Mendacity, Medicare, & Social Security

Friends and faithful interlocutors A.I. and Donald Pays have been jousting with me over the Social Security System. Contrary to what they may suspect, I find a lot to praise about these institutions. They have virtually eliminated poverty among the elderly, and that is no small achievement. For precisely that reason we ought to be very honest about what is wrong with these systems, and there is a lot wrong.

If I understand my interlocutors, they more or less concede my point that, in fact, the Social Security Trust Fund is not a reserve of wealth that the system can draw on in the future. It is merely a collection of IOU's, or promises of future payment. They think, however, that the "full faith and credit of the United States" is more reliable than any private contract would be.

Given the trillion dollar plus deficits the United States is currently piling up each year, I am less confident than they are. But let us assume, arguendo, that they are right. Privately managed savings always involved a tradeoff between risk and returns. The savings are always invested in something that is expected to hold or increase its value. Someone hoping for a high return on his or her savings will have to accept a greater degree of risk. Someone wanting security will generally accept much lower returns. Privately managed accounts can pay returns because the money invested in a way that creates wealth, enough wealth to cover both the returns and to allow the managers to make a profit.

Almost everyone will expect some return on their savings, so that the money they eventually end up with is more than what they put in. If an "investment" offered no return, you might as well put the money in a pickle jar and keep it behind the wine in the basement. What sensible person would put his money into an account that paid back less than what he put into it?

Apparently, Social Security does exactly that, at least for a lot of investors. Powerline brings to our attention a very revealing article from the Associated Press.

Consider an average-wage, two-earner couple together earning $89,000 a year. Upon retiring in 2011, they…will have paid $614,000 in Social Security taxes, and can expect to collect $555,000 in benefits. They will have paid about 10 percent more into the system than they're likely to get back.

Social Security, being mandatory, is also confiscatory. In return for that full faith guarantee of benefits, it seizes more than it is likely to pay back. Maybe that's a good bargain, but it's not one that would sell in the marketplace. Whether it would sell politically isn't clear, for the average couple doesn't know about this because the system isn't honest.

What does Government do with that extra 10%? As we have established, it doesn't put it aside to pay future benefits. It spends it. The surplus that Social Security has been running for decades goes into the Treasury. Perhaps this ought to be common knowledge.

Medicare, by contrast, pays benefits beyond all reasonable expectations. When our average couple retires in 2001

they would have paid $114,000 in Medicare payroll taxes during their careers. But they can expect to receive medical services — from prescriptions to hospital care — worth $355,000, or about three times what they put in.

Well, that's a good deal! Try getting a 300% return on any market investment. No problem, mon, if you can pick the next Microsoft or Google. Private investments have to create enough wealth to cover all returns. Medicare, by contrast, has to fund payments out of receipts.

The system has worked for 45 years, with occasional fine tuning. But the retirement of the baby boomers, the first of whom become eligible for Medicare in 2011, threatens to push it over the edge.

Medicare covers 46 millions seniors and disabled people now. When the last of the boomers reaches age 65 in about 20 years, Medicare will be covering more than 80 million people. At the same time, the ratio of workers paying taxes to support the program will have plunged from 3.5 for each person receiving benefits currently, to 2.3.

"With Medicare, we are all still making out like bandits, shoving all those costs to future generations," said Steuerle. "At another level, we know that this system is totally unsustainable."

In fact, both Medicare and Social Security are totally unsustainable in their present forms, and for the same reason. The number of retirees drawing out is growing faster than the number of workers paying in. Soon enough Social Security will reach the breaking point. Medicare is approaching that point now.

I can't resist pointing out that ObamaCare is financed in part by hypothetical cuts in Medicare. "Mendacity," Paul Newman said in A Cat on a Hot Tin Roof, is the system we live with." Ain't that the truth. Maybe it's time for all of us to see the system for what it is.

Comments

[Donald Pay]

You misunderstand Social Security. Social Security benefits also involve an insurance component for disability, and for spousal support. Your FICA tax also goes to these.

[George Mason]

The point KB is making is that all of these programs are unsustainable. You can tax the country into poverty and you will not be able to fund these programs without substantial reform.

[Donald Pay]

Notice we never hear about the stupid wars conservatives get us into as being "unsustainable."

These programs can be sustained with changes. There are multiple levers--taxes, benefits, operations, and a mixture of all three. Social Security has had many such changes throughout its history. Social Security was in much worse shape in the 1980s, and a combination of fixes helped.

Let's not forget that the surpluses in Social Security helped hide the fiscal impact of the Bush tax cuts. Back then borrowing from Social Security, as well as borrowing from China, made those tax cuts possible. It comes down to what and who you intend to use government to benefit. Conservative think the rich should benefit. Liberals think that working people should benefit.

[KB]

Donald always comes through for me. His comment falls squarely between the two relevant points. Viewed as insurance, it doesn't matter what government does with the 10% our couple gets back. They don't get it back, and that makes the return look very poor compared to private insurance and savings.

Viewed as a vehicle of income distribution, Social Security still looks bad. Social Security has been running a surplus for a very long time. That's money that wasn't redistributed among spouses or the disabled or disabled spouses. It was spent as part of the general treasury on whatever Congress was interested in. This was a con job. Precisely if you think that Social Security is a good program, you ought to be offended by this.

[duggersd]

No Donald. Conservatives believe we should look to ourselves. Liberals believe when someone makes more money than another person it is unfair and up to them to redistribute the wealth. That "surplus" in SS has been spent since the 1960's to help fund the Great Society. While I agree the "surplus" has helped hide the deficits of Bush, it also helped hide the deficits of Clinton, Bush, Reagan, Carter, Ford, Nixon and Johnson. It also helped it appear Clinton was running at a surplus at the end of his term when the Congress forced changes in spending practices. Those changes in the tax rates from the Bush era have very little to do with increasing the deficit. In fact I would argue they actually helped lower the deficit. It was the spending that caused the problem.