If John McCain didn’t already have my vote…
… he’d have it now:
“In the long-term, the only way to keep the budget balanced is successful reform of the large spending pressures in Social Security, Medicare, and Medicaid,” the McCain campaign says in a policy paper to be released Monday.
“The McCain administration would reserve all savings from victory in the Iraq and Afghanistan operations in the fight against Islamic extremists for reducing the deficit. Since all their costs were financed with deficit spending, all their savings must go to deficit reduction.”
I’m skeptical of the pledge to balance the budget in four years, but reigning in the growth of entitlement spending is the only way we’re even going to come close.
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and ponies. dont forget the magical, free ponies.
You know, I used to give a damn about the deficit, but I no longer do; it’s such a small percentage of our national income, and the debt such a small percentage of our national wealth, I find it almost silly to worry over. I mean, I’m glad some people are doing that, but I no longer believe the sky is falling, and I’m inclined to be skeptical and believe that whoever is in the minority in Congress will be doing most of the whining over it because the money’s not being spent on what they want, it’s being spent on what the majority wants.
Never could quite figure out why Social Security gets singled out for budgetary reasons. It has largely thrown off surplusses that have absorbed the debt run up by other govt programs.
If the rest of the govt was as fiscally responsible as SS, we wouldn’t have many worries.
It gets singled out because it’s so massive, and because despite the fact that it’s supposed to be run like a pension system, it actually takes money straight out of the pockets of the young to give it to the old, and is thus really a welfare check for being old (to put the blunt truth to it). People don’t like to admit this, so they let themselves believe it’s a system that’s "insolvent" (it always has been) that you can "fix" somehow (which you can’t unless you move it to private accounts, which the political will does not exist to do right now).
The only problem per se is that we soon will have substantially fewer people paying substantially more people than we have in the past. This will create a strain on younger workers if we don’t do something about it. There are several political alternatives for doing something, they just all annoy someone important somewhere. So we’ll do what we always do, wait until the last possible minute and then throw money at it.
Dean,
I agree that at current levels, where debt as a percentage of GDP is relativley flat, the deficit is mostly harmless. I’m more concerned about government spending as a percentage of GDP, which I why I’m happy to see McCain getting aboard the entitlement reform train.
Roger,
Social Security gets singled out because it’s the largest single program (21% of the budget) and it’s growing much faster than GDP. It’s also symbolic of the larger problem with entitlement programs in general (SS, Medicare, Medicaid, and SCHIP are over 40% of the budget). Note this graph from the 2008 CBO budget projections update. Social Security is currently running a surplus because of a big increase in the payroll tax in 1982, but it’s expected to outgrow its revenue in 2017. Medicare outgrew its revenue in 2004.
McCain has also promised to make the Bush tax cuts permanent, add huge new tax cuts, and balance the budget in four years. If you believe that, I have bridge you might be interested in buying.
Entitlement spending means Social Security, Medicare and Medicaid. Social Security has a relativily small funding problem over the next 30 years that would be easily fixed if politicians would stop grandstanding.
Medicare and Medicaid have a huge problem, totally out of control health care costs, but this is not just a problem of Medicare and Medicaid, this is a problem for the whole US economy. Total US spending on health care has been rising at 2x to 3x inflation for years. This is just not sustainable. Health care spending is like 13% of GDP and project to rise to 20% of GDP in the next 10 years. It is not just Medicare and Medicaid that are going to be bankrupted by this, it is the whole economy.
You can not discuss controlling entitlement spending without discussing controlling health care spending.
By CBO numbers, McCain can do exactly that if he can hold the rate of increase of government spending to 1-2% per year instead of the projected 5.8%.
You can not discuss controlling entitlement spending without discussing controlling health care spending.
Sure you can. I’ve proposed a way of doing exactly that in an earlier post. I don’t think McCain’s going to try to implement anything like my proposal, though. His plan to remove the tax incentives for employer-provided full service health insurance probably will reduce the rate of growth of health care costs, but I’ve got no idea by how much.
Sure you can. I’ve proposed a way of doing exactly that in an earlier post.
Your plan simply will not work for Medicare. There is a reason Medicare exists today. Insurance companies do not want to provide health insurance to seniors. Oh, yes, they are happy to cherry pick the healthiest seniors and provide insurance to them, but they would simply refuse to insure the oldest and sickest at any price.
Actually we already have the Medicare Advantage program which is an option that allows some seniors to buy subsidized private health insurance. Even though the insurance companies cherry pick healthy seniors to sell these policies to, the government pays more per person in subsidies to the insurance companies than it does per person in the regular Medicare program. Some cost savings.
You simply do not understand how free markets work. The free market solution to an energy shortage is to raise prices or energy taxes sky high so that people will start to conserve energy. The free market solution to health crises is to raise prices sky high or tax the living daylights out of health care services. This will force people to think carefully about spending on health care and ration health care services. Instead of a $20 co-payment to see a doctor, impose a doctor visit tax of $200 or $500. Then people will think seriously about getting ill. That is using free market to solve the problem. The free market solution is to simply make health care so expensive that most people cannot afford it.
"By CBO numbers, McCain can…"
But McCain hasn’t released any numbers, as far as I know. Which is pretty much the only way he’s going to make this pledge sound plausible for even a moment. He’s repeated a lot of the same rhetoric about ending earmarks (which actually wouldn’t help that particular problem) and the usual stuff about unspecified "wasteful spending" and so on. But the reality is that he won’t raise taxes, and he hasn’t proposed any substantial means of cutting spending. And if we’re going to be in Iraq throughout his term, and maybe increase our presence in Afghanistan as well, and then maybe show Mugabe a thing or two (which I wouldn’t mind, personally) and perhaps go to war with Iran, that’s going to cost a thing called money.
There are lots of good reasons to vote for McCain, but an absurd pledge to balance the budget without any hard specifics has to be by far amongst the silliest.
And entitlement spending? So your plan is that we’ll tell seniors that, oops, sorry, maybe you paid into the system, but we’ve needed to borrow that money to pay for various other fun things for decades now, and on top of that we’ve now decided to default on some of it.
That’s really going to fly real good with one of the largest and most powerful constituencies (particularly in swing states). That must be why McCain has been so forthright about, say, means testing the retired rich, right?
Right…
Bad’s last blog post..Defending Obama’s ?Faith-Based? Funding Changes: Special Rules for the Religious?
I agree with mikeca that the largest single domestic problem is the growth in health care costs. It’s not just a problem for you and me, it’s a problem for companies that support even a portion of their employees’ healthcare costs, it’s a problem for city, county, and state governments, and it’s a big problem for the federal government. Unfortunately, neither candidate for the presidency has a realistic plan for curbing that growth. Either candidate’s plan might slow the growth a tiny bit if the enormous (IMO unrealistic) assumptions they’re making are true.
I think that the ease of increasing revenue is at the root of many of the federal government’s problems. Note that increasing revenue isn’t just increasing taxes or fees or adding new taxes or fees. It also includes borrowing.
I’ve arrived at the conclusion that the state of Missouri has the right idea. In Missouri all measures to raise revenue including borrowing must be approved by direct popular vote. That doesn’t mean that the citizens of Missouri never vote to raise revenue. It does mean that the politicians need to convince the people that it’s a good idea.
You simply do not understand how free markets work. The free market solution to an energy shortage is to raise prices or energy taxes sky high so that people will start to conserve energy. The free market solution to health crises is to raise prices sky high or tax the living daylights out of health care services. This will force people to think carefully about spending on health care and ration health care services. Instead of a $20 co-payment to see a doctor, impose a doctor visit tax of $200 or $500. Then people will think seriously about getting ill. That is using free market to solve the problem. The free market solution is to simply make health care so expensive that most people cannot afford it.
Umm, taxing markets is precisely the opposite of keeping them free. Just thought I’d point that out. Who doesn’t understand free markets again?
[…] 2000s…). Among other things, McCain has promised to clean up entitlement programs. McCain got one vote… ANOTHER AREA WHERE THE CANDIDATES GREATLY DIFFER is Social […]
mikeca,
I do understand how free markets work. The free market solution to health care is to make those receiving the care pay the cost of their care and let them decide how much care is worth the cost (private health insurance is also a free market solution, if it’s purchased voluntarily by the beneficiary in a competitive market). That’s more-or-less what my proposal for Medicare does — convert Medicare from a program where the government buys you as much care as you want to a program where the government gives you money and lets you spend it however you want.
Bad,
I’m not voting for McCain because he’s promising to balance the budget. As I said in the original post, I’m skeptical of that claim (although as I added in the comments I don’t think it’s completely implausible). I’m voting for McCain because he’s promising to reduce the rate of growth of government spending, including entitlement programs.
Dean,
SS is surely massive, but it isn’t a contributor to the deficits, in fact just the opposite. When McCain can balance the current budget, then I might be more inclined to listen to a SS reform plan. But SS isn’t the defict generator we have to tackle.
I don’t think it is anywhere near a "fact that it’s supposed to be run like a pension system". You may want it to run that way, but it was not proposed that way from its beginning. It also isn’t like welfare, where the only qualifications tend to be current economic status. You have to have paid SS taxes during your working career generally, and those taxes influence what level of benefits you get.
Yes, there is an element of the young funding the old. But the old now were young once and funded the elders of their time thru FICA taxes. And in the end, no matter how one structures it, the young workers provide the goods and services for the elder retirees. That’s the way it will work, SS or not.
The demographic issue are real, but they remain whether SS does or not. But few reformers want to face that fact.
Maniakes,
SS isn’t symbolic of the other 3 programs you mention, because those deal with health care costs that SS doesn’t. Yes, SS costs are growing faster than GDP, largely for demographic reasons. But any reform that abandons the elderly is a non-starter politically and morally. And any reform that keeps current benefits but dries up the FICA tax stream makes the problem (deficits and debt) they were supposedly gonna fix much worse.
Yes, SS raised taxes in the early 80’s. That kept the program fiscally sound and responsible. That’s a good thing. And although folks like to point out the 2017 date, that really isn’t the important date. SS will still be financially sound for a couple decades beyond that because of the Trust Fund.
2017 is the date when SS will no longer be running a surplus. That is significant because the government will need to either sell more bonds or spend money out of general revenue in order to pay back the "trust fund" money it’s been loaning itself.
My preferred solution to SS is to change the benefits formula to use price-indexing rather than wage-indexing, so someone who retires in 2028 will get the same benefits (after adjusting for inflation) as someone who retires in 2008 rather than 20-40% more. If we put that into effect now, it’ll be more than enough to keep SS solvent through the retirement of the baby boomers.
Raising taxes to keep Social Security is problematic for three reasons. First, it increases the bite that government takes out of our wallets. Second, it increases our obligations down the road because SS benefits are based in part on how much taxes you pay into it. Third, raising marginal tax rates interfere with the economy by screwing up incentives (what economists call "deadweight loss due to taxation").
You are correct that the other retirement programs have the additional problem of being driven by health care costs, but that doesn’t negate the point I was trying to make — that if you want to balance the budget and keep it balanced in the long term, you cannot ignore entitlement programs because they make up a huge slice of the budget and grow 2-3x as fast as the economy.
"I’m voting for McCain because he’s promising to reduce the rate of growth of government spending, including entitlement programs."
How one reduces government spending generally without ever reducing anything in specific, however, is the question. Nearly every single Republican in the last decade has promised to reign in "entitlements" (they sound nasty, don’t they!) and curb spending. But without specifically committing yourself to specific cuts, and taking the political heat from the groups that care, it’s all pie in the sky nonsense. Is McCain going to scale back the military? Is he going to means test SS? What?
And nearly all the projections that assume that a balanced budget is plausible treat the tax cuts as expiring, and the AMT as applying. McCain is against both of those. Without them though, and without any substantive, or any numbers from his camp, you should be a lot more than skeptical.
Bad’s last blog post..Defending Obama’s ?Faith-Based? Funding Changes: Special Rules for the Religious?
mikeca, I do understand how free markets work. The free market solution to health care is to make those receiving the care pay the cost of their care and let them decide how much care is worth the cost (private health insurance is also a free market solution, if it’s purchased voluntarily by the beneficiary in a competitive market). That’s more-or-less what my proposal for Medicare does — convert Medicare from a program where the government buys you as much care as you want to a program where the government gives you money and lets you spend it however you want.
As I have explained before, any solution which involves individuals purchasing private health insurance will not work. The reason is simple. Insurance companies asses risks and price insurance according to that risk. If a person is seriously ill or in poor health, insurance companies must price coverage for that person at rates no one can pay.
The only way private health insurance works is if it is sold to a group. Employers usually are the group. Insurance companies price the coverage on the basis of the risk of the whole group. Now if the government wanted to form groups for Medicare and let private insurance companies bid to cover that group, that would be fine. There could even be a base plans that was completely covered by Medicare, and other plans that were partly paid for by the individual.
The problem with all this is it will do very little to control costs or ration health care. When a family member is seriously ill, the family will spend almost any amount of money.
Instead of having a government run fire department, we could have private fire departments. If your house caught fire, you could negotiate a price with several competing fire departments to put the fire out. I seriously doubt that this would reduce the cost of fire protection or improve the quality of protection. If your neighbors house caught fire and he was out of town or refused to pay to have it put out, it could spread to the whole neighborhood.
To some extent the same issue exists in health care. If someone has TB and does not get it treated because they cannot afford to treatment, they can spread it to many other people. That is another reason free market solution to health care don’t work very well.
Given McCain’s track record opposing Bush’s spending increases (including the Medicare prescription drug benefit), I’m willing to extend him a little credibility on spending. I am disappointed at the lack of specifics on how he’s planning on cutting entitlements, but I’m very glad he’s no longer just talking about discretionary spending as an area to cut.
Maniakes says:
2017 is the date when SS will no longer be running a surplus.
Yes. But the significant date is the date when the SSTF has redeemed all its bonds. That leaves the National Debt in the same place it would have been if SS had remained merely a twinkle in FDR’s eye.
That is significant because the government will need to either sell more bonds or spend money out of general revenue in order to pay back the "trust fund" money it’s been loaning itself.
Yes, because the govt’s general revenue account has been borrowing from the SSTF all these years. That’s not SS causing a debt problem. That is the Non-SS budget causing a debt problem. That’s the problem that needs solving if one is concerned about debts or deficits.
And they don’t really have to sell more bonds, but merely sell them to different bondholders. The SSTF holds the bonds that they will redeem. The National Debt doesn’t increase, because the bonds held by the SSTF are already part of the National Debt.
My preferred solution to SS is to change the benefits formula to use price-indexing rather than wage-indexing, so someone who retires in 2028 will get the same benefits (after adjusting for inflation) as someone who retires in 2008 rather than 20-40% more. If we put that into effect now, it’ll be more than enough to keep SS solvent through the retirement of the baby boomers.
I’ve been advocating that for the last decade as well. I’m not sure it cures all ills, but it helps the long term issues with minimal disruption.
If a person is seriously ill or in poor health, insurance companies must price coverage for that person at rates no one can pay.
Since everyone knows that their health will deteriorate as they get older, they could save up for the higher premiums or sign up for "whole health" plans (analagous to currently available whole life insurance plans) where they pay higher premiums when young and healthy in order to lock in premiums and coverage for when they’re older and sicker. That doesn’t happen now because of the regulatory environment and because people expect Medicare to cover them. If we were to phase out Medicare over a period of 30-40 years and remove regulatory barriers to whole-health and other long-term insurance contracts, then I think we would see people able to provide for their own health care during their golden years.
The reason we have Medicare now is because post-WW2, there’s been an expectation of employer-provided health care (an artifact of the tax code; wages were taxed at up to 90% marginal rates, but full-service health insurance was tax-free). Medicare was introduced to cover people who lost their employer-provided health insurance when they retired. We’re seeing now how bad an idea employer-provided health-insurance is — it bids up prices, decreases accountability, and holds your family’s health care hostage to your job. The question now is whether to shift it to individuals or to the government.
If someone has TB and does not get it treated because they cannot afford to treatment, they can spread it to many other people. That is another reason free market solution to health care don’t work very well.
I absolutely agree that the government has a role in controlling and preventing epidemics, but that’s a pretty small slice of the total health care sector.
And they don’t really have to sell more bonds, but merely sell them to different bondholders. The SSTF holds the bonds that they will redeem. The National Debt doesn’t increase, because the bonds held by the SSTF are already part of the National Debt.
There’s a huge difference between owing money to yourself and owing money to other people. When the government loaned the SS surplus to itself, no additional money left the private sector. But when the government starts spending down the SSTF, the bonds will need to be sold to investors. Every dollar that investors spend to buy those bonds will be a dollar not available for the private sector.
Every dollar that investors spend to buy those bonds will be a dollar not available for the private sector.
Yes, and if you think that is a bad thing, you need to blame non-SS spending. If SS never existed, the same would apply. The amount of private money in govt bonds would be the same.
That’s the point you fail to grasp. It was non-SS spending that incurred that debt. SS was never intended to fix that reality. It’s mechanism only temporarily masked the effect.
I’m thinking of government revenue and spending as one big black box, because that’s how it affects the economy. General revenue taxes and payroll taxes both dip money out of the private sector into government coffers, and a variety of government programs spends that money (and then some, most years). Officially, payroll taxes are earmarked for SS and Medicare, but in practice the government shuffles money around freely, using "trust funds" to use revenues from one part of the budget to cover shortfalls in another part of the budget.
You complain that this has masked overspending on the general-fund budget, and I don’t disagree with you, but I also don’t think that means that it’s not a problem that SS costs are projected to go way up over the next several years, forcing external borrowing to rise unless we raise taxes or cut spending somewhere.
Not complaining at all. It’s not necessarily good nor bad, just something that seems to confuse you.
SS costs are projected to go way up over the next several years, forcing external borrowing to rise unless we raise taxes or cut spending somewhere
So? We knew that back in the early 80’s, which is why we increased FICA taxes beyond the immediate needs to build up the SSTF for just such times. In general, the workers who pay the increased FICA taxes are the ones who will benefit from the SS increased spending. External borrowing, raising taxes or cutting spending are the options we have for unfunded spending. And since it is non-SS spending at issue, the non-SS budget should pay for it. That seems perfectly reasonable to me, and not something that is the fault of SS.
This isn’t a bug or unforseen event, this was exactly what was planned for. You are free to view it as a Black Box where money shuffles around freely. But that isn’t what the law says, nor what happens. The FICA money must be accounted for, and the SS portion can only be used to pay SS benefits. They can’t even discuss changing that in Congress without numerous super majority votes, unanimous consents and suspensions of the rules. Doesn’t sound like it was designed for money to shuffle around freely. Indeed, just the opposite.
Regardless of how it’s designed, that is precisely what happens. No supermajority votes, unanimous consents, and suspensions of the rules are required provided congress promises to pay itself back eventually. The trust fund exists on paper, but in reality we have already spent it. The question is what do we do in 2017 when the government starts needing to pay itself back with money that doesn’t exist.
If the trust fund were invested externally to the federal government, in stocks, private bonds, and foreign government bonds, that would be a different story. Without the ability to lend the SSTF to itself to cover deficits, the federal government would have needed to exercise more fiscal discipline in non-SS programs between 1982 and 2017, and the federal government would have real assets that it could sell to pay social security benefits. But that’s not what happened.
Consider an analogy. Suppose I take on a second job or work overtime to raise money to save for my contribution to my child’s college education. But apart from that revenue, my household budget is in the red. I take out a second mortgage or run up credit card bills, but I also "borrow" money from the college savings account. I don’t feel too bad about that, since I carefully keep track of how much I borrowed and promise to pay myself back.
When my child graduates from high school, I am heavily in debt, it’s still getting worse, and the college savings account consists of nothing but IOUs from myself to myself. But not to worry — there’s plenty of IOUs to cover the cost of my child’s education.
To complete the analogy — my overall *external* debt load is not overwhelming: I’m in no danger of missing payments or getting cut off by the bank, and my raises are keeping pace with the interest payments, but if my kid gets into Harvard and I pay the whole tuition like I’m planning, getting the bank to refinance my IOUs so I have cash to pay the tuition would bankrupt me.
I could say with equal justice that the problem is that I overspent in my personal budget while I was supposed to be saving for tuition, or that I’ve promised more in tuition assistance than I can afford. But since I can’t go back in time and unspend what I’ve already spent, the only reasonable course of action is to sit my kid down and explain that I can’t afford to help out with his college expenses as much as I’d hoped (price-based indexing). The sooner, the better. I should also look into fixing the shortfall in my personal budget (cutting discretionary spending) and putting the money I’m saving between now and when my kid starts college in a real bank account in his name (carve-out personal accounts).
I’ll make a couple more comments, and then let you have the last word. I think we will have to agree to disagree.
The question is what do we do in 2017 when the government starts needing to pay itself back with money that doesn’t exist.
Isn’t that a question for people who say:
I agree that at current levels, where debt as a percentage of GDP is relativley flat, the deficit is mostly harmless.
In the scenario for 2017 and beyond, where the TF redeems its bonds, the debt doesn’t increase one iota due to that. It is already included in the debt. Now you are talking like it isn’t so harmless. I can understand folks who hold either opinion, but not both at once. The issue of the Baby boom demographics has motivated some debt hawks for 3 decades. We knew this was coming SS took appropriate measures, the general budget didn’t.
I think most people will understand that SS isn’t to blame.
The trust fund exists on paper, but in reality we have already spent it.
Are you just now discovering that such is the nature of bonds, public and private? The money is turned over to another party to spend in exchange for a piece of paper called a bond. That’s how it works. When Bush tried a similiar statement during his last ditch effort to save his plan, bondholders around the world were not amused. If I was a foreigner and a bondholder, I’d get a little nervous about statements like that.
If the trust fund were invested externally to the federal government, in stocks, private bonds, and foreign government bonds, that would be a different story.
Putting aside the horror of people like Greenspan, who basically supported the Bush Tax Cuts because he feared the country would run out of federal debt that SS could invest in, and the 99-0 vote against in the Senate in response to Clinton’s proposal to put a small portion of the SSTF into private securities, in the end it would make no practical difference. The added $2 trillion (or whatever) in private markets would be offset by $2 Trillion from the private markets absorbing the govt debt. Makes no difference in the macro picture.
The problem with your "borrowing from oneself" example is that isn’t what’s happening. These issues are a matter of law, and binding upon all parties till changed. Could problems result in 2017 and beyond? certainly, but the blame clearly would belong to the buy now pay later general budget process, not SS, which is paying now to buy later.
It’s no secret how people dig themselves into debt. And it isn’t by planning ahead and paying now to buy later. It’s the instant gratification crowd. And you seem to want to comsierate with them and blame those who plan ahead.
I think there’s an Aesop’s Fable that deals with that.
Since everyone knows that their health will deteriorate as they get older, they could save up for the higher premiums or sign up for "whole health" plans (analagous to currently available whole life insurance plans) where they pay higher premiums when young and healthy in order to lock in premiums and coverage for when they’re older and sicker.
With a life insurance policy, the insurance company is agreeing to pay a fixed dollar benefit on death. If someone is expected to live for 30 or 40 more years, an insurance company knows how to figure the premium to pay that fixed dollar benefit.
With health insurance, no one knows what health care will cost 30 or 40 years from now. No one knows what kind of medical technology will even be available. There is no way an insurance company can price a "whole life health insurance" plan. They simply will not sell a product like this.
RogerR,
I’m fine with agreeing to disagree. We’ve been talking past each other for a while.
MikeCA,
Yeah, you’re probably right about whole-health. It might be workable with some sort of lifetime cap on benefits, but there’s still huge amounts of uncertainty as to where in the range you’ll fall. It seemed cool when I thought of it, but…
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