Читать книгу Disinherited - Diana Furchtgott-Roth - Страница 10
ОглавлениеJared’s grandfather, August Meyer, an octogenarian living in Minnesota, does not see his Social Security checks as entitlements because he paid Social Security taxes during his entire career as an airline-engine shop foreman. He was told that the Social Security system would invest his hard-earned money and use the returns to ensure that he had a comfortable retirement. But owing to a series of botched and unfunded promises, Social Security has turned into a pay-as-you-go system in which the money he paid in, as payroll taxes taken out of each paycheck, was spent long ago and the money young people are now paying goes directly to retirees in his position.
In terms of government spending, August is a winner. He is an unintended winner, because he never wanted to take advantage of his grandchildren, but he is a winner nevertheless. The government increases the federal debt, and, if August’s grandchildren get jobs and pay taxes, they are the ones who will be stuck paying it back. Our government requires young people to pay an outsize share of taxes, loans, and health-insurance premiums—all to benefit older Americans. This system is neither sustainable nor fair.
Jean Thompson (not her real name), a young professional, agrees. “I think my generation is paying for the boomers’ credit cards with the entitlement programs [Social Security, Medicare, and now Obamacare] as they are structured now,” she told us. “I remember reading in U.S. News and World Report that the interest from these programs and the national debt will absorb 92 cents of every dollar in the next 10 years. Boomers have less in personal savings as compared with other generational cohorts, and I suspect that this is in part because they are relying on these programs they believe they have paid in to, even if Social Security and other programs aren’t exactly paid for in this manner.”
Jean studied demography, so she approaches these problems in demographic terms. She is mildly forgiving of the boomers, because she does not think they understood that fertility rates were declining. In the 1970s, as these entitlement programs were gathering steam, people were concerned about a population bomb, not a birth dearth. But with declining fertility rates, sustaining entitlement programs is difficult unless the American economy is exceptionally strong. There are fewer young people, so they will have to contribute more to the system, as a group through a high labor-force participation rate and individually through ever-higher payroll taxes. Economic growth has been tepid since the recession, though, so young people lack financial resources.
Jean sees that Washington has been reluctant to fix this system, all while the federal deficit grows. Politicians have not acknowledged how much this system hurts young people. It is tough for older Americans to understand why young people might live at home with their parents, carry large debt loads, or have trouble finding work. And because older Americans are a large voting bloc, politicians have resisted increasing the amount of money that older people pay to the entitlement programs they benefit from.
Few young people know that America is $18 trillion in debt, and fewer know that this is only the federal debt. Of this amount, $5 trillion is held by the government and $13 trillion is privately held.1 Social Security contributed $69 billion toward the debt, but that is just the tip of the iceberg.2 When future spending obligations on entitlements are compared with future tax obligations, the so-called fiscal gap is $205 trillion.3 This is 12 times GDP and 16 times official debt held by the public. In simpler terms, we are broke.
In addition, states have their own deficits, which will have to be funded by young Americans. States are $5 trillion in debt from unfunded pension liabilities.4
“I think that our political institutions and political leaders have accommodated themselves to deficit spending and growing debt and acquired a stake in their continuance,” Hudson Institute senior fellow Christopher DeMuth wrote in National Review. “Disagreements over the consequences and immediacy of the problem are always resolved in favor of borrowing more to address the problems of the moment and deferring ‘debt consolidation’ (through some combination of higher taxes, lower spending, and higher economic growth) to a later time. The American body politic has acquired deficit-attention disorder.”5
Paying off the amount of the federal fiscal gap—irrespective of state deficits—would require an immediate and permanent 57 percent increase in all federal taxes. In 20 years, this amount becomes 69 percent and in 30 years, 76 percent. Another way to close the fiscal gap would be to institute immediate and permanent cuts of 37 percent in all federal spending except that which services the debt; in 20 years, this number becomes 43 percent, and in 30 years, it balloons to 46 percent.6 Neither of these options is politically feasible, but the consequences of delayed action only worsen as time passes.
This leaves young Americans with two options. They can either pay substantially higher taxes than their parents do, while not receiving any more benefits, or they can pay the same rate as their elders and receive far fewer benefits. Both outcomes are grossly unfair. “You have been conscripted to finance other people’s retirement and health-care needs, regardless of what impact this will have on your life. Your duty is to set aside your own happiness in order to serve the needs of the old,” Don Watkins explains to millennials in his book Rooseveltcare.7
The Congressional Budget Office estimates that if the country continues on its current path, the federal deficit will be $7.2 trillion aggregated over the next 10 years. CBO’s job is to analyze the effect that current laws on spending and taxes will have over the next decade. Based on their assessment, they construct projections of deficits or surpluses. These days, deficits are all they see, and these are getting larger. CBO has projected that government revenues, nearly all of which come from taxes, will stay around 18 percent of GDP until 2024, while spending would rise from slightly more than 20 percent of GDP to 22 percent of GDP over the same 10-year period.8
Real Federal Debt per Capita
Sources: U.S. Department of the Treasury, Treasury Direct; U.S. Census Bureau, Population Estimates; and Bureau of Labor Statistics, Consumer Price Index
Federal Debt to GDP
Sources: U.S. Department of the Treasury, Treasury Direct; Bureau of Economic Analysis, National Income and Product Accounts
It is not just that young people are paying for their elders’ entitlement programs, but that those currently in Washington are handicapped by decisions made by previous administrations. Federal spending in 2014 on mandatory programs such as entitlements equaled 12 percent of GDP, whereas discretionary spending was 7 percent of GDP.9 This leaves less money for more-essential functions of government such as building and maintaining America’s transportation infrastructure.
This is not to say that Washington is starved for funding. Federal debt from government activities outside these major entitlement programs is also projected to rise over the next decade.
In Dead Men Ruling: How to Restore Fiscal Freedom and Rescue Our Future, Urban Institute scholar Eugene Steuerle shows that the federal deficit is primarily driven by programs put in place long ago.10 These programs were created and essentially set on autopilot. Since then, they have grown in scope and scale. Washington has not mustered the political will to end the entitlement programs it has inherited. Now the government finds itself unable to adapt to 21st-century challenges, as it is increasingly constrained by laws passed in the 20th century. Young Americans are funding Social Security and Medicare for the current population of elderly Americans, but the programs are scheduled to go bankrupt long before people who are young today reach retirement age.
If Washington does not change present law, the Social Security trust fund will be depleted by 2033.11 This means that for people retiring in 20 years, those Social Security checks will not be paid in full. The Hospital Insurance component of Medicare is scheduled to exhaust its trust funds by 2030.12 Recall the octogenarian August Meyer, who spent a large part of his career paying into Medicare and was confident he had earned every penny of his Social Security checks—but his two knee replacements are not cheap. As the costs of end-of-life care continue to balloon, it is clear that those in his situation are getting the best end of the deal.
When taken together, Social Security and Medicare account for almost 40 percent of the federal spending in 2014.13 Even though Social Security and Medicare are on an unsustainable path, young people and their employers continue to pay a combined 15.3 percent of their paychecks into the programs, funding current retirees with contributions the young will probably never see paid back.14
The beginnings of Social Security go back to 1935, when the Social Security Act became law. While the Act was intended to provide for the needy and destitute, many prominent lawmakers raised substantive questions about its practicality, constitutionality, and potential for growth. Daniel Reed, then a New York Republican in the House, remarked that with the passage of the act, Americans would feel “the lash of the dictator.”15 Representative John Taber, another New York Republican, asserted, “Never in the history of the world has any measure been brought here so insidiously designed as to prevent business recovery, to enslave workers.”16 Senator Thomas Gore, an Oklahoma Democrat and the grandfather of author Gore Vidal, was quoted as saying, “Isn’t this socialism?”17
Social Security had humble beginnings. In 1937, the program included a mere 53,236 beneficiaries who received a total of just $21 million in today’s dollars.18 Considering that the American government now spends $7 million a minute, this was not a substantial amount of money by today’s standards.19 By the end of 2013, total beneficiaries amounted to 58 million—over 1,000 times more beneficiaries than in 1937.20 In fiscal year 2013, Social Security cost $808 billion—nearly 40,000 times what it cost in 1937, adjusted for inflation—amounting to almost 23 percent of federal spending.21 According to the 2014 Social Security Trustees’ Report, with an infinite horizon, the present value of unfunded liabilities in 2013 was $24.9 trillion.22
Social Security needs to move from a pay-as-you-go system, where what is paid in is quickly paid out, to a sustainable system that allows payments to grow as investments that can help pay for retirement. An adjustment in benefit calculations, sooner rather than later, will go a long way toward shoring up Social Security’s troubled finances. If the program is to be there for young people when they retire, something has to change—and fast.
Geoffrey Levesque, a recent college graduate who is trying to build a career in television production, resembles many of his peers in that he does not expect to ever receive the money back that he is now paying in to Social Security. “Already I don’t know if the baby boomer generation will receive all of its Social Security,” he told us. “So I can’t even imagine what it will be for my generation. With how this government spends money, it will be unlikely. Whatever your political views are, there is a duty to help the elderly. They worked hard for their money. Still, I would be upset if I did not receive all of my Social Security, but, based on my experience so far, I am always prepared to be disappointed by the government.”
Social Security is not the only major entitlement program that is facing serious actuarial problems. The projected aggregate cost of Medicare is staggering, and it is the main driver of our debt. The Congressional Budget Office has estimated that, under an extended baseline, Medicare expenditures as a percentage of GDP would grow from 3 percent today to 5.5 percent in 2050, and to 9.3 percent in 2089.23
Medicare’s modest origins can be traced to 1965, when President Lyndon Johnson signed it into law. The program was designed to provide medical care for those 65 and older, at a time when life expectancy was about 70 years.24 In 1966, 19 million people signed up for the program, and it cost $30 billion in today’s dollars.25 By 2013, 52 million people were enrolled—nearly a threefold increase. The program cost $583 billion in fiscal year 2013—20 times higher than costs in 1966—which represented 14 percent of total federal outlays that year.26 To understand just how much the program has expanded in the last 30 years,27 consider that as recently as 1980 Medicare spending amounted to a mere $101 billion, covering 28 million people.28
Medicare spending is projected to rise to 6.9 percent of GDP by 2088. Projected revenues—coming from payroll taxes and taxes on Old Age, Survivors, and Disability Insurance Program (OASDI) benefits that go into the Hospital Insurance (HI) trust fund—rise from 1.4 percent of GDP today to 1.8 percent of GDP by 2088, assuming current law. The portion of non-interest Medicare income that comes from taxes will drop from 41 percent to 28 percent at the same time that general revenue transfers will rise from 43 to 52 percent, and the share of premiums will rise from 14 to 18 percent.29
This change in the distribution of financing will happen because costs for Medicare Parts B and D (which are funded by general revenues) increase at a faster rate than do the Part A costs, according to Trustees’ projections. In 2088, the Supplementary Medical Insurance (SMI) program will need general revenue transfers of 3.3 percent of GDP, and the HI deficit will reach 0.5 percent of GDP in 2088. No provision exists to finance this deficit through general revenue transfers or any other revenue source.30
The Medicare Modernization Act of 2003 requires that the Boards of Trustees determine each year whether the annual deficit exceeds 45 percent of total Medicare costs in any of the first seven fiscal years of the 75-year projection period. If it does exceed 45 percent, then they must include a report on “excess general-revenue Medicare funding.” If two of these reports are required consecutively, then there is a “Medicare funding warning” that forces the president to respond to the overrun by proposing legislation within 15 days of the next budget submission. Congress is then required to consider the proposal with priority. So far, Washington has not responded to the funding warnings that have been a part of seven of the last eight reports. Politicians are breaking their own law. Again, Washington does nothing and then wonders why our fiscal position is deteriorating.
Washington did pass a law constraining Medicare’s growth. Reimbursements to Medicare physicians are supposed to be trimmed whenever Medicare exceeds a pre-set growth rate. But Washington repeatedly repeals the proposed cuts to Medicare physicians. If it failed to do so, no doctor would participate in Medicare.
In 2014, the HI deficit was $15 billion. Until 2030, interest earnings and asset redemptions will cover deficits of the HI trust fund. At that time, the trust fund will be bankrupt. After that, new revenue will be necessary. This will require some combination of increasing taxes, reducing benefits, cutting other government spending, and borrowing more from taxpayers. If nothing is done, then borrowing from taxpayers will need to reach 4.4 percent of GDP by 2040.31
As these programs balloon, the old gain, and the young pay. Adjustments to Medicare’s growth rate, both in terms of coverage and cost, need to be seriously evaluated if the program is going to remain viable for those who are paying for it.
The Social Security and Medicare Trustees’ report highlights the commonly known problems with Social Security. In 2013, Social Security benefits cost 14 percent of taxable payrolls. By 2035, they are projected to cost 17 percent; they will climb upward to 18 percent in 2088. For Medicare, costs were at 4 percent of taxable payrolls in 2013 and are projected to climb to 5 percent by 2050, then up to 6 percent in 2088.32
If trends continue, workers could be paying a combined employer-employee payroll tax rate of 32 percent in 2050 just to cover Medicare and Social Security payments.33 The rate paid now is 15 percent.34 That is a major cut to take-home pay that will severely affect consumer spending and investment. A 32 percent payroll tax rate seems unimaginable in 2014, but it is below rates paid by some other major industrialized countries. In France, the rate is 42 percent; in Germany, it is 39 percent; in Italy, 40 percent; and in Spain, 37 percent. The United Kingdom has one of the lower rates in Europe, at 24 percent.35
That does not even count the amount that taxpayers will have to pay from their paychecks for state deficits. States hold an additional $5 trillion in liability, of which $4.4 trillion represents debt for pensions and other post-employment benefits. This does not even include the pension or capital-market debt of cities, counties, and other local government entities. A true picture of America’s fiscal position should include all levels of government liabilities.
To cover the total unfunded pension liabilities of state governments, each person in the United States would have to pay $15,052.36 But there is a vast spread between states. Tennessee is in the best financial shape, with $6,531 per person in liabilities. It is followed by Wisconsin, at $6,720; and Indiana, at $7,304. Alaska is in the worst shape, with $40,639 per person. In the continental United States, the state in the worst shape is Illinois, at $25,740; followed by Ohio, at $25,028; and Connecticut, at $24,080. Both red and blue states face towering unfunded promises because the defined-benefit pension system allows politicians from all parties to grant something for nothing—and to defer the inevitable bill.
During economic booms, states deliver more-generous pensions to their employees, but during economic downturns, these increases are rarely pared back. This means that states make promises to public-sector unions that they usually cannot afford.
Absent major concessions, these pensions will have to be paid over time to the 19 million men and women who work for state, county, municipal, or school-district government. If pension-fund income is insufficient to cover these obligations, as is expected, the burden will shift further to state taxpayers. If Washington decides to bail out the states, all American taxpayers, no matter how young, will be liable for these irresponsible promises.
This dire debt has arisen even though the National Association of State Budget Officers found that 49 states had balanced-budget requirements in 2008. Forty-four states require the governor to submit a balanced budget, 41 require the legislature to pass a balanced budget, 37 require the governor to sign a balanced budget, and 43 prevent the state from carrying over a deficit.37
How has this happened? Even when there are balanced-budget amendments, states are often free to use different funds that are not required to be in balance. The balanced-budget requirements typically apply only to general fund budgets. This leaves large amounts of revenues and expenditures free from budget constraints.
Many states can also issue debt to balance their budgets. It is not surprising that, just like the federal government, state governments pass their bills to future generations. Cash-based accounting schemes allow states to issue debt as a way around balanced-budget requirements. Loan proceeds are counted as revenues under cash-based accounting. Even though loans have to be paid back, states can meet their budget requirements by not counting debt due in the future and by shifting expenses from one year to another. Under cash accounting, if a state owes $10 million in annual pension contributions but puts in only $5 million, the budget is still considered “balanced.” All this does is postpone the payment of the debt. This is why cash-based accounting is not a widely accepted method for businesses. The Securities and Exchange Commission only recognizes accrual-based accounting, a far more accurate indicator of an enterprise’s fiscal condition.
States were lulled into complacency because a growing economy propelled increases in stock prices for many years, enhancing the coverage of many pension plans, public and private. Pension systems faced a surplus of funding, and they boosted benefits without regard for future market possibilities. Before the Fed’s three-part venture into quantitative easing, interest rates were higher, too. Prudent planning cannot assume that interest rates will rise to prior levels or that stocks will resume their prior course—state budget projections need to reflect this reality. States must devise ways to reduce their debt so as not to burden their taxpayers, present and future.
Even when financial markets perform relatively well, they do not regularly create a return as high as estimates that state pension plans use (usually 8 percent). The past few years have seen large gains in equities, which have helped the balances of pension funds. But when declines and sluggish growth from the previous years are taken into account, funds do not meet rosy projections. There is no tidy approach to resolving these problems. The states are essentially autonomous, free to pass the burdens of their spending to the young.
In other research, the Pew Center on the States, a nonpartisan research organization based in Washington, estimates that 34 states have funding levels below 80 percent of full coverage.38 In 2010, Wisconsin was the only state with a fully funded public-pension plan.
In the public sector, gains and losses were smoothed over a longer period, typically five years. The Governmental Accounting Standards Board, a nonprofit organization that influences how governments report their pension finances, is proposing that public-sector plans do away with smoothing and instead use market valuations of their assets.39 This would correct one of the transparency problems that have led to public funds’ incurring greater near-term deficits than private plans. The disparity, and potential effect on future generations, suggests that states and cities need to be disciplined and held accountable.
Even more problematic are the high discount rates used by public-pension plans. These rates cloud the plans’ true costs. When a higher discount rate is used, plans appear to be better funded.
Pension plans are supposed to be safe investments. There is no reason to expect a consistent return of 8 percent on investments that are not risky. Using a discount rate that represents actual returns makes plans’ fiscal conditions look worse, but showing an accurate picture of funding levels is something that benefits all stakeholders—public-sector workers, retirees, elected officials, and taxpayers. How can policymakers achieve their goals if they do not have a clear picture of what is going on? In other words, lying with numbers does no favors for anyone.40
Although private plans can reduce employee benefits and increase contributions to bring underfunded plans into financial health, some public-sector plans have been prohibited by the courts from doing this. New employees can be charged a higher contribution rate for lower benefits, but not current employees who were hired under more favorable terms. A municipality in bankruptcy, such as Detroit, can restructure its pension obligations—but not all cities want to, or should, go bankrupt.
Instead, states could gradually raise the age at which government workers can retire. In some states, employees can quit at 50 and start collecting benefits, at the same time as they get another job—and start accruing a second set of pension benefits. Alternatively, states could allow workers to retire at the same age but postpone the age at which they begin to collect benefits.
States could convert their defined-benefit pension plans to defined-contribution plans, thereby eliminating the addition to future pension liabilities. As to what we must do to fix the current crisis, either older workers and retirees will have to accept lower payments or tax increases will be necessary. The switch to defined-contribution plans has been the trend in the private sector. Only union-managed multi-employer plans are sticking to their defined-benefit status, and many of these are in poor financial shape.
States could also reduce the power of the public-sector unions. Wisconsin, which has the lowest per-person pension liability, passed a law in 2011 stating that joining a public-sector union would be optional and that the state would not collect dues for unions. The percentage of workers belonging to unions in Wisconsin declined from 14.2 percent in 2010 to 11.7 percent in 2013, according to Labor Department data released in January 2015.41 This decline was driven by a steep decline in public-sector union membership.
With Uncle Sam strapped for funds, it is extremely unlikely that Washington will bail out insolvent state pensions. William McBride of the nonpartisan Tax Foundation has estimated that in order to fund our federal deficits, the federal government would need to raise tax rates on people earning over $250,000 to 90 percent or more.41 This would not cover our deficits for long, because it does not account for the shrinkage in GDP that would result, which would lower the revenue. This is clearly impossible and impractical, but it shows just how dire America’s financial standing has become.
Alternatively, Washington could make up the revenue by doubling all personal income tax rates, so the top rate would be 80 percent and the bottom rate would be 20 percent. This would raise $493 billion per year, accounting for reduction in hours worked due to higher rates, or $1.2 trillion per year, with no change in behavior. Realistically, raising taxes to this extent would lower GDP by more than 12 percent and wages by 3 percent, and would cost the economy more than 3 million jobs.
Another option would be a value-added tax of 10 percent, which could bring in between $500 billion and $1 trillion a year. But this would be vastly unpopular.
These high tax rates are unimaginable and un-American. Something else must be done to bring the financing of Medicare, Social Security, and other federal programs under better control. It is not practically possible to increase taxes enough to get rid of the federal debt. The only solutions are to cut spending or increase economic growth. So far, we’ve had no success with either of these options.
Take entitlement reforms. Older Americans are too attached to their entitlement programs to cut them, even though keeping the status quo means that young people will pay the price. No president, Republican or Democrat, has succeeded in trimming entitlements. No Congress has passed laws making significant adjustments to the programs. President George W. Bush started exploring Social Security reform in his first term. But it was not until 2004, after winning reelection, that he actively pushed to allow individuals to put a portion of their Social Security contributions into private accounts and then pass the accounts on to their heirs at death. Unfortunately, as with most attempts to take on “the third rail of American politics,” his efforts failed. While his proposals were far from perfect, opponents demonized them before the county had a chance to have a constructive public debate, and so we fell deeper into fiscal disarray. Similarly, some individuals and think tanks have suggested solutions to Medicare’s fiscal woes, but Americans have yet to support enough politicians who want to put any of these ideas into practice.
One way to inject competition into Medicare is premium support, an idea dating back to the 1997 National Bipartisan Commission on the Future of Medicare, chaired by two retired members of Congress, Representative Bill Thomas (R., Calif.) and Senator John Breaux (D., La.). Thomas and Breaux have retired from Congress, but the Medicare Commission’s premium-support idea appears in the House 2013 budget. Modeled after the Federal Employee Benefits Program, it would allow Americans 55 and younger, beginning in 2023, to choose from a variety of government-approved competing comprehensive health-insurance plans, at different prices with different levels of service. Current Medicare recipients would not be affected. Options could include high-deductible plans carrying lower premiums combined with health savings accounts, or more traditional managed-care or fee-for-service plans. Traditional Medicare would continue to be one option. This would lower health-care costs because when people are aware of prices, they spend less. Now the only ones who usually see the prices are insurance companies and the government, who have put themselves in the position of telling people what health care they should have. But the incentives of third-party payers and patients are very different.
America is being driven towards bankruptcy. The federal debt is exploding thanks to historical deficits year after year. The unfunded liabilities of runaway entitlement programs, mainly Social Security and Medicare, make America’s fiscal outlook even more frightening. On top of the federal debt and unfunded liabilities, states have their own fiscal problems. Most state debt is the result of unfunded promises as well.
While the situation is dire, there is hope for reform. The American public has a newfound concern about mounting federal debt—nearly 8 in 10 Americans agree that the national debt should be among Washington’s top three priorities—and some members of Congress are starting to respond to public pressure.42 While righting the course of our fiscal ship will not be easy, delaying action will only make matters worse.
It is the job of those elected politicians at the state and federal levels who said they would tackle the deficit to offer alternatives for debate and discussion, rather than pushing the problem down the road, on the backs of younger Americans. Young people did not incur these debts, and forcing them to face consequences they do not deserve is neither fair nor good for future economic growth.
