance today will leave you with balance you can borrow tomorrow. Plus, of course, the savings on interest payments until tomorrow will make your burden easier.

By increasing SSI's revenue today, the gov't reduces its borrowing. That makes it easier to borrow in the future. Plus, of course, there's the reduced interest costs to factor in. There is also the economic benefit. If gov't buys back a $100 bond today then what happens? Most likely that $100 will be invested elsewhere. If all goes well that $100 will be put towards some type of profitable investment. The future economy should be not only less burdened by gov't debt but should also be a bit larger due to the $100 investment that has had that many years to improve things.

shamus writes:

If you simply assume there will be no change in the macro environment, then reducing debt makes sense. However, it's not reasonable to assume that the macro environment will remain static.

Interest rates reflect competition for capital. If there is strong demand for capital, then rates will be driven up. If there is little demand for capital, then rates will languish. Currently the demand for capital is weak, so it might make sense to borrow long term at current rates.

Boonton writes:

True shamus but all that means is that low interest rates make the cost of borrowing lower. To use the analogy of someone facing a large bill for college in 15 years or so, it would make more sense for him to pay off his high interest credit cards before paying off the low interest ones....but doing either is beneficial.

Jim writes:

changing the patent rules is one of the worst suggestions i've ever heard

drugs reduce medical costs relative to the alternative, and they tend to come off patent less than a decade after fda approval

i think the first step to curing the problem is to recognize that ss is a ponzi scheme as mr. jew pointed out. then transition it to an insurance plan of last resort for poor old people that didn't plan for retirement. it shouldn't be viewed as a 401k for the average joe.

Lawrance George Lux writes:

Jim,
I agree with your view of SS, but disagree with your view of limiting the length of Patent duration for Drugs and Chemicals. Your claim that most Companies come off of Patent-holding pricing in face of competition within a decade is functionally true, but a shortened Patent life would forestall Patent-generated pricing entirely, in favor of competitive market pricing to sustain Sales. lgl

Comments for this entry have been closed
Return to top