system that pushes up costs by rewarding inefficiency, causing unbelievable waste, pushing over-medication

TO BE NOTED: From Robert Reich:

"The Truth Behind the Social Security and Medicare Alarm Bells

What are we to make of yesterday's report from the trustees of the Social Security and Medicare trust funds that Social Security will run out of assets in 2037, four years sooner than previously forecast, and Medicare’s hospital fund will be exhausted by 2017, two years earlier than predicted a year ago?

Reports of these two funds' demise are not new. Fifteen years ago, when I was a trustee of the Social Security and the Medicare trust funds (which meant, essentially, that I and a few others met periodically with the official actuary of the funds, received his report, asked a few questions, and signed some papers) both funds were supposedly in trouble. But as I learned, the timing and magnitude of the trouble depended a great deal on what assumptions the actuary used in his models. As I recall, he then assumed that the economy would grow by about 2.6 percent a year over the next seventy-five years. But go back into American history all the way to the Civil War -- including the Great Depression and the severe depressions of the late 19th century -- and the economy's average annual growth is closer to 3 percent. Use a 3 percent assumption and Social Security is flush for the next seventy-five years.

Yes, I know, the post-war Baby Boom is moving through the population like a pig through a python. The number of retirees eligible for benefits will almost double to 79.5 million in 2045 from 40.5 million this year. But we knew that the Boomers were coming then, too. What we didn't know then was the surge in immigration. Yet immigrants are mostly young. Rather than being a drain on Social Security when the Boomers need it, most immigrants will be contributing to the system during these years, which should take more of the pressure off.

Even if you assume Social Security is a problem, it's not a big problem. Raise the ceiling slightly on yearly wages subject to Social Security payroll taxes (now a bit over $100,000), and the problem vanishes under harsher assumptions than I'd use about the future. President Obama suggested this in the campaign and stirred up a hornet's nest because this solution apparently dips too deeply into the middle class, which made him backtrack and begin talking about raising additional Social Security payroll taxes on people earning over $250,000. Social Security would also be in safe shape if it were slightly more means tested, or if the retirement age were raised just a bit. The main point is that Social Security is a tiny problem, as these things go.

Medicare is entirely different. It's a monster. But fixing it has everything to do with slowing the rate of growth of medical costs -- including, let's not forget, having a public option when it comes to choosing insurance plans under the emerging universal health insurance bill. With a public option, the government can use its bargaining power with drug companies and suppliers of medical services to reduce prices. And, as I've noted, keep pressure on private insurers to trim costs yet provide effective medical outcomes.

Don't be confused by these alarms from the Social Security and Medicare trustees. Social Security is a tiny problem. Medicare is a terrible one, but the problem is not really Medicare; it's quickly rising health-care costs. Look more closely and the real problem isn't even health-care costs; it's a system that pushes up costs by rewarding inefficiency, causing unbelievable waste, pushing over-medication, providing inadequate prevention, over-using emergency rooms because many uninsured people can't afford regular doctor checkups, and spending billions on advertising and marketing seeking to enroll healthy people and avoid sick ones.

posted by Robert Reich"

Social Security and Medicare totaled more than $1 trillion last year, accounting for more than one-third of the federal budget

TO BE NOTED: From the NY Times:

"Recession Drains Social Security and Medicare

"Recession Drains Social Security and Medicare

By ROBERT PEAR

WASHINGTON — Even as Congress hunted for ways to finance a major expansion of health insurance coverage, the Obama administration reported Tuesday that the financial condition of the two largest federal benefit programs, Medicare and Social Security, had deteriorated, in part because of the recession.

As a result, the administration said, the Medicare fund that pays hospital bills for older Americans is expected to run out of money in 2017, two years sooner than projected last year. The Social Security trust fund will be exhausted in 2037, four years earlier than predicted, it said.

Spending on Social Security and Medicare totaled more than $1 trillion last year, accounting for more than one-third of the federal budget.

The fragility of the two programs is a concern not just for current beneficiaries, but also for future retirees, taxpayers and politicians. Lawmakers say they would never allow Medicare’s trust fund to run out of money. But beneficiaries could be required to pay higher premiums, co-payments and deductibles to help cover the costs.

The projected date of insolvency, a widely used measure of the benefit programs’ financial health, shows the immense difficulties Mr. Obama and Congress will face in trying to shore them up while also extending health coverage to millions of Americans.

The labor secretary, Hilda L. Solis, noted that 5.7 million jobs had been lost since the recession began in December 2007. With fewer people working, the government collects less in payroll taxes, a major source of financing for Medicare and Social Security.

A resumption of economic growth is not expected to close the financing gap. The trustees’ bleak projections already assume that the economy will begin to recover late this year.

The Treasury secretary, Timothy F. Geithner, said the only way to keep Medicare solvent was to “control runaway growth in both public and private health care expenditures.” And he said Mr. Obama intended to do that as part of his plan to guarantee access to health insurance for all Americans.

But if cost controls do not produce the expected savings, Congress is likely to find it difficult to preserve benefits without increasing taxes.

Just hours before the trustees of Medicare and Social Security issued their annual report, suggesting that the nation could not afford the programs it had, the Senate Finance Committee finished a hearing on how to pay for the expansion of health insurance coverage that Mr. Obama seeks.

Mr. Obama has said he does not want to finance expanded health coverage with more deficit spending. Rather, he says, Congress must find ways to offset the costs, so they do not add to the deficit over the next decade.

Federal deficits and debt are soaring because of the recession and federal efforts to shore up banks and other industries while trying to revive the economy with a huge infusion of federal spending.

“The financial outlook for the hospital insurance trust fund is significantly less favorable than projected in last year’s annual report,” the Medicare trustees said. “Actual payroll tax income in 2008 and projected future amounts are significantly lower than previously projected, due to lower levels of average wages and fewer covered workers.”

In coming years, the trustees said, Medicare spending will increase faster than either workers’ earnings or the economy over all.

The trustees predicted that, for the first time in more than three decades, Social Security recipients would not receive any increase in their benefits next year or in 2011. In 2012, they predicted, the cost-of-living adjustment will be 1.4 percent.

The updates are calculated under a statutory formula and reflect changes in the Consumer Price Index, which was unusually high last year because of energy prices.

If there is no cost-of-living adjustment for Social Security, about three-fourths of Medicare beneficiaries will not see any change in their basic premiums for Part B, which covers doctors’ services. The monthly premium, now $96.40, is usually deducted from Social Security checks, the main source of income for more than half of older Americans.

The trustees said that one-fourth of Medicare beneficiaries would face sharply higher premiums: about $104 next year and $120 in 2011. This group includes new Medicare beneficiaries and those with higher incomes (over about $85,000 a year for individuals and $170,000 for couples).

Seventy-five percent of beneficiaries will not pay any increase, so the remaining 25 percent have to pay more to keep the trust fund at the same level, Medicare officials said.

The aging of baby boomers will strain both Medicare and Social Security, but Medicare’s financial problems are more urgent.

The trustees predict a 30 percent increase in the number of Medicare beneficiaries in the coming decade, to 58.8 million in 2018, from 45.2 million last year.

But the projected increase in health costs and the use of medical care is a more significant factor in the growth of Medicare. The trustees predict that average Medicare spending per beneficiary will increase more than 50 percent, to $17,000 in 2018, from $11,000 last year.

Representative Pete Stark, the California Democrat who is chairman of the Ways and Means Subcommittee on Health, said the Medicare report “underscores the urgent need for health reform.”

eliminate the payroll tax and replace it with a tax on consuming things harmful to the environment

From Free Exchange:

"The payroll tax keeps the retired off welfare

Posted by:

Economist.com | NEW YORK

Categories:

Fiscal policy

HENDRIK HERTZBERG reckons the US should eliminate the payroll tax and replace it with a tax on consuming things harmful to the environment. It soundS like a happy idea, satisfying the agendas of both parties.

Liberals have been reticent, too. The payroll tax now provides a third of federal revenues. And, because it nominally funds Social Security and Medicare, some liberals regard its continuance as essential to the survival of those programs. That’s almost certainly wrong. Public pensions and medical care for the aged have become fixed, integral parts of American life. Their political support no longer depends on analogizing them to private insurance. Besides, the aging of the population, the collapse of defined-benefit private pensions, the volatility of 401(k)s, and pricey advances in medical technology mean that, no matter what efficiencies may be achieved, Social Security and Medicare will—and should—grow. Holding them hostage to ever-rising, job-killing payroll taxes is perverse.

Felix Salmon calls payroll taxes "horribly regressive" because they are a flat 15.3% (including employer and employee contributions) on income.

So what's wrong with that idea? The problem is the payroll tax is more of a forced savings scheme than a tax. The amount of taxes you pay, the number of years you pay, and average wage growth determine your benefit. Social Security is progressive because the lower your income, the higher your benefit relative to your contribution. If you are a low wage earner you can expect a high fraction of your average monthly income as your Social Security benefit. In this sense Social Security serves as both national insurance and as a form of welfare. Taking away the payroll tax and replacing it with a more "progressive" consumption tax puts an enormous burden on middle- to upper-income earners. An average wage earner already see less than a 2% return on their Social Security tax dollar. Scrapping the payroll tax entails completely changing how benefits are calculated. Would your benefit somehow be proportional to how much carbon you consumed as a worker?

I heard Amity Shlaes once say she does not like the idea of a payroll tax holiday because it eliminates any illusion that Social Security is an insurance scheme, rendering it entirely a welfare system (this brings the US one big step closer to being no better than Sweden). That sounds like what Mr Hertzberg is advocating. In that case it does not really address the death of defined benefit plans (whose demise shoud be welcomed anyhow) and 401(k) volatility, it just means we’ve created a huge welfare system. This does not address the savings needs of most of the population.

Now, I have always thought Social Security did a pretty lousy job by being both an insurance and a welfare system. If we overhaul the system the welfare component of it should be separate and the forced saving part can work in a myriad of funded ways. But, you cannot simply swap out a payroll tax for a consumption tax without changing the entire scope of a state pension. "

Me:

Don the libertarian Democrat wrote:

March 16, 2009 23:18

Just so we're clear about Sweden:

http://www.forsakringskassan.se/sprak/eng/pension/

"The pension is based on the income you have had during the whole of your life [from the age of 16 up to and including 1998]. If you have worked for a long time and earned a lot, you will receive a higher pension. Similarly, you will receive less pension if your income has been low."

And:

"Premium pension [Premiepension]

2.5 per cent of your pensionable income goes towards your premium pension. For those born between 1938 and 1953, this percentage is less. You may choose to invest your pension capital in any of the various funds registered with the Premium Pension Authority."

I'm for a Guaranteed Income as advocated by Milton Friedman and Charles Murray.

"They can be easily addressed by sorts of changes to the program (tax increases and or spending cuts)"

Dean Baker makes a point:

"There is No Plausible Scenario in Which Social Security Can Not Be Sustained Over the Long Run

The NYT is doing some serious fear-mongering when it tells readers that Social Security is a program that along with Medicare "threaten to grow so large as to be unsustainable in the long run."

Because are children and grand-children are projected to live longer lives than us, the costs of Social Security are projected to outrun its revenue in 40 years, but the projected shortfalls are relatively modest. They can be easily addressed by sorts of changes to the program (tax increases( WHICH THE YOUNG MIGHT NOT ACCEPT ) and or spending cuts( WHICH THE ELDERLY MIGHT NOT ACCEPT)) that we had in the decades of the 50s, 60s, 70s, and 80s. There is no realistic sense in which Social Security can be termed unsustainable unless we take the view that unlike in prior decades, the program can never be changed.( THIS IS TRUE. THE QUESTION IS REALLY POLITICAL, NOT ECONOMIC. IF WE KEEP THE PROGRAM MORE OR LESS AS IT IS, I FAVOR MEANS TESTING FOR BENEFITS. )

--Dean Baker

"Moral of the story: If you want to design such a scheme and get away with it, make it legal"

As I said, I believe this. From Economix: "Do Bailouts Encourage Ponzi Schemes? By Utpal Bhattacharya":

"Say I convince my friend Elvis to invest $100 with me, promising to double his money in a month. Next I convince my friends Simon and Garfunkel. They each give me $100, and I use the $200 to pay off Elvis. Elvis is impressed and tells all his friends. I take $100 each from four of them — John, Paul, George and Ringo — and use the $400 to give back $200 each to Simon and Garfunkel. Suddenly everyone wants to invest with me. I take money from eight of them, then 16, then 32, and so on. When a lot of people are involved, I disappear with the money that I raised in the last round.

The scheme that I have just illustrated is called a Ponzi scheme. It is named after Charles Ponzi, who raked in $15 million in nine months in 1919 and 1920. At the height of his success, Mr. Ponzi was hailed by those he was cheating as the greatest Italian who ever lived. “You’re wrong,” he said modestly, “there’s Columbus, who discovered America, and Marconi, who discovered radio.” “But, Charlie, you discovered money,” they told him.

What is being called the biggest Ponzi scheme of all time was uncovered just a few days ago. The Wall Street legend Bernard Madoff is reported to have told influential investors that he could guarantee them a 1 percent monthly return. That promise probably sounded too good to be true — and it was.

Ponzi schemes — to the extent that people realize, even subconsciously, that something is not right — should work only if investors are irrational ( WISHFUL THINKING ). Investors in the last round know that they will lose their money when the organizer disappears with their funds. No one wants to play the last round, making the second-to-last round actually the last. Those people will refuse to take part as well. Using this logic again and again, no one should take part.

But sometimes our greed or our naivete trumps our rationality ( WISHFUL THINKING ). Almost a century after Charles Ponzi, people continue to fall victim to Ponzi schemes like the one attributed to Mr. Madoff. A recent Google search revealed more than 100 such schemes being investigated all over the world.

Not all Ponzi-like economic activity is bad or illegal.

Social Security, which involves the younger generation paying some of the retirement benefits of the older generation, is a perfectly legal Ponzi scheme.

Asset pricing bubbles, where the intermediary takes in a cut every round, is a Ponzi scheme grafted to a bubble, and they are legal. For example, when people take out mortgages they can’t afford, based on the expectation that their homes will continue to increase in value, they are engaging in legal Ponzi and bubble activity.( BECAUSE AT SOME POINT SOMEONE WILL BE WRONG? )

But what happens when the music stops and people find themselves playing the last round of the Ponzi game?( OOPS )

The federal government may chose to spend billions to bail out the last-round players to protect overall financial stability ( I BELIEVE SO, AND I BELIEVE MOST PEOPLE DO ). The Ponzi participants will get a piece of the bailout but will still have a net loss. The problem is that taxpayers have to foot the bailout bill, and they may have even greater net losses than the people who initially signed up for the Ponzi game ( AND? YOUR POINT BEING? ).

If taxpayers stand to lose more money than Ponzi players, it is suddenly rational to play the game. That’s because only by getting a piece of the bailout will Ponzi participants protect themselves from the larger losses faced by taxpayers( THAT'S A LOT OF PLANNING ). This is what happened in the early 1990s in nearly all the countries transitioning from communism: promises of state bailouts encouraged gigantic Ponzi schemes ( I SAY THAT IT WAS THE MAIN CAUSE OF THIS CURRENT CRISIS ). In Albania, it even led to a civil war ( IT MIGHT LEAD TO UNPLEASANT SOCIAL REACTIONS HERE ).

Therefore, while some Ponzi-like behavior is legal and even beneficial for our economy, bailouts only serve to reinforce behavior that can lead to even riskier Ponzi schemes( CORRECT ). So, though many of us recognize deals that are too good to be true, bailouts will encourage us to take part in such deals( THEY ENCOURAGE RISKY BEHAVIOR, WHICH IS THE CAUSE OF OUR CURRENT CRISIS. NAMELY, TOO MUCH RISK ). The $700 billion federal bailout may eventually lead to Ponzi schemes large enough to make Mr. Madoff’s reported $50 billion swindle pale in comparison ( WHICH IS WHY WE NEED TO CHANGE THE SYSTEM. I BELIEVE THAT WE CANNOT GUARANTEE BAILOUTS LIKE THIS ANY LONGER ).

Moral of the story: If you want to design such a scheme and get away with it, make it legal — like investments in subprime mortgages, or investments in energy from water. Then involve as many people as possible, so that it becomes “too big to fail.”( THAT'S WHAT I BELIEVE HAPPENDED ) Some of the $700 billion bailout money may actually be used to rescue some of your investors ( THAT'S HAPPENING NOW ).

I believe that the Implicit and Explicit Government Guarantees to intervene in a financial crisis are what explain the enormous risk by individual human agents that led to this crisis. This post lends credence to that belief, in my opinion.

"estimated present value of future social insurance program expenditures for all current and future program participants to be $43 trillion."

Shopyield takes a look at the Federal Budget:

"The US Treasury has released the Fiscal Year 2008 Financial Report of the United States Government.

This report details the U.S. government’s current financial position, as well as its short-term and long-term financial outlook… the accrual-based Financial Report includes the cost of operations, the sources used to finance those costs, how much the government owns and owes, and the outlook for its social insurance programs.

From the Treasury release…

~~~~ “It is without question that we face extraordinary challenges in our financial markets and the larger economy,” said OMB Director Jim Nussle. “As a result, the bottom-line budget results in the short-term are sobering. It is imperative to continue to aggressively confront today’s challenges. Functioning markets and a healthy economy will not only help put the federal budget back on a path towards balance, but will position us to take on inevitable future economic challenges, such as the our nation’s biggest budgetary challenge, the entitlement crisis.”

Revenue results in this year’s Financial Report were $2.7 trillion, increasing slightly by $34 billion or just over 1 percent, compared to last year. Total costs were $3.6 trillion, an increase of $.7 trillion or 25 percent compared to last year. Net operating cost increased to $1 trillion, up from last year’s net operating cost of $275.5 billion. The growth in the net operating cost resulted from the economic slowdown, the government’s response to the slowdown, and significant re-estimates of the government’s long-term liabilities for veterans’ disability compensation benefits.

Treasury projected an estimated present value of future social insurance program expenditures for all current and future program participants to be $43 trillion. Over the next two decades, Social Security and Medicare expenditures are projected to increase from their current 8 percent of GDP to about 11 percent. Without reform, the cost of these programs is projected to approach 18 percent of GDP by 2080. Medicare, Medicaid, and Social Security accounted for 16 percent of total government expenditures 40 years ago. Today, they comprise 40 percent of all expenditures."

"we can use this found money to encourage people to create jobs, or we can use it to encourage people to use more gasoline"

Via Greg Mankiw, a post on Time from Michael Kinsley that I like:

"The only good economic news lately has been the collapse of oil prices. At the beginning of July, just five months ago, the price of a barrel of was more than $140. By the beginning of December, it was down to about $45. That's a drop of more than two-thirds. In the U.S., we consume about 15 million bbl. of crude a day. The saving of $95 per bbl. adds up to more than $500 billion a year. That's big--enough to bail out the auto industry 15 times."

In fact, it's acted as a kind of stimulus.

"Of course, we've been through this before. The price of oil shoots up; we start using less; reduced demand sends the price down; we start using more; pretty soon it's shooting up again. This time, though, it does feel different. It seems as if Americans have made a real and fundamental commitment to consuming less energy. That is not so much out of idealism as it is the good side, for a change, of our short attention span. When the price of gasoline shot past $4 per gal., it was both shocking and reassuring. Economists had long wondered what price it would take to get our attention. This, at last, was it. Yet $4 gas turned out not to be the end of the world. Although it was devastating for some people--and it surely accelerated our plunge into recession, which is affecting all of us--we adjusted more easily than one would have thought possible. And we kept on adjusting, even as the price of oil plummeted. (See pictures of the recession of 1958.)

Will this change in behavior last? Or will we return to our wastrel ways as we climb out of recession and the reality again sinks in that gas is cheap? The one sure way to prevent this second scenario from happening is not to let gas get cheap again. Yes, this is yet another plea for that hoary notion: a big energy tax. Just five months ago, we were essentially paying a tax of $95 per bbl. That's the difference between what oil cost then and what it costs now. This was a "tax" whereby the revenue went into the pockets of oil producers--about two-thirds of them foreign countries and one-third fellow Americans. Isn't there something better to do with the money?

This idea always comes up and never goes anywhere. That's partly because of our general loathing of taxes and suspicion of Washington and partly because the idea tends to come up when energy prices are rising and people find it hard to believe that it would be good if they rose even more. But a couple of things are different now. First, we have experienced the high energy prices that people in most of the rest of the world already live with, and we know we can live with them too. Four-dollar gasoline is no longer unthinkable."

This is my position. We should try it now while the price of gas is low.

"Second, this is the perfect moment for the other part of many proposals for an energy tax, which is to give the money back to people by lowering the payroll tax. The payroll tax, or FICA, collects about 15% of your wages or salary--half from you and half from your employer. It is expected to bring in close to a trillion dollars in 2009. Using our windfall from plummeting crude-oil prices alone, we could cut the FICA tax by more than half. Including other forms of energy would bring in even more. (See pictures of oil.)

FICA is, in effect, a tax on job creation. It applies to the very first dollar earned by a minimum-wage worker, but most of it tops out at an annual income of about $100,000 and doesn't apply at all to income from investments. For most Americans holding jobs, FICA now takes a bigger chunk of their income than the income tax itself. And yet it rarely enjoys the tender concern of tax-cutting Republicans, who prefer to concentrate on tax breaks for capital gains. Cutting the FICA tax in half, for workers and for employers, would make it more affordable for employers to hire--or avoid layoffs--while giving everyone who makes less than $100,000 a 7.5% raise to spend and stimulate the economy even further. People making more than $100,000 would get a tax cut too--as big as anyone else's, though a smaller percentage of their incomes.

One argument against all this is that FICA finances Social Security payments, and the connection between money in and money out helps keep Social Security secure. There's a simple answer: among the many problems we now face, the danger that a majority in Congress will gang up against Social Security benefits must surely rank low.

It comes down to this: in the terrible storm of economic misery, we suddenly have a half-trillion-dollar windfall. As unemployment heads toward double digits, we can use this found money to encourage people to create jobs, or we can use it to encourage people to use more gasoline. It's a pretty easy choice, don't you think?"

I'm fine with this, but I like cutting sales taxes better, along with targeted tax cuts for investment. But I'll take this.

"Almost everything else is off the table right now, with Obama having little financial room to do very much."

Paul Kedrosky with an excellent post:

"There are many things on here, including a healthy industry distrust of lying politicians and their promises. But it is mostly something else: Wall Street doesn't believe Obama, and it didn't believe McCain either. While Wall Street worried for a little while about Obama's tax increase promise, his pro union leanings, and his regulatory fervor, it now doesn't really care. Why? Because Wall Street knows that everything has changed, as happens with any battle plan after the first skirmish. President Obama can't raise taxes right now. A tax increase during the most severe U.S. economic downturn in modern memory would be a Depression-class error, the sort of thing guaranteed to get you in the history books, albeit for all the wrong reasons. So it's not going to happen. And it's not just tax increases that markets have discounted from Obama, it's pretty much everything, except for more bank bailouts, some regulatory reform, and one or two major financial stimulus packages. Almost everything else is off the table right now, with Obama having little financial room to do very much.

The same would have been true, of course, of President McCain, had he been the voters' choice. Either way, however, Wall Street has now given the presidential election a good close look and decided that it matters less than ever this time around. The financial services industry's recent collapse has turned to a smoking ruin the U.S.'s already burnt balance sheet, putting President Obama square into fire-fighting with a straw and no money for water. All he can do is try to survive in the face of massive deficits, a teetering economy and a looming social security nightmare. Wall Street has neatly managed to half-way marginalize President Obama, even if it had to gut itself and the economy to do it."

This is pretty much Peston's view and my view.