Over/underestimation of inflation and US entitlements policy

[wiggin]

I heard an interesting tidbit this morning on the radio discussing a fairly 'easy' way to reduce long term entitlement spending. It had to do with the cost of living adjustments are made in indexing benefits (e.g. pensions) as well as tax brackets. The chap was arguing that current inflation indexing is tied to the overall consumer price index. They challenged this and suggested that the CPI does not take substitution effects into account, and thus systematically overestimates US inflation. The upshot is that if you were to switch to a chained CPI (which attempts to account for substitution), entitlements would grow slower in the long run. The initial change wouldn't be much, but it would add up over time, and is a fairly low-pain way to work towards deficit reduction in the long run. They interviewed some AARP spokesperson, who was obviously upset at the very idea, and suggested that COLA were too low to start with, since spending by the elderly was already outpacing inflation, given its heavy weighting to healthcare spending (some benefits are currently indexed to wage growth rather than inflation anyways, which tends to be much more expensive than CPI targeting. I think this is just a bad idea all around).

The specifics of this debate are largely irrelevant, but it got me thinking about the way in which inflation estimates are produced, and what measure of inflation is most useful for automatically indexation. (Note that I think this is irrelevant from a monetary policy perspective - IMO core CPI is more than adequate for guiding monetary policy.) On the one hand, I get the argument for the chained CPI supporters - if we will readily substitute for cheaper goods, why shouldn't that be a reflection of our actual spending? In some ways, this seems like just a logical extension of the conclusions drawn by the Boskin Commission in the mid-1990s (the conclusions of which led to a revamp in the way hedonics/etc. work in adjusting CPI numbers). In the recession, many households moved to store-brand items instead of brand-name items, saving significant amounts of money with little change in quality - shouldn't this be factored into inflation baskets? On the other hand, I think that it can be problematic - if we adjust entitlements to chained CPI, we will be progressively pricing benefits recipients out of various higher price markets to substitute to a lowest common denominator. To be fair, though, substitution can work both ways - if there's a sudden shortage of chickens (and thus price increases), more people will buy beef even if it's more expensive on an absolute basis, something chained CPI should account for. I am also somewhat concerned about the complexities associated with accurately determining substitution behavior. An interesting side-effect is that with hedonics and substitution fully incorporated, you actually see more significant US wage growth over the last few decades, suggesting that perhaps overall 'quality of life' has in fact improved more than we realize. It's hard to account for the effects of new product classes and rapid improvements in quality we've seen in the last few decades, and perhaps current CPI measures have indeed been underestimating our buying power.

There are other significant concerns with CPI as used for indexation. The value of homes is fairly volatile over a long period compared to other inflation measures, so housing is priced by the cost of equivalent renting cost (which has smoother changes), even if a large proportion of American households own their homes and pay mortgages. This can result in systematic over- and under-estimation of inflation, depending on which way the housing market is going. Now, the major group of people who have mortgages are spending a big chunk of their income on their household, and thus tax rules on income brackets and deductions/exemptions will be skewed compared to the rest of the population if housing inflation is over or underestimated. Similarly, there is the issue with two other big chunks of spending that outpace inflation by a big chunk: college/graduate studies and healthcare. Those chunks of the population who spend a lot of their money on either (the young and the old) are experiencing much higher inflation than the CPI.

This 'granularity' we see - where certain chunks of the population are experiencing cost of living this is either significantly higher or lower than that estimated by CPI - makes it very challenging to design appropriate indexation policy for benefits and taxes. I believe this is a different issue than the substitution effects mentioned above, which apply to everyone more or less equally, but it's also a challenging policy question. These changes are not trivial - they can easily amount to a double-digit percentage difference between what the government thinks you're spending for an average life compared to what you actually spend. What should we do?

On the question of substitution, I think a case can be made for indexing benefits to chained CPI. If normal market behavior results in changes in spending, I'm not too troubled if government benefits change in accordance with that behavior. Presumably as the BLS gets more and more sophisticated in their inflation models, they will be able to more accurately represent what an actual person in spending.

On the question of granularity, though, I think it's hard to see an effective policy that would replace CPI or chained CPI. Some people have suggested having different inflation measures apply for different programs - for example, using a healthcare-heavy inflation measure for programs targeting the elderly, and a housing price (not rent)-heavy measurement for the middle aged, and a education-heavy measure for programs targeting the young. Yet this seems needlessly complex, and a blunt instrument to boot. I believe Dread brought up a similar question on granularity a while back, but referencing tax brackets varying with geography. I opposed taking into account local cost of living then, and I think I oppose taking into account 'local' cost of living here. There, the arguments were a bit more clear-cut - after all, you can always move to a cheaper area, meaning you are make a choice. Here it's not as clear-cut (yes, there are choices for cheaper healthcare and education, but even 'cheaper' options are outpacing inflation; housing is a bit easier to argue about, though). Do any of you have suggestions on how to deal with this? Do other governments have clever inflation indexation schemes to get around these problems?

[Dreadnaught]

Nice post.

The chain-weighted stuff is interesting, and if it pisses off AARP then we know it's probably a decent idea. And we know the underlying logic has gotten totally screwy if we're considering medical expenses when we talk about pension adjustments (isn't the other budget-crippling entitlement, Medicare, already about medical stuff?).

But I've become to think that maybe the whole idea of indexing is the wrong approach. We need to stop thinking about this as some kind of defined-benefit plan. We should think of this as a pension program that allocates its resources based on its savings and its income.

In other words, we should be calculating the payments based on current income to the pension fund and use someone's lifetime earnings as a multiplier/deflator for the benefit. So, if you earned less over your lifetime, you will have a higher multiplier and get a larger pension check. If you earned more, you will have a lower multiplier and get less. Ideally, we could make this reasonably progressive.

But the point is to keep the overall outlay within the confines of the income our pension fund is already getting from the insane 13.4% payroll tax* + depleting the pension trust fund a bit to cover the baby boomers. It boggles any actuarial mind that we would robotically cut pension checks and increase the pension every year without much regard to how much the pension program is actually earning.



*Excluding 2012, when we raided the payroll tax.

[Lebanese Dragon]

The CPI is suposed to indicate that everything has gone up by a certain % in price, even if you're substituting a 2 liter of pepsi for sam's cola. Furthermore if the substitutes are truly "near equal" when everyone switches it'll drive the price up of the new product to match what it's substituting. It'll all balance out just may have some latency.

There, the arguments were a bit more clear-cut - after all, you can always move to a cheaper area, meaning you are make a choice

I think state by state CPI makes sense. To think families will up and move to a different state for savings on bread and butter is rediculous.

Though it does seem to create it's own vicious cycle this idea of prices go up so people get paid more, so prices go up, then people get paid more etc... seems circular.

[wiggin]

The chain-weighted stuff is interesting, and if it pisses off AARP then we know it's probably a decent idea. And we know the underlying logic has gotten totally screwy if we're considering medical expenses when we talk about pension adjustments (isn't the other budget-crippling entitlement, Medicare, already about medical stuff?).

But I've become to think that maybe the whole idea of indexing is the wrong approach. We need to stop thinking about this as some kind of defined-benefit plan. We should think of this as a pension program that allocates its resources based on its savings and its income.

In other words, we should be calculating the payments based on current income to the pension fund and use someone's lifetime earnings as a multiplier/deflator for the benefit. So, if you earned less over your lifetime, you will have a higher multiplier and get a larger pension check. If you earned more, you will have a lower multiplier and get less. Ideally, we could make this reasonably progressive.

But the point is to keep the overall outlay within the confines of the income our pension fund is already getting from the insane 13.4% payroll tax* + depleting the pension trust fund a bit to cover the baby boomers. It boggles any actuarial mind that we would robotically cut pension checks and increase the pension every year without much regard to how much the pension program is actually earning.

I respectfully disagree on the shape of future benefits payments. In my mind, the purpose of social spending programs like SS, Medicare, Medicaid, etc. is to provide a predictable 'floor' of benefits that every American should expect to get, even if their other financial situation blows up for any number of possible reasons. It's a safety net, not intended to be a full replacement for full retirement/healthcare/etc. benefits. The size of this safety net should not be determined on the basis of how much money we have, but on the basis of some reasonable metric (X times the poverty line, or coverage of X conditions/procedures, whatever). There's no question that social spending will fluctuate with demographics, and that sometimes other portions of the budget will have to suffer as a result. To me, that's fine - for a long time FICA was paying for things like infrastructure spending and education, and it's not unreasonable - given the changing demographics of the US - for the government budget to devote a larger proportion of its budget to such social programs now that it is relevant. The government has the advantage that it can have an 'investment horizon' on the order of decades, allowing them to do things that no corporate accountant would even imagine doing... and that's okay.

I feel like your solution doesn't actually address the problem - how to provide decent services at a good price - but is more of a 'starve the beast' kind of approach. Maybe effective fiscally, but not really meeting the goals of the programs. I do agree, though, that we shouldn't 'robotically' cut checks without thinking hard about exactly how benefits are structured, and whether there are ways we can economize without compromising out program goals. For example, I think means testing is an easy way to keep from violating the basic point of a safety net while saving significant sums.

The CPI is suposed to indicate that everything has gone up by a certain % in price, even if you're substituting a 2 liter of pepsi for sam's cola. Furthermore if the substitutes are truly "near equal" when everyone switches it'll drive the price up of the new product to match what it's substituting. It'll all balance out just may have some latency.

Uh, what? If I understand what you're saying, I'm pretty sure you're wrong. The CPI is a fixed basket of goods that doesn't check every price in the US. If people are substituting other items into that basket, there's a definite shift between chained CPI and CPI. The BLS calculates both and there's a clear difference.

I think state by state CPI makes sense. To think families will up and move to a different state for savings on bread and butter is rediculous.

Intrastate differences are just as big (or bigger) than interstate differences. You'd have to have a much more finely grained analysis. Anyways, the reason people move has nothing to do with the price of food and everything to do with the price of housing.

[GGT]

I respectfully disagree on the shape of future benefits payments. In my mind, the purpose of social spending programs like SS, Medicare, Medicaid, etc. is to provide a predictable 'floor' of benefits that every American should expect to get, even if their other financial situation blows up for any number of possible reasons.

It's a safety net, not intended to be a full replacement for full retirement/healthcare/etc. benefits. The size of this safety net should not be determined on the basis of how much money we have, but on the basis of some reasonable metric (X times the poverty line, or coverage of X conditions/procedures, whatever).

Unfortunately, millions of people worked a lifetime of minimum-wage, low-wage, median-wage jobs....with no benefits at all, unable to get above the "floor". It's almost impossible to create a retirement savings, or buy your own healthcare, when those costs increase 10-20% every year, along with housing or utilities, but wages only increase at 2% or remain flat. For those folks, Medicaid, Medicare, and SS are not just a safety net, but their lifeline.

We have to control the ever-upward costs of healthcare first and foremost. Then try to keep housing, energy, and food 'affordable'....or increase wages to keep up. That includes college-educated workers in skilled 'professional' service industries, not just burger flippers, cashiers, or janitors.

[Dreadnaught]

I respectfully disagree on the shape of future benefits payments. In my mind, the purpose of social spending programs like SS, Medicare, Medicaid, etc. is to provide a predictable 'floor' of benefits that every American should expect to get, even if their other financial situation blows up for any number of possible reasons. It's a safety net, not intended to be a full replacement for full retirement/healthcare/etc. benefits. The size of this safety net should not be determined on the basis of how much money we have, but on the basis of some reasonable metric (X times the poverty line, or coverage of X conditions/procedures, whatever). There's no question that social spending will fluctuate with demographics, and that sometimes other portions of the budget will have to suffer as a result. To me, that's fine - for a long time FICA was paying for things like infrastructure spending and education, and it's not unreasonable - given the changing demographics of the US - for the government budget to devote a larger proportion of its budget to such social programs now that it is relevant. The government has the advantage that it can have an 'investment horizon' on the order of decades, allowing them to do things that no corporate accountant would even imagine doing... and that's okay.

I feel like your solution doesn't actually address the problem - how to provide decent services at a good price - but is more of a 'starve the beast' kind of approach. Maybe effective fiscally, but not really meeting the goals of the programs. I do agree, though, that we shouldn't 'robotically' cut checks without thinking hard about exactly how benefits are structured, and whether there are ways we can economize without compromising out program goals. For example, I think means testing is an easy way to keep from violating the basic point of a safety net while saving significant sums.

I think we're failing to provide a predictable and substantial floor for large numbers of people already, while also managing to bankrupt our government. I think it's disastrous to have a program that is "not...determined on the basis of how much money we have". Government can make decades-long planning, but voters can also forget the original intention of these programs over the decades and begin to forget the original point. That's how safety nets become middle class entitlements.

If we're going to create a safety net for older people, shouldn't we build a system that operates slightly more like a real safety net? In a world without Washington's insane baseline budgeting, I think that would mean progressively-structured payouts/means testing and budgeting each year based on actual revenue projections, instead of obscure formulas.

But what I'm saying is very far from starving the beast. Social security is about cash support later in life. It should work towards its original purpose of helping older people who had limited income but also couldn't work in older age. At this point in its history, too many people expect too much from Social Security and treat it like a defined-benefit, regardless of their personal income or savings. The benefit formulas remain a mystery to most Americans.

I should actually take some time and see if anyone's done any research calculating how SS impacts lifetime consumer discretionary spending...

[Hazir]

I think we're failing to provide a predictable and substantial floor for large numbers of people already, while also managing to bankrupt our government. I think it's disastrous to have a program that is "not...determined on the basis of how much money we have". Government can make decades-long planning, but voters can also forget the original intention of these programs over the decades and begin to forget the original point. That's how safety nets become middle class entitlements.

If we're going to create a safety net for older people, shouldn't we build a system that operates slightly more like a real safety net? In a world without Washington's insane baseline budgeting, I think that would mean progressively-structured payouts/means testing and budgeting each year based on actual revenue projections, instead of obscure formulas.

But what I'm saying is very far from starving the beast. Social security is about cash support later in life. It should work towards its original purpose of helping older people who had limited income but also couldn't work in older age. At this point in its history, too many people expect too much from Social Security and treat it like a defined-benefit, regardless of their personal income or savings. The benefit formulas remain a mystery to most Americans.

I should actually take some time and see if anyone's done any research calculating how SS impacts lifetime consumer discretionary spending...

Means tested Social Security is just so much extra red tape.

[Dreadnaught]

Interesting point that I hadn't given much thought into. Though "means tested" usually doesn't involve applying for Social Security pensions -- it just means the checks you get will vary depending on your lifetime income. But the formula is calculated automatically.

So if you have higher lifetime/peak income, you will get relatively less money than someone whose income gave them less opportunity to save.

This puts a lot of power in the hands of the bureaucracy, though the formulas can be reviewed by elected legislators and it has the potential of making the cost curve less insane. And it's no more power than they already have over a tax that consumes +12% of payrolls annually.

[GGT]

SS was created as defined-contribution retirement insurance, something everyone who paid into could access, regardless of income or assets. It wasn't designed with means-testing, because that would have made it a "welfare program"....

[wiggin]

I don't have time to respond to the rest right now, but SS is the very opposite of a DC system, GGT, it's a DB system.

[GGT]

The only way to qualify for SS benefits was having payroll 'contributions' deducted from your paycheck (or a spouse's). The monthly benefit was defined by those lifetime contributions. SSDI was added later, as a safety net and defined benefit, regardless of payroll deductions.

[wiggin]

Your benefit is not defined by your contributions, once you've qualified (by having put in for 10? years). Your benefit is determined roughly by your salary in your latter years (with a lot of caveats). People who put in wildly different amounts of lifetime contributions can have identical benefits.

[GGT]

I'll clarify. SS isn't like a "defined benefit" employee pension plan, annuity, or life insurance with guaranteed payments. But it is conveyable to spouses or dependent children as a death benefit, using different calculations. It's also not an Old Person Pension that kicks in automatically at age 65/67, or a welfare program to supplement income for the elderly poor. It's more like a "defined contribution" plan because you can't get SS payments if you don't contribute (via payroll tax).

Benefits are based on lifetime reported earnings, and you have to qualify by earning credits based on wages. The wage / credit ratio adjusts over time, with inflation and changes in laws. Example: in 2000 you'd earn One credit for every $780 in wages, maximum Four credits per year. You need 40 credits over a working lifetime (less for disability), and the benefits amount is based on average lifetime earnings. I'm reading that directly from the SSA fact sheet they used to mail to every SS tax payer, until nixed by budget cuts.

Government workers who get a pension and don't contribute into SS, also don't accrue qualifying credits. Self-employed have to pay both employer/employee contributions. But it's also possible to work a lifetime in a cash economy.....and not be eligible for any SS benefits. Lower wage workers have puny monthly SS checks (I've seen them as low as $500 from food pantry clients. That's when Medicaid, SNAP, section 8 housing, and subsidized utilities become crucial.)

Also, eligibility for Medicare is tied to these earned wage credits. You can't simply apply for Medicare insurance once you're 65 years old. It seems tons of people are under the impression that SS and Medicare are automatic or defined benefits for everyone over 62/65/67. They're not.

[Hazir]

Interesting point that I hadn't given much thought into. Though "means tested" usually doesn't involve applying for Social Security pensions -- it just means the checks you get will vary depending on your lifetime income. But the formula is calculated automatically.

So if you have higher lifetime/peak income, you will get relatively less money than someone whose income gave them less opportunity to save.

This puts a lot of power in the hands of the bureaucracy, though the formulas can be reviewed by elected legislators and it has the potential of making the cost curve less insane. And it's no more power than they already have over a tax that consumes +12% of payrolls annually.

Automatic when you reach a certain age? Or automatically recalculated every year? Or when you come into an inheritance or suddenly loose your income? Owning a house gives you a lower check but selling it and wasting the proceeds gets you a full benefit? Just a few questions of the hundreds I could throw at you and which will be thrown at any plan to 'fix' SS this way?

I can tell you thousands upon thousands of civil servants will be loving the politicians responsable for this 'fix'.

[Dreadnaught]

Distributing welfare based on wealth/income is certainly not a revolutionary or new idea.

I would agree it puts a lot of power in the hands of the civil servants, except they are already wielding enormous power with our "pension" scheme already.

[GGT]

SS benefits are estimated until you apply at retirement age....then it's calculated based on lifetime earnings, COL adjustments, and changes in the law. Benefits can be reduced if you have a government pension, but other assets or savings don't play a part at all.

If Mitt Romney or Warren Buffet had 'contributions' deducted from their wages/salary, and have 40 earned credits, they're eligible for SS benefits. Owning a home, or having other savings or assets doesn't reduce the SS payment. If you apply for Medicaid, your primary home is excluded, but selling other assets can be required for eligibility.

[wiggin]

I think we're failing to provide a predictable and substantial floor for large numbers of people already, while also managing to bankrupt our government. I think it's disastrous to have a program that is "not...determined on the basis of how much money we have". Government can make decades-long planning, but voters can also forget the original intention of these programs over the decades and begin to forget the original point. That's how safety nets become middle class entitlements.

I don't mean we should ignore the budget entirely, of course, just that our budget should not control the program, rather the program's goals should shape how we make policy - and raise revenue. The basic tradeoff with long term government benefits schemes is that you have a significant surplus while your population is young, which allows you to invest in things like infrastructure and education, increasing your overall growth and economic prospects. As the population ages, you have to shift more of your revenues to paying for the benefits you promised - but it's from a bigger pie, so it doesn't hurt as much. We always knew that SS and Medicare were going to cost more in the future, and I don't fundamentally have a problem with that - as long as it's driven by demographics and not unreasonable inflation in costs.

That doesn't mean we should just write these programs a blank check and move on - obviously the programs often need to be reevaluated to see how it's meeting the stated goals. But this reevaluation should be done with an eye to using innovation to cut waste while keeping the basic program in place, rather than just robotically cutting everything in times of budgetary strain (which, btw, is one huge downside to sequestration). In the case of Medicare, serious work needs to be done to bring healthcare costs under control; in the case of Medicaid, fraud and abuse need to be targeted, as well as overhauling the incentives (e.g. to go for emergent care instead of preventative care); in the case of Social Security, the enhanced health and longevity of our citizens means it should kick in at a later time, and only provide significant support for the truly needy. But these are policies not done with an eye to matching a revenue projection, but rather common sense to reduce costs and meet the program objectives.

If we're going to create a safety net for older people, shouldn't we build a system that operates slightly more like a real safety net? In a world without Washington's insane baseline budgeting, I think that would mean progressively-structured payouts/means testing and budgeting each year based on actual revenue projections, instead of obscure formulas.

Agreed on means testing, not so agreed on revenue projections. It isn't a safety net if you slash it while revenue is low; quite the opposite (presumably times are good when revenue is high, so you need less safety net). The whole point is to provide something people can't provide for themselves - when employment/investment/equities/etc. are all messed up, the government has the scope to borrow at insanely low rates to cover the difference. This can't become the status quo (funding benefits through borrowing), obviously, but it most definitely should be a cyclical reality. I think it would be incredibly complex to come up with a revenue weighting formula that would take these concerns into account.

Interestingly, I saw an article claiming that the latest austerity budget in the UK had temporarily reduced indexation of some benefits to 1% for the next several years (instead of inflation), which would obviously provide modest pain to benefits recipients, but would have a huge budget dividend over enough time. This suggests they are definitely crafting policy with an eye to the deficit, but using a fairly mild form of changing indexation rules to close the gap. I don't have a problem with this in principle, as long as it's a temporary measure. If it became permanent, then inflation would eat away at the benefit until it was meaningless, which negates the whole point of the program. This latter scenario is what I envision happening if you put your revenue link into play. Yes, you'd fix the budget, but you wouldn't do it through clever policymaking that still preserved the underlying program.

But what I'm saying is very far from starving the beast. Social security is about cash support later in life. It should work towards its original purpose of helping older people who had limited income but also couldn't work in older age. At this point in its history, too many people expect too much from Social Security and treat it like a defined-benefit, regardless of their personal income or savings. The benefit formulas remain a mystery to most Americans.

I should actually take some time and see if anyone's done any research calculating how SS impacts lifetime consumer discretionary spending...

I apologize for my offhand remark - obviously your suggestion is not exactly the same as the classic 'starving the beast' approach. I just feel like your revenue-focused model will cut benefits without addressing real drivers of costs. I'm entirely supportive of changing SS in particular to add means testing, but that's a reform that should happen irrespective of the revenue picture.

One thing I do like about SS even for 'wealthier' Americans is that it provides everyone a shelter from market and longevity risk. Obviously it's wise to buy some annuities if you have the money, but even those are way riskier than a SS payout. If SS is around when I retire, I would definitely factor that in on the DB column when planning my fallback financial position (try to make fixed payouts like SS and annuities match my expected minimum needs). Obviously that's silly for the likes of Warren Buffet to get a SS check from the government, but it's not so crazy for a couple with a $1 million nest egg (seemingly a lot of money) use it to hedge their market and longevity risk.

[Hazir]

I really don't understand how somebody whose objective with means testing would be keeping the likes of Warren Buffett from getting a SS check can think that is a good idea. If you would exclude your $1m couple it would still be a ridiculous bureaucracy to achieve almost nothing, but if only seriously rich people would be the target of your policies you could not even start to recover the cost of the increased bureaucracy.

[wiggin]

I really don't understand how somebody whose objective with means testing would be keeping the likes of Warren Buffett from getting a SS check can think that is a good idea. If you would exclude your $1m couple it would still be a ridiculous bureaucracy to achieve almost nothing, but if only seriously rich people would be the target of your policies you could not even start to recover the cost of the increased bureaucracy.

No, I think that support can be titrated down as income goes up. As it is, we do this by having a cap (both on income subject to payroll tax as well as benefits), this just phases it out for the benefits under that cap for couples with over X in income.

The real challenge with the current SS system is that people who have earned significantly higher amounts of money, especially in their later lives (up to something like $110k), will get FAR more benefits than someone relatively poor who actually needs it. Means testing tries to mitigate this by decreasing the benefits for the wealthy, since they had far more opportunities to save given their higher lifetime earnings. Even fairly modest means testing could easily save a lot of money, and honestly it wouldn't be any more complicated than the current formula (which, admittedly, is complex as hell). I don't think the bureaucratic burden would be as high as you imagine - people already have to declare their income for taxes, this just factors it into the model.

[Hazir]

Am I to believe Social Security payments are made by the IRS?

[wiggin]

No, of course not, it's the Social Security Administration. But they already get all of your tax records.

[GGT]

It's worth repeating that if SS becomes means-tested, it becomes a Welfare program. That's why it's considered an Entitlement, an insurance program available to every worker who contributed through payroll deductions -- also to make it politically viable for congressional conservatives to pass.

Copied from my SSA statement:

"Social Security is the largest source of income for most elderly Americans and plays a major role in keeping them out of poverty. But Social Security can't do it all. Social Security benefits were not intended to be the only source of income for you and your family when you retire. You'll need to supplement your benefits from a pension, savings or investments. Think of Social Security as a foundation on which to build your financial future."

Since we know hardly any employer offers a traditional pension these days, and not all employers make matching 401-K contributions, and a savings account yields less interest than inflation (or fees can outstrip piddly interest), and investments in Wall St. can blow up....that "foundation" for financial future/retirement is tenuous for millions of people, but especially low-mid-income workers whose wages have been flat or stagnant for decades.

Instead of tweaking inflation for entitlements, IMO it makes more sense to focus on wages. A Living Wage that could reduce need for other safety-net or welfare programs. And reinstate these annual SSA statements, so everyone can see how estimated benefits change with budget cuts and laws (and how small the payments might be).

[Dreadnaught]

I don't mean we should ignore the budget entirely, of course, just that our budget should not control the program, rather the program's goals should shape how we make policy - and raise revenue. The basic tradeoff with long term government benefits schemes is that you have a significant surplus while your population is young, which allows you to invest in things like infrastructure and education, increasing your overall growth and economic prospects. As the population ages, you have to shift more of your revenues to paying for the benefits you promised - but it's from a bigger pie, so it doesn't hurt as much. We always knew that SS and Medicare were going to cost more in the future, and I don't fundamentally have a problem with that - as long as it's driven by demographics and not unreasonable inflation in costs.

That doesn't mean we should just write these programs a blank check and move on - obviously the programs often need to be reevaluated to see how it's meeting the stated goals. But this reevaluation should be done with an eye to using innovation to cut waste while keeping the basic program in place, rather than just robotically cutting everything in times of budgetary strain (which, btw, is one huge downside to sequestration). In the case of Medicare, serious work needs to be done to bring healthcare costs under control; in the case of Medicaid, fraud and abuse need to be targeted, as well as overhauling the incentives (e.g. to go for emergent care instead of preventative care); in the case of Social Security, the enhanced health and longevity of our citizens means it should kick in at a later time, and only provide significant support for the truly needy. But these are policies not done with an eye to matching a revenue projection, but rather common sense to reduce costs and meet the program objectives.

Lots to respond to, but two things stick out here-

1) I'm not sure where you're getting that there was ever been some kind of grand plan, especially for something like Social Security. The program is decades old and predates major demographic surges in the US population. The tax rate for Social Security has gone from 1% of payroll to 12% of payroll. That's an enormous. We've had to make some substantial reforms Social Security at least once. The trajectory is not great at all.

The narrative you're laying-out is more of a retrospective narrative.

2) My understanding is Social Security doesn't have much waste to skim off. The service is relatively simple and, because the main service is dispensing cash, adjusting those payments is really the only way to fix it without taxing even more.

[wiggin]

To address point 1, I don't disagree that when SS was founded in the 30s it wasn't the same goals as today. The narrative I'm giving is one discussed by economists wrt demographics and social spending, not necessarily policymakers when they first established the program. It's certainly implicit in the way most benefits programs have worked since the 60s/70s. I'd also note that tax rates haven't changed in over two decades.

To address point 2, I mostly agree - my point about waste had more to do with the real driver of increasing deficits, healthcare benefits (I'm sometimes conflating the two because both are affected by inflation indexation). To me, Social Security is not and never has been a major deficit headache. You can easily make the program solvent for another century with fairly small tweaks to benefits, mostly taking into account that people are far healthier and more able to work at 65 than they used to be. It's not exactly 'waste', but it does pull people out of the workforce unnecessarily, and drains the government coffers to boot. I'm completely in favor of raising the retirement age significantly (68? 70?), ditto for Medicare eligibility. Means testing and tweaking indexation numbers as they related to SS are just icing on the cake - they'll probably keep SS in surplus for the foreseeable future.

[GGT]

SS isn't the problem. It's solvent until at least 2037 using current metrics. It could be made even better by adopting the Dream Act, since thousands of Latinos are turning 18 yrs old per month, including undocumented life-long residents with college degrees. That would do a lot to change the worker-to-retiree ratios.

Medicare and Medicaid are the problems. And only because medical care costs have been escalating every year, sometimes 20% per year. No individual, business, or gov't program can keep pace with that. Well, perhaps the private insurance industry can.

[wiggin]

SS is a problem now, since FICA doesn't cover outlays, so it has to be covered by general revenue. Also, 2037 is closer than you think. It's just not as big of a problem as Medicare/Medicaid.

I frankly don't believe that healthcare costs have gone up by 20% in any year. Source?

[GGT]

Those payroll tax holidays mean less funding, a case of diminishing returns? SS just needs more workers entering the system, so we'd have 3 workers for every current retiree, instead of the opposite.

Healthcare costs for consumers increased 10-20% annually in insurance premiums, particularly the last decade. No source atm, but there are plenty buried in other threads.

[wiggin]

There's a huge difference between 10% and 20%, and premiums are not the same as healthcare spending. I challenge you to find a source where annual healthcare spending increased by even close to 20%.

[GGT]

Premiums, deductibles, and OOP expenses are what most people consider healthcare spending. I don't know many people who add in portions of their taxes that cover public health programs, do you? Granted, economists and legislators use a broader measure, including those public programs and taxes for national healthcare spending.

I didn't intend to nitpick about this, but if it's that important I'll change my "sometimes" 20% per year to "often" 10% per year. Better?

Health expenditures in the United States neared $2.6 trillion in 2010, over ten times the $256 billion spent in 1980. [1] The rate of growth in recent years has slowed relative to the late 1990s and early 2000s, but is still expected to grow faster than national income over the foreseeable future.[2] Addressing this growing burden continues to be a major policy priority. Furthermore, the United States has been in a recession for much of the past decade, resulting in higher unemployment and lower incomes for many Americans. These conditions have put even more attention on health spending and affordability. [1]


Since 2002, employer-sponsored health coverage for family premiums have increased by 97%, placing increasing cost burdens on employers and workers. [3] In the public sector, Medicare covers the elderly and people with disabilities, and Medicaid provides coverage to low-income families. Enrollment has grown in Medicare with the aging of the baby boomers and in Medicaid due to the recession.[1], [4] This means that total government spending has increased considerably, straining federal and state budgets. In total, health spending accounted for 17.9% of the nation’s Gross Domestic Product (GDP) in 2010. [5]

http://www.kaiseredu.org/Issue-Modul...und-Brief.aspx

The average price of a family plan has risen 113 percent since 2001, the organizations reported.

http://www.bloomberg.com/news/2011-0...er-family.html

[GGT]

A simplified explanation of chained CPI:

http://www.politico.com/story/2012/1...251_Page2.html


Short of wading through all the posts above, would the Fed also use this chained CPI to measure inflation -- or keep using the same metrics that can exclude prices of energy and healthcare?