This is taken from a paper by Brad DeLong. And what is the number one issue of our time? Income distribution. Enjoy the beach because you ain't gonna be working in the future.

The urgency of a growth agenda is strengthened by the recognition that the United States' social insurance system was designed for the pre-1973 rapid rather than the post-1973 slow pace of growth.Without faster long-term economic growth America's social insurance system as we know it is unlikely to survive the next generation. Thus there is a sense in which the stakes at risk in the task of finding policies to spur American economic growth are larger for the left than for the right half of the political spectrum. All have an interest in faster economic growth: faster growth empowers the American people to better achieve their ends whether their ends are sitting on beaches sunning themselves, raising their children, protecting endangered species, or increasing their level of education.

But in the absence of faster economic growth than has been seen in the past two decades, the future of the social insurance state is easy to read: Medicare and Social Security devour the rest of the Great Society and the New Deal over the course of the next generation. Two generations hence Medicare and Social Security run up against their own budget constraints, and destroy themselves.

Death by Entitlement

Thanks to current student Kyle Peterson for the graph...

This is where the money went. Look at the first derivative of income shares since 1980.

http://johnhcochrane.blogspot.com/2012/02/where-your-money-goes.html?utm_source=feedburner

What if the long run is now? What if this is as good as it gets? What if the graph below is true? Wait...it is true.

http://johnhcochrane.blogspot.com/2012/01/goolsbee-on-budgets.html

Real neat graphs on debt and taxes and stuff. Thanks to Phil McPherson for sending these.

http://www.zerohedge.com/news/10-essential-fiscal-charts-demonstrating-americas-disastrous-condition

From Paul Samuelson in 1967. Different way to view things back then.

http://gregmankiw.blogspot.com/2011/09/paul-samuelson-on-social-security.html

Paul Ryan in his own words...Mediscare? Reforming entitlements and going back on the gold standard are our only hopes for long-run sustainability.

Well one out of two ain't bad.

What he said.....

http://www.washingtonpost.com/wp-dyn/content/article/2010/03/28/AR2010032802353.html

This posting ran last October 2008. Let's look at it again shall we? And these projections were without health care for all!

This is old news. Apparently it needs to be repeated over and over. This is the "tomato that is going to eat Philadelphia". Of course I speak of Medicare, Medicaid and Social Security. And still we go on, year after year, one year indistinguishable from the next, and nothing happens. Kinda like claiming staring into a bug zapper every evening all night long is your major accomplishment in life.

Read the following, if you can, from the May 2008 Congressional Budget Office report "The Long-Term Economic Effects of Some Alternative Budget Policies" :

"How would the economy be affected if the projected rise in primary spending under CBO’s alternative fiscal scenario (from about 18 percent of GDP in 2007 to about35 percent in 2082) was financed entirely by a proportional across-the-board increase in individual and corporate income tax rates? Answering that question is difficult because the economic models that economists have developed so far would have to be pushed well outside the range for which they were initially developed. Any numerical estimate would be very speculative and heavily dependent on the model producing it.
Nonetheless, tax rates would have to be raised by substantial amounts to finance the
level of spending projected for 2082 under CBO’s alternative fiscal scenario. With no
economic feedbacks taken into account and under an assumption that raising marginal
tax rates was the only mechanism used to balance the budget, tax rates would
have to more than double. The tax rate for the lowest tax bracket would have to be
increased from 10 percent to 25 percent; the tax rate on incomes in the current
25 percent bracket would have to be increased to 63 percent; and the tax rate of the
highest bracket would have to be raised from 35 percent to 88 percent. The top corporate
income tax rate would also increase from 35 percent to 88 percent. Such tax
rates would significantly reduce economic activity and would create serious problems
with tax avoidance and tax evasion."

Want the whole report? Here: http://www.cbo.gov/ftpdocs/92xx/doc9216/Letter-to-Ryan.1.1.shtml

Now go back to work and pay up sucker!

VAT tax coming for sure.

Here it is in a nut shell. I really like this guy. But what happens to all our future promises if economic growth hits the wall?

http://www.nytimes.com/2009/11/24/opinion/24brooks.html?ref=opinion

Social Security in a nut shell: Part III

This is Ida May Fuller, the first person ever to get a Social Security check. She paid in to Social Security a total of $24.75 in 1937-39. Her first check was for $22.54. She lived to be 100 and collected a total of $22,888.92. She hit the superfecta and did not even buy a ticket. I don't begrudge her this or any of our other proud senior citizens that fought the Depression and won World War II. What I am terribly troubled by, however, is the future projection of benefits and that is problem #3.

Problem: Ever rising real, inflation-adjusted benefits. Today, the average person at 65 gets about $14,000 per year in Social Security benefits. In 2050, the promised average benefits are $20,000 per year in 2009 dollars. Every generation gets higher and higher promised real, inflation-adjusted benefits. So what has been promised to today's 20 year olds is 40% higher than what people get today. This comes from legislation passed under Carter that indexes initial benefits to wages and not prices. The result is ever rising real benefits. Sorry folks but that is not sustainable either.

Solution: From the mortality tables and wage histories, actuarially, we can figure out within $1.32 how much is needed in the years to come to pay promised benefits. The Social Security trust fund runs out around 2042, although it could be sooner if economic growth takes a hit in the decades to come. It is estimated that after 2042, there will be taxes sufficient to cover 70% of promised benefits. Whamo! I propose to tell the American people that after 2042, you will receive 70% of what has been unrealistically promised. You now have 33 years to make adjustments to your retirement cash flow. In addition, there was talk of a "blended" indexation formula that made a great deal of sense to me. That is probably why it has not been spoken of again. This would change the indexing formula as follows: instead of indexing initial benefits to wages only, the bottom 1/3 of all recipients would continue to have their benefits indexed to wages, the middle 1/3 would have their initial benefits indexed by a 50-50 blend of wages and the Consumer Price Index, and the top 1/3 would have their initial benefits indexed to the CPI only. This would go a long way to correcting this pie-in-the-sky future promised benefits Candyland.

Remember, when all is said and done, we could have higher benefits with a stable worker-to-retiree ratio and economic growth...OR...we could have a declining worker-to-retiree ratio with stable real promised future benefits...BUT... we can not have a declining worker-to-retiree ratio with higher real promised future benefits. And of course, that is what we have right now.

As the late great Herbert Stein famously said, "something that can't go on forever...won't". And it won't.

Social Security in a nut shell: Part II

Monday we spoke of the increase in longevity that is stressing the Social Security system. Today we speak of the demographic change.

Problem 2: Declining worker-to-retiree ratio.
We are living longer and having fewer children. Back in 1950 there were 16 people working for every person retired. So, the pot of money that could be extracted to pay Mrs. McGillicuddy her Social Security was vast and so only a small sum needed to be taxed from each worker. The original tax was 1% on both employer and employee from 1937-49. Now it is 7.65% on both, with self-employed people paying the whole 15.3% whack themselves. It is estimated that by 2030 there will be 34 people retired and collecting Social Security for every 100 people between the ages of 19 and 64 who are working. That is a far cry from a 16-to-1 ratio like in 1950. So do we continue to take more and more from fewer and fewer of tomorrow's workers to fund longer retirements? If your answer is "yes" then hit the floor and give me 10 push ups.

Solution: Massive immigration or increase the birth rate. Neither of which are likely to happen. So once again we come back to facing less benefits or taxing the economy out of productive existence.

Social Security in a nut shell: Part I

Since we are talking about government programs, how about if I be a "snit" and bring up Social Security. That is a problem too lest we forget and it has not been dealt with at all best I can remember. In what follows I will try and lay out the problems. There will be more postings to follow.

It all boils down to three things:
Problem 1: People are living longer. That is not a problem. Longer life is a good thing. But the current structure of the system is not equipped to handle it. When Roosevelt signed Social Security into law, life expectancy was 62. Thus Social Security was considered a "jackpot" program. If you lived past life expectancy and made it to 65 then "jackpot", you collected. But Roosevelt hocked the collection age of 65 from Chancellor Bismarck when he thought it up in 1870 as the age to begin benefits when Germany started the modern welfare state. I ask you now, don't you think after 139 years it is time to have some fresh thinking about the actuarially appropriate age to begin collecting Social Security? Well folks, 65 is not it. If people today retired for the same number of years that people did back in the 1930s when Social Security was started, they would work until the age of 74. They don't and they start looking for the "jackpot" earlier for longer retirements. This has put the system under stress that it won't be able to withstand.

Solution: I was born in 1960 and can collect, under current law, 100% benefits at age 67. That's too early. It needs to be raised to 70 or more. Look, I'm arguing for me to get less so you know my words are sincere. You need to get less too. The eligibility age needs to rise. We can still let people have 70% benefits at 62, but full benefits age needs to go up. Start with me. Anyone born in 1960 or after, you are now moved to age 70. Have a nice day now knowing you are not milking the generations that come after you. What? Do you think this is France or something?

Next up: Declining worker-to-retiree ratio

Hey wait a minute...riddle me this?

Since when is $102,000 = $250,00? If I heard it correctly Senator Obama is talking about uncapping social security. Well that means higher taxes for anyone making more than $102,000 not $250,00 as he claims. And a lot more taxes. But hey, taxes are the price of government services right?