July 21, 2003
From the desk of Jane Galt:What I'm reading this week
A paper from the AEI by Messrs. Gokhale and Smetters on the unfunded liabilities of the US government. (It's been circulating in draft for quite some time, but the final version is newly out this month).
The differences between future benefit payments and future tax collections are not part of either the government’s debt or budget measures.It is not only the current size of Social Security and Medicare that makes the accounting omission a serious one. Although the financial commitments involved will be paid far into the future, they affect the savings behavior of younger people today— both programs are deeply embedded in the political expectations and immediate economic choices of all Americans. And the rapidly approaching “demographic transition” to a society with a much higher ratio of older to younger people will make the current expedient of pay-as-you-go financing unsustainable before long. Accurate accounting has a practical purpose: to reveal the consequences of current practices and to clarify the nature of the choices we face. In the absence of accurate accounting, political debate over some of the most momentous issues of the age is proceeding in an empirical vacuum, and has become much more confused and desultory than it needs to be. American citizens are being misinformed, to their serious detriment, in both their political and private choices.
Gokhale and Smetters propose a new set of accounting measures
to supplement the conventional ones. “Fiscal Imbalance” adds to the federal government’s current public debt the present value of the difference between all projected federal non-interest spending and all projected federal revenue. “Generational Imbalance” indicates how much of the Fiscal Imbalance arises from older generations shifting tax burdens to younger (including yet-unborn) generations.
I've just started reading it, but I think that last measure is rather important, more morally than economically.
Short term borrowing, over say the next ten years, does not to a significant extent give benefits to current citizens at the expense of those not yet arrived. But long term deficit spending is deeply immoral: those alive get all the fun, while those unborn get all the bills. And the way that it's stacked now, with an active over-sixty generation demanding exorbitant taxes to fund their retirement and medical care, and those slightly behind them handing the bill to their grandchildren rather than have an unpleasant confrontation, is just dreadful.
More thoughts later. . .
Posted by Jane Galt at July 21, 2003 4:15 PM | TrackBack | Technorati inbound linksSocial Security is an intergenerational Ponzi scheme with high overheads. It is long past time to switch from pay as you go to funded retirement plans.
Actually, it's an intergenerational Ponzi scheme with relatively small overhead. The system moves an incredible amount of money with low processing cost (because for revenue it piggybacks on the income/withholding tax system and for expenditure has very little discretion in terms of who gets paid what).
There is, of course, the Barro argument that such transfers are washed out by bequests; we're handing our grandchildren the bill, but we're also handing them an inheritance to pay that bill. More broadly, there is a notion that part of the purpose of the tax code is to transfer wealth from those who are better off to those who are worse off (whether you agree with this notion is another matter). To the extent that continued growth means that our grandchildren will be better off than we are, isn't this debt just more of the same?
old peope: villainous bloodsuckers that we should cut off... or should we just get a can of raid???
just tell everyone who isn't collecting ss... you won't accrue any more benefits, and we're halving what you've built up... now get a freaking job grandpa!
Nothing's going to change re SS until the electorate treates SS for what it truly is: a welfare system. It's not insurance, it's not retirement, it's not an IRA. It's a safety net to ensure that America's elderly have an income to support them so that they won't have to eat dog food.
Once the nation comes to this understanding, SS can then be means tested. If you don't need it, you don't get it. Yes, the average rich guy paid into The System for 40 years; so what? That rich guy doesn't collect welfare checks because he doesn't qualify. The same should be true of SS.
Means testing offers the best chance for expenditure reduction without excessive taxation.
It also is an attack against "The Rich", which is always popular; it'll be difficult for Bill Gates to argue that he has a right to his SS checks.
Brian -- won't work with this liability, because the liability is indexed to inflation.
Don -- interesting point, but I think that since that generation, in turn is supposed to leave something to the generation after it, the effect washes out -- particularly if grandpa starts eating into junior's inheritance.
I'm so glad Australia always had it's old age pension as just that, a pension, ie. welfare.
We already have means testing and asset testing and privatized accounts. All were easy to introduce, and just because we used a different name for what was almost exactly the same thing.
Jane,
That's exactly Barro's point -- that inheritance washes out the debt. So instead of passing on inheritance I, we're passing on debt D and inheritance D+I. Mind you, I don't believe it 100%, but it's an interesting perspective. Heck, don't take my word for it. Read the paper. "Are Government Bonds Net Wealth?" Big Bad Bob, JPE (I think).
yeah but its d + i - i1 (since kids are supposed to leave at least as much to their kids, if not more)
just kill old people its cheaper
Young people have no more right to an inheritance than old people do to borrow from their descendants. If Old Dude builds up an estate, Old Dude has the right to spend it, give it away, burn it, or leave it to Number 1 Son, no matter what Number 1 Son thinks he should do with it.
Anyway, intergenerational borrowing by government is a collective act. Inheritance is done on an individual basis - we can't offset one with the other.
I think this is all a joke. Look at the debt we are creating as one big home improvement loan.
We are passing debt to future generations and that is a problem, only if you totally ignore the improvements we have made in our society.
The world I leave with my grandson born in 1994 is a much better place than my grandfather left me in 1948 when I was born, or he inherited in 1891 when he was born.
All the alarmist talk of "debt passed to our children" is rather Malthusian. If they don't want to shoulder they wont! Then it is the creditor who gets hurt.
Michael Strickland wrote:
I think this is all a joke. Look at the debt we are creating as one big home improvement loan.
That might be arguable if the debt were the result of things such as bonding for road construction but since most federal spending is used for income transfers, I don’t see how one can legitimately liken it to a “big home improvement loan.”
Social security is not a welfare plan. All workers paid 7.5% of thier income and thier employer put in 7.5% which equals 15% of you income..The system was designed to repay us as we retired. Unfortunaltly the system paid out all the benefits and instead of putting the surplus away, they spent it to keep our other taxes low. We got screwed, of course they also screwed some private plans and they want bailed out by the govy. Dont ever forget the S&L bailouts, Enron, global crossing, Martha stewart etc etc. One nation under fraud. Fuzzy math.
Social security is not a welfare plan. All workers paid 7.5% of thier income and thier employer put in 7.5% which equals 15% of you income..The system was designed to repay us as we retired. Unfortunaltly the system paid out all the benefits and instead of putting the surplus away, they spent it to keep our other taxes low. We got screwed, of course they also screwed some private plans and they want bailed out by the govy. Dont ever forget the S&L bailouts, Enron, global crossing, Martha stewart etc etc. One nation under fraud. Fuzzy math.
Social security is not a welfare plan. All workers paid 7.5% of thier income and thier employer put in 7.5% which equals 15% of you income..The system was designed to repay us as we retired. Unfortunaltly the system paid out all the benefits and instead of putting the surplus away, they spent it to keep our other taxes low. We got screwed, of course they also screwed some private plans and they want bailed out by the govy. Dont ever forget the S&L bailouts, Enron, global crossing, Martha stewart etc etc. One nation under fraud. Fuzzy math.
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