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Archive for the ‘Entitlement Reform’ Category

Moving On from the Debt

There was a brief moment a few years back when concerns over the size of the budget deficit were leading to some discussions of the long-term fiscal imbalances and the potentials for a grand bargain. But with last month’s budget deal, the debt is no longer on the agenda.  As Alex Seitz-Wald notes in National Journal:

While it’s easy to miss the disappearance of something, the change is glaring if you know where to look. You can see it on the House and Senate floors where, last month, Republicans uttered the word “debt” just 225 times, down from 3,188 mentions in July 2011, according to the Sunlight Foundation. You could see it in President Obama’s latest State of the Union address, which mentioned budget deficits almost two-thirds fewer times than his 2011 speech.

None of this should be a surprise, of course. Election season will soon be upon us and one can be certain that no one wants to run on the promise to cut universal entitlements and/or raise taxes when there are all those hot button issues to exploit and so many babies to kiss.  Just don’t tell the babies about the problems they will face in adulthood.

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As you likely know, the Congress seems poised to pass a $1.012 trillion omnibus spending bill to avoid another shutdown (see coverage from the Wall Street Journal, the Washington Post, the Hill).  It appears that both the Democrats and Republicans will get things they hold dear in the spending provisions and the riders (Ed O’Keefe has a list of winners and losers). The GOP seems to have won this round–more money for the Pentagon, riders preventing NLRB e-Card Check for unions and the enforcement of the incandescent light bulb ban. There is even mention of Benghazi and “Operation Fast and Furious.” Score!

Of course, the spending bill deals with discretionary spending, and from a long-term perspective, discretionary spending is not driving the long-term budget problems. This chart, based on data from the Office of Management and Budget’s Historical Tables (table 8.4) gives a sense of the long-term trends.

Spending

Mandatory spending and interest have dominated the budget for some time, increasing from 6.2 percent of GDP in 1962 to 15 percent today, and within the mandatory programs, Social Security, Medicare and Medicaid have grown the fastest.  The Congressional Budget Office’s 2013 Long-Term Budget Outlook projects that Social Security and the major health care programs will grow from 9.5 percent of GDP (2013) to 14.2 percent of GDP (2038). Indeed, by 2038, the CBO projects spending to be at 26.2 percent of GDP, with revenues of 19.7 percent of GDP. All of this is under the extended baseline scenario. Obviously, 2038 is a long way away, and these are but projections (I can offer my own prediction: in 2038, no one will remember Operation Fast and Furious).

None of this is impacted at all by the new omnibus spending bill, which from a long-term perspective is trivial despite the heavy press coverage.

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Forgive me if I am confused.

On May 13, 2013, the Social Security Board of Trustees released its annual report on the Old-Age and Survivors Insurance, and Disability Insurance (OASDI) Trust Funds. A few salient points:

  1. In 2012, the OASDI Trust Funds had $840 billion in income, including $509 billion in contributions, $27 billion from taxation of benefits, $109 billion in interest on trust fund assets, and $114 in reimbursements from the General Fund of the Treasury (a product of the payroll tax reductions that were used as a stimulus)
  2. Total expenditures were $786 billion. That leaves a surplus of $54 billion. As a result, at the end of 2012, the assets of the OASDI Trust Funds were $2.73 trillion. With an effective annual interest rate of 4.1 percent, it would appear that things are in good shape.

Indeed the Trustees report:

“The combined trust fund reserves are still growing and will continue to do so through 2020. Beginning with 2021, the cost of the program is projected to exceed income.”

“The projected point at which the combined trust fund reserves will become depleted, if Congress does not act before then, comes in 2033 – the same as projected last year. At that time, there will be sufficient income coming in to pay 77 percent of scheduled benefits.”

But now, we are told that a failure to raise the debt limit could have devastating consequences for Social Security. As the WSJ reports:

The Social Security Administration has begun warning the public it cannot guarantee full benefit payments if the debt ceiling isn’t increased.

When asked by the public, the agency is notifying beneficiaries that “Unlike a federal shutdown which has no impact on the payment of Social Security benefits, failure to raise the debt ceiling puts Social Security benefits at risk,” according to a person familiar with the agency directive.

The same kinds of warnings were issued in 2011. (more…)

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The Economist thinks so, and has dedicated a good deal of space to the question in the newest issue (here  and here). A few quotes:

Other states and cities should pay heed, not because they might end up like Detroit next year, but because the city is a flashing warning light on America’s fiscal dashboard. Though some of its woes are unique, a crucial one is not. Many other state and city governments across America have made impossible-to-keep promises to do with pensions and health care. Detroit shows what can happen when leaders put off reforming the public sector for too long.

The Economist sites an interesting statistic: the total pension gap for the states is $2.7 trillion (or 17 percent GDP).  In Connecticut, my adopted home state, the pension shortfall is 190 percent of annual tax revenues (Illinois is even worse, at 241 percent). Of course, this does not include the pension gap in the cities and, more importantly, the health-care benefits for state and municipal retirees.

There are some obvious fixes going forward (e.g., substituting defined-contribution pensions for existing defined-benefit pensions). But this does nothing to address the current unfunded liabilities that are largely the product of politics (e.g., to win the allegiance of public sector workers, promise glorious benefits at some time in the future when someone else will have to foot the bill). As recent events have revealed, efforts to force reform can carry high political costs.

When one considers the huge unfunded liabilities at the federal level, the additional problems in the states and municipalities may prove even more difficult to address. It is hard to imagine the federal government providing much in the way of assistance when it is being forced to draw increasingly on general revenues to cover its own obligations.

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President Obama’s budget proposal supports entitlement reform, in part, through the introduction of the chained CPI (rather than the current CPI-W) for calculating cost-of-living adjustments. This change has been part of various reform proposals over the years, although it has often been discussed as part of progressive indexing (i.e., maintaining the CPI-W for low wage workers, thereby increasing their Social Security payments relative to those with higher incomes).  This proposal has usually attracted the ire of those on the left, who view it as a cut in Social Security rather than a reduction in the trajectory of growth.

You would think that the President’s proposal would attract the unified support of the GOP. After all, many Republicans have made this proposal before, seeing it as one of several reforms that could address the long-term entitlement problem. But with the 2014 midterm elections quickly approaching, some Republicans may see the short-term political benefits of blocking reform to be irresistible.  Consider National Republican Congressional Committee Chairman Greg Walden (R-OR), who has presented the chained CPI as Obama “trying to balance this budget on the backs of seniors.”   A piece by Alex Roarty (National Journal provides an extended quote from Walden’s interview on CNN:

“When you’re going after seniors the way he’s already done on Obamacare, taken $700 billion out of Medicare to put into Obamacare and now coming back at seniors again, I think you’re crossing that line very quickly here in terms of denying access to seniors for health care in districts like mine certainly and around the country,” Walden said. “I think he’s going to have a lot of pushback from some of the major senior organizations on this and Republicans as well.”

Although the Club for Growth is not pleased with Walden’s critique, at least he has gained the support of the AFL-CIO, as the National Journal reports.

“Walden’s quote underscores what we knew,” said Mike Podhorzer, the AFL-CIO’s political director. “Obama’s chained CPI proposal is terrible policy that only makes political sense to Washington insiders who don’t get outside the Beltway often enough. Obama beat Romney because working people care more about jobs and fairness than the deficit, and Democrats risk losing their political edge on the issue if they stick with this Beltway gambit.”

The GOP leadership may discipline Walden. But if Walden’s comments signal the GOP’s intention of opposing reform in hopes of winning some additional seats in 2014 and undermining the Democratic Party’s claim of protecting seniors, one can predict that entitlement reform will be kicked down the road once again.

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The Inaugural

There was little that I found surprising in President Obama’s second inaugural address (if you didn’t watch it or have a chance to read it, you can find it here). He clearly articulated—however vaguely—a center left agenda, much as one might have predicted.  Unless the Democrats capture the House in the 2014 midterms, I don’t see a set of circumstances that would result in major progress on any of the big-ticket items.

My biggest concerns came in the President’s discussion of entitlements.  The relevant passages:

We, the people, still believe that every citizen deserves a basic measure of security and dignity.  We must make the hard choices to reduce the cost of health care and the size of our deficit.  But we reject the belief that America must choose between caring for the generation that built this country and investing in the generation that will build its future.  (Applause.)  For we remember the lessons of our past, when twilight years were spent in poverty and parents of a child with a disability had nowhere to turn.

We do not believe that in this country freedom is reserved for the lucky, or happiness for the few.  We recognize that no matter how responsibly we live our lives, any one of us at any time may face a job loss, or a sudden illness, or a home swept away in a terrible storm.  The commitments we make to each other through Medicare and Medicaid and Social Security, these things do not sap our initiative, they strengthen us.  (Applause.)  They do not make us a nation of takers; they free us to take the risks that make this country great.  (Applause.)

As I have noted in many past postings, the challenges posed by our entitlements is nothing short of daunting. The dates for the insolvency of the various trust funds have been moved up in recent years (with the disability trust fund slated for insolvency by 2016, the last year of President Obama’s second term). The passages above reinforce my existing concerns that there will be little if any progress on entitlement reform in the next few years. The President’s rejection of a tradeoff between “caring for the generation that built this country and investing in the generation that will build its future” ignores an important fact. The status quo guarantees that the “generation that will build the future” will also have to bear an enormous tax burden to cover the costs of the baby boomers’ pensions and health care. These costs and the costs of servicing the debt will squeeze out much of the discretionary spending for the very programs that the President finds so attractive.

Of course, the President may believe that the trust funds could be made solvent if only the rich paid their fair share. If this is the case, the President’s claim that we need to “revamp our tax code” may be shorthand for significant increases in marginal rates.

More likely, the President believes (like his predecessor) that entitlement reform is best left to a future administration that will have no choice but to face the tradeoffs that he rejected in his inaugural address.

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The Fiscal Cliff has been averted postponed, if not made worse.

Big takeaways:

  1. Senate Majority Leader Harry Reid has once again proven himself to be incapable of leading the Senate.  Is there any stronger rebuke than McConnell’s appeal to Biden as he searched in vain for a negotiating partner in the Senate?
  2. The Democrats have done what was once unimaginable: they made permanent the much-decried Bush tax cuts for all but the wealthiest households. The talking heads spent much of the last few months noting that if Obama had any mandate from the 2012 elections, it was the mandate to raise taxes on those making about $250k. So much for mandates.
  3. A Republican controlled House is not much of a counterweight. Let us assume that McConnell was successful in getting the best deal he could out of this Senate (recall the tax cuts). The GOP-controlled House could have responded with a bill that combined the tax cuts with significant spending cuts, thereby forcing a compromise. But Boehner et al blinked (and Ryan, once believed to be a force for fiscal stability, no longer has a claim to this title). Ah yes, but they lived to fight another day. Of course, is there any real evidence that their capacity to fight will improve with a reduced majority?
  4. In terms of long-term fiscal sustainability, the Congress arrived at the worst possible solutions: tax cuts and increased spending. Although there were early discussions of entitlement reforms—ranging from means testing Medicare to changing the calculation of the cost of living adjustment for future benefits—in the end, Congress made matters worse by preventing scheduled reductions in rates paid to doctors under Medicare. And although there were early discussions of cutting tax expenditures, a series of existing expenditures were extended.
  5. By placing a two-month hold on forced sequestration, Congress not only made things worse but also assured that the winter and early spring will look remarkably like the past few months. I am somewhat surprised that Biden negotiated, and Obama accepted, this decision.  Whatever chances the President had to make some significant policy changes in the early days of his second term seem diminished greatly. Immigration reform, assault weapon bans, etc., will be difficult to achieve when all attention is focused on the next fiscal cliff and the debt ceiling. Moreover, if there were any belief that this would somehow help the economy, it is ill founded. There is little to suggest that the credit rating agencies, investors, or firms looking for regime stability will find anything resembling a silver lining in this deal. Quite the opposite.

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The Prologue

The protracted negotiations over the fiscal cliff suggest how difficult things will actually become once we begin to address the simple fact that existing entitlements cannot continue to exist in their current form.

The one significant reform that was proposed earlier by President Obama during his discussions with the Speaker involved using the chained CPI rather than the CPI-W to calculate the cost of living adjustment for future Social Security benefits. This change would reduce the rate at which benefits would increase in the future.  This would not solve Social Security’s problems, but it would be a movement in the right direction. There are better options in my opinion (including progressive indexing that would retain the CPI-W for low wage workers, adopt the CPI for high wage workers, and blend the two for those who fall in the middle). But adopting the chained CPI would be more palatable than other options (e.g., raising the retirement age could have devastating consequences for African American males, who have a shorter life expectancy).

But none of this matters at this juncture, since the political response was precisely what one might have anticipated. Reportedly, Senator McConnell, at one point willing to trade higher taxes for the changes in Social Security, has now taken it off the table. Democrats rejected the proposal and the majority of the GOP caucus in the Senate supported excluding it from any deal on the fiscal cliff. The GOP may find tax increases abhorrent, but the largest entitlement programs—unlike taxes—remain politically untouchable.

The Obama administration, the House, and the Senate clearly understand (or should understand) three things: (1) the largest entitlement programs are both unsustainable and the drivers of long-term fiscal instability; (2) reform is inevitable; (3) the sooner reforms occur, the less pain will be imposed on taxpayers and beneficiaries. If they don’t understand these things, they should simply turn to the reports by the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (currently chaired by Treasure Secretary Geithner and including HHS Secretary Sebelius and Labor Secretary Solis).

From the 2012 report’s overview:

“The dollar level of the combined trust funds declines beginning in 2021 until assets are exhausted in 2033. Considered separately, the DI Trust Fund becomes exhausted in 2016 and the OASI Trust Fund becomes exhausted in 2035.”

The projected unfunded liabilities have grown considerably in the past few years:

“The open group unfunded obligation for OASDI over the 75-year period is $8.6 trillion in present value and is $2.1 trillion more than the measured level of a year ago.”

Of course, there are many options for reform identified by the Trustees, including increases in the payroll tax (from 12.4% to 15.01%), reduction in benefits “equivalent to an immediate and permanent reduction of 16.2 percent,” or a decision to draw on general revenues. This last option is not a real option given the magnitude of our deficits and debt.

Medicare, which is projected to grow from 3.7 percent GDP (2011) to 5.7 percent of GDP (2035) is even more of a challenge. According to the Trustees:

“The Medicare HI Trust Fund faces depletion earlier than the combined Social Security Trust Funds, though not as soon as the Disability Insurance Trust Fund when separately considered.”

“The drawdown of Social Security and HI trust fund reserves and the general revenue transfers into SMI will result in mounting pressure on the Federal budget. In fact, pressure is already evident. For the sixth consecutive year, the Social Security Act requires that the Trustees issue a “Medicare funding warning” because projected non-dedicated sources of revenues—primarily general revenues—are expected to continue to account for more than 45 percent of Medicare’s outlays, a threshold breached for the first time in fiscal year 2010.”

The Trustees strongly support immediate action:

“Lawmakers should not delay addressing the long-run financial challenges facing Social Security and Medicare. If they take action sooner rather than later, more options and more time will be available to phase in changes so that the public has adequate time to prepare. Earlier action will also help elected officials minimize adverse impacts on vulnerable populations, including lower-income workers and people already dependent on program benefits.”

One wishes that the Obama administration and Congress had used the self-imposed fiscal cliff as a window of opportunity to address the unsustainability of our long-term entitlements. There were some early indications that they were moving in this direction. But short-term incentives prevailed. Is anyone surprised?

In the next few days (or at most, the next few weeks), Congress will find a fix for the fiscal cliff without addressing the long-term drivers of our fiscal problems. At best, the drama of the past few weeks will be little more than a prologue to the far more significant battles in the future.

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The fiscal cliff debates seem to be at a standstill as we approach the end of the year.  On the spending side, the proposal to change the indexing for Social Security seems to be quite positive. The use of the CPI-W has fueled growth in the real value of benefits and the substitution of a more realistic measure of inflation (or some kind of progressive indexing) is a change that could make a significant difference over time.  Republicans are likely correct in their dissatisfaction with tax increases today in exchange for significant cuts in the future since no Congress can effectively bind the hands of a future Congress.

The tax side is particularly interesting, and I wonder if the GOP understands what a victory any agreement would be that made the Bush tax cuts permanent for the vast majority of the population. Regardless of whether the taxes increase for households making $250k, $400k or some other number, the overwhelming fact is that the significant tax cuts introduced under George W. Bush are likely to become permanent. For the GOP, this is no less a victory than the 1996 elimination of AFDC, which essentially consolidated many of the reform efforts of the past 15 years.

Zachary Goldfarb (Washington Post) has an interesting article reinforcing this position. A few excerpts:

R. Glenn Hubbard, dean of the Columbia Business School and an architect of the Bush tax cuts, said it is “deeply ironic” for Democrats to favor extending most of them, given what he called their “visceral” opposition a decade ago. Keeping the lower rates even for income under $250,000 “would enshrine the vast bulk of the Bush tax cuts,” he said.

And, due to the progressivity of the US tax system, even the wealthy would continue to reap benefits when compared with the expiration of the tax cuts when taken as a whole.

The first $250,000 earned by even the wealthiest families is subject to lower rates. For this reason, Obama noted last month that under his proposal, “every American, including the wealthiest Americans, gets a tax cut.”

For instance, an individual taxpayer earning between $200,000 and $500,000 a year would pay an average of $515 more in taxes next year if the Bush tax cuts for the wealthy expire, according to the nonpartisan Tax Policy Center. But if all the Bush tax cuts were to vanish and the rich had to pay higher rates on all their income, their tax bills would shoot up by an average of $6,000. The very richest — the top 1 percent of earners — would pay much higher taxes if solely the upper-income tax cuts expire, because the savings from extending the rest of the rates would be relatively negligible.

Bottom line: regardless of where you draw the line on taxes for upper income earners, the proposed deal on the fiscal cliff locks in the Bush tax cuts—a clear victory for the GOP, particularly given the poor Republican performance in the 2012 elections, candidate Obama’s commitment to reversing the Bush tax cuts,  and the fact that the Democrats are firmly in control of the White House and the Senate.

Of course, I would not argue that a victory for the GOP is a victory for the nation given the long-term fiscal imbalances. In my view, we need higher taxes (let’s begin with the elimination of all tax expenditures, beginning with those that lavish subsidies on the top two quintiles). We also need significant reductions in expenditures, particularly in our largest entitlements, the defense budget, and various forms of corporate welfare (including agricultural subsidies).

But there is little question that the Obama administration is willing to hand the GOP a significant victory. It only has to accept the gift.

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Actually, it appears to be accelerating. The train is the impending insolvency of the large entitlement programs. The news today: Social Security. A summary of the latest trustee report (as presented in the Christian Science Monitor):

The trust funds that support Social Security will run dry in 2033 — three years earlier than previously projected — the government said Monday.

There was no change in the year that Medicare’s hospital insurance fund is projected to run out of money. It’s still 2024. The program’s trustees, however, said the pace of Medicare spending continues to accelerate. Congress enacted a 2 percent cut for Medicare last year, and that is the main reason the trust fund exhaustion date did not advance.

Setting aside the fiction that the trust funds constitute a store of wealth, there is nothing genuinely surprising here given the economic conditions and the policy response. Many of those who have exited the workforce (those “discouraged workers” whose exit has helped mask a sluggish recovery) have simply retired. Many who remain employed are working fewer hours and thus paying less into the system. At the same time, efforts to prop up demand by providing payroll tax cuts have further reduced the flow of revenues into the system.

There is also little new (other than the accelerated timetable for fund insolvency). Analysts have been projecting this for decades, urging reform. Of course, myopia reigns in Washington. Few would ever engage in a serious and sustained consideration of reform if doing so would require that they sacrifice the short-term political advantages that might be derived from framing reform as “balancing the budget on the backs of the elderly” or “an ideologically-driven assault on two of government’s finest programs.

Of course, fixing Social Security is not a technically difficult task. There are a few key leverage points (e.g., increase revenues by raising the earnings cap, changing the indexing formula, means testing benefits, etc.). Medicare is more complicated, but only marginally. Each of the alternatives have costs and benefits and should be subjected to vigorous analysis and debate. The problems, alas, are political and can be reduced to a simple fact: elected officials (and those who seek to join their ranks) place a high discount rate on the future.

As we approach the 2012 presidential campaign, we have the opportunity, once again, to address the impending entitlement crisis. If the past is any guide, both major party candidates will choose instead in a conspiracy of silence.

And why not? A decade or two is an eternity in politics.

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Paul Krugman (NYT) turns to the article that we have been discussing on Pileus (here and here) and Monty addressed in an insightful post on Ace of Spades.  Krugman has never really acknowledged the reality of a looming entitlement crisis (indeed, it often appears that there can be no program large enough, no deficit large enough, no marginal rate high enough). So instead, he turns to the irony of the situation: those in the red states have a higher dependency on the social safety net than those in the blue states, yet they gravitate toward small government rhetoric and the GOP.  The question is: why?

Unsurprisingly, the focus turns to a few well-worn explanations.  One might argue (following Thomas Frank) that the plutocrats, who promise Jesus and deliver tax cuts for the rich, simply manipulate the red state rubes. Alternatively, one might argue (following Suzanne Mettler) that people would love the state if they only understood all the good things it does for them (e.g., many Social Security and Medicare recipients deny that they have used government programs).

Yet, the NYT article that has been the subject of conversation does not provide much support for either of these theses. Social issues rarely find much of an expression in the vignettes and those interviewed seem quite aware that they are using government programs. Their discomfort comes from the fact that they are ideologically opposed to these programs despite the fact that they see no options outside of the safety net. They are, to quote the title of one of my favorite James Buchanan essays, “afraid to be free.” Perhaps it is with good reason, as suggested earlier, given the erosion of civil society institutions and norms of self-help and communal responsibility.

Krugman rightly chastises Mitt Romney for his lack of frankness when addressing the issue of entitlements (e.g., Romney attacks Obama for failing to embrace entitlement reform and then, without a pause, attacks him for slashing Medicare). But I think he fundamentally misunderstands the broader situation:

The message I take from all this is that pundits who describe America as a fundamentally conservative country are wrong. Yes, voters sent some severe conservatives to Washington. But those voters would be both shocked and angry if such politicians actually imposed their small-government agenda.

Perhaps, does this sad state of affairs speak to their conservatism? I am skeptical.

Let me draw a quick example: all of us have known people with severe substance abuse problems. In some cases, it was simply a product of choice; in other cases, they had sought refuge in intoxicants following some significant crisis. They clearly understand the evils of dependency and they are painfully aware of the ways in which their addictions undermine their ability to live a flourishing life. At the same time, after years or decades of abuse, they find the idea of going into rehab unbearable. Some rightly anticipate that the act of regaining sobriety could imperil their very lives. At the very least, it would disrupt their social relationships and daily activities. Given the damage already done, they may wonder whether the benefits of sobriety would be higher than the costs.

Does this mean that they should be avid supporters of universal intoxication? Not to my mind. It means that are in a tragic and untenable situation, often with the assistance of myriad enablers.

A few readers might object to drawing parallels between welfare and addiction. But recall that even the father of the modern welfare state, Franklin Roosevelt, saw the connection when he noted in his 1935 SOTU address that “continued dependence upon relief induces a spiritual disintegration fundamentally destructive to the national fiber. To dole our relief in this way is to administer a narcotic, a subtle destroyer of the human spirit.”

A few years ago, a good friend was dying. Decades of alcohol abuse and heavy smoking had taken their toll. After a stroke, the doctors told me that their immediate concern was not the effects of the stroke but the severity of the withdrawal symptoms. Soon thereafter he was diagnosed with terminal lung cancer.  Our last meeting occurred in a bar, where he sat with a beer in one hand and a cigarette in another. Filled with cancer, he took a draw on his cigarette, smiled, and said: “These damn things killed me.”

Of course, this was not a new revelation for my friend. He was brilliant, witty, and had made comparable comments in the past when the future was still unclear. Nonetheless, the pain of withdrawal would have been far too great for him to take the steps that would have extended his life.  One might have assuaged his concerns by explaining that the chemical effects of the drugs he consumed had a positive impact on the pleasure centers of his brain. One might have encouraged him to simply celebrate addiction.

He never would have bought it.

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A few days back I posted (here) on an article in the NYT that focused on recipients of welfare (usually Social Security, Medicaid, disability) who are dependent on the state but also seem without options. My post ended on a somber note: “the expansion of the safety net has been accompanied by changes in social norms and the displacement of private institutions. At one time, people…might have been confident that their extended families and congregations would never let them fall into abject poverty in the absence of public programs. But it is difficult to imagine that a significant reduction in entitlement spending would lead to a revivification of a world that has long passed.” As a result, reform in entitlement programs—which I see both as inevitable and desirable—will induce a lot of pain, and this should be a source of concern, particularly if it makes incremental reform impossible in a democratic system.

At Ace of Spades, one commentator linked to the post (with the tag: “Americans seem to have difficulty imagining a time when there was no pervasive government-run welfare state”).

“There was a time when the arm of the federal government did not reach far at all, and citizens had to rely on themselves, their friends, their families, and their communities for help and support. And you know what? It worked, mostly. … Misery and hardship is the lot of humanity on this earth. Yet our forbears managed to not only get by, but to build the greatest nation in the history of the world…and they did it without an overbearing, interfering, smothering nanny state monitoring their every breath.”

Of course, it is not difficult to imagine a time when there was no welfare state. That is, in fact, quite easy (no more difficult than imagining a time when dinosaurs ruled the earth). The difficulty comes in charting a course back to that original position. Moreover, I would not deny that there was a time pre-welfare when citizens relied on “themselves, their friends, their families and their communities for help and support.” One may be justified in longing for a return to these times (although these claims are often tinged with a bit of romanticism).

The key point of my original post is there have been significant changes in social institutions and norms in the postwar period. Arguably, much of this has been driven by policy decisions that have altered individual behavior and displaced private institutions. It was once a norm for extended, multi-generational families to live together and pool resources. It is no longer.  Indeed, procreation outside of marriage will soon be the rule. Private pensions and savings once provided the primary sources of retirement income; now two of the three legs have disappeared for many, leaving them dependent on Social Security. Private institutions that once had a mission to provide others in times of need have in many cases been starved for resources (“Why tithe when I pay taxes?”) or coopted by the state,  becoming quasi-private service delivery organizations that would  wither on the vine without a flow of public funds.  If one believes that political and social development is path dependent, one should not expect an instantaneous return to a previous branching point. Indeed, the path may prove arduous.

One could argue—and I think persuasively—that elements of the old order may reassert themselves in the future. But the future is a big place. Changes will not come quickly and not necessarily in ways that one may hope. Significant reforms in entitlements will impose a fair amount of pain in the interim. For some, the pain will be minimal (e.g., readjusting the timing of retirement, deleting costly items from the bucket list). But for others, it will be devastating (e.g., selling the family homestead for rent and food, foregoing medical procedures that could extend life or improve the quality of life).

The observation that there once was a time when welfare did not exist is a bit too easy. We can all imagine a world without welfare. Yet, it tells us nothing about whether a return to this original position is possible (or likely) and whether individuals will willingly accept the sacrifices it will entail.

The characters described in the NYT article referenced in the original post were working class or lower middle class individuals who were sympathetic to the Tea Party but were simultaneously fearful of how they could survive (in some cases, literally) without their existing entitlements. They were not Reagan’s mythic welfare queens, exploiting the system for a life of ill-gained luxury. One can only wonder whether their embrace of small government will prove all too thin once they understand the short-term consequences?

Ideally, reform would occur in a deliberate and reasoned manner. But if broad support for reform is difficult to create or maintain, an incremental path to reform will be politically impossible. Ultimately, fiscal crisis could open the door to changes that are far less compatible with liberty than one might hope. This too, is not difficult to imagine.

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Binyamin Appelbaum and Robert Gebeloff had an interesting piece in the NYT this weekend entitled “Even Critics of Safety Net Increasingly Depend on It.”  An early quote provides the context:

 The government safety net was created to keep Americans from abject poverty, but the poorest households no longer receive a majority of government benefits. A secondary mission has gradually become primary: maintaining the middle class from childhood through retirement. The share of benefits flowing to the least affluent households, the bottom fifth, has declined from 54 percent in 1979 to 36 percent in 2007, according to a Congressional Budget Office analysis published last year.

Rather than restating a host of projections that many of us know all too well, the remainder of the piece works through a variety of vignettes of individuals—largely middle class or lower middle-class–who depend on various parts of the welfare state (e.g., Medicare, Social Security disability). In most cases, they  recognize the problem of fiscal imbalances and they detest liabilities being passed on to future generations; many seem like rank-and-file tea party advocates who advocate cutting the size of government.  At the same time, they have few alternatives to the safety net. There comments are in many ways tragic. Here is one example:

She [Barbara] believes that she is taking more from the government than she paid in taxes. She worries about the consequences for her grandchildren. She said she would like politicians to propose solutions.

“We’re reasonable people,” she said. “We’re not going to say, ‘Give it to me and let my grandchildren suffer.’ I think they underestimate seniors when they think that way.”

But she cannot imagine asking people to pay higher taxes. And as she considered making do with less, she started to cry.

“Without it, I’m not sure how I would live,” she said. “With the check I’m getting from Social Security, it’s a constant struggle on making sure that I pay my rent and have enough left for groceries.

“I haven’t bought a Christmas present, I haven’t bought clothing in the last five years, simply because I can’t afford it.”

While I doubt that there is anything approaching a random sample in this piece, the stories are touching and worth reading as you reflect on the long-term liability crisis. The long-term fiscal imbalances cannot be addressed without significant reform in the largest entitlement systems and increases in revenues. But several of the characters in this article (1) recognize this fact but (2) clearly have no sense of how they could survive without the current levels of support.

Obviously, the expansion of the safety net has been accompanied by changes in social norms and the displacement of private institutions. At one time, people like Barbara might have been confident that their extended families and congregations would never let them fall into abject poverty in the absence of public programs. But it is difficult to imagine that a significant reduction in entitlement spending would lead to a revivification of a world that has long passed, at least on a timeline that would be relevant to current beneficiaries.

Reform will come—the status quo simply cannot be maintained. But reform will impose a great deal of pain in a nation where so many have come to depend on the state for so much and there are few live alternatives.

EDITORIAL UPDATE: Those interested in more of Marc’s thoughts on this subject should look here as well.

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The WSJ has an editorial today entitled “Entitlement Nation” in which it outlines America’s political history that has led to so many millions of us today receiving, even living off, payments of money, goods, or services from the government. The numbers are shocking: “50.5 million Americans are on Medicaid, 46.5 million are on Medicare, 52 million on Social Security, five million on SSI, 7.5 million on unemployment insurance, and 44.6 million on food stamps and other nutrition programs. Some 24 million get the earned-income tax credit, a cash income supplement.”

The Journal rightly argues, “Congress has made so many promises to so many Americans that there is no conceivable way those promises can be kept.” It is because the current debt-ceiling negotiations are not even discussing the drastic changes to Medicaid, Medicare, and Social Security that would be needed to keep us fiscally afloat that they are really just playing pretend. We are still looking for the proverbial Adult In The Room. 

When the subject of reforming the Big Three entitlement programs arises, one often hears, especially from people receiving payments from them, some version of: “I paid into those programs, so I’m entitled to get my money back.” It seems like a reasonable position: people should get what they paid for, especially when they were promised to get what they paid for.

The problem is that what you paid is long gone. The money you paid over your working career was spent immediately on all manner of government cornucopia—programs, benefits, bureaus, agencies, institutes, centers, initiatives, divisions, projects, expenditures, studies, commissions, summits, departments, and on and on. You may not have noticed, or may not have been paying attention, but every single penny that was taken from your paychecks was spent. Not saved, not invested: spent. So it is now gone. Indeed, it is more than gone, since what has been spent is a lot more than what came in—which means that not only was every penny they took from you spent, but they’ve promised others a lot more of your, or someone’s, pennies.

The obvious question must now be asked aloud: If all that money, and then some, has already been spent, what is funding those entitlement programs right now, today? Answer: it is being extracted from other people’s paychecks, and financed by debt that other people will have to pay in the future. People receiving entitlement payments now are living off the money taken, or promised to be taken, from other people.

Should it be this way? Should the government have made promises it could not keep? Should it be the case that the government actually spent the money they took from you instead of saving or investing it? No, no, and no. Alas, what should be often is not.

The moral status of some people living off wealth taken from others, as so many millions of us Americans now are doing, is a separate question. I have my own view about it, but coming to a correct moral judgment about it requires first coming to a proper understanding of the situation.

It might well have been your money that was taken from you all those years, and, especially in retrospect, it might well have been wrong of the government to take it from you. But the money you are receiving now is not that money: it is someone else’s, someone who no doubt also would claim ownership of it. If you accept the money, you have to face that fact squarely.

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In an interview with CBS News, the President has issued some stark predictions of what will happen should Congress fail to extend the debt ceiling.

“I cannot guarantee that those checks go out on August 3rd if we haven’t resolved this issue. Because there may simply not be the money in the coffers to do it.”

For those who have been following entitlements, this seems hard to reconcile with the assurances issued by OMB Director Jacob Lew a mere four months ago.

“According to the most recent report of the independent Social Security Trustees, the trust fund is currently in surplus and growing. Even though Social Security began collecting less in taxes than it paid in benefits in 2010, the trust fund will continue to accrue interest and grow until 2025, and will have adequate resources to pay full benefits for the next 26 years.”

Of course, Lew’s views of the trust fund have changed overtime. When he was working as President Clinton’s OMB Director, he was a bit less sanguine:

 “These [trust fund] balances are available to finance future benefit payments and other trust fund expenditures—but only in a bookkeeping sense. These funds are not set up to be pension funds, like the funds of private pension plans. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, have any impact on the Government’s ability to pay benefits.”

See Peter Suderman (Reason) on the shifting interpretation of the trust fund.

The President’s recent warnings about the cessation of Social Security payments post August 2—while undoubtedly overblown–would suggest that he takes  Lew (2000) more seriously than Lew (2011). Stated another way, that the assurances of earlier this year were a less than accurate portrayal of our entitlement crisis that may not be sustainable in the full light of day (like Social Security).

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In an interesting piece in Politicotoday, Alex Isenstadt argues that GOP plans to reform Medicare could open the door to the Democrats retaking the House in 2012 (something no one would have predicted following the results of the 2010 midterms).

According to Isenstadt, the Democrats are in possession of a “silver bullet.”

the GOP’s Medicare proposal, an issue the New York race suggested rivals cap-and-trade or President Barack Obama’s health care plan for its ability to antagonize voters. A CNN/Opinion Research Corporation national poll in late May revealed that nearly 6 out of 10 voters opposed the plan. The same survey found that the number of those who believe GOP control of the House is good for the country is in decline, dropping from a 52 percent to 39 percent margin in November to 48 percent to 44 percent.

Other commentators, like Michael Tomasky, find all of this a bit premature. Perhaps. But given the lackluster economy and continued engagement in two unpopular wars, is there any question that Medicare will become central to the DNC’s 2012 strategy?

To be certain, one can lay out the long-term fragility of Medicare with relatively great precision. One can make a principled argument that without reform, Medicare—for all of its virtues—will cease to provide the benefits many currently expect. However, one can also provide a critique of reform in ways that will likely strike the elderly with terror. This piece by the Agenda Project is a good example:

If there is a chance that serious discussions about Medicare reform will place one’s reelection in jeopardy, there will be strong disincentives to engaging serious entitlement reform before the results of 2012 are tabulated. The incentive to kick the can down the road may be overwhelming, even if the road appears to be coming to an abrupt end.

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