The Deficit Hawks' Attack on Our Entitlements
By Robert Kuttner
Washington Post Op-Ed, 2009-02-23

[This opinion piece seems to be a fount of mis- and dis-information,
sometimes deliberately distorting history to support its desired agenda.
An example from the article (emphasis is added):]

History provides a parallel.
At the end of World War II,
the public debt was about 120 percent of GDP --
about three times today’s ratio.
the heavily indebted wartime economy
stimulated a quarter-century postwar boom --
because all that debt went to
recapitalize American industry,
advance science and technology,
retrain our unemployed and put them to work.

[That isn’t entirely accurate.
Let’s look at two issues:

First, what did the government buy with the debt it incurred during WWII?
Answer: It paid for the greatest munitions buildup the world has ever seen,
making America in the eyes of some “The Arsenal of Democracy”.
(A nice easily accessible description of this is in
Paul Kennedy’s The Rise and Fall of Great Powers.)
At the end of WWII the U.S. had built, and that debt had paid for,
a gigantic 1200 ship navy,
a gigantic Army Air Force,
and acres of army items,
not to mention spending $2 billion, a large sum in those days,
to develop the atomic bomb.
Further, it paid for all the munitions (shells, bombs, bullets)
that were expended on the Axis powers to defeat them.
And it paid for the salaries of tens of millions of service members.

Second, what fueled the post-war American economic boom?
Well, look at the industrial and economic state of the rest of the world.
Germany and Japan had been bombed to a far-thee-well,
to destroy both their industrial base and their will to resist.
France had been fought over,
Russia had had much of its industry destroyed by the German invasion, and
China had also been fought over in a ten-year war with Japan.
American industry had very little competition
until those nations could get back on their feet.

Put this in a current context:
Who makes many of the manufactured products we buy today?
Germany, Japan, and China.
To really recreate the post-1945 situation for America,
we wouldn’t increase our public debt
and use the money to make the expenditures the left is so eager for,
we would build up our military
and bomb the bejabbers out of Germany, Japan, and China.
Boy, that’d take care of the competition.
Of course, even that would not resurrect
the specific demographic situation, cultural values, and social structure
which even Kuttner must admit
played a large part in America’s success throughout the twentieth century.

Back to Kuttner’s op-ed:]

Since the early 1980s, Peter G. Peterson has been warning that
future entitlement deficits would crash the economy.
Yet when the crash came,
the cause was not deficits
but wild speculation on Wall Street.

[What sophistry.
Can there only be one crash, and the speculation one was it?
Of course not.
The problems Peterson has warned us about are still out there,
still not addressed.]

A 'Crisis' America Needs
By Robert J. Samuelson
Washington Post Op-Ed, 2009-05-25

When the trustees of Social Security and Medicare recently reported on
the economic status of these programs,
the news coverage was universally glum.
The recession had made everything worse.
“Social Security, Medicare Face Insolvency Sooner,”
headlined the Wall Street Journal.
Actually, these reports were good news.
Better would have been:
“Social Security, Medicare Risk Bankruptcy in 2010.”

It’s increasingly obvious that Congress and the president (regardless of the party in power)
will deal with the political stink bomb of an aging society
only if forced.
And the most plausible means of compulsion
would be for Social Security and Medicare to go bankrupt:
Trust funds run dry; promised benefits exceed dedicated payroll taxes.
The sooner this happens, the better.

That the programs will ultimately go bankrupt is clear from the trustees’ reports.
On Pages 201 and 202 of the Medicare report,
you will find the conclusive arithmetic:

Over the next 75 years,
Social Security and Medicare will cost an estimated $103.2 trillion,
while dedicated taxes and premiums will total only $57.4 trillion.
The gap is $45.8 trillion.

(All figures are converted to “today’s dollars.”)

The Medicare actuaries then note what happens
once the trust funds for Social Security and Medicare’s hospital insurance program
are depleted:
“No provision exists under current law
to address the projected [Medicare and Social Security] financial imbalances.
Once assets are exhausted,
expenditures cannot be made
except to the extent covered by ongoing tax receipts.”
Translation: Benefits would fall.

Social Security checks would shrink;
some Medicare bills wouldn’t be paid in full --
and the shortfalls would progressively worsen.
Retirees would scream.
Hospitals might shut.
No president or Congress would abide the outcry.
Even the threat of imminent bankruptcy would rouse them to action.
But restoring the programs’ solvency
would confront Congress and the White House with fundamental questions.


In 1940,
life expectancy at birth was 61.4 years for men, 65.7 for women;
by 2008,
the comparable figures were 75.4 and 80.

So: As health and longevity improve,
when should people stop working and be entitled
(from which comes “entitlement”)
to receive government retirement subsidies?
Stripped of politically pleasing euphemisms
(“social insurance,” “entitlements”),
that’s what Social Security and Medicare mainly are.
If so, how much should wealthier retirees be subsidized?

Or: How much should obligations to the old displace other national needs --
for, say, defense, education, research, transportation
or, more broadly, adequate family incomes?
In 1990, Medicare and Social Security
represented 28 percent of federal spending;
in 2019, their share will be almost 40 percent,
projects the Obama administration.
As this spending grows, pressures will intensify to raise taxes, increase budget deficits or cut other programs.
What’s the right balance between the past and the future?

How can the medical system be reorganized to improve care and restrain costs?
By some estimates,
a third of health-care spending may be unneeded or ineffective.

the Medicare and Social Security trust funds won’t be exhausted
until 2017 and 2037, respectively, by the latest projections.
Although these bankruptcy dates are moved up from last year’s estimates
(2019 for Medicare and 2041 for Social Security),
they’re still fairly distant.
Between now and then,
the drain on the rest of government will occur invisibly.
The inadequate trust funds will steadily diminish.
The government bonds in these trust accounts
will be presented to the Treasury for payment.
Those payments can be financed in only three ways:
bigger deficits, higher taxes or spending cuts.

But without a genuinely forcing event -- something requiring a response --
presidents and Congresses sidestep the underlying choices.
They profess concern, but their proposals are cosmetic, ineffectual or both. “We must save Social Security for the 21st century,” proclaimed Bill Clinton. “The system . . . on its current path, is headed toward bankruptcy,” warned George W. Bush. Now, Barack Obama seems to be reverting to this familiar form.

“What we have done is kicked this can down the road,” he told The Post. “We are now at the end of the road.” Great rhetoric -- but that’s all. Although no one expects Obama to have a grand blueprint after just four months, he has yet to signal even general support for needed policies: gradual increases in eligibility ages; gradual benefit reductions for wealthier retirees; a fundamental overhaul of Medicare. Indeed, Obama’s plans to expand government-paid health insurance might increase Medicare spending by aggravating medical inflation.

Like General Motors, we continue bad habits because we can -- temporarily. Procrastination is a bad policy. The longer changes are postponed, the more wrenching they will be. The hurt for retirees and taxpayers will only grow with time. Social Security last faced a forcing event in 1983, when a dwindling trust fund prodded Congress to make changes. The lesson: A “crisis” is just what we need.

Welfare in a Bad Way
By Robert J. Samuelson
Washington Post Op-Ed, 2009-06-22

Raised in an individualistic culture, Americans dislike the concept of the “welfare state” and do not use the term. But make no mistake, the United States has a welfare state, and its future is precarious. The true significance of General Motors’ bankruptcy lies more with this welfare state than with the battered condition of American capitalism.

Broadly speaking, the U.S. welfare system divides into two parts -- the private, run by firms; and the public, provided by government. Both are besieged: private companies by competitive pressures; government by rising debt and taxes. GM exemplified the large corporation as private welfare state. In contracts with the United Auto Workers, GM promised high wages, lifetime employment, generous pensions and comprehensive health insurance. All this is ancient history: New workers get skimpier benefits.

As metaphor, GM’s bankruptcy marks the passage of this model. Companies still provide welfare benefits to attract and retain skilled workers. But these shelters against insecurity are growing flimsier. Career jobs remain, but lifetime job guarantees -- whether formal or informal -- are gone. Last year, about 50 percent of male workers ages 50 to 54 had been with the same employer at least 10 years; in 1983, that was 62 percent.

Health insurance and pensions tell similar stories. In 2007, employer-provided insurance covered 177 million Americans, 59.3 percent of the population; in 1999, coverage was 63.9 percent. Since 1980, companies have gradually moved from “defined benefit” to “defined contribution” pensions, notably 401(k)s. Defined benefit plans provided guaranteed monthly payments; defined contribution plans -- just putting money into a pot -- make workers responsible for managing retirement savings.

What most Americans identify as government “welfare” are payments to single mothers, food stamps and (perhaps) Medicaid, the federal-state health insurance program for the poor.

But that’s not the half of it. Since 1960, government has changed radically. Then, 52 percent of federal spending went for defense, 26 percent for “payments for individuals” -- the welfare state. By 2008, 61 percent consisted of “payments for individuals,” 21 percent for defense.

Social Security and Medicare -- programs for the elderly -- represented the biggest share: $1 trillion in 2008. Most Americans don’t consider these programs “welfare,” but they are. Benefits are paid mainly by present taxes; there’s little “saving” for future benefits; Congress can alter benefits whenever it wants. If that’s not welfare, what would be?

Pressures on private and public welfare won’t abate. The economic conditions that encouraged corporate welfare have long since vanished. In 1955, GM, Ford and Chrysler accounted for 95 percent of U.S. light vehicle sales, reports economist Thomas Klier of the Chicago Federal Reserve. With market dominance and technological leadership, the Big Three assumed they could pass along to customers the costs of job guarantees, high wages and fringe benefits.

Eager to defuse the class warfare of the 1930s -- and to avoid unionization -- many U.S. companies imitated the model. They, too, believed that competition would be limited and technological change could be controlled. These conceits are gone (in 2008, the Big Three’s market share was 48 percent and dropping). Now, companies are hypersensitive to competitive and economic threats. A survey of 141 companies by Watson Wyatt consultants found that 72 percent recently cut jobs, 21 percent reduced salaries and 22 percent curtailed matching 401(k) contributions.

In theory, expanding public welfare could offset eroding private welfare. President Obama’s health-care proposal reflects that logic. The trouble is that the public sector also faces enormous cost pressures, driven by an aging population and rising health costs. The Congressional Budget Office projects the federal debt will double as a share of the economy (gross domestic product) to 82 percent of GDP by 2019.

Any sober examination of figures like these suggests that the system has promised more than it can realistically deliver. We are borrowing not to finance investment in the future but to pay for today’s welfare -- present consumption. Sooner or later, the huge debt will weaken the economy. Nor would paying for all promised benefits with higher taxes be desirable. Big increases in either debt or taxes risk depressing economic growth, making it harder yet to pay promised benefits.

The U.S. welfare state is weakening; insecurity is rising. The sensible thing would be to decide which forms of public welfare are needed to protect the vulnerable and to begin paring others. Our inaction poses another dreary parallel with GM. It was obvious a quarter-century ago that GM the auto company could not support GM the welfare state. But the union wouldn’t surrender benefits, and the company acquiesced. Inertia prevailed, and the reckoning came.

The same cycle, repeated on a national scale with sums many multiples higher, would be correspondingly more fearsome.


The welfare state’s death spiral
By Robert J. Samuelson
Washington Post, 2010-05-10

What we’re seeing in Greece is
the death spiral of the welfare state.
This isn’t Greece’s problem alone,
and that’s why its crisis has rattled global stock markets
and threatens economic recovery.
Virtually every advanced nation, including the United States,
faces the same prospect.
Aging populations have been promised huge health and retirement benefits,
which countries haven’t fully covered with taxes.
The reckoning has arrived in Greece, but it awaits most wealthy societies.

Americans dislike the term “welfare state”
and substitute the bland word “entitlements.”
Vocabulary doesn’t alter the reality.
Countries cannot overspend and overborrow forever.
By delaying hard decisions about spending and taxes,
governments maneuver themselves into a cul-de-sac.
To be sure, Greece’s plight is usually described as a European crisis --
especially for the euro, the common money used by 16 countries --
and this is true.
But only to a point.

Euro coins and notes were introduced in 2002.
The currency clearly hasn’t lived up to its promises.
It was supposed to lubricate faster economic growth
by eliminating the cost and confusion
of constantly converting between national currencies.
More important, it would promote political unity.
With a common currency, people would feel “European.”
Their identities as Germans, Italians and Spaniards
would gradually blend into a continental identity.

None of this has happened.
Economic growth in the countries using the currency
averaged 2.1 percent annually from 1992 to 2001
and 1.7 percent from 2002 to 2008.
Multiple currencies were never a big obstacle to growth;
high taxes, pervasive regulations and generous subsidies were.
As for political unity, the euro is now dividing Europeans.
The Greeks are rioting.
The countries making $145 billion in loans to Greece --
particularly Germany --
resent the costs of the rescue.
A single currency could no more subsume national identities
than drinking Coke could make people American.
If other euro countries (Portugal, Spain, Italy) suffer Greece’s fate --
lose market confidence and can’t borrow at plausible rates --
there would be a wider crisis.

But the central cause is not the euro, even if it has meant
Greece can’t depreciate its own currency to ease the economic pain.

Budget deficits and debt are the real problems;
they stem from all the welfare benefits
(unemployment insurance, old-age assistance, health insurance)
provided by modern governments.

Countries everywhere already have high budget deficits,
aggravated by the recession.
Greece is exceptional only by degree.
In 2009, its budget deficit was 13.6 percent of its gross domestic product
(a measure of its economy);
its debt, the accumulation of past deficits, was 115 percent of GDP.
Spain’s deficit was 11.2 percent of GDP, its debt 53.2 percent;
Portugal’s figures were 9.4 percent and 76.8 percent.
Comparable figures for the United States -- calculated slightly differently --
were 9.9 percent and 53 percent.

There are no hard rules as to what’s excessive,
but financial markets -- the banks and investors that buy government bonds --
are obviously worried.
Aging populations make the outlook worse.
In Greece, the 65-and-over population is projected to go
from 18 percent of the total in 2005 to 25 percent in 2030.
For Spain, the increase is from 17 percent to 25 percent.

The welfare state’s death spiral is this:
Almost anything governments might do with their budgets
threatens to make matters worse
by slowing the economy or triggering a recession.
By allowing deficits to balloon,
they risk a financial crisis as investors one day -- no one knows when --
doubt governments’ ability to service their debts
and, as with Greece, refuse to lend except at exorbitant rates.
Cutting welfare benefits or raising taxes all would, at least temporarily,
weaken the economy.
Perversely, that would make paying the remaining benefits harder.

Greece illustrates the bind.
To gain loans from other European countries and the International Monetary Fund,
it embraced budget austerity.
Average pension benefits will be cut 11 percent;
wages for government workers will be cut 14 percent;
the basic rate for the value-added tax
will rise from 21 percent to 23 percent.
These measures will plunge Greece into a deep recession.
In 2009, unemployment was about 9 percent;
some economists expect it to peak near 19 percent.

If only a few countries faced these problems, the solution would be easy.
Unlucky countries would trim budgets and resume growth
by exporting to healthier nations.
But developed countries represent about half the world economy;
most have overcommitted welfare states.
They might defuse the dangers by gradually trimming future benefits
in a way that reassures financial markets.
In practice, they haven’t done that;
indeed, President Obama’s health program expands benefits.
What happens if all these countries are thrust into Greece’s situation?
One answer -- another worldwide economic collapse --
explains why dawdling is so risky.

Social Security, the trust fund and funny money
By Allan Sloan
Washington Post Opinion, 2010-08-10

There’s real money, then there’s funny money -- stuff that looks real but isn’t.

Today, let’s talk about one of the world’s biggest piles of funny money -- the $2.54 trillion Social Security trust fund. It matters now because Social Security revealed plans last week to tap the fund for $41 billion this year and will begin tapping it on a regular basis in less than five years.

This year’s cash deficit, the first since the early 1980s and the biggest ever, means the government will have to borrow money to redeem some of the Treasury securities in the trust fund. Even at a time when Uncle Sam is borrowing $1.5 trillion a year to keep his checks from bouncing, $41 billion is real money.

Here’s why the trust fund is funny money. Let’s say I begin taking Social Security when I hit the full retirement age of 66 later this year. Because its tax revenue is below its expenses, Social Security would have to cash in about $3,400 of its trust-fund Treasurys each month to get the money to pay my wife and me. The Treasury, in turn, would have to borrow $3,400 from investors to get the money to pay Social Security. The bottom line is that the government has to borrow money to pay me, regardless of how big the trust fund is.

It’s not surprising that Social Security is now running a negative cash flow -- I predicted a year ago that it was likely to happen this year, and wrote in February that it had happened.

Democrats, for the most part, say everything’s fine because the trust fund has a fat balance. Republicans, who were happy to have Social Security taxes subsidize tax cuts for 25 years, have suddenly developed a holier-than-thou fiscal rectitude. They’re both wrong -- the Democrats financially, the Republicans morally.

Let me show you in two different ways how useless the fund is. The first is a quote from the introduction to the 2009 Social Security trustees report, the second is the graphic by my Fortune colleague Robert Dominguez that accompanies this article.

Allen Smith, economics professor emeritus at Eastern Illinois University and author of “The Big Lie: How Our Government Hoodwinked the Public, Emptied the S.S. Trust Fund, and caused The Great Economic Collapse,” spotted the 2009 quote, and it is telling.

It says: , “Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.”

In other words, the trust fund is of no economic value.

This sentence wasn’t in the 2010 introduction, released last week. Treasury says that it stands by the statement but that the Social Security trustees decided not to include it this year because it reiterates the obvious.

Now, to the “Geithner bond,” which shows how easy (and useless) it would be for Treasury to stick as many bonds as needed into the trust fund, and then declare Social Security to be sound forever.

You know, of course, why this wouldn’t work -- at least, I hope you know. It’s because the U.S. government ultimately has to pay its bills with cash, not with its own IOUs. In the long run, you need cash -- real money -- not funny money. Other than being a send-up, this hypothetical Geithner trust-fund bond is no different than the Treasury bonds the trust fund owns, except that it carries a higher interest rate.

There are ways, even at this late hour, to begin turning the trust fund from funny money into real money without unduly stressing the government’s finances. (I’ve discussed them before, and will do so again, but not today.) Given that taxpayers are bailing out the most imprudent companies and people in the country, we damn well should bail out Social Security, the mainstay of low- and middle-income people.

But let’s not kid ourselves that a fat trust fund is the solution. When Social Security’s cash deficits begin running more than $100 billion a year within a decade, it’s going to take a lot of money to keep the checks coming. And it sure won’t be funny.



To fix Medicare and Social Security, look to Singapore
By Bryan R. Lawrence
Washington Post Opinion, 2012-08-16


When Medicare was debated and enacted,
Paul Samuelson was America’s most influential economist.
He was an adviser to presidents Kennedy and Johnson,
author of the nation’s best-selling economics textbook
and a soon-to-be Nobel laureate.
In 1967, Samuelson wrote in Newsweek about
the funding mechanism for Medicare and Social Security:

“The beauty about social insurance is that it is actuarially unsound.
Everyone who reaches retirement age
is given benefit privileges that far exceed
anything he has paid in. . . .
Always there are more youths than old folks in a growing population.
More important,
with real incomes growing at some 3 per cent per year,
the taxable base upon which benefits rest in any period
are much greater than
the taxes paid historically by the generation now retired. . . .
A growing nation is the greatest Ponzi game ever contrived.”

But the baby boom was ending as Samuelson wrote those words.
Births per woman had fallen
from 3.7 in 1960 to 2.6 by 1967 and then to 1.8 by 1975.
By 1990, births were back to 2.0 per woman,
but the demographics of the next century had been determined:
The rapidly growing population
needed to make up for insufficient savings by each generation of Americans
was no more.

Anyone could see that this would mean trouble for Medicare and Social Security
when the boomers began to retire.
But our leaders chose to protect the programs rather than restructure them,
and they have used dubious accounting standards
to hide the burden placed on younger Americans.

China’s leaders made different choices.
[China's political system is male-dominated.]
With a one-child policy,
they could not rely on children to pay for their retirement.
Instead, they have designed a system much like Singapore’s:
The government makes few retirement promises,
and Chinese citizens save significant portions of their income —
the average household socked away 38 percent in 2010,
Bloomberg Businessweek reported,
compared with 3.9 percent for U.S. households.
Much of those savings are invested by China’s state-owned banks into U.S. Treasury bonds,
which our government sells to finance Americans’ retirements.

Of the $11.2 trillion of U.S. public debt —
this doesn’t count the $4.8 trillion held by our government,
largely in IOUs to itself for Social Security —
the Chinese own $1.2 trillion,
making them the largest holder of U.S. Treasurys after the Federal Reserve.

This situation is as dangerous as it is ironic.
The Treasury Department’s 2011 annual report shows
U.S. debt as a share of the economy (gross domestic product) rising —
to 125 percent of gross domestic product by 2042 and 287 percent by 2086 —
as retirement promises turn into cash outflows.
And if Medicare’s costs per beneficiary grow at historical rates,
as the Medicare trustees fear is likely,
the U.S. debt-to-GDP ratio will eventually exceed 500 percent.
Recall that Greece was pushed into crisis
with a debt-to-GDP ratio of 113 percent.

How long will foreign investors, who own half of outstanding Treasurys,
be willing to use their savings to finance our promises?
In December, the head of China’s sovereign wealth fund,
which invests $400 billion of his country’s savings,
criticized Europe’s welfare system in blunt terms,
saying that it induces “sloth, indolence.”
What do the Chinese think of our system?

In the States, the investment management firm Pimco, the largest private buyer of Treasurys,
said last month that
our retirement promises have “similar characteristics” to Bernie Madoff’s scheme
and predicted a Greek-like crisis if the system is not reformed.

the Federal Reserve bought 60 percent of Treasurys issued last year.
This rate of purchases cannot continue indefinitely.

Today’s leaders
did not design Medicare and Social Security as an intergenerational transfer,
and they did not choose the government’s misleading accounting standards.
But because these bad choices have not been corrected,
many Americans believe that a cut to Medicare or Social Security
is a confiscation of money they paid into a trust fund.
This misconception greatly complicates our politics.

The good news is that Americans know changes are needed.
And our health-care system can be reformed
to reduce the burden on our children.
We need better information to have this critical national discussion.

Will our leaders give us an honest accounting and discussion of our choices,
or will we have to wait for a debt crisis to force the issue?

[The author has given an honest evaluation of the economic situation;
let’s try and give an equally honest evaluation of the political situation,
in particular,
who is to blame for the situation he has so pointedly and accurately described.
It is the senior citizens who have so repeatedly and consistently
block voted based on the single issue
of who can protect their
unwarranted and unjustified income transfers from the young.
It is they who have kept the politicians,
who surely understand the situation and the problem as well as anyone,
from doing the right thing.
We should also mention the media,
which has failed to point out consistently what a canard it is
that the senior citizens are just getting
the benefits which they contributed to when they were working.
(Although kudos to the Washington Post
for publishing this article and the previous ones by Lawrence,
and also the excellent columns by Robert Samuelson.)]

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