The New Republic

Mr. Galston you said this: "By contrast, the Ryan budget represents the victory of the Tea Party mentality over mainstream conservatism within the Republican Party. It illustrates the inevitable and draconian consequences of a fiscal policy that excludes net tax increases and holds federal government spending to its historic postwar average. " You are far too kind to Ryan than he deserves. What he deserves is ridicule. If he did the above it would on some level be defensible (not really) but at least it wasn't sociopathic. What Ryan does is massive tax cuts for the top and draconian cuts. In short this is a budget that Ryan's hero Ayn Rand could only love.

- MikeB.

April 8, 2011 at 6:00pm

Galston is a finance and economics nitwit. The Bowles-Simpson plan called for more tax cuts, reduced social security benefits (most notably a higher retirement age although there is exactly zero evidence that we have a labor shortage), and a reduction in health care costs to be achieved by completely unspecified means. The only material difference between Ryan and Bowles-Simpson is that Ryan fills in the huge Bowles-Simpson blank be explaining that the way to reduce medical costs is to de-fund Medicare. Well, what did Galston, a BS advocate (you decide what BS advocate means), think would be the BS means of reducing Federal health care costs? Suddenly, Galston notices that this would mean people who cannot afford care won't get it. The algebra is very simple, as dsimon has pointed out elsewhere. If the cost for health care for all is x and some people cannot afford it, actually a lot of people as the cost moves from the current 17% of GDP toward 20%, then some people with more money have to pay for those who cannot afford it or they will not get health care. Any other solutions come to mind? It matters very little whether the means by which those who can afford it pay for those who cannot is through health insurance premiums inflated to cover the subsidies (in the manner of college tuition) or via taxes. Six of one, half a dozen of the other. OR we can actually take the steps to control costs, both price and utilization, directly and reduce the drag on the economy, which would still mean that those who do not earn enough need a subsidy unless we are going to deny care, just a smaller subsidy which would be to the good. Premium support is just a subsidy. Collecting the health insurance premiums as taxes and then paying the costs is just a different financing method. No matter the financing method, we either pay for care or deny care. NO OTHER OPTIONS EXIST. Galston, like the rest of the deficit wingnuts in this debate, also fails to notice that 84% of the current deficit is not due to Medicare and Social Security but to the gap between the operating budget, including Medicaid, the very subsidies that are essential if care is not to be denied, and the taxes we collect. In 2010, the operating deficit was $1.05 trillion, the deficit in Medicare and Social Security $244 million. How does solving the entitlement deficit solve the other problem, that we have a structural deficit due to the combination of hugely disparate income distribution and absurdly low taxes on the wealthy? Let me help Galston: It doesn't. Finally, since we finance less than 2% of our consumption and investment with trade deficits, it is necessarily the case that we produce enough to support our consumption, including medical care, and our net investment, as we have since some time in the 19th century. If we are going to have medical care in the future, we will have to have enough GDP to afford it. Even without cost controls on medicine, we can as we are very wealthy. If the aggregate income is there, then the only reason we have a budget deficit is that we leave too much nominal income in private hands through inadequate taxation. The amount of private income in excess of private consumption and investment is called Treasury bonds. If we taxed that excess away, we would not have to issue. Someone, please, educate Galston in the basic elements of national income accounting or find someone else to write about these issues for TNR. Galston is an embarrassment to himself and this magazine, much as David Brooks is for the NYT. (Today was a high point, Brooks's main points on behalf of the Ryan plan, similar to those of Galston, being shot to pieces by Paul Krugman in the very same issue on the very same page.) The core problem for Medicare is that it is funded with regressive payroll taxes that have even the working poor paying taxes to provide health care for wealthy seniors. This is an outrage! There is absolutely no justification for placing the burden of senior health care entirely on wage earners and even less justification for having the poor subsidize the rich. There are a variety of sensible solutions, none of which could possibly come to the attention of the benighted Galston.

- roidubouloi

April 9, 2011 at 1:29am

The discussion we can no longer defer is the horrific administrative waste that is essential to our "system" of multiple private insurers and how it distorts optimum delivery of care. The bureaucracy on the provider and insurer sides for 17,000 policies in the private sphere, plus Medicare, Medicaid, the VA, Tricare, Federally Qualified Health Care Centers, tax deductions, the medical portions of workman's comp and auto insurance, and the soon to come exchanges, mandates and subsidies takes untold hundreds of billions away from the provision of care. It also makes impossible the necessary rational reforms to the delivery systems of health care - medical homes that emphasize primary care and coordinate specialty care; electronic records and smart cards; a treasure of accessible information to inform best practices, and much more. The profit motive in the financing and in some ways in the delivery of care distorts proper care. Spending almost twice what other industrialized nations spend on health care is a drag on our economy. Shifting more cost onto individuals will only increase the hundreds of thousands who file bankruptcy yearly in the US. Can we talk about changing to a single, publicly accountable system to pay for our health care? Only if we're serious about the deficit.

- bsemple

April 9, 2011 at 2:04am

Rising health care costs (both because of inefficiencies and an aging population) are an issue separate and apart from the deficit and would need to be addressed even if the budget were in balance. And it's unfortunate that they are being conflated because it allows charlatons like Ryan to use rising health care costs as an excuse to gut worthwhile government programs and to disguise a mssive tax cut for wealthier Americans; in other words, to transfer even more of our nation's wealth and resources to the wealthy. Give credit to Galston for his focus on rising health care costs, for which I have two comments. First, as indicated, rising health care costs are attributable to two factors: inefficiency and an aging population. We spent an entire year addressing the former: it's called ACA. Yet, Galston fails to even mention it. Second, he suggests some form of "premiun support-based program" to replace Medicare; in other words, one based on private insurance. Yet, he then acknowledges that private insurance, especially for elders, is inherently flawed: "Premium support would be tied to average health care costs, not an economic index. The menu of private insurance plans would be limited to facilitate informed choice by enrollees. A non-profit or government agency would provide explanatory literature and extensive counseling and handle sales to avoid misleading and costly sales methods. Group-based, retrospective risk adjustments—financial transfers among plans based on the risk profiles of actual enrollees—would make competition based on risk selection unprofitable.” Galston ends by calling out Obama to take the lead. It's true that, without Obama's active involvement, there will be little if any progress on this issue. On the other hand, I understand Obama's passivity. For as long as the nation is enthralled with charlatans like Ryan, no reasonable proposals, by Obama or anybody else, has any chance. So Obama has chosen to ride out the storm in hopes of a better day, when a more sane and helpful political and pundit class, and a more sober and informed public, is ready to tackle this very large and complex issue.

- rayward

April 9, 2011 at 8:28am

Now my comment about the separate issue of the deficit. This too is mostly about politics and only marginally about the deficit. Republicans have spent nearly 30 years gutting the progressive income tax, not just by reducing the top rates but eliminating brackets and, more importantly, by funding more and more of government operations with the regressive payroll tax, made possible by a massive increase in the payroll tax adopted in 1983 but phased in over many years (so few would notice) and using the excess in payroll tax collections (over $2.6 trillion, that's trillion) to pay general operating costs unrelated to social security and other entitlements. [It's no mere coincidence that this massive increase in the payroll tax occurred at the same time as labor's (i.e., the middle class') share of national income has dropped, but that's another issue.] Now, not only are the excess in payroll tax collections coming to an end but the bill ($2.6 trillion) for the amounts "borrowed" is coming due. The minority leader in the Senate has made it clear that income tax collections (i.e., taxes paid mostly by wealthier Americians) will not be used to pay this bill, not if he has anything to do with it. There's a resaon why Bowles-Simpson, Ryan, and other "deficit" plans combine deficit reduction with social security reform: it's the regressive payroll tax. If, as these plans propose, the top income tax rate is dropped to the mid-twenty range and many tax expenditures are untouchable (e.g., the mortgage interest deduction), from what source will the offsetting government receipts come from? That's right, the regressive payroll tax. We already have a de facto flat tax system in America as between the middle class and the wealthiest Americans (as reflected in those charts that Chait has produced on his blog). Now the goal is to make it official.

- rayward

April 9, 2011 at 9:00am

As soon as the words "tax increase" leave a Democrat's lips, the Republicans will dog pile faster than you can say "Job Kiillers." That's what is paralyzing President Obama. He's already said "paying taxes is patriotic" which sounds like to most people like the last call to lemmings before they march into the sea. We need to say, instead, that we can't have low taxes on the consumption force in the economy unless we raise progressive rates. Get rid of the lower 15% cap gains and dividends tax and replace it with deductible dividends for publicly traded corporations. The 15% rate discourages investment in small business income which is taxed at a higher top 35% rate.

- Nusholtz

April 9, 2011 at 9:06am

Yes, but is there any plausible scenario in which these BS proposals regarding health care result in any significant savings to Medicare? Medicare already is a public option. The ACA is in place. So, the whole weight falls on "strengthening" the IPAB? If B-S isn't BS, then why isn't the problem of Medicare funding already solved? Like I said, the "Medicare" savings in B-S are by unspecified means, unless you count handwaving as specification. The core problem of Medicare is that medical care for all seniors is supported by a regressive tax that hits only wage earners. B-S is unresponsive in that it solves neither the cost problem nor the financing problem. Although the social security problem is trivial, it makes no sense to raise the retirement age so long as we are faced with chronic unemployment and under-employment. You do that when you are short of labor, not when you are short of jobs. Having the baby-boomers retire is the best prospect we have had for full employment in decades. The likelihood is that productivity gains will allow a relatively smaller workforce to support the same population, but, if not, THEN you raise the retirement age. Means testing and eliminating the ceiling on wages subject to payroll taxes would be a much sounder way or solving the relatively small social security shortfall. Raising payroll taxes further so that taxes for the rich can be cut further is really monstrous.

- roidubouloi

April 9, 2011 at 1:34pm

In the discussion of Medicare and insurance most overlook the fact that the creation of medicare in the first place was the non availability of insurance for the elderly. One on the major diseases of elderly is dementia trying to sort out plans will reap the same result as part D, confusion. Why get middle men in the flow of funds it will be a diversion of care.

- quirko

April 9, 2011 at 3:29pm

Maybe I am misinformed, but isn't Medicare the single-payer for its insureds right now? If not, who is paying Medicare's bills? Social security, by allowing workers to retire, opens up jobs for workers joining the workforce at the opposite end of the job ladder. If workers postpone their retirement, then, unless something increases demand, there are more workers for the same number of jobs. Unemployment goes up and young people have a harder time entering the workforce. This has in fact been occurring for some time. If we were at full employment, so that our output were constrained by the labor supply, and the labor supply were declining relative to population, then it would make sense to increase the labor supply by deferring retirement. But if we cannot even provide enough jobs for the workforce we have, it makes no sense at all. It may be necessary at some point, but not when we still suffer unemployment and underemployment. Also, it is by no means the case that we will have difficulty supporting a larger population with a smaller workforce. If labor supply gets tight, capital/labor substitution and labor productivity gains may well suffice to afford us sufficient output for the working and non-working population. Remains to be seen. But, if not, THEN you postpone retirement. There is no practical alternative to pay-go for a national pension system for the United States because we have no adequate external source of investment opportunities. Investment domestically is a function of current or near-term demand. No one builds factories unnecessary today because we would need more in 20 years and mothballs them until they are needed. Thus, there is no place for the US economy to save if we were not on pay-go. It would be impossible for us not to be on pay-go. One way or the other, the current working population has to support both itself and the non-working population (including children). Whether the consumption of retirees is financed by having them invest and then disinvest or having the government tax and redistribute is a bit beside the point. Whether by buying securities from the retired population or paying taxes that are distributed to the retired population, current workers support everyone. Whatever retirees consume cannot be consumed by workers. Therefore, early retirement is a problem only if it leads to increased consumption by the retiring, which is typically not the case. If the consumption of retirees goes down and output does not because they are replaced by younger workers, there is in fact more for young families. Unless we propose dramatically to reduce the consumption of the retired population from its current norm, the demographics are going to be the same problem, or not, regardless of whether we have any retirement system at all. We either share our output with retirees in some manner or we don't and let them starve. I realize that is a bit confusing and counter-intuitive, but it is so. Ryan, Bowles-Simpson, and Galston all have almost nothing to do with the structural deficit in the operating budget. It is a REMARKABLE sleight of hand that the artificially manufactured fiscal crisis is being exploited not to solve the fiscal crisis itself but as a way of beating up the entitlement system and making our taxes even more regressive than they already are. Although it may not be his intention, Galston is actually contributing to this because he does not understand finance and economics (at least he shows no evidence whatsoever of understanding them despite his appointment at Brookings).

- roidubouloi

April 9, 2011 at 4:09pm

By the way, the economists who designed social security were well aware that it could only be a pay-go system. It was not merely an accident or some kind of oversight or political decision.

- roidubouloi

April 9, 2011 at 4:13pm

Unless congressman Ryan advocates the death penalty for most misdemeanors and all felonies, I don't think you can say his plan is "literally Draconian" - http://en.wikipedia.org/wiki/Draco_(lawgiver)

- Francisco Toro

April 9, 2011 at 4:38pm

malahat, sorry to disagree, but the Canadian pension system is only funded to the extent that it is invested outside of Canada. That might be possible for Canada. For the US, given its size and the magnitude of its per capita GDP, that would not be possible. We are 25% of world output. In addition to which, one might have cause to worry about the soundness of external investment of such magnitude. Most of the world would rather invest here. Why shouldn't we? Provincial debt is just a claim on taxes, hence just taxes. To the extent that Canada owns other assets in Canada, it can only claim an appropriate share of national output (the investment returns or proceeds of sale) to pay its pensioners. Thus, the Canadian economy has to generate sufficient GDP for pensioners and workers. If in a given year the requirement to pay pensions is x percent of GDP, Canada could, instead, simply tax the same amount and distribute. On a macro basis, it makes no difference. Pay-go is as if the US owned a diversified porfolio of all income generating assets and activity in the US; it is everyone's co-owner and partner. It just doesn't have a piece of paper that says owner. So what? Look at it another way, in order to fund its system, Canada had to tax more than it was paying out and then returned the excess to the economy by buying assets. All that means is that it taxed away assets in the past, title to assets changed hands. The assets didn't change, the investment didn't change, consumption didn't change. Only title changed. Absent significant external investment, the demographics are the same whether a national plan is nominally funded or not. The same number of workers still has to support the same number of workers, children and retirees. No additional investment will have been made due to a nominally funded system in prospect of retirements because you cannot invest in real assets for future demand, only current or near current demand. No matter what you do, in the absence of a significant external source of income, the Canadian economy as a whole, with the number of workers it has, or the US economy, has to generate the GDP to support everyone. If the population has too many mouths for the workers to support, I can guarantee you that the workers will not go hungry while everyone else lives off of the Canadian government's investments. Wages would simply be bid up to the point where the value of the investments is inflated away and they depreciate. There is no escape from the iron logic that the total output must be shared between workers and non-workers although the mechanics may differ. True, there are some distributional effects and second order effects to nominal funding as opposed to nominal pay-go, but it is all pay-go in the end. There are stability issues as well, but the notion of transfer of wealth from future generations to present generations is non-sensical. No real wealth can be transferred in this direction and American capitalization is higher than Canada's. All that capital will be transmitted to the future. It cannot be transmitted into the past. That is just rhetorical. It is just a question of who has title. When the government can tax the whole economy, title doesn't matter.

- roidubouloi

April 9, 2011 at 6:09pm

Also, all consumption is at the expense of foregone investment. As long as pensioners consume, that is foregone investment whether they got the money for their consumption by liquidating investments of by receiving an income share from the government.

- roidubouloi

April 9, 2011 at 6:11pm

Fascinating conversation, but I shudder to think the turn it will take if our resident libertarians show up. Roi, mind helping me out? I have a friend who's saying that "the top 5% of the US pays 62% of all the taxes collected by the gov't." Do you know how I can source that to determine its truthfulness, because that just doesn't sound correct.

- zardoz67

April 9, 2011 at 7:31pm

I will take a look at that malahat. zardoz, there is a link to the IRS that I cannot find at the moment but I got there by googling income and tax distribution US. I did however download the table in spreadsheet form. In 2007, the last year they report, the top 5% paid just under 60% of the total income personal income tax. However, they had 39% of adjusted gross income and undoubtedly a much higher percentage of real economic income. This is not surprising as there is very little disposable income at the low end and enormous amounts at the upper end. Also, when you realize that income taxes came to only about 11-12% of AGI, you realize that this statistic doesn't mean much. 60% of 12% is only about 7%. As a share of 39%, that is only 18%. If you adjust for economic income, much less. Then, wage earners pay 12+% in payroll taxes. The wealthy a much lower percentage.

- roidubouloi

April 9, 2011 at 8:49pm

Oh, the claim is approximately correct as applied to Federal income taxes only. Not at all true with respect to all Fed taxes.

- roidubouloi

April 9, 2011 at 8:50pm

Thanks, roi. Just what I thought.

- zardoz67

April 9, 2011 at 9:42pm

Here's the link for those IRS tables. http://www.irs.gov/taxstats/indtaxstats/article/0,,id=129270,00.html

- roidubouloi

April 9, 2011 at 11:44pm

That is a very complex piece malahat, but I think it supports my position, not yours. First, there is the unstated assumption that the system is to be run only on payroll taxes. This is a political decision that imposes special burdens on the current generation of workers, especially lower wage workers, because the payroll tax is regressive. I think that if even all earned income were subject to taxes to support pensions the result is quite different. There is likewise no principled reason why income on capital should be exempt from this responsibility. I am pretty sure that if you simply levied a flat tax across all income in the economy to provide the benefit to retirees, all of the generational distortions described by this article would vanish, provided that the benefits are means tested. The article itself notes that the unfunded liability is nothing more than the current value of the start up costs of the system because the initial generation of retirees did not pay in. Second, the article states in a number of places that the demographic problem is intrinsic reflecting the changing proportion of workers to retirees. Third, the article notes that if payroll taxes had been invested but financed with debt the system would still be pay-go in fact even though it nominally not. Well, if the current tax proceeds were not used to pay benefits, but invested, then current benefits would have to have been paid either with borrowing or with much larger taxes. So, the generation that paid the start up costs would have had an even heavier burden than it did, paying out of current income not only the then retiree's benefits but the costs of funding its own pensions. It would require a lot of work to parse that piece, but my conclusion is still that the problems have to do with the financing mechanism, not with pay-go. When you cut through the financing to real effects, there is no possibility other than pay-go as all consumption and investment is but a part of current national income. Every generation's workers produce the output to pay returns on capital and for investment currently, to pay for the consumption of workers, and to pay for the consumption of non-workers. There is no other there there, no external place from which the income can come, at least not in the case of the US. On an aggregate basis, there is no such thing as investing for the future. We invest for the purpose of current or near-term output. Period.

- roidubouloi

April 10, 2011 at 12:35am

I will have to go look for that, but several points: I am pretty sure that the premise of that study is still that only wage and salary earners (and probably not all of the income of the high earners) bear the cost of pensions. I think it may be possible to conclude under those circumstances that funding is more efficient. I rather doubt it otherwise. From 1948 to 2008, the US GDP grew at an average real rate (compounded) of 3.3%. I don't think the real riskless rate was higher than that. I also don't accept that savings drives investment. Quite the reverse. Whatever is invested is saved, Whatever is not invested is not saved. Investment not only drives but determines it. If people try to save more than is being invested, the result is a reduction in output that eliminates the difference between savings and investment and may produce recession and further loss of output. Finally, the excess of payroll taxes over current benefits in the US was "invested" in US Treasuries at the "real" rate on risk-free government bonds. The system can only ever invest the difference between payments in and payments out even if it is fully funded.

- roidubouloi

April 10, 2011 at 2:16am

"A pay-as-you-go system provides a long-run below-market rate of return equal to the growth rate of national labor income." As I said, the unspoken assumption is that the burden of paying for pensions for retirees falls entirely on workers.

- roidubouloi

April 10, 2011 at 2:23am

It looks like roid should open his own blog, or maybe this is it.

- Nusholtz

April 10, 2011 at 7:59am

Sorry nusholtz. Malahat, this is giving some interesting ideas for a research paper. It seems I thought about this overnight, and in the light of day I am pretty sure there is an accounting fallacy in the claim that funding is more efficient than pay-go, and it does relate to taxing capital. Leaving aside the case where "the pie is higher," as George Bush liked to say, a dynamic effect that is outside the scope of an analysis of a pension system, if someone is getting more with the same number of workers and same capital base, someone is getting less. If retirees are getting more (or workers are paying in less), and the shift in value is not between retirees and workers, one at the expense of the other, then the difference has to be coming from capital. Because of the start up costs -- the initial generation gets benefits without having paid in and starting a pension system to start paying in 25 years would never have been possible -- there would have to have been a source for the first generation of capital investment. Either that generation of workers would have had to pay double, not really possible both due to the lack of demand that would have resulted and the sheer financial burden on workers, this would have meant taxing the necessary capital assets away from capital. However, if we are willing to tax capital to support pensions, as we should be, then it is not necessary to tax away capital assets for a generation to fund the system. We can let the nominal owners keep it and just tax their returns on a timely basis. We only need a share of their share of output anyway; there is no virtue to holding title to the asset if you are a de facto partner. Therefore, I think my initial intuition is exactly right: These claims about efficiency are a function of (1) the assumption that only workers support pensions and (2) a magical source for the start up capital, obliquely acknowledged by the author of the Dallas Fed paper when he states that the current unfunded liability is the compounded value of the initial generation's benefits. Either we would have had to tax capital heavily then or tax it somewhat now to make the equation work. And if we are willing to tax capital now, as we should be, then funding versus pay-go (not my coinage, the shorthand that labor economists commonly use) would be purely notional. There is no magic money fountain.

- roidubouloi

April 10, 2011 at 10:52am

The Dallas Fed paper is a strictly neoclassical analysis. An economist can convince himself of almost anything when working on that form because: (1) the solutions are almost always partial equilibrium solutions, (2) there is constant confusion between the financial realm, including price, money, financial assets, returns, etc., and the real. A good way to check the result is to translate it into the real and see if it still makes sense. In this case, we need only to go back to the reality that there is no transfer of real consumption between generations, only capital is transferred and only in one direction, forward. The quantity of capital is, as I mentioned, outside the analysis of a pension system. That doesn't mean there cannot be dynamic effects on both the level of current output and the level of current net investment due to the financial structure of a pension system, but that is a separate problem. Given a population of workers and a population or retirees, which we can take as a demographic given, a level of capital, and technical rates of labor and capital productivity (i.e., current technology), current output is what it is. All consumption and current net investment is only out of current output. We cannot really store meaningful amounts of output for future use. We are hypothetically distributing the current output amongst three groups, workers, retirees, and owners of capital. In principal, we can use taxation to achieve any arbitrary division of output among them. It can be argued that particular tax structures have different incentive effects, and that is worthy of exploration, but if the net allocation of income amongst the three classes is X due to a funded system or X due to an unfunded system and tax redistribution, there is no a priori reason to believe that behavior will be different. Everyone gets the same net outcome either way. Of course, if you limit yourself to taxing workers only, then you are limiting the distribution that you can achieve. If you start up the system and you want to fund it, even assuming you are not paying retirees anything until a generation has gone by, you have no choice but to tax capital to obtain the necessary assets. If you tax workers, you reduce their consumption. You turn around and use the tax proceeds to buy assets from capitalists. But what do they do with the money? They are not going to invest more in assets unless they are willing to accept much lower returns (in which case the funding argument falls apart) because they invest in real capital to produce output that will be consumed. You have just knocked down consumption which will lead to less investment, not more. The capitalists have to lend back the money to workers as consumer debt. So, indirectly, the workers have borrowed money to buy assets to fund their pensions. But if the assets are financed with debt, you are still in pay-go. Maybe the government eveb says, wait, we don't want the consumer debt. Bad for the economy. We will take it off your hands, guarantee it, and give the capitalists government debt instead of consumer debt. Everyone will be happy. Now it is as if the workers paid no tax. The government simply exchanged its paper with the capitalists for ownership of assets. As the assets are debt financed, you are, again, still in pay-go. The only way you get out of pay-go is to get rid of the debt. But the only way to do that is to take it, or the assets, from the capitalists via taxation. Therefore, to fund a pension system, you have to tax capital. You can either do it ahead of time, take title to assets and then earn the return or you can leave title in the hands of capitalists and tax their returns currently to produce the same share of output that you are going to give to retirees currently. If you tie your hands and insist that you cannot tax capital to pay for pensions, then I think the correct answer is that you are in a pay-go system no matter what you do. But if you are willing to tax capital, it really doesn't matter whether you fund the system or not. You can achieve the identical outcome either way by taxing capital to fund the system or taxing a share of returns "as if" the system were funded because the government owns that piece of the capital. You then have to consider whether there are dynamic differences that push in one direction or the other but, in our case, it is too late. We didn't tax capital to fund the system at start up.

- roidubouloi

April 10, 2011 at 1:32pm

Roid No apology is necessary. I just clicked thought it was funny that there were so many posts from you.

- Nusholtz

April 10, 2011 at 10:43pm

Depends, malahat, on who had to pay how much to buy down the annul contribution from 14% to 10%, and whether it sticks. Government projections of yields on pension assets have a way of being over-optimistic. Indeed, that is one of the other benefits of pay-go, IF that is you are willing to tax capital not just labor. You have in effect a diversified portfolio of all assets and you can decide currently, rather than at some point in the distant past, what the government share needs to be. A lot of pension accounting is illusionary, if not outright delusional. In reality, the tab is always paid currently out of current output because that is all we ever have. The elaborate accounting, discounting, etc. to obscure that does not change the reality at all.

- roidubouloi

April 11, 2011 at 5:40am

i think Roi's dead on, and hitting home runs in this discussion: any system that caps the proportion of wage income subject to social security tax, and worse, leaves capital income entirely out of the picture, is fundamentally doomed to run ever-increasing deficits, not to mention being unconscionably unfair.

- bonsaibush

April 11, 2011 at 3:37pm

Workers produce everything that is produced. The purpose of a pension system is to give them income after they retire. There is no reason, other than ideology, why the cost of that should be borne only be workers and not by capital. 40% under paygo? I don't think so. Do you mean 14% as you quoted previously? I don't know how the Canadian system was set up or managed, but, according to the Dallas Fed paper you cite, the current "unfunded" $10 trillion in the US system is the present value of the past start-up costs compounded. I don't see how we can grow out of that, or why we would want to, be increasing the retirement age in the face of unemployment, leading to more unemployment. To get out of that liability, someone would have to pay taxes well in excess of the current outlays. But we won't even do that to avoid explicit funded deficits. The shortfall in social security is trivial. Means testing would get rid of it in a thrice. Withal, the idea that Americans are going to pay higher taxes of any kind, let alone payroll taxes, to fund the unfunded liability is preposterous -- and unnecessary. That it would lead to higher total savings is questionable as we appear to have not only enough investment capital but too much, hence our asset bubbles. What we really need in this country is more income equality to fuel demand. With that, and tightness in the labor market from the retirement of the boomers, we have by far the best chance of growing our economy right out of the debt. The major problem with almost all of the analysis of social security is that it proceeds in a vacuum, meaning partial equilibrium, without considering the effects on the system as a whole. This is a particular flaw of neo-classical analysis -- a great deal of which IS wrong for this very reason. Doesn't have to lead to the wrong conclusion, but the chance that you can get it right when looking at macro questions by doing what amounts to micro analysis, the neo-classical mode, is slim. Too many variables that you have to keep track of.

- roidubouloi

April 11, 2011 at 4:50pm

Malahat - I thought the purpose of social safety net was to provide a SOCIAL safety net. I guess the swells living off the sweat of us poor plebes really do live in a different society. God help us all when the armies of the dispossessed show up at their doors, fed up with their "got mine, up yours" (or maybe it really is "got mine up yours") attitude, and with nothing left to lose.

- bonsaibush

April 11, 2011 at 7:26pm

malahat, With all respect, sincerely meant, I think you are caught up in the neo-classical confusion between the financial economy and the real economy. It is 50 years from now, the economy still consists of workers, retirees, the owners of capital, and the government to the extent that it is providing services (e.g. the army), not transfer payments. The consumption by the government is not profoundly different than consumption by individuals. The difference is that it is paid for collectively and the benefits, such as they are, are not distributed by the market. Workers use the tools (capital) available to them and the aggregate output is divided (distributed) somehow amongst the four groups. The distribution is by the market subject to the tax and benefits structure in place at the time. In principle, any distribution is achievable. There is by your hypothesis some large amount of government debt out there and a lot of taxes are in theory going to pay the debt with the result that net income is very skewed by the taxes taken in to pay the debt. Income is being allocated away from wage earners to holders of capital. This is what "future generations paying the debt of past generations" means in practice. But, of course, future generations are not paying past generations. Past generations are dead. They cannot collect. Rather, the members of future generations are paying each other depending on who owns the debt. This is but a rearrangement of the distribution of output. Why do you think this is what will happen? Assuming that future workers are the owners of the least portion of this debt, do you think that workers are going to work for so much less net income because of the existence of the debt? Nope. They won't. What will actually happen is that wages will increase to compensate for the debt burden which means that prices will increase which means that the debt will be inflated away. It will simply disappear. So, what is really being protected by the push to cut social security etc. is not the pensions of future retirees, but the value of financial assets. If the workers, who do have bargaining power because without them nothing happens, aren't going to take the hit and the owners of financial capital don't want to, and the government spends by fiat, who is left? Retirees. The play is to stiff retirees to protect financial capital. But that isn't going to happen either unless you believe that the workers are going to go along with seeing their parents impoverished in order to protect the value of financial capital. Not when they have most of the votes, current Republican mania notwithstanding. Now, there are important reasons of financial stability not to want this to happen. For one, when inflation eats up the debt, it can also be destabilizing for the economy and growth. For another, although the monied classes would take most of the hit, there are still victims of much lesser means (just as retirees are now suffering from low interest rates). Thus, there is every good reason for us to want the debt to be a declining percentage of GDP, as it was under every postwar presidency other than Reagan and the Bushs and now Obama, who inherited Bush 2's mess. The Republicans destabilized the system with their absurd tax cuts, and now they want to pound the social security system and Medicare to re-stabilize it. But, leaving aside pensions, the only way that the debt is going to be stabilized is with additional taxation of the wealthy or by immiserating those at the bottom. Short-term, the Republicans may get away with stiffing the middle class as they are trying to do, but only short-term. They may get away with immiserating the poor for a longer while, but only for a while as people have forgotten what the country looked like pre-Great Society. If we return thence, and the suffering becomes vivid enough, there will be a voter rebellion. There is no big hole in social security. It can be fixed with means testing alone. If we run short of labor, then there is plenty of time to increase the retirement age to compensate. But, make no mistake about it, the impetus for doing that now is precisely to increase unemployment and thereby suppress wages and maintain a docile workforce. This is the same strategy behind globalization and secular trade deficits. It saps demand for domestic labor. And what capitalists love more than mother's milk, more than their children, is to stick it to labor. Like Charlie Partana said in Prizzi's Honor, "Sicilians would rather eat their children than part with money and they are very fond of children." That's how capitalists feel about paying labor. They think that labor getting paid is theft of the money that they, the capitalists, have produced. The people who can afford to pay more taxes in order to stabilize the deficit are the people who are receiving the Treasury bonds today because they have money in excess of their consumption and real investment. That problem is fixed with sensible taxation. It is not a problem due to social security, nor will future generations be "paying off the unfunded liability." They will be supporting retirees, just as they are doing now, and the nominal amount of the "unfunded liability," however calculated, is absolutely and completely irrelevant to anything and everything. It is purely notional. If they tried to pay it off, who would they be paying anyway? The very same retirees with the very same money. Since Reagan, the wealthy have stolen the payroll taxes of workers by using them to reduce their income taxes. Now that the demographics are changing, that cannot work, the social security system is no longer running surpluses. And the wealthy want to skip out on the debt leaving it to the workers whose payroll taxes they stole. The Republicans, of course, want that to happen. I don't think it will. Obama may not have the stones to stand up to the Republicans. To all appearances he does not to my everlasting disappointment. But if he caves, the swindle will soon be clear and there will be a leader on the left who can explain to people in terms they understand just how they have been snookered. And then whatever deal the Republicans manage to make will be undone, in spades. Even Bismarck, hardly a leftist, the man who invented social security, understood that without a decent deal for workers there would be revolution and capital would be the loser in the end. The future will not be a world in which retirees have nothing, workers have only a bit more, none of them has healthcare, and capitalists gorge themselves.

- roidubouloi

April 11, 2011 at 11:36pm

Thank you, Roidubouloi. "The Republicans destabilized the system with their absurd tax cuts, and now they want to pound the social security system and Medicare to re-stabilize it." ... "Since Reagan, the wealthy have stolen the payroll taxes of workers by using them to reduce their income taxes. Now that the demographics are changing, that cannot work, the social security system is no longer running surpluses. And the wealthy want to skip out on the debt leaving it to the workers whose payroll taxes they stole. The Republicans, of course, want that to happen." Those comprise the clearest statements I've seen yet of what the last 30 years have been about under the dogma of the Republican Party. Well said!

- bonsaibush

April 12, 2011 at 11:43am

Thanks, b. That's a pretty big difference malahat, and the reason why I was wondering aloud who had paid enough to fund the Canadian system and whether it really had begun life unfunded as the US system did. The US system is not wildly out of balance. It is already stable for something like the next 50-75 years despite the demographic bulge. With means testing, we could extend that out probably indefinitely. That would make social security into a pension income insurance system rather than a pension system, and an insurance system is exactly what it should be. It makes no sense at all, regardless of what retirees "paid in," to tax young current workers so that wealthy retirees can have more or more to gift to their children. It is in fact cruel. When you pay insurance premiums, you get protection. You don't expect to collect on the policy even if you do not have the loss. That's how we should treat social security. If you have done well enough not to need it, then good for you, but you should have no further claim on society.

- roidubouloi

April 12, 2011 at 11:50am

Not most viewed? You mean people are not fascinated by pension economics? I don't buy the CEPR notions about behavioral change and evasion given the amounts involved. Tax evasion for $11,000 of social security benefits? Vacation condos? I don't think so. The clawback is done through the IRS so I also don't buy their claim about administrative costs. I would take back 100% for every dollar of income (including SS) over $100,000. By CEPR numbers, that puts the amount in the range of $30 billion a year I believe. That should add several trillion to the pot over the time period of the evaluation, and then the boomers are long gone.

- roidubouloi

April 12, 2011 at 2:48pm

Correct as you stated it the last time. When it reaches the point where people making $25,000 and supporting families are paying 12.4% taxes to pay people making $100k plus, something is wrong. The problem, in one sense, is the myth that people are paying for their own social security benefits. This really creates a sense of entitlement. But it is no more true than that people are paying for their own personal defense. They are paying their share to support the needs of the society from which they benefit in a multitude of ways. I don't think poor people ought to be paying to support rich people. Republicans would of course disagree.

- roidubouloi

April 12, 2011 at 4:31pm

I believe that current benefits are well in excess of what could plausibly be said to have been earned by contributions. But, more important, you have to get over the funding myth. Current retirees are supported by the taxes paid by current workers. It cannot be any other way except that capital income could be required to share the burden. There is no other there there. Hence, wealthy retirees are receiving benefits paid for by the working poor. The wealthy retirees supported their parents' generation and so on until you reach the point where the generation receiving benefits did not pay in. Do you generally think that you are entitled to money from your children, whether you need it or not, because you supported them when they were young? Do you think that you are entitled to money from other people's children, whether you need it or not, because you paid school taxes when you were working? Should your school tax burden be adjusted for the cost of your own education? We live in a society. We do not pay taxes that are directly related to the benefits we individually receive. We pay taxes to sustain the society that sustains us and our descendants. While the claim that social security was but a "fund" in which you were saving for your own retirement was a useful political device for getting it passed, the myth has outlived its usefulness now that the demographics have changed.

- roidubouloi

April 12, 2011 at 5:42pm

One might as well ask whether people without children should have to pay school taxes.

- roidubouloi

April 12, 2011 at 5:43pm

Means testing benefits IS a progressive tax, especially if there is a zero bracket ($100,000 in my suggestion) and then a tax of 100%. That is quite progressive. I would agree that a tax code that counted all output as income, so that aggregate taxable income equaled total GDP, without any adjustment for anything, and a progressive rate structure of three brackets, 0, 50% and maybe 70%, would be ideal. Throw in a progressive alternative minimum tax based on consumption so the wealthy cannot manipulate their way out of paying taxes, a strong inheritance tax, and don't bother taxing capital gains (or allowing deduction for capital losses). I think we would have an easy time raising the funds we need for all purposes.

- roidubouloi

April 12, 2011 at 5:51pm

Good. And I meant to say "a progressive inheritance tax." If we had a proper progressive tax structure, we could simply tie the social security and disbility benefit to per capita income and the whole system would be stable. We could get rid of payroll taxes altogether as they are regressive.

- roidubouloi

April 12, 2011 at 5:57pm

Well, I think it is first and foremost a social duty. Even retirees have to pay school taxes thought the argument that it is in their interest is pretty tenuous. They won't live long enough in many cases to see all of the school population in the workforce. Doesn't matter. I don't need to be convinced of the superiority of comprehensive, progressive income taxes. Ours are shot full of holes though which makes them a lot less progressive than the rates would suggest, and they extract too much at the lower end.

- roidubouloi

April 12, 2011 at 8:16pm

Likewise, very much so.

- roidubouloi

April 12, 2011 at 11:02pm