"Undermining my electoral viability since 2001."

Funding the General Wellfare

According to press accounts, President Obama is pondering a strategy to make substantial cuts in both Social Security and Medicare funding. A friend asked on The Twitter why I thought this was a huge fail, and I can't really explain in 140 characters. So, the first substantively political blog post in a while.

I won't spend much time explaining why I think Social Security and Medicare are worth funding or what is motivating there is a clamor to fundamentally dismantle them. I just want to present some important and often overlooked information about the economic underpinnings of these arguments.

Social Security: There Is No Crisis

Social security is not in bad fiscal shape. Projected shortfalls are 20 to 30 years away, and are modest in size. It's very hard to say what will happen at that time. If the economy tanks for 20 years, a lot of things are going to be messed up. If not, the situation may look different. Planning that far out is at best approximate.

That said, there are a few very important things to know about the financial situation for Social Security:

  • The funding source for Social Security (and Medicare) is payroll taxes — taxes taken off the top of all regular paychecks on both the employee and employer side. Anyone who gets a paycheck (or is self employed) pays, even if they are earn so little that they pay no income tax.
  • However, the amount that is subject to payroll tax is capped. The current cap (aka the "Wage Base") is $106,800.
  • That means someone who earns $106,800 and someone earning $200,000 contribute the same amount to Social Security and Medicare. Their employers contribute the same amount as well.
  • Over the past 30 years, wage inequality has grown. A much larger proportion of income goes to the top end of the spectrum; people earning above (well above) the Wage Base.
  • Non paycheck income (e.g. the majority of income in the financial sector) does not contribute to Social Security.

Simply put, more and more of our economic output has been flowing is ways that don't support Social Security. While in the long run I hope we reduce wage inequality and people running hedge funds either contribute their fair share or better yet we find more productive uses for all that capital, we could also just raise the Wage Base modestly to $150k and push off even pessimistic shortfall projections until 2050 or so. Given how hard it is to plan the economy that far, it seems like a much more sensible move than forcing elderly people to work longer into their twilight years.

But What About All Those Elderly People? ZOMG The Baby Boom Will Kill Us All!!!

People will often remark that because there are more retirees than ever, or because people are living longer, the system is fundamentally unsound. This is pure propaganda. This lie has been promoted by senators and highly-paid pundits. I don't know why, but it's total crap. Anyone raising this line of argument is either misinformed, or willfully trying to misinform you.

The Social Security Administration employes teams of actuaries who are quite competent. They have been anticipating population fluctuations for several decades. Payroll taxes were specifically raised in the 1980s as a direct result of the impending (20 years off) baby-boomer retirement wave. They've been planning for this since Reagan was president. It's not news.

As for life expectancy, figures from the 1930s are low in large part because of much higher rates of infant mortality due to common diseases, and the sorts of poverty conditions that prevailed before social welfare programs uplifted the lives of millions of Americans. Those who die young neither contribute or draw from Social Security. The important figure is how long people who survive to be working members of society tend to live. The figures there are much less jarring. These are also well known to the actuaries who manage the system.

The point for me (and younger generations): don't buy into the line that Social Security won't be there when you retire. You should expect to get your benefits. You paid for them and they're managed (outside of elections) by competent people. But they might need protection.


Medicare spending is a different animal. Here in the US, we've been spending more and more and more and more (and more) on health care per capita without really improving the results for years. Spending has been growing faster than the economy in China, and clearly that cannot continue. At current growth rates, medical costs will be well over 100% of all economic spending before the end of the century. Impossible; something has got to give.

The question of why this spending is increasing is very complex, but it's clear this has something to do with our system. We don't have better health outcomes than other countries, or better satisfaction with care, or better anything that anyone can measure, yet we spend about twice as much as any other industrialized nation. There's something wrong there.

So, we have a cost problem related to our system. We can either take on a hard problem and work on the cost side of the equation, or cut benefit levels and reduce care. Cutting means pulling support from the most vulnerable, literally killing people, and also bankrupting many more with medical bills.

That seems like a dick move to me.

The Debt

Lastly, people will invoke the debt as a general reason for these measures, saying "we have to live within our means," and the like. While it's true that the deficit and national debt are increasing, it's important to look at this in context:

  1. Total numbers are less meaningful than debt as a share of GDP (debt to income). On that basis, our trillions in debt is not really crazy.
  2. The real indicator of a debt crisis would be rising interest rates on government bonds. In spite of everything, T-bill rates are near historic lows. As of this writing our debt sells for about 2 to 3%, Greece's goes for 25%+. The markets don't seem to think we have a debt problem.
  3. Current yearly deficits are high because a lot of people are out of work and in need, and there was a massive housing crisis. The most important thing to do for the deficit is to bring the economy around with more jobs for working people. That, ending our major foreign occupations, and restoring the Clinton-era taxes on ultra-wealthy people and estates (which were fine then and will be fine now), and we'd be back to surplus.

The best solution to our deficit is to get people back to work. On the one hand, this would raise revenues. On the other hand, this would reduce spending on unemployment and other programs, which are understandably way up over the past three years. We can't cut our way to solvency.

In spite of this, we (and governments around the world) seem dead set on austerity. I won't speculate as to motive, but this is a very bad idea from a rational economic perspective. Given that interest rates are low, it would make more sense to borrow more money over the short term and invest that in useful infrastructure projects (e.g. repairing water systems, bridges, etc) which would boost employment. Improved employment would do a lot for our long-run fiscal health, and also help people live much better lives. Improved infrastructure — as opposed to McMansions in the desert — would create lasting economic value. Win/win.

In the US the federal government is in a unique position to undertake these kinds of large-scale programs using debt to improve the state of the world, the quality of our lives, explore space, or somewhat less awesomely to blow a lot of things up. This is one of the purposes of having a government and a currency, and it's a legitimate one when used well.

That debt exists is not a bad thing a-priori, the question is how much (relatively) is being rung up and what it is being used to finance. Austerity measures, however, will further weaken our economy, while promoting misery and inequality, and we'll be back in this position soon only worse.

What Happened, America?

Seriously, WTF? Are we a poorer nation than we were fifty years ago? It doesn't seem that way to me. I think we should do better, not worse.

I had very low expectations of President Obama, but not low enough it seems. Up until now I've been only disappointed. This is something different. He's crossing a line.