Topic: Social Security

Dealing with Fiscal Challenges

I was recently asked the following:

You gotta figure:

  1. States defaulting on pension obligations through bankruptcy and/or action by legislatures. Some de facto defaults will likely be to promise payment at age 90 or whatever.
  2. National governments, including the US, also likely defaulting on everything, gov’t bonds and so-called “entitlements.”

So, pensioners, city, state and national get at least a huge haircut on what they expected and Medicare and Medicaid just aren’t viable over time.

What are the economic implications and possible other implications?

Here’s my response:

Many US states are facing pension fund insolvency and will have to impose heavier burdens either on taxpayers, employees, or retirees, or some combination thereof. There is a precedent, although not a direct one, for a federal bailout of state and local governments: The Emergency Relief and Construction Act of 1932 provided $300 million to be lent to the states (and onward to cities and counties) for relief. Everybody understood that these loans probably would never be repaid and, in fact, they were eventually written off. This statute was the first breach of the federal “relief dam” – one that burst after FDR took office in March 1933. Despite it, three states-Arkansas, Louisiana, and South Carolina-defaulted on their debts. By the end of 1933, approximately 1,300 local governments also had defaulted and many other state and local governments verged on default.

Recently, Ben Bernanke has ruled out a bailout of states via the Fed (who believes him, given what he’s already done?) and Eric Cantor recently wrote that the states have the tools to deal with their fiscal challenges, including renegotiating agreements with public-sector unions. In his opinion, there is no reason for federal involvement in state government fiscal problems, but how policymakers will respond when the chips are down (or there’s “blood on the streets”) is anyone’s guess. Some states are in pension trouble because they assumed highly risky investment strategies that failed when asset values sank during the 2001 and 2008-09 recessions. One favorable element for some states - Arizona, Utah, Texas, NM, etc. – is their favorable demographics that could help them to slowly improve their pension and fiscal conditions.

At the federal level, the default must also occur through a “renegotiation” of entitlement promises. The Medicare actuaries have clearly indicated that the so-called Medicare fix enacted through ObamaCare is untenable. So, whether or not ObamaCare is repealed, we’re still at square one and a renegotiation must happen soon. The problem is that we always wait for the people to deliver a “clear verdict” through elections, and elections usually don’t. Leadership on this issue is sorely needed but is not forthcoming for understandable reasons. The political game is to push the adjustment costs out into the future – but eventually it will imply significantly reduced living standards for future generations. How that will come about – whether through a crisis as in Greece and Spain, or through a gradual erosion of living standards is difficult to say. The inevitability of one or the other is not in doubt. All we could say is that the probability of a resolution through a violent crisis increases the longer we continue to push the costs out.

I’m placing a high probability on the dissolution of the Euro by the end of this year. With the election results in France, Greece, and Germany, the debt roll-over requirements that Greece, Spain and Italy are facing, and the impossibility of external sources of credible “bailouts” I don’t see how it can be any other way. Some people wonder whether the periphery states will opt out first or whether Germany and stronger northern states will move first to kick them out. There are no formal exit strategies included in the European Stability and Growth Pact. I think, though, that it will be the former – the southern countries are facing austerity with, or chaos without, the Euro and now the perceived difference between the two is not very large.

To answer the last question “And then what?” I would simply say that the developed nations will all be poorer – have lower living standards, more unemployment, less growth, etc, until the boomers pass away. I predict as much in my book that examines the implications of demographic and economic trends in developed nations (it does not deal with business cycle related events). Future generations will have to re-think the state-citizen relationships – a process that we can influence.

Social Security ‘Calculator’





Sometimes, Governments Lie (6th Anniversary Ed.)


Sometimes, Governments Lie





I offer the following proposition:



Dignity in Retirement

In his 2005 open letter to Karl Rove, Ed Crane defended Cato’s proposal for private retirement accounts thus: “You want to get people excited about personal accounts? Tell them about the 1960 Supreme Court case, Flemming v. Nestor, which explicitly says Americans have no ownership rights to the money they pay into Social Security. It is, the Court ruled, a social program of Congress with absolutely no contractual obligations. What you get back at retirement indeed, when you can retire and receive benefits is entirely up to the 535 members of Congress. Where is the dignity in such a system?”

President Bush’s reform of the Social Security went nowhere, but Ed Crane’s warning is no exaggeration. Yesterday, Dimitris Christoulas, a 77-year-old retired pharmacist killed himself in front of the Greek Parliament. “A suicide note found in his coat pocket blamed politicians and the country’s acute financial crisis for driving him to take his life, police said. The government had ‘annihilated any hope for my survival and I could not get any justice. I cannot find any other form of struggle except a dignified end before I have to start scrounging for food from rubbish bins,’ the note said.”

According to The Telegraph, “One in five Greeks are unemployed, depression is on the rise and there is a growing feeling of despair across the country. The [Greek] government said last year that suicides had increased 40 per cent over the previous two years. The high-profile suicide [of Dimitris Christoulas] came a day after a 78-year-old Italian woman threw herself from the balcony of her third-floor apartment in protest against a cut in her monthly pension from 800 euros to 600 euros.”

Those Americans, who rely on Social Security for their retirement, should remember that what the government gives, it can take away. The Social Security system is on an unsustainable path to bankruptcy. The only question is whether Social Security is reformed before it brings about national bankruptcy as well. Every day that our masters in Washington, D.C. dither and refuse to act, the Greek option [i.e.: national bankruptcy] becomes more realistic. The only way to ensure dignified retirement for millions of America’s pensioners is by reforming social security and cutting the size of the government’s future financial obligations.

Are Individual Mandate Critics Showing ‘Bad Faith’?

Paul Krugman is the latest to suggest that advocates of personal Social Security accounts are guilty of hypocrisy in criticizing the constitutionality of Obamacare’s individual insurance mandate.  After all, they contend, are not personal account supporters arguing in favor of a federal government mandate that individuals purchase a specific commercial  product (i.e., stocks, bonds, mutual funds, or whatever)?

No doubt, there is a superficial similarity.  But the analogy significantly misses what personal account proponents are calling for. If there was no current Social Security program and the government were simply to mandate that individuals purchase some form of commercial retirement savings product, that would indeed be analogous to the health insurance mandate, and would be unconstitutional for the same reasons. However, Americans are currently paying a Social Security payroll tax. What personal account advocates propose is simply a tax credit against that tax if individuals contribute to a personal account. That the credit would be equal to the size of the contribution is structurally irrelevant.

The government uses credits to incentivize behavior all the time. For example, it offers a tax credit for the purchase of the Chevy Volt. That may be bad policy, but it is generally agreed to be constitutionally permissible. It is, however, very different from a mandate that every American buy a Volt. Similarly, Congress would have been on much stronger constitutional ground if it had imposed a tax on all Americans to fund uncompensated care, and then offered a credit to anyone who obtained insurance. The same individuals would end up paying the penalty/tax as under Obamacare, but the structure would have been less offensive to the Constitution. The federal government clearly has the power to tax, and it can offer tax credits and deductions. Congress chose not to do it that way for political reasons—they didn’t want to be accused of raising taxes. But political expediency does not justify an unprecedented expansion of federal power.

And, while on the subject of Social Security, it should be noted that several individual mandate defenders—including Justice Ginsburg—have likened it to Social Security, saying that if the government can make us participate in Social Security, why can’t it make us buy health insurance? But in the case of Helvering v. Davis, the Supreme Court ruled that Social Security was constitutional precisely because it was not insurance and did not require citizens to buy a product. Rather, the Court held that the Social Security tax was simply a tax, authorized by the Constitution’s taxing power. Social Security benefits are simply a government spending program, authorized under the General Welfare clause, and unrelated to the tax itself. As the Court pointed out, “The proceeds of both the employee and employer taxes are to be paid into the Treasury like any other internal revenue generally, and are not earmarked in any way.”  One may disagree with the Court’s expansive interpretation of the General Welfare clause in this case, but it clearly distinguishes Social Security (and Medicare or even a single-payer health care system) from the individual mandate constitutionally.

Some might say that these distinctions are just quibbles or nit-picking. But how government does things matters. Constitutional limits are there for a reason. We are, after all, a government of laws, not of men.







Here are a handful of observations.
















