(posted by Mike Rulle on Marginal Revolution, February 25, 2009)
I do not understand Health Care/Medicare/Medicaid one iota; so I will limit my comments to Social Security. The problem with Social Security is not what it is supposed to be, a Government managed deferred retirement account. It is "what it is", or has become, thats the problem. It is a Ponzi Structure. It did not need to become one, but it has. We have literally borrowed from our savings and spent it on things like "Levitation Trains". This is no different than if we borrowed from our 401ks to go on vacation, then got angry because there is no money left for retirement. I am fairly sure that the large majority of the public does not understand this. It would not surprise me if politicians did not understand this. Whether they do or not, one need only recall the "lock box" debates of 2000. While Gore was mocked by comedians, he was mocked because of his "affect", not because any one understood why a "lock box" was absurd.
The bottom line is there is no savings. Since we have no savings, but the Government has taken money from the public which would have paid for their retirement, we have a true societal loss (perhaps one could argue our incomes are higher for having "arbitraged" the future--but someone else can make that case). So what to do? There has never been a problem so conceptually easy to fix, yet so politically impossible to address. To address it is to openly admit the fraud, and no politician is moral enough to do this. I believe 3 things need to be done. First, "stop the madness". That is, we must begin the phase out of Social Security taxes. Secondly, we need to reduce the payments. Third, we need to freeze everyone's accrual at today's level. So a 62 year old will have a higher payout come age 65 then a 25 year old (who will effectively have none).
By freezing everyone's accrual at today's level, we have a known set of future payments. Just knowing we have done this should have a positive effect on markets. This may permit the market to absorb some of the initial incremental borrowing required more easily. How do these obligations get funded? As far as I know, there are only 3 ways to pay back money you owe, which is our current situation. Spend less, take from savings, and grow your income. Spend less means other program's growth rates will have to decline. Take from savings means the indexing of Social Security will have to create a lower internal rate of growth. We currently index to wages. There will need to be an index to inflation rather than wages. Finally, since the number of people receiving SS will no longer increase, revenues from economic growth (i.e., population growth combined with producitvity growth) will begin to dominate what is owed.
There may be some requirement for individuals to still pay a "SS" tax for a period of time, phasing out over 5-10 years so the Government need not borrow so much so quickly. In return, individuals who were required to do this, will be permitted to defer more into tax deferred savings later on, which becomes the ultimate replacement for SS. Is this the best idea? I doubt it. But the reality is we do not have the money. It has been spent. We have a Ponzi in its place. Government Ponzis can work in principle, but they are highly unstable and unpredictable. Solving the problem is all about present value, compounding and intergenerational subsidies. But first, recognize the money is owed and does not exist---hence it must come out of future income.
But this, or any other reform, will never happen in the near future. So far we see a President who is increasing, or proposing to increase, taxes, spending, and borrowing. He wants to provide price supports for houses and price supports for Bank stocks. Things don't look so hot.