Yes, it’s the Monday before the election and Robert Samuelson wants us to cut Social Security

November 7, 2016 | Economic Opportunity Institute

EOI Board Member Dean Baker

Dean Baker, co-director, Center for Economic Policy Research

Yep, he tells us the real national embarrassment is not having a racist, sexist, xenophobic candidate as a major party presidential nominee. It’s not our failure to address global warming so our kids might face a ruined planet. No, Robert Samuelson tells us our real national embarrassment is that we have an aging population and, horror of horrors, this may involve spending more money on Social Security and Medicare. Okay, let’s go through his story.

Samuelson tells us:

“In 1990, those 65 and over comprised 12.5 percent of the population; now, according to Census Bureau projections, that share is racing toward 16 percent in 2020 and 19 percent in 2030. That’s one in five Americans. Already, federal spending for older Americans (mainly Social Security, Medicare and nursing-home care under Medicaid) dominates the national budget. It’s crowding out spending on other programs, from defense to parks, and is the chief source of chronic budget deficits.

“Nor is that all. The economy’s slowdown reflects in part the retirement of millions of baby boomers, whose exit from work reduces labor force growth. The generational unfairness is palpable. Younger Americans are seeing more of their taxes diverted to care of the elderly, who often are in better financial shape than the young who are subsidizing them.

“What we need — it was obvious even before the Bill Clinton presidency — is a new social contract between generations, one that acknowledges longer life expectancy (justifying higher eligibility ages for Social Security and Medicare benefits) and greater wealth among millions of older Americans (justifying lower benefits for well-to-do retirees).”

Okay, so we have a rising share of the population over age 65. That is something that happens when a country gets wealthier and medical technology improves. If we take a little longer view, the share of the population over age 65 was 7.4 percent in 1945. It’s currently just under 15.0 percent. That means that we have seen a rise in the share of the over age 65 population rise by more than 7.5 percentage points. Apparently in Robert Samuelson world, that rise was okay, but something really really bad will happen when the share of people over age 65 rises another 4.0 percentage points to 19.0 percent.

There are three points worth making about the crowding out story. First, older Americans have paid for their Social Security with their Social Security taxes. The cost of their health care will exceed what they paid in taxes but this is because of how much money we pay to doctors, drug companies, medical equipment companies and others in the health care industry. If we paid as much for our care as people in other wealthy countries (who have comparable health care outcomes) then Medicare taxes would be sufficient to cover the cost of the program. We know that Samuelson wants to blame seniors for the fact that we pay twice as much for our doctors and drugs as everyone else, but serious people might think we should instead look to cut payments to doctors and drug companies.

The second point is that accompanying the rise in the elderly share of the population is a decline in the share of the population that is young. In fact the dependency ratio (the share of the population that is either over age 65 or under age 18) is never projected to rise back to the levels of the 1960s when the baby boomers were kids. This ratio peaked at 0.945 in 1965. It is projected to be 0.838 in 2030. Even this comparison overstates the problem since many more women are in the workforce now than in 1965. Also people are working later in life, in part because the age for receiving full Social Security benefits is rising to age 67.

The final point is that the crowding out story assumes that the amount of money the government raises in tax revenue is somehow fixed. God may have told Samuelson that this amount can never be raised, but he forget to tell the rest of us. Through the decades of the 1940s, 1950s, 1960s, 1970s, and 1980s we repeatedly raised the payroll tax to finance Social Security and Medicare. It is difficult to see the problem if we again raise taxes for this purpose in the next decade or two.

The generational injustice in this story is very hard to see, especially since real wages are projected to rise by more than 50 percent over the next three decades. Are we suppose to feel we have done some great harm to our kids if we tell them that they may have to pay another 2–3 percentage points of income to support their longer retirement? I missed that ethics course.

There is a point that most workers have not seen their share of wage growth because the gains have disproportionately gone to those at the top. This is a very big issue, but it has nothing to do with generational inequality. It has to do with too much money going to the rich. Samuelson and his colleagues on the Washington Post editorial page generally don’t like to talk about this upward redistribution of income. They would rather complain about seniors getting Social Security checks that average a bit more than $1,300 a month. But the rest of us believe in going after the money.

There are a couple of other points about the idea that we should feel really guilty if our kids pay higher taxes than we do. The first is that we just cost our kids an enormous amount in terms of future wages and income because people like Robert Samuelson demanded that we reduce budget deficits following the collapse of the housing bubble.

The austerity imposed in 2011 prevented the economy from recovering as the Congressional Budget Office and others had projected. The result is that CBO’s estimate of potential GDP for 2016 is more than 10 percentbelow the levels that had been projected back in 2008 before the recession. This is roughly twice the current size of the Social Security tax.

Because of the fixation on small deficits, we have cost our kids an amount in lost wages that is roughly twice the size of the current 12.4 percent Social Security tax. Robert Samuelson wants us to ignore the enormous harm we have done to our kids by reducing their before tax wages, but then we are supposed to get hysterical over the prospect of raising their tax rate by 1–2 percentage points. That may make sense at the Washington Post, but not anywhere else in the world.

Finally, if we only focus on taxes, we ignore other ways in which the government imposes cost of future workers, most importantly patent and copyright protection. Government granted patent monopolies are a way that the government uses to finance research. It can be extremely costly, but it does not appear in the budget. In the case of prescription drugs alone we are paying over $430 billion this year for drugs that would likely cost less than $80 billion in a free market.

This gap of more than $370 billion is equivalent to a tax collected by the pharmaceutical industry. Robert Samuelson might want us to ignore this burden, but serious people don’t have that option. A dollar out of our pockets or our kids’ pockets to pay patent rents is the same thing as a dollar our of the pocket to pay taxes. That may not fit Samuelson’s Social Security cutting agenda, but that is the way the real world works.

So we get that Robert Samuelson wants to cut Social Security and Medicare. The ideology that a dollar in the pocket of lower- or middle-income person is a dollar that could be in the pocket of the rich is a pretty powerful ideology in Washington policy circles. It just doesn’t have much appeal elsewhere.

Original: Beat The Press »

Posted in Retirement Security, Social Security

Comments

  1. Winslow P. Kelpfroth says:

    …First, older Americans have paid for their Social Security with their Social Security taxes…
    that’s not the case when you’re dealing with a pay-as-you-go system. What I pay now goes to support those already retired. What the already retired paid went to their own predecessors.

    • Winslow P. Kelpfroth says:

      …Through the decades of the 1940s, 1950s, 1960s, 1970s, and 1980s we repeatedly raised the payroll tax to finance Social Security and Medicare. It is difficult to see the problem if we again raise taxes for this purpose in the next decade or two…
      Actually, I do see a problem with this idea. Taxes have two purposes: raise money for government activities and suppress activities not in the public interest, such as smoking and drinking. The Social Security tax as presently constituted is, unfortunately, a tax on employment. Maybe when it was 1% of wages the marginal cost could be considered trivial, but today it’s touching 15% with the medicare tax included. It may be true, as Mr. Romney famously observed, that 47% of the work force doesn’t pay federal income tax (they’re actually in the zero bracket) but they still have to stump up the employment tax starting with the first dollar of wages. At some level of employment tax workers and employers will find it better to work on the informal economy or ship the work to where the labor cost is less. Think carefully about advocating a rise in the employment tax.

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