Amid the recent revival of the spectre of large tax increases, a simply splendid post by David Farrer pointing out exactly why the political classes need them:
The truth is that the welfare state is bankrupt and almost no one, not the Scotsman editorial writer and certainly not the Tories, is willing to say that the Emperor has no clothes.
And not just the British welfare state either. For all the robust free market rhetoric that frightens the piss out of European lefties, the American welfare state is in just as parlous a condition:
Are we really broke? The answer is clearly, YES, but living on borrowed time and money. A recent study was done by Jagadeesh Gokhale and Kent Smetters which measures our government’s current debts and projected debts based on the proposed federal budget and revenues for 2004. By extending the numbers in constant 2003 dollars, they have come to the conclusion that the Federal government is officially insolvent to the tune of $44 trillion.
According to Financial Sense Online (from whence the above quote is lifted) both Medicare and Social Security will be bankrupt by 2010 or 2011.
This is really the big, global, dirty, open secret: the 20th century welfare state constructs are lurching, creaking and on the verge of collapse. Yet, in polite circles, this looming disaster cannot even be discussed, let alone addressed. Such is the taboo status of the welfare state that most Western politicians would rather be seen to publicly champion child molestation than any serious reform agenda.
It is for this reason that the reactionaries are trying to float various methods for the state to plunder everything and anything they can in the desperate, febrile, frantic hope that they can put off the Day of Reckoning for just a few more precious years.
That is true and has been so for years here in America. Sad that years ago Chile sent technicians to advise us on how to privatize social security as they had done, successfully, many years before. And we’re still looking at our navels, not even able to introduce Bush’s timid reform.
One of the odd things about America is that although the US does not have as large a welfare state as the rest of the world with respect to benefits available to people of working age, it has a gigantic state pension scheme, much greater than just about anywhere else. This is something of a historical accident, but it is kind of peculiar. There are problems looming with Social Security, and I am all for reducing and ultimately eliminating the state’s role in this, but still the situation is nothing like that that exists in some other countries with larger welfare states and worse demographic crises.
A coincidence that 2010 is about when the first baby boomers retire.
Boomers are the first generation to have paid into Social Security their entire working lives.
Boomers have paid more into Social Security than any other generation has or likely ever will.
How dare they retire.
Fred:
That is exactly the point that was made on the Financial Sense Online broadcast. Previous beneficiaries got out much more than they paid in.
Here is a good debate about some previously overlooked tax consequences of the massive surge in tax deferred 401k contributions in the US.
Seems that future taxes on private pensions haven’t been fully factored into the picture in the US. To the tune of trillions of dollars. The fight over how to spend them has now begun.
The question is how do I profit from this (we are capitalists, right?).
Is it wise to invest in gold? The bankruptcy of the welfare state has been the mantra of goldbugs for the last thirty years (www.dailyreckoning.com types I mean).
But 30 years later the welfare state is still in business, which makes me wonder.
The question is how do I profit from this (we are capitalists, right?).
Is it wise to invest in gold? The bankruptcy of the welfare state has been the mantra of goldbugs for the last thirty years (contrarian types I mean).
But 30 years later the welfare state is still in business, which makes me wonder.
“A democracy cannot survive as a permanent form of government.
It can last only until its citizens discover that they can vote themselves largesse from the public treasury.
From that moment on, the majority (who vote) will vote for the candidates promising the greatest benefits from the public purse, with the result that a democracy will always collapse from loose fiscal policies, always followed by a dictatorship.”
–Lord Thomas Babington Macaulay, 1857
Nailed it, m’lud.
That’s why everyone knows we’re screwed, and yet no one can do anything about it. Even if (for example) the Republicans were to stretch out their neck for the axe and make the cutbacks or changes that are required, they would be voted out in the next election by an enraged “entitled class” (note also that 48% of all US income earners pay no Federal income tax, and therefore have no dog in the hunt) and the incoming Dems would put all the giveaways back.
I see no solution except eventual failure and utter collapse, followed by reconstruction from the rubble…with a 10 to 20 year economic “Dark Age” intervening.
This is dissapointing. The Gokhale/Smetters study was discussed ad nauseum weeks ago on many blogs and print journals. They lumped S.S./Med with regular federal budgets and came up with a contrived number. The Financial Times got a black eye for sloppy reporting on this about the same time as the NYT was being roasted for “creative journalism”.
S.S./Med are pay-as-you-go systems rather than debt. The benefits that will be payed, if any, depend on contributions to those systems at the time payments are made. Both the contributions and the payments are negotiable. Increases in contributions(such as would result from productivity growth) and decreases in payments (such as would result from means testing, later retirement and medical cost containment) make the hysterical claim that “the Federal government is officially insolvent to the tune of $44 trillion” laughable for anyone who is paying the slightest attention.
All societies with PAYG systems, as well as all corporations (such as the US auto makers) with pension liabilities depend on growth. Growth can come from more payers or more productivity per payer and so greater wealth. As post-WWII demographic bubbles work their way through developed countries there will be adjustments required to systems defined in the 1940s. Few subjects have been studied more widely or written about more extensively in recent years.
“Both the contributions and the payments are negotiable.”
Uh-huh. Sure they are. See (a) the quote above from Macaulay, (b) the data showing that half or less of the US pays any income taxes, and (c) the post above about baby boomers.
The negotiation about benefits is going to be pretty one way for the foreseeable future – upward. The baby boomers, true to generational form so far, are not about to make any sacrifices in their retirement packages, and the pending prescription drug benefit shows what we can expect in the form of “negotiating” the benefit package.
As for taxes, I suspect that the boomers will have no compunction at all about taxing the productive class of society right into the ground.
So, yeah, I think the US government will stay solvent for awhile, but the “renegotiation”, when it comes, will be a generational war with catastrophic consequences at best.
The problem with Pay as You Go systems for government benefits is that they will eventually require one cohort of workers to pay both for their own retirement (which will occur after the system is “renegotiated”), and for the retirement of the generation(s) ahead of them in line.
But hey! We already have a professional Army in the US, and are already taking foreign enlistments in return for citizenship…Ave Caesar!
Yes Bucky, the shit IS going to hit the fan, we’ll see how many boomers get fed into the meat grinder when the time comes, natch?
Or we could just assess a 5% global VAT, that would about cover it I think. Let’s see how long it takes for the new Empire to become self funding!
Don’t put that last down as “Impossible!”, the Boomers would rather rule the world with our Legions than face them at home, or give up their goodies.
“…half or less of the US pays any income taxes…”
S.S./Med are not funded by income taxes, they are funded by payroll deductions that everyone pays whether they pay income taxes or not. This is another reason why conflating national budget deficits with PAYG entitlements makes no sense.
The sky will not fall chicken little however much you long for it. Some politicians will die, there will be political blood running in the gutters, but the system will be reformed, in repeated steps, to reflect the fact that people live longer now, are healthier in old age, and consume larger quantities of drugs and medical services that when the systems were created in the 40s.
The demograhics in the US aren’t as bad as in Europe and Japan. The fertility rate is higher and immigration brings in new young workers. We all need to adjust to the fizzle of the population bomb, and we will.
“Boomers are the first generation to have paid into Social Security their entire working lives.” Not quite… Social Security began in 1935. so people whose working lives began in the mid-1930’s paid Social Security taxes their entire working lives. (I will grant you that those people got a good deal out of it because mostly they paid very low taxes compared to the benefits they have received.) I’m not a boomer either — born in 1943, I’m a war baby and have been paying into Social Security since 1960. Even in the 60’s I complained about SS — it was always talked about (especially by Democrats) as an “Insurance” plan, which was pure BS; it’s a welfare plan. Worse, it’s a regressive one because well-to-do seniors will now be receiving prescription drug benefits partly paid for by payroll takes on low wage workers, many of whom don’t even have their own basic medical coverage, and yet are being taxed for a group that is politically favored (because they vote in high numbers and are greedy enough to vote themselves more and more benefits). [And before anyone accuses me of senior-bashing, think about my year of birth — I’m sixty years old, which is close enough to senior status myself]
“S.S./Med are not funded by income taxes, they are funded by payroll deductions that everyone pays whether they pay income taxes or not. This is another reason why conflating national budget deficits with PAYG entitlements makes no sense.”
Back40… what annoys me is that every single time an income tax cut is proposed, people on the left complain that payroll taxes aren’t being cut too. You can’t touch payroll taxes without touching Social Security, the third rail of American politics. Oh and don’t dare try to propose any reforms, especially anything involving that dreaded “P” word. They don’t want solutions… they would much rather have a political football.
BAck 40 – I am quite aware that some of the current payroll tax goes to pay SS/MA benefits, but some of it now goes into the general fund. In the future, this flow will be reversed, so that income taxes are diverted to pay SS/MA benefits. The bogus social security trust fund is be the mechanism through which these transfers occur. If you like, I can explain in more detail.
Both are taxes, both go to feed the monster. So some comes out of your front right pocket, and some comes out of your back left pocket – who cares?
Regardless of the shift from using part of the payroll tax to pay for SS/MA benefits to using all of the payroll tax and part of the income tax, the fundamental dynamic of the political renegotiation will be unchanged. Beneficiaries will outnumber, or at lease outmuscle, taxpayers, so taxes will go up.
Yes, and when those taxes get raised…gee, is the professional military in the US composed primarily of underpaid young people, or aging boomers?
Not much of this lacks historical precedent. The boomers can and will vote themselves massive benefits, but unless they are more savvy than they appear, they will reap the wirlwind.
The history of past democracies and empires makes all this pretty clear. I suppose that yes, those of us who remember history are doomed to watch others repeat it.
Why people continue to be deluded into thinking that just because something was decided in an election that the US and UK militaries will always honor those results? With the educational, fiscal, and other social trainwrecks happening in slow motion before our eyes, don’t be surprised in 10-20 years when such nastiness comes about.
” I am quite aware that some of the current payroll tax goes to pay SS/MA benefits, but some of it now goes into the general fund.”
It all does, there is only one purse into which revenues are placed.
“In the future, this flow will be reversed, so that income taxes are diverted to pay SS/MA benefits.”
No, when the surplus has been paid out then payroll taxes will increase or benefits will decrease.
“Both are taxes, both go to feed the monster. So some comes out of your front right pocket, and some comes out of your back left pocket – who cares?”
Most people care, I care. We cannot dispense with government and taxes to fund it but we can limit government to desirable acts. Part of this is to distinguish the costs and benefits of various policies. The fact that revenue streams from various sources all funnel into a single purse doesn’t mean that we fail to keep accounts and so lack the ability to judge policies.
“…using all of the payroll tax and part of the income tax…”
It doesn’t work this way.
There won’t be a wreck. There will be heated debate leading to sensible, necessary reform. The issue isn’t whether the social safety net will be abandoned or not as too expensive for an aging population, the issue is what services will be paid. That depends on the productivity of those still working. At current levels of productivity there will be fewer services as the number of recipients increases. Increased productivity will allow more services.
The ways to increase productivity are to increase the age of retirement and keep people producing for longer, and improved production techniques as we have experienced in the past and fully expect to experience in future but can’t precisely predict.
The ways to reduce services are to limit benefits to those who need them most and reduce the cost of services through various efficiency measures.
The public discussions are about the reasons containment is necessary and the methods available for containment. Reforms will take place in steps as information becomes available. This isn’t a problem that can be solved once and for all, it is one which we will work at forever.
“No, when the surplus has been paid out then payroll taxes will increase or benefits will decrease.”
There is no surplus being accumulated anywhere. Right now, we are using payroll taxes to pay for things out of the general fund, and that fund is issuing treasury notes to social security that will be paid in the future by the general fund out of taxes collected in the future.
The whole trust fund scam is built on using future tax revenues to “redeem” notes “issued” by the government to itself to reflect the diversion of today’s payroll taxes that are not needed to pay today’s benefits (the “surplus”) to the general fund to pay for other stuff. But really, all of today’s tax collections are being spent today, there is no surplus being accumulated, and tomorrow’s astronomically higher benefits burden will be paid for entirely out of tomorrow’s tax collections.
You don’t seem to think that income taxes will ever be tapped to pay SS/MA benefits. I suppose this is possible, if payroll taxes are run up to truly astronomical highs, but unlikely. One year soon (I believe it is around 2012) payroll taxation at current levels will not be sufficient to cover SS/MA benefits. At that point, the current plan is to start redeeming all those “notes”, which will mean that the general fund (supported primarily by income taxes) will be drawn on to pay for SS/MA benefits. I don’t see any practical way to avoid this, absent a drastic reduction in benefits that is politically impossible.
Your faith in people giving up benefits in order to reduce the tax burden on someone else as part of a “heated debate leading to sensible, necessary reform” is touching, and I sincerely hope that it plays out that way. I just don’t believe that it will.
If you know of any other countries that have seen a beneficiary class wielding dominant political power that voluntarily surrendered benefits to lower taxes on the productive class, please share with the class. The time to make easy fixes to a benefit system is years before the crisis, in other words, right now. What do we see, though? No prospect of fixes being adopted now. In fact, the political system in America is about to give us the biggest single entitlement expansion in the history of the world, the prescription drug benefit. The trend, in other words, is not running in the direction of lower benefits and rational solutions.
Earned Income Credit wipes out any payroll taxes that the bottom fifty percent pays in. Also I believe that 44 trillion figure is extended out 75 years and that figure is about ninety-five per cent medicare and SSI. In 75 years the U.S. economy, at the present rate of GDP, will produce 700 trillion dollars, and that’s if growth stays at this slow pace. I believe partial privatization will ease a great deal of this problem. And sooner or later partial privatization will occur.
As we get closer to the abyss, the prescriptions of Libertarians are beginning to look better and better to people, but unfortunately, apparently not enough to persuade the electorate to put sufficient numbers of libertarians in office who would actually do something helpful in advance of the collapse. Even the threat of Libertarian electoral success might prompt the major parties to get off the dime and do something useful, just to keep “their” voters in the tent.
The medicine is bitter, but unless we take responsibility to deal with it now, we’ll be forced to deal with it at the point of collapse, when our options will be much more limited. How sad that some want to keep the ship from hitting the iceberg, some are refusing to see the iceberg, and some are secretly scoping out lifeboats in order to facilitate their private escapes.
“There is no surplus being accumulated anywhere. Right now, we are using payroll taxes to pay for things out of the general fund…”
This is a matter of bookkeeping. We might wish that a real fund existed, one which might appreciate, and there are proposals to do so, but it is inaccurate to conflate income taxes with payroll deductions simply because they all go in one purse.
“The whole trust fund scam is built on using future tax revenues to “redeem” notes “issued” by the government to itself to reflect the diversion of today’s payroll taxes that are not needed to pay today’s benefits …”
Scam isn’t a useful description, nothing is concealed.
“… tomorrow’s astronomically higher benefits burden will be paid for entirely out of tomorrow’s tax collections.”
No, they will be paid from future payroll deductions. Income taxes are not used for these purposes. The laws could be changed to make your confusion true, but it seems unlikely since there is no benefit to doing so. When SS/Med costs grow to unsupportable levels they will have to be reduced. It is not certain that this will happen since we are not certain what future productivity will be, but we must remain vigilant and ready to reform the system as circumstances require. Americans are not French, they are more likely to dismount and walk beside their horses than ride them to death.
“You don’t seem to think that income taxes will ever be tapped to pay SS/MA benefits….”
Not under current law. Laws can change but as noted above this doesn’t seem likely. There are better solutions.
“If you know of any other countries that have seen a beneficiary class wielding dominant political power that voluntarily surrendered benefits to lower taxes on the productive class, please share with the class.”
America may be the exception. It certainly sees itself as the exception and always has done. It’s funny how self image can constrain behavior and quite instructive for those who have trouble with restraint.
“…the prescription drug benefit…”
May be a blessing in disguise. Drug consumption and drug costs have exploded in the US. More drugs are taken, each drug has grown in price, and the combination is huge. This increase corresponds to the advent of consumer marketing of drugs. 16% of drug company sales revenue is spent on advertising, more than is spent on R&D. A possible result of a drug benefit would be to reduce the effectiveness of drug advertising to individuals as consortia buy in bulk. This would in turn reduce drug costs. Another possible result, already in place in the US state of Oregon, is comparative drug testing which allows market forces to restrain drug costs to their performance value rather than their fashion value.
Massive drug consumption is a new thing, one which over time will lose its novelty as people gain experience. Many of the newest, most expensive drugs don’t really perform much better than older, cheaper generics that are off patent. The initial rush to a new wave of “wonder drugs”, fomented by direct consumer advertising, is unsustainable as information about comparative performance becomes known. This is the nation of consumer reports and warehouse discounters, a nation which in the past has happily supported retailers who sharpen their pencils and offer value, a nation willing to substitute brands when significant savings are offered.
I think we are seeing a “drug bubble”, one that will burst as consumers become more sophisticated. Health fads, diet fetishes, miracle cures and wonder drugs are eternal lures for the aged and unwell, but none endure for the simple reason that there aren’t really any miracles…yet. When a true wonder drug appears, such as some of the vaccines for devastating childhood diseases, no one gets rich off them. The secret to getting rich is to sell hope but avoid delivering a cure so that users remain buyers. It’s the razor and blades school of marketing; hype the razor and even give it away since profits come from selling replacement blades. This only works until a competitor enters the market and drives down prices. Then a new wonder razor, and its revenue stream from replacement blades, must be designed and promoted.
There is no good reason for drugs to be so expensive. Focusing attention on them through a new drug benefit will expose this fact. Major costs for drugs come from advertising and the approval/certification process, especially human trials, neither of which make useful contributions to drug efficacy and so are vulnerable to improvement and reduction.
When I read this article, I was immediately reminded of David Weber’s Honor Harrington series of books– which are, by the way, required reading for all intelligent organisms. Mr. Weber is a great guy, very funny, and well-versed in history.
I would provide a direct quote, but the books are all packed in boxes right now. The short version of the relevant part of the setting goes something like this:
The Republic of Haven was a shining example of democracy, culture, economics… all of that good stuff. Eventually, though, egalitarianism went out of control. All citizens would be paid a “Basic Living Stipend” (BLS), whether they worked at all, or not. The state-run education system went in the toilet after that, and the majority of people became an unemployed mob that demanded an ever-increasing BLS.
In time, Haven had to turn expansionist in order to fill the troughs with slop. This worked at first, but after the new economies were bled dry, well… the government only knew one system. It was exported to the conquered territories, which then became an additional parasitic load on the system. This called for more expansion, and by that point, things were really spiraling out of control. Politicians had no choice but to perpetuate the system, as the mob simply would not accept anything besides a continual increase in the BLS. Abraham Lincoln’s quote about having a wolf by the ears is fully applicable.
So that’s what I thought of, the very instant that the collapse of a welfare state was suggested. Please, go out and acquire Weber’s On Basilisk Station at your earliest convenience. In fact, you might as well pick up The Honor of the Queen and The Short Victorious War while you’re at it.
Back40, I’m not sure that we have any real disagreement about the way things are done now. I don’t really care that much if SS/MA benefits are paid for by my income tax or by my payroll tax; it is really quite irrelevant to my point that (a) there is very little prospect of benefit packages being cut and (b) every likelihood, therefore, that taxes of some kind will be raised to very high levels before something finally gives.
I think that demography and politics will postpone any real change in this pattern until the necessary solutions are painful in the extreme.
Income taxes are not now used to pay for SS/MA benefits, but in the future I believe they will be because the system is now designed to make it happen that way in the future when payroll taxes are no longer adequate. Really, though, hiking payroll taxes, rather than income taxes, year after year to cover SS/MA liabilities makes no difference to my view of the situation.
I do think the “trust fund” terminology is a scam – while some may understand that there is no trust fund at all, most people take this term at face value and believe their money really is being saved up for them somewhere. If I were to try to run a retirement plan the way the government runs SS, I would be put in jail for fraud. In my book, that makes it a scam.
As to whether even more massive government involvement in the drug industry will be an improvement, well, I suppose anything is possible, but I seriously doubt it. Advertising expenses for drugs are not a significant part of their costs (the claims to the contrary are based on conflating many other costs into advertising). Significantly reducing the regulatory burden on the drug industry is a dream of libertarians everywhere, but I think the more likely outcome of government fincancing is price controls leading to a drastic reduction of pharmaceutical research. It is much more politically palatable to slam the drug industry and slap on price controls than to reduce the regulatory hurdles (too easily portrayed as selling out the safety of sick people to the eevvill drug companies).
I’ve been irritated and angered by this issue for years now. The problem is that the senior lobby is large and getting larger. And they vote. Any reasonable reform that reduces benefits will be opposed, but the system could be fixed in a manner that meets the needs of both young and old. The senior lobby will never let it happen.
For instance, notional accounts, like in Sweden, that make the system reflect the amount paid into the system would stabilize the $10 trillion unfunded liability. It’s not on the table yet and won’t get there because it would do away with any potential increase in benefits.
Congress is in the process of adding $2.55 trillion to the unfunded liability for Medicare by adding a drug benefit. The entire system of non-hospital medicine could be changed into a functioning market if Medicare Part ‘B’ were simply changed into a system of medical savings accounts — each senior is given an account, funded with the Part ‘B’ money, and a debit card to pay for non-hospital medical care — a functioning market would result. They would shop around for the best care. Any drug benefit should be handled similarly.
This would have a profound impact on the market for health care in the U.S. With the sheer size of Medicare a transformation would ensue and employers would follow suit. HMOs would play a vastly reduced role in non-hospital costs, thus eliminating a third party.
Finally, with regard to financing, there’s no hope of benefits actually being cut so general revenue will end up being used. If they actually took the money and placed it in debt-based securities, a real trust fund could be established that didn’t involve claims on future taxpayers — use of Treasuries would be disallowed, as would stocks.
There are ways to fix this but the geezer brigade and their lobby are too strong. If history is any indicator their demands on these systems will increase — see drug benefit — rather than decrease and the whole fucking country will suffer for it.
I should also add that the U.S. is in much better shape than the EU in terms of our long-term finances. Look here.
One other correction to Fred Boness: the boomers are *NOT* the first generation to have paid into it their entire working lives. Anybody 18 years old and younger in 1938 when SS first started collecting did the very same thing. They paid into the system their entire working lives.
Need to get off the pitty pot.
Here’s a good way to sell the abolition of restrictive government policies vis a vis the pharmaceutical industry.
Go directly to the older people, point out that they are currently under sentence of death, and that their only hope of reprieve is for pharmaceutical companies to come up with a miracle drug that stops the aging process.
The only chance in hell of that happening is if government allows them to reap big profits from pharmaceutical research… i.e., drops its stonewalling of new drugs, threats to impose price controls on the drug industry, dark hints that it might soon nationalize the whole health care industry, and so on.
Once the pharmaceutical industry comes up with the anti-aging drug, Social Security and Medicare immediately become irrelevant. There certainly won’t be any calls to expand it.
I’d say that’s our only hope of getting away from the abyss. Plus, I don’t much like being under sentence of death myself.
“Go directly to the older people, point out that they are currently under sentence of death, and that their only hope of reprieve is for pharmaceutical companies to come up with a miracle drug that stops the aging process.”
… And then:
2005: ‘Pfizer wants to charge me ten bucks a dose for LiveForeverNex! The gub’mint should Do Something About That!’
2006: ‘The senior citizens in my district have to eat cat food in order to pay for LiveForeverNex. That just isn’t right, and that’s why I am introducing the Life Extension Fairness Act which will force those drug barons to…’
2013: ‘The drug industry today asked Congress for an additional 12 jillion dollars in suplemental aid in order to continue producing life-extending drugs. Sen. Roundbottom expressed the hope that the Wellness Act of 2013, which would help further support the pharmacutical industry, would receive the president’s signature.
In other news, senate Republicans have attacked the president’s latest proposal to cap the upper-income tax bracket at 76%, and remove some senior citizen tax immunities. The AARP voiced strong opposition to this proposal…’
2014: (On a libertarian weblog) ‘Here’s my plan: we go to the senior citizens and convince them to vote in their long-term best interests…’