Addressing the Problem

I have largely ignored the Northern Valley Beacon for some time, but I will quote that fountain of bile here because it is instructive. After four paragraphs about Nazis, Professor Newquist has this:

The financial problems of the developed countries have resulted in the designation of a new class of useless eaters by some people. An article in The Atlantic contends that the impending demise of Europe and the eventual failure of America are because there are too many old people on pensions, useless eaters, and not enough young people who contribute to productivity. Advances in medicine have prolonged life expectancy and controlled births, creating the imbalance between old and young. Moreover, these old people raise up in rebellion and protest when the governments propose reducing or taking away their pensions. Furthermore, they tend to watch their money and do not spend a hell of a lot to stimulate the economy. One blog recommended this article as brilliant. The article and its advocates seem irritated that old people do not seem willing to go gently into poverty, destitution, and beyond when it is proposed for them. As it is in the Paul Ryan budget.

In the original paragraph, the word "brilliant" links to my post on an article by Meagan McArdle.

McArdle pointed out that it will be hard for Italy in particular and Europe in general to solve their fiscal problems without economic growth and that it is hard to generate economic growth with declining populations. These judgments strike me as near mathematical certainties and I thought it germane to point them out. Whether or how we can remedy the problem is a much bigger question.

Focusing on something more specific, Social Security is an example of what are called transfer payments. In this case, wealth is transferred from people who work to people who don't. The ratio between the number of people paying in and the number of beneficiaries will matter. If the former is shrinking relative to the latter, the system is very probably in trouble. Anyone who wants to know whether or how the system can be maintained had better pay attention to that ratio.

Professor Newquist seems to assume that, because I and McArdle note that the ratio is shrinking, we are advocating the elimination of the beneficiaries. Thus we are Nazis. The adolescent non sequitur aside, there is still a logical problem. A ratio can be altered by changing either side. McArdle and I were clearly focusing on the problem of declining populations. Of course, Professor Newquist has never been very good when it comes to logic.

Economist Robert Samuelson addresses the problem in his latest column. He notes that FDR was not in fact in favor of what Social Security actually became.

When Roosevelt proposed Social Security in 1935, he envisioned a contributory pension plan. Workers' payroll taxes ("contributions") would be saved and used to pay their retirement benefits. Initially, before workers had time to pay into the system, there would be temporary subsidies. But Roosevelt rejected Social Security as a "pay-as-you-go" system that channeled the taxes of today's workers to pay today's retirees. That, he believed, would saddle future generations with huge debts -- or higher taxes -- as the number of retirees expanded.

What FDR wanted was a genuine pension plan. Worker contributions would be invested and the resulting investments would be paid out. It didn't happen. Congress quickly transformed the system into a pay-go scheme. The left has been very fond of that system. It has meant, so far, that Congress could guarantee levels of payment regardless of economic realities. It depended, however, on a favorable payee/beneficiary ratio. That ratio has changed.

Early Social Security beneficiaries received huge windfalls. A one-earner couple with average wages retiring at 65 in 1960 received lifetime benefits equal to nearly 14 times their payroll taxes, even if those taxes had been saved and invested (which they weren't), calculate Eugene Steuerle and Stephanie Rennane of the Urban Institute.

But now, demographics are unfriendly. In 1960, there were five workers per recipient; today, there are three, and by 2025 the ratio will approach two. Roosevelt's fear has materialized. Paying all benefits requires higher taxes, cuts in other programs or large deficits. Indeed, the burden has increased, because it now includes Medicare, which is also viewed as an entitlement.

That is the problem. The Social Security system as it exists is unsustainable. Medicare is much more so. Pointing out the role that demographics is playing in this drama is merely pointing out the hard facts. If we don't reform these systems, they will collapse. Probably a lot more of the economy will collapse with them.

Newquist is a crackpot; however, his rhetorical strategycondemning anyone who points out the problems, let alone actually tries to address themis distressingly common.

Comments

[Donald Pay]

I don't get this doom and gloom. It really does sound like nascent Naziism.

Eventually changes are going to be made to Social Security to balance demographic changes and fiscal challenges. It's not as if the program hasn't been changed several times before. The social security system as it existed in the 1980s was unsustainable, until the politicians fixed it. But there's a difference between fixing the program and dismantling it. We've got a bunch of retrograde conservatives who want to get rid of Social Security all together (really as a payoff to their Wall Street minders), and no one trusts them to make the necessary changes without hurting the elderly, and their middle class chilfren who will have even more financial and care giving burdens to shoulder.

If conservatives really worry about declining populations of productive workers, many of their policies go directly counter to encouraging having children or adding population through immigratioin. This disconnect betweeen what you say you want and what policies you actually propose and oppose means a lot more than your hollow protestations that you don't want to kill off people, or at least make it much more likely they will die sooner than later.

[larry kurtz]

Fascinating, we seem to be witnessing Ken's psychic meltdown:

http://www.nvo.com/psych_help/paranoidpersonalitydisorder/

[lynn]

Oh, Don, you know not whereof you speak. You sound like that idiot legislator Grayson from Florida who thankfully lost re-election. He said too that the conservatives/Reps wanted people to just die. Ridiculous. You I am sure love Obamacare, which will eventually bankrupt the nation, which even the CBO has now managed to acknowledge. However, Obamacare has in its wealth of new regs and wonderfulness the creation of a panel that will determine who gets what and how much medical care based on age, usefulness, worth of care to length of life, etc. This, in fact, will make it much more likely that people will die sooner than later. And regarding Social Security, the Dems have proposed nothing that will ensure that it is there for the next generations; they just ridicule any attempt to reform it as "throwing granny over the cliff." There comes a time when the money runs out, and it isn't as magnamimous as you seem to believe to keep entitlements as they are, which will go broke, and to add another via Obamacare. You claim to want to protect the people, but not addressing the problems inherent in the spend, spend, spend entitlement philosophy is ridiculous and shows ignorance of basic math and economics. Oh, wait, that is exactly the philosophy of our great commander in chief, the great O, and the trusted leader of the left.

[larry kurtz]

lynn: yer a dunce.

[LK]

Dr. Blanchard,

I ask a long winded question here: http://thedisplacedplainsman.blogspot.com/2012/04/will-states-save-medicare.html

I would appreciate hearing your opinion.

[Donald Pay]

lynn,

Thanks for the compliment. I love Grayson, who has a good shot at winning back his seat.

Actually, the health care mandate, the Republican part of Obamacare, is not my favorite solution. I would have prefered a public option or a single payer system which would eliminate the need to mandate that people purchase coverage from the more expensive private insurance market. I view the mandate as an unfortunate concession if we are to maintain the current private health care market.

Right now private, unelected health insurance bureaucrats make decisions on what coverage people can receive. The fact is your fears about rationing care have been an ongoing problem with the current system. Our current system rations based on the whims of and employer or of the insurance company. Because it pays based on services rather than outcomes, it is inefficient and expensive. Obamacare puts an end to that.

Regarding Social Security, if you are talking about privatizing it, lynn, I hope that Democrats will stand firmly against it. I don't see the why we need to increase the retirement age, which prevents younger employees from moving up the ladder.

One of the good things about the demographics is that a lot of higher paid older workers will be retiring, allowing younger workers to move up to higher paying jobs. There will be quite a demographic pull, because there will be more jobs being opened than workers available to fill them. That will put an upward pressure on wages, and younger workers, will be able to afford higher FICA taxes.

[duggersd]

Don, if you do not understand why we need to raise the retirement age, talk to an actuary. We have more and more being supported by fewer and fewer. This is the type of scheme that got Bernie Madoff into jail.
BTW, what makes you think that those people retiring would put an upward pressure on wages? What is the logic?
BTW, you have nailed it about unelected bureaucrats making healthcare decisions. What you missed is it is being turned over to government bureaucrats that are rationing healthcare under that monstrosity called Obamacare.

[larry kurtz]

Yer right, Barnes: we skinny people shouldn't have to cover your obesity:

http://www.sciencedaily.com/releases/2012/04/120409103247.htm

[Mark Anderson]

Hey, I'll volunteer to help create more people. No problem. I'll have to ask my wife first.

[Mark Anderson]

Here's a good article to read on the sustainability of Social Security:http://www.epi.org/publication/social_security_is_sustainable/ and hey it actually quotes that great Nobel prizewinning economist Paul Krugman.