The New York Times has an interesting multiple choice question regarding how to spend money to help stimulate the economy,

If you wanted to help the economy and you had $14 billion to bestow on any group of people, which group would you choose:

a) Teenagers and young adults, who have an 18 percent unemployment rate.

b) All the middle-age long-term jobless who, for various reasons, are not eligible for unemployment benefits.

c) The taxpayers of the future (by using the $14 billion to pay down the deficit).

d) The group that has survived the Great Recession probably better than any other, with stronger income growth, fewer job cuts and little loss of health insurance.

The New York Times notes that the Obama Administration has decided to go with option d. And this spending will follow a 5.8% cost of living increase from this past year. Now granted, Social Security recipients are scheduled to get no cost of living increase next year, because they received such a large one this year, but still is this the best way to spend $14 billion? Give it to people who are not productive and have already gotten a nice raise? Especially when we have options a and b out there?

I have to agree with Rosanne Altshuler, this is nothing more than “pure pandering to the elderly”. Change you can believe in.

Tyler Cowen has three health care fallacies and the first one is something I’ve mentioned before (and tooke quite a bit of heat for),

Today’s report is this:

The financial outlook for Medicare and Social Security has significantly worsened, as the bad economy and mounting job losses have pushed both programs years closer to insolvency, according to a grim report issued Tuesday by the Obama administration.

Maybe you once argued that “Social Security is fine,” but dollars are fungible and the budget must be judged as a whole. The consumption tax is coming, I am sorry to say.

In other words, we can’t simply ignore Social Security in trying to get a handle on the long term fiscal imbalances facing the country. While in isolation Social Security might be “fine” and need only some minor adjustments, the entire budget is looking rather bleak. So, taking Social Security off the table might make the problem intractable.

I also like this part as well,

I’m seeing nascent signs of a new (but actually old) fallacy, namely that since health care costs can (will?) crush the budget, we don’t have to worry so much about other expenditures. The mental story runs something like this: “if we don’t cure health care cost inflation, it doesn’t matter; if we do cure health care cost inflation, we can afford it.” That’s exactly the kind of false mental framing that behavioral economics identifies as irrational in other settings.

Quite a few commenters are accusing John McCain of flip-flopping because he favored privatization of Social security in 2004 and now adamantly rejects the insinuation that he supports it now:

This is a clumsy rhetorical game rather than a policy shift. Then and now, McCain’s position is that Social Security would remain as a government program but that younger workers should be allowed the option of placing part of the money they would have been required to remit to FICA into a private retirement account in return for reduced future government benefits. Sometime during the 2004 campaign, though, Republican learned in focus groups that “privatization” was an unpopular label for this policy and started talking instead about “reforming” or “strengthening” Social Security instead.

Hilzoy makes a more interesting, related argument, which she illustrates with a clever cartoon:

McCain talks as though letting younger workers put some of their FICA taxes into private accounts would help fix the Social Security shortfall. This is not true. Private accounts would make the Social Security shortfall much worse.

Recall the way Social Security works. I pay Social Security taxes. My taxes are used to pay the benefits of today’s retirees. When I retire, my benefits will be paid by the taxes of the generation behind me, and so on. Suppose that we start allowing people to put some of their FICA tax dollars into personal accounts. That means that I will be paying not for the generation of workers who are now retired, but for me.

As it turns out, she and McCain are both right; they’re just talking about different things. McCain’s point is that we’re trapped in an unsustainable cycle. As the number of retirees increases while the number of workers decreases, this generational transfer won’t work. Getting young people off the merry-go-round, at least partly, helps solve the problem long term.

But, yes, the short-term impact is that there are fewer dollars going into the kitty to pay for the retirees who were fed the lie all along that they were actually paying into a “trust fund” for their “own retirement.” Considering that we all agree — and McCain emphasizes — that we’re morally obligated to pay current and future retires whose potential savings we siphoned off into a Ponzi scheme, Hilzoy concludes:

That means one of three things. Either it will come from the Social Security Trust Fund, in which case it will make the Trust Fund’s solvency problems worse; or else it will come from Our Tax Dollars, which doesn’t sound very pleasant, or else it will come from the Fiscal Fairy, who makes our numbers add up by magic.

That last option is the most favored by Democrats and Republicans alike, especially during campaign season. In reality, of course, Option 1 and Option 3 are identical given that neither fairies nor the Social Security Trust Fund actually exist. Social Security payments will therefore continue to come from our tax dollars, unpleasant though it may be.

Regardless, substantial privatization of Social Security in the near future is a dead letter. The Baby Boomers are incredibly powerful politically, the Democrats will control the Congress regardless of who wins the presidency, and confidence in the stock market is lower now than it was four years ago. The debate is, therefore, almost entirely academic.

As I wrote nearly four years ago, our alternatives are rather bleak:

• The status quo. This is unsustainable without a massive influx of young people into the system willing to shell out an increasing share of their income to comparatively wealthy elderly folks retiring at what is now a relatively young age.

• A sustantial increase in the retirement age. When FDR established this program in 1932, 65 was very old. Indeed, it was past the expected lifespan. Now, people who reach 65 can expect to live another 15-20 years. We’ve already gradually increased this for the out years. But raising it to, say, 75 will be incredibly difficulty politically and doesn’t take into account the fact that even 65 is relatively old for those in more labor intensive occupations.

The “massive influx of young people” caveat is actually more plausible than I thought at the time, if we’re willing to have this happen through immigration. We’d need to do it on the books, though, so that we’re actually collecting FICA taxes. The “guest worker” option, wherein we collect FICA taxes but then send them from whence they came before they can collect benefits would be even better from a fiscal standpoint but has the drawback of being horribly immoral.

Publius snarks, “It’s too bad we didn’t invest one-third of the Social Security system in the market.”

Indeed it is. To be sure, we’d have “lost” money if we had done so in early 2005 and taken all of it out this morning. Then again, we’d have lost money anyway since, in lieu of investing it in stocks, we’re simply spending it and writing IOU’s.

Moreover, retirement savings is a long-term, large scale enterprise that reaps the benefits of compound interest and dollar cost averaging. During periods when the market is in decline, as it is now, one’s investment buys more shares of stock. During periods when the market is growing, as it has for most of the past thirty years, one earns dividends which are reinvested. Either way, there are no legal ways of which I’m aware to make more money over a long period of time.

Moody’s, a credit rating agency, says the U.S. government’s triple-A credit rating is jeopardy due to soaring health care expenditures and Social Security. This shouldn’t be all that surprising. Think of a corporation whose expenditures are growing faster than its profits. Such a firm, generally, wont be around long. And that is precisely the problem with Medicare. It is growing at a clearly unsustainable rate, and as such the U.S. becomes more of a credit risk.

The US is at risk of losing its top-notch triple-A credit rating within a decade unless it takes radical action to curb soaring healthcare and social security spending, Moody’s, the credit rating agency, said on Thursday.

The warning over the future of the triple-A rating – granted to US government debt since it was first assessed in 1917 – reflects growing concerns over the country’s ability to retain its financial and economic supremacy. [...]

But Moody’s warning comes at a time when US confidence in its economic prowess has been challenged by the rising threat of a recession, a weak dollar and the credit crunch. [...]

Unlike Moody’s previous assessment of US government debt in 2005, Thursday’s report specifically links rises in healthcare and social security spending to the credit rating.

“The combination of the medical programmes and social security is the most important threat to the triple-A rating over the long term,” it said.

Steven Hess, Moody’s lead analyst for the US, told the Financial Times that in order to protect the country’s top rating, future administrations would have to rein in healthcare and social security costs.

But we have McCain telling us he is going to cut Medicare premiums. Every Democratic candidate wants to actually spend more money. In the case of Senator Clinton; she proposed to fund her spending, in part, by rolling back the Bush tax cuts. Sounds good at first until you realize that the Bush tax cuts will expire on January 1, 2011 and that all of Senator Clinton’s spending will actually add to the budget deficit and exacerbate the situation.

Greg Mankiw presents a quote and article by Paul Krugman that, if you didn’t know any better you’d swear were written by different people.

Krugman on This Week:

Paul Krugman: Social Security, if you go through the federal government, piece-by-piece, and see which programs are seriously underfunded and which are close to being completely funded, social security is one of the best. It’s not for certain that social security has a problem. And it’s something that the right has always wanted to kill, not because it doesn’t work but because it does. And Obama to go after this program, at this time, you have to wonder. All of my progressive friends are saying what on earth is going through his mind to raise this

Krugman from the New York Times:

Generous benefits for the elderly are feasible as long as there are relatively few retirees compared with the number of taxpaying workers — which is the current situation, because the baby boomers swell the workforce. In 2010, however, the boomers will begin to retire. Every year thereafter, for the next quarter-century, several million 65-year-olds will leave the rolls of taxpayers and begin claiming their benefits.

The budgetary effects of this demographic tidal wave are straightforward to compute, but so huge as almost to defy comprehension. Mr. Peterson, the chairman of the Blackstone Group, a private investment bank, informs us that ”the combined Federal cost of Social Security and Medicare, expressed as a share of workers’ taxable payroll, is officially projected to rise from the already burdensome 17 percent in 1995 to between 35 and 55 percent in 2040. And this figure does not include the many other costs — from nursing homes to civil service and military pensions — that are destined to grow along with the age wave.”

Must be tough living with such schizophrenia.

However, all snarkiness aside, In the New York Times article Krugman is discussing both Social Security and Medicare. The problems facing Social Security aren’t all that serious. Some moderate policies could bring that program back into balance at least for awhile. And while I think this is the less desirable solution¹, it isn’t that horrible. Medicare is indeed the 5,000 pound gorilla that could end up crippling the economy.
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¹My view is that Social Security is “fixed” periodically but that these fixes never work for very long. A more permanent solution might be some sort of forced savings that has everyone putting money into a diversified investment fund and manages disbursements to avoid market fluctuations.

Well, that moment that has been much talked about has finally arrived. The first member of the Baby Boomer generation has applied for social security.

The nation’s “first” baby boomer, a retired teacher from New Jersey, applied for Social Security benefits Monday, signaling the start of an expected avalanche of applications from the post World War II generation.

Social Security Commissioner Michael Astrue called it “America’s silver tsunami.”

Kathleen Casey-Kirschling applied for benefits over the Internet at an event hosted by Astrue. Casey-Kirschling was born one second after midnight on Jan. 1, 1946, gaining her recognition as the first baby boomer — a generation of nearly 80 million born from 1946 to 1964, Astrue said.

While, I think the rather gloomy predictions about Social Security are largely true, the problems that welfare program poses are far less than the problems posed by the Medicare system. Having 80 million people enter the Medicare system is going to increase demand. Given that there are few if any policies currently in place to expand supply and that there are reasons to suspect that no such policies will be forth coming for awhile health care expenditures have nowhere to go but up.

Last week, Bush’s budget director called the growth in Social Security, Medicare and Medicaid a “fiscal train wreck.” The three entitlement programs make up nearly half of all federal spending, a share that is expected to grow.

While one might disagree with Bush’s policies his budget director is exactly right in his assessment of an on-coming fiscal train wreck. When you add 10,000 people, on average, per day for the next 20 years to Medicare things aren’t going to get better.

And any idiot who suggests that we should expand Medicare to cover the entire population is simply a complete scoundrel. Given current projections, Medicare’s shortfall is measured in trillions of dollars, and there isn’t much hope for economic growth to solve the problem. Keep in mind these projections are based on as the system as it currently works. Add in a couple hundred million more people and the numbers get even worse.

Casey-Kirschling said her generation won’t let Social Security fail.

No, they may actually be the reason why Social Security and Medicare fail.

Laurence Kotlikoff spells out what the costs are of ignoring the problems of Social Security and Medicare.

Let’s face it–Uncle Sam is broke. The gap between the U.S. government’s future expenses and tax receipts is $63.3 trillion. No surprise. The nation has 77 million retiring baby boomers on track to collect well above $30,000 a year–the average amount we’re paying today’s elderly–in Social Security, Medicare and Medicaid benefits. If you’re planning for a cushy retirement, forget it. Get ready for much higher taxes, lower benefits and inflation.

Fun, eh? People (e.g. Nancy Pelosi) complain that the Republicans were too stingy with the Prescription Drug Program and that the “donut hole” has to be closed. But the truth is that the Republicans were too generous and the Democrats most likely will be even far more generous. On top of this, there is nobody in Washington that can take care of this problem right now, and like credit card debt where even the interest isn’t paid off, this inaction means that the problem just becomes more and more expensive.

One of the worst things President Bush did in terms of the fiscal outlook for this country was to put forward the Medicare prescription drug benefit. This plan is estimated to add $8.7 trillion in unfunded liabilities to Medicare’s $21 trillion in unfunded liabilities. This is money that we won’t be able to pay. And one of my big concerns is that the Democrats are going to want to close the “donut hole” in Medicare’s prescription drug program.

The “donut hole” is a range where seniors covered under Medicare Part D have to pay 100% of the costs of the drugs that they purchase. This range is between $2,250 and $5,100. When prescription drug purchases are below $2,250 the participant will have to pay a $250 deductible and 25% of the cost of the drugs, plus the cost of the plan, currently $420 annually. Once past the “donut hole” the cost of drugs are covered up to 95%.

My problem isn’t that there is a desire to help out seniors who are struggling to cover the cost of prescription drugs, but that in doing so it will add even more red ink to an already grim fiscal outlook. Closing the “donut hole” could add trillions more to the cost of Medicare.

Is there reason to think that the Democrats will want to do this now that they have majorities in both chambers of Congress? Yes.

“he Democratic Prescription for Change will make prescription drugs more affordable by allowing Medicare to negotiate lower prices and using those savings to close the donut hole; provide seniors with the simple and reliable option of a plan administered by Medicare; and ensure reliable and uninterrupted access to prescription drugs by stopping drug plans from increasing co-payments and creating burdensome bureaucracy.

Democrats intend to enact our Prescription for Change in a fiscally responsible way – improving the benefit without burdening future generations with endless debt.

The key here, for me, is the idea that by using the government’s “negotiating” power to get better prices for the drugs and use those savings to close the loophole without adding to the cost. Frankly, I think this is a load of wishful thinking.

For one thing, the prescription drug plan will likely induce employers to cut back and even eliminate drug coverage benefits to retirees. This will have the effect of raising costs for Medicare. Also, these programs just seem to have a way of becoming much, much more expensive than they are initially deemed to cost.

Further, the government doesn’t “negotiate,” it dictates things by fiat. The government says to the drug manufacturers: This is the price you will get. It will, in effect, be a type of price control for a very large segment of prescription drug consumers. This will greatly reduce or even eliminate the profits for pharmaceutical companies. So what can we expect will happen? Pharmaceutical companies will stop investing in R&D for new drugs that benefit the elderly. After all, if the rate of return falls for such investments, then other investments start to look (relatively) better. So one long term cost, that won’t show up on the accounting ledger, would be to have fewer drugs that would extend/improve the lives of the elderly.

The bottom line is that the Democrats’ claims that there is basically a “free lunch” here are just pure bunk. One thing that economics should teach everyone is that nothing is ever free. Everything has a cost, even if it is just the opportunity cost. In this case, the cost here is the profits for the pharmaceuticals industry. While some might see such an appropriation reasonable in that it is for the greater good, there are some very serious issues with unintended consequences and perverse incentives. Add on that Bush is a “compassionate conservative” who hasn’t met a government program he doesn’t love to spend money on, and my feeling is that the fiscal outlook for the country is only going to get worse.

Via Menzie Chinn at Econbroswer comes this report from the GAO’s Comptroller General, David Walker. This completely rebuts any claims by President Bush in regards to fiscal restraint.

What is truly disappointing for those of us who are interested in fiscal restraint is the fourth line under Implicit Exposures. Medicare Part D is Bushes baby all the way, the Medicare Drug Benefit for Seniors. And yes, it is estimated to cost almost $9 Trillion dollars. In other words, just this program alone accounts for about one third of the increase of the fiscal exposure this country is facing. It is also the single largest component of the increased fiscal exposure as well.

But how does all of this translate into fiscal burden? Well the GAO report gives us that information as well,

I can’t think of much to say other than, look at those numbers. And if you think Bush’s notion of making the tax cuts permanent will solve the problem via higher growth rates, you are in for a very nasty wake up call in decade or two down the road. Faster economic growth, while it will help, cannot solve this problem. The GAO report notes that for growth to solve this problem we’d need economic growth in the double digits for every year for the next 75 years. And given the spotty record of tax cuts spurring economic growth, the idea of making the tax cuts permanent is just nonsense.

The bottom line is that when Bush talks about fiscal restraint he is simply not being honest.

A computer hacker has stolen the names and personal information of over 1,500 nuclear scientists.

A computer hacker stole a file containing the names and Social Security numbers of 1,500 people working for the Energy Department’s nuclear weapons agency.

Officials told a congressional hearing Friday that the department’s senior managers were informed only two days ago of last September’s incident, which was somewhat similar to recent problems at the Veterans Affairs Department. None of the victims was notified, they said.

The data theft occurred in a computer system at a service center belonging to the National Nuclear Security Administration in New Mexico. The file contained information about contract workers throughout the agency’s nuclear weapons complex, a department spokesman said.

[...]

[National Nuclear Security Administrator] Brooks said the file contained names, Social Security numbers, date-of-birth information, a code where the employees worked and codes showing their security clearances. A majority of the individuals worked for contractors and the list was compiled as part of their security clearance processing, he said.

Really, between this and the recent theft of a the Veteran’s Affairs Department, it’s a wonder that hackers just don’t go straight for the Social Security Administraiton itself. They might as well. It’s clear that the federal government doesn’t take privacy or the security of personal information very seriously.

Well, this item is starting to make its way around the rightward blogs. From what I can tell the gist of it is this:

In calculating the Social Security benefits for people who are currently illegal aliens, but become citizens under one of these various immigration reform bills, their income and contributions to Social Security while illegal would still be counted when determining the benefits for these people.

Now, that is just my reading of this and I could be wrong. But if this is the case, there sure seems to be alot of outrage over what will likely amount to a small amount of money…maybe several billion paid out a couple of decades down the road.

The idea that this is really bad or outrageous in terms of Social Security and its insolvency is mostly a silly outrage given the amount of money that Social Security is estimated to be short (while billions might sound like lots of money, think trillions when talking about the short fall). And compared to President Bush’s Medicare Drug Program it is an even smaller amount of money relatively speaking. And if we were to drag in the short fall in Medicare, well, how does tens of trillions grab ya?

Basically this is not a big deal. And it certainly isn’t extending Social Security to include Mexico. And on the bright side Medicare will probably break us before we even get to the point of paying Social Security to former illegal immigrants who may become citizens.

With a name like that you might think her solution is to just unleash her Mongol hordes, but in actuallity she has two posts on the topic that I think have some very good points.

In the first post Atilla Girl lists three points,

…1) secure the border; 2) streamline the legal immigration system for those who truly want to come here and assimilate; and 3) offer some sort of guest-worker program for young people who simply want to be here temporarily to make a few dollars, and then go home.

I think all three points are quite on the mark for a number of reasons. First, securing the border makes sense from national security stand point. We don’t want the next terrorist cell that carries out a successful plan to cross over from Mexico practically on a red carpet. Second we do need more people in this country. I’ve touched on the Social Security and Medicare issues before, and the bottom line is if we aren’t going to reform those systems and we aren’t going drastically increase taxes last year, then we simply need more bodies working and paying into the system before they become so burdensome as to drive our economy right down the crapper. The final point, is also the best of both worlds. If a person comes here and works for 10 years then bails for back home, well we get his contributions to Social Security and Medicare and he gets nada. Almost as good as a smoker who kicks it at 64.

In her second post Atilla Girl develops the problem with legal immigration further.

Right now, our attitude toward immigrants—whom we need, by the way, given our system of entitlements and falling birth rates—is, “welcome to the United States. Fuck you.”

That is pretty much it. You want into the U.S. for a better life, to work hard, and raise your children to love America and Freedom? Well tough shit. Get at the back of that long line and we’ll call you in 15 years. One reason that there are so many illegal immigrants is that immigrating legally is very, very difficult. Make legal immigration easier, and make illegal immigration harder and you’ll see changes in those two flows. Legal immigrants will increase (with background checks, etc.) and illegal immigrants (are are less likely to assimilate due to their illegal status) will decrease.

Note that this isn’t merely flinging open the “doors to the country” and letting in every Tom, Dick and Ahmed with a suitcase nuke. Recall again point number 1: securing the border. Tightening up the border is fine, and combining it with easier legal immigration will mean we wont have to spend huge sums of money watching each ant crawl back and forth across the every inch of the border.

No, not body snatcher imposter, but an imposter in terms of being a conservative. I have been feeling this way about Bush for quite some time now. Bush’s first reaction to any problem is to turn toward government. Government is what has brought about the new jobs he has been bragging about (and frankly it ain’t much to brag about, IMO). When it came to education, instead of getting government out of the way Bush shoved government even further into the picture, and in a way that may not be helping all that much. Then there is that gigantic atrocity known as the Medicare Prescription Drug Program, or as I like to call, the Black Hole. When in doubt George W. Bush’s first instinct is to turn to government for the answer and to make government bigger. In short, President Bush is an activist for bigger more intrusive government.

I know I’ll get many of the rightward leaning readers of this blog responding with lots of “Yeah, buts…” or “No, your wrong because….” The problem is that I’m not wrong. Consider the Medicare Trustees annual report that gave a projected cost Bush’s Medicare Drug Program of over $10.8 trillion.

So any attempt to point to Bush’s plans to overhaul Social Security pale in comparison I’m afraid. Bush doesn’t look at government with skepticism or distrust, but with the idea that if we just get it right it will work. This, Bartlett argues, is very much the mindset of a Democrat not a Republican (at least in the mold of Reagan) and certainly not in line with small ‘c’ conservativism.

Bartlett also advances the argument that Bush’s Medicare Drug Program will pave the way for price controls on prescription drugs. The problem is that the program will lead to an explosion in the federal budget and that the best and fastest way to control that explosion will be price controls.

But in the longer run, it is inevitable that price controls will be imposed on drugs. Realistically, it will be the only way that exploding costs can be controlled quickly. Indeed, some new cancer drugs now cost $100,000 for a single course of treatment. There is no way that taxpayers will be able to afford that expense. That is why virtually every other industrialized country substantially controls the prices of most prescription drugs. It is also the reason why Canada sells the same drugs available here for lower prices.

So, Bush is setting the stage for even further intrusion by the government into the economy. On top of it as most people will realize right away, price controls come with many problems. Reducing the profitability of any commodity will reduce its supply. This isn’t some sort of fancy highly mathematical economic theory, but a result of the simplest most accepted model in economics (basic supply and demand) as well as plenty of empirical evidence (gasoline price controls anyone?). So Bush is setting the stage for fewer and fewer new drugs to address health problems on top of his expansion of government like nothing we have seen in the last 20 years or more.

And the Medicare Drug Program isn’t the only example. As already mentioned there is the educational program, No Child Left Behind. Then there was the pork riddled energy bill, and then the pork filled highway bill with bridges to nowhere. Bartlett notes that pork barrel spending under Bush went from 6,333 projects totalling $18.5 billion to 13,999 projects totalling $27.3 billion a 50% increase!

By comparison Bill Clinton is a paragon of spending restraint and fiscal responsibility. Granted, Clinton early on wanted to also expand government to an unprecedented level, but back then Republicans and conservatives either believed in ideals of smaller government or cynically used them to short stop Clinton’s proposal. Based on the behavior of the Republican party these past 5 or so years, I’m inclined to believe in the latter.

Other than cutting taxes and the war in Iraq and on terrorism, President Bush is a liberal. That is the bottom line. Calling Bush a conservative is, in my opinion, an insult to conservatives.

GOP Senators May Make 69 Retirement Age (AP)

WASHINGTON — Key Senate Republicans are considering gradually raising the Social Security retirement age as high as 69 over several years as they struggle to jump-start legislation that President Bush has placed atop his second-term agenda, officials said Tuesday. …

The possible increase to 69 over two decades or more was among the suggestions that Iowa Sen. Charles Grassley, chairman of the Senate Finance Committee, presented to fellow Republicans on the panel last week as part of an attempt to give the program greater financial solvency, the officials said.

I’m looking for a little help/perspective on this one: when I started working at age 16, I was told that the federal government was going to take a portion of my earnings for my own good, but that there was nothing to worry about because I’d get it back — plus interest — when I turned 65. Now they want to back out on what at the time seemed like a contractual agreement. If they extend the retirement age, aren’t they essentially reneging on a contract because they can’t stop spending money on superfluous things?