Arnold Kling  

Budget Myths and Reality

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This paper on the long-term budget outlook was just released. My guess is that I will refer to it often in the future.

I encounter a number of arguments that purport to explain why we do not have to restructure Social Security and Medicare. This paper is where I attempt to point out the weaknesses in those arguments.

We can argue about how best to restructure entitlements. Perhaps Jed Graham has ideas that are more appealing than mine. But the people who are fighting to keep Social Security as it is and to expand Medicare are fighting an uphill battle against arithmetic.


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COMMENTS (9 to date)
Lord writes:

No, it is those favoring restructuring that have a problem with arithmetic as their changes only offer different and generally less attractive and effective methods of achieving the same cuts as current law. They assert that without changes, cuts will never be allowed to happen, but this begs the question of why changes will allow them to happen, especially when the changes they propose are generally worse than doing nothing.

Hyena writes:

I never understand your rhetorical positioning. You always punch where it's least effective, right at the point where everyone is debate-hardened.

Why not lead with a dramatic illustration of just how rosy a future these programs assume we'd have? I mean, Medicare and Social Security are designed for a world in which the US population is pushing at 500 million or more and I'm taking a flying car to my job at the jetpack factory on Neptune.

I don't know why everyone who worries about entitlements avoids saying that we're not as rich as we think we are. iPads are made by hand in China, not by robots on the moon....

Ned Baker writes:

Didn't we just restructure Medicare to save $1.2 trillion? [CBO]

Randy writes:

"...the American people must face up to significant structural changes in entitlement programs that reduce promised benefits."

The boomers have been aware for over 20 years that these programs would likely not be available for us, so if we collect 75% we will mostly feel lucky. Not that this will stop us from bad mouthing the politicians when it happens.

The real question is how the younger generations will respond. Will they vote to keep the less generous programs after seeing how their parents and grandparents were treated? Or will they vote them out entirely?

richard writes:

"However, the trust fund is simply a measure of the accumulated promises given to
workers by the Social Security system in exchange for the taxes paid by those workers to fund the
benefits of those already retired. The trust fund contains only government bonds, which are not
productive assets."

This actually overstates the extent of the trust fund as it implies that the debt in the trust fund is fungible. It's plainly not. What would happen if congress failed to raise the debt limit one of these years, could the government fail to recognize the validity of the SSA special issue bonds but continue to pay interest on T Bills held domestically and abroad?

JP98 writes:

My experience has been consistent with Randy's comment. I and my fellow boomers frequently "joke" about how Social Security will be gone by the time we retire. I'm trying to base my savings (and expectations) on the assumption that I won't be getting government assistance.

Lord writes:

It is often pointed out younger workers will enjoy lower returns on their contributions, but this is not a problem with Social Security but with all investments in the future. If you believe equities will return historic returns into the distant future you are living a fantasy. The same fall in returns Social Security will suffer, all other investments will as well. It is just a product of slower growth and the half of growth due to population will disappear.

rhhardin writes:

Raising the retirement age to whatever balances the demographics solves the SS problem completely and easily.

If you want to retire earlier, bridge the gap on your own dime.

That keeps SS as an inflation-protected annuity intact, but ensures enough workers at a low enough tax rate to support it.

Raising the retirement age is also the easiest political sell, in that it can be explained with simple enough concepts.

Hugh Watkins writes:

I have now had a chance to read your paper. Congratulations! It is well written and clearly argued.

It is amazing to re-read Paul Krugman's comments on Social Security: that all is well as Social Security is "running a surplus". How can he say such things with a straight face? In part I believe this is an accounting problem: the Government needs to appoint a team of actuaries and accountants to draw up annual financial statements that show a "true and fair view" of the Social Security balance sheet. By seeing what happens from one year to the next we would see if the situation is improving or worsening. It would also be easier to talk about solutions.

There's a lot of scare talk about "privatising Social Security" that's basically meaningless as only liabilities are left......

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