Human Events | Star Parker | Nov. 2, 2007
The U.S Comptroller General and head of the GAO, Government Accountability Office, has described the entitlements crisis facing this country as a “tsunami” that approaches while we continue to party on the beach.
What GAO head David Walker is talking about are the massive upcoming obligations under Social Security and Medicare that we have no funds to meet. Tens of trillions of dollars of supposed commitments, promises made to us by our government, that today we have no clue how we’ll pay.
In those rare moments when our political “leaders” screw up sufficient courage to acknowledge this dark and ominous fiscal cloud hanging over us, the discussion is invariably technical. Proposed tax increases, cap increases, retirement age increases, benefit cuts, indexing — all geared to “save the system.”
But who has considered that, despite all the discussion about unfunded liabilities, what we really have on our hands is, at root and core, a moral crisis?
No one explains this better than my friend Jose Pinera. And no one has better credentials to talk about this problem.
Twenty seven years ago, in November 1980, Chile, Dr. Pinera’s home country, approved Social Security reform in which a tax-based, pay-as-you go government retirement system — essentially identical to what we have here — was replaced with an ownership based system of individually owned retirement accounts. Yes, in principle the kind of reform that President Bush proposed.
As the then youthful Minister of Labor and Social Security of Chile, Pinera was the godfather, mastermind, architect, navigator, and quarterback of the reform.
Key in execution was to allow every Chilean worker the dignity of choice.
They could choose to stay in the existing system, continue to pay payroll taxes, and qualify for government benefits at retirement, or they could get out and use those same funds to open and invest in their own personal retirement account.
Within months, 90 percent of the Chilean workforce opted out of the government system and into their own personal ownership regime.
The result has been more than just an enormously successful transformation of a failed government retirement system. Chile’s social security privatization — if I may use the word that politicians, even the conservative ones, choke on these days — has been a driving piston in Chile’s economic engine, now the most powerful in Latin America.
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Just to be clear, there is no Federal Entitlement program known as the “SocialSecurityMedicareMedicaid” program.
There is the Social Security program, the Medicare program and the Medicaid program. All of these are distinct programs with completely different and separate financing structures and sources, and very different actuarial estimates of their solvency.
The Social Security program is quite healthy and projected to be able to fully meet it’s fiscal obligations through 2047. After 2047 the program will be able to meet most, but not all of it’s obligations and the gap is somet,hing that can easily be closed with some modest program changes such as increasing the income level subject to FICA tax or raising the retirement age a few years.
The Medicare and Medicaid programs are in more dire condition. Medicare is projected to become insolvent in 2017, only 10 years from now. However, the main factor responsble for Medicare’s impending insolvency is the rapidly rising cost of medical care nationwide, which impacts not only the Medicare program, but medical costs in private health isnrance as well.
It should therefore be blindlingly obvious that the most powerful thing we can do to improve the fiscal outlook for our nation’s entitlement programs is to enact meaningful health care reform designed to bring soaring health care costs under control.
Secondly while, Social Security will be solvent until 2047 it will stop running a surplus in 2017. After that the federal governemt will not be able to borrow against the surplus as a means of making the deficit look smaller. We should therefore move towards a balanced federal budget as soon as possible through a combination of spending cuts and tax increases (neither one alone is sufficient) in order to prepare for the end of the Social Security Surpus and the repayment of the funds borrowed from the program.
Medicare program and the Medicaid program. All of these are distinct programs with completely different and separate financing structures and sources, and very different actuarial estimates of their solvency.
Um, not at all. All the fed revenues go into one big pot, and all expenses go out of same pot. Those line items on your paycheck (FICA, SS, Medicare) do not mean anything. If the fed gov is running a deficit then no program is “solvent” and if it is running a surplus then all programs are “solvent”. This talk of “borrowing” against the surplus is just a game – it does not mean anything.
Some want to make it so (remember the “lock box”) but I talking this way (as if the programs are somehow “separate” as far as “financing” goes – it’s all just taxes that go into the “general fund”) does not help sort out the truth of the matter…
But back to the article, I never really understood why President Bush did not gain more grassroots support to privatized SS accounts. I can understand the AARP (or is it more accurately described as the AA for liberal RP?), liberals, media, but what happened to the much talked about “right wing conspiracy”? Any ideas?
This is exactly why the gov’t wants to keep things exactly the way they are: “All the fed revenues go into one big pot, and all expenses go out of same pot.” They promote the lie that the Social Security system is a “retirement” account where you “contribute” towards a fictional fund that will guarantee you a payment when you retire.
By not allowing the people to fully control and decide what to do with their money the gov’t (a) insures there is zero accountability regarding the rate of return that money earns, (b) strips the people of all power to decide what to do with their money and to maximize the potential rate of return as a real hedge against inflation, (c) concentrates even more power in Washington, and (d) allows politicians to use those funds now and continue to spend us into deeper and deeper deficits while hiding the real deficit numbers which would make for more bad press.
Finally, such an entitlement program gives politicians huge amounts of power to leverage in order to scare and manipulate ever-increasing number of senior citizens and gives them even more control over our lives. After all, if you are retired and fully in control of your own SSN retirement account what could the gov’t possibly hold over your head and scare you with besides the “crisis du jour”? It’s a communist’s wet dream and all of us allow these hypocrites to continue to perpetuate this sham. Of course, the fact that sham hurts the poor and middle-class folks the most does not seem to bother Dean one bit. Funny ain’t it?
Chris,
Perhaps I should post the parable of the Good Samaritan here…just to help muddy the water and equate SS/Medicare / Medicaid with the Gospel…:)
Chris B. writes: “This is exactly why the gov’t wants to keep things exactly the way they are . . . ”
Since the article is about the Chilean retirement system I would note that even in Chile the retirement system is heavily regulated by the government, including selecting funds in which investments can be made and having mandatory contributions.
http://www.cato.org/testimony/ct-jr073101.html
In addition there is the general expectation that the government would have to kick in additional funds in the event that the investments didn’t do well. So this is not, strictly speaking, privatization, but a mix of privatization and governmental regulation. Also, in a developing country the value of investments can rise rapidly, and it is not clear how the Chilean model would work in a developed economy.
Nonetheless, I think that some version of the Chilean model might be possible here. But it is not clear how the transition to that from the current system would work. But I think it’s worth having that conversation. Whether that conversation will happen in the current political environment is a different question.
Jim writes: “subject to government regulations on the specific types of instruments and the overall mix of the portfolio.”
That is a reasonable compromise, as long as people are allowed to freely chose from a variety of funds and real competition is allowed and encouraged. I believe we already have good regulations and oversight of 401(K) and 403(b) type programs, so this would be a natural extension of that.
But it is not clear how the transition to that from the current system would work.
Bush tried to suggest a gradual transition that allowed individuals of certain age to switch to a new model, while also guaranteeing all existing benefits of older Americans who could not make the switch. I believe he suggested allowing only 2% or 4% of the SS funds to be managed by the individuals. Despite such minimal recommendations large number of Democrat demagogues, some union leaders, and the AARP viciously fought against it and derailed any hope of possible changes. So much for mature and reasoned debate on key topics of nationwide concern.
There is not one big pot. There never was one big pot.
A lesson for people who don’t bother to check their facts:
1) The money for the Social Security program comes from FICA tax.
Source: How is Social Security Financed? The Social Security Administration
http://www.ssa.gov/pressoffice/factsheets/HowAreSocialSecurity.htm
2) The money for Medicare comes Federal operating funds combined with payroll deductions, and premiums paid by program beneficiaries.
Source: How Is Medicare Financed?, The American Academy of Actuaries, Fall 2001
http://www.actuary.org/pdf/medicare/financing_fall2001.pdf
3) The money for each individual state Medicaid program comes from the individual state governments, with matching funds provided by the federal governemt out of general operating funds.
The Medicaid program is funded by a combination of federal and state
dollars allocated through a statutorily required matching structure. Because Medicaid is an entitlement program, the federal government matches state spending on an open-ended basis, using a calculation called the federal medical assistance percentage (FMAP). The FMAP is determined annually for each state, using a formula that compares the states’ average per capita income levels with the national average income level. FMAPs range from 50 percent in the wealthier states to 77 percent in the poorest state. (On average, the federal government covers 57 percent of total Medicaid costs.)
Source: “Medicaid Financing: The Basics”, National Health Policy Forum, September 13, 2006
http://www.nhpf.org/pdfs_basics/Basics_MedicaidFinancing_09-13-06.pdf
There are three distinct programs. They each have their own seperate funding sources and revenue streams. They are each governed by different statutes and administered by seperate governmental bodies. Each of these programs has been analyzed by actuaries who have produced dramatically different estimates of the fiscal health of each program.
If you have information that contradicts the actuaries please produce it, or stop spreading disinformation.
ChrisB – As you yourself have produced four articles discussing the woeful lack of ethics in business, the reason for the widespread public rejection of the social security priivatization scheme, should be readily apparent.
In just the last few weeks a number of major wall Street firms, such as Bear Stearns, Merrill Lynch and Citigroup have announced major losses and writedown resulting from their purchase of mortgage-backed securities collatoralized by subprime loans of uncertain value. Imagine if those securities represented the sole, or significant source of income for a frail retired person of advanced age.
The fact is that Presideent Bush was unable to devise any privatization scheme that did not involve massive federal borrowing.
Source: “Bush Promotes Social Security Privatization Plan”,
http://seniorliving.about.com/od/lawpolitics/a/bushsocialsecur.htm
It should be no surprise that an overwhelming majority of Americans thought that borrowing 2 trillon dollars to invest in the casino-like stock market was a really bad idea.
Social security is not, and was never intended to be, an investment scheme. It is a social safety net to provide a minimum level of financial security for retired people, regardless of the performance of the economy. Individuals would be wise to invest for their retirement above and beyond social security, and the governemt should encourage them to do so. However putting the one income source that keeps elderly seniors away from complete destitution at risk for financial loss is irresponsible.