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Milton Friedman – The Social Security Myth
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Spending Caps are the Fiscal Gold Standard
Earlier this month, I wrote separate columns about the spending cap in Switzerland (the “debt brake“) and the spending cap in Colorado (“TABOR“).
In this clip from my appearance on Let People Prosper, I explain those spending caps are the gold standard for fiscal rules.
It should go without saying that spending caps are good only if they actually constrain the size of government, just as speed limits in school zones are good only if they protect children from reckless drivers.
Which is why I favor spending caps that comply with my Golden Rule.
As you might suspect, politicians generally don’t want any constraint their ability to spend money (and buy votes).
But sometimes they do the right thing. Or at least propose the right thing.
In an article for the Hill, Aris Folley and Mychael Schnell explain that Republicans are offering to give Biden more borrowing authority if Biden agrees to spending caps for the “discretionary” part of the budget.
Here are the relevant excerpts.
House Republicans on Wednesday passed a bill to raise the borrowing limit and implement sweeping spending cuts… The bill would raise the debt ceiling by $1.5 trillion or through the end of next March,
whichever happens first, in exchange for a wide range of Republican proposals to decrease government spending that, according to the Congressional Budget Office (CBO), amount to $4.8 trillion. The bill would cap federal funding hashed during the annual appropriations process at fiscal 2022 levels, while also limiting spending growth to 1 percent every year over the next decade.
The good news is that Republicans are talking about spending caps. This is a welcome change of pace after the profligacy of the Trump years.
The bad news is that the GOP plan presumably has very little likelihood of getting approved.
And even if Biden and Senate Democrats somehow agree to the spending cap, it only applies to discretionary spending. That’s better than nothing, but entitlements are America’s big fiscal problem.
Moreover, keep in mind that Republicans got spending caps on discretionary spending back in 2011, but those caps were then abandoned after some early success.
In other words, I’m not brimming with optimism. But let’s not make the perfect the enemy of the good. Politicians are talking about spending caps today, so maybe there’s a chance of getting real results at some point in the not-too-distant future.
Social Security’s $60 Trillion-Plus Problem
The 2023 Social Security Trustees Report was released yesterday, and just like I did last year (and the year before, and the year before that, etc), let’s look at the fiscal status of the retirement program.
There is a lot of data in the Report. But the most important set of numbers can be found in Table VI.G9.
As you can see from this chart, these numbers show the amount of revenue coming into the program each year, adjusted for inflation, as well as the amount of yearly spending. Both are rising rapidly.
Since the orange line (spending) is climbing faster than the blue line (revenue), the obvious takeaway is that Social Security has a deficit.
But that would be an understatement.
As you can see from the second chart, the cumulative deficit over the next 77 years is more than $60 trillion.
You’ll notice, of course, that I added a bit of editorializing to both charts.
That’s because it is reprehensible that Joe Bidenand Donald Trump are opposed to reforms that would modernize the program.
They won’t admit it, but their approach necessarilyand unavoidably means huge tax increases on lower-income and middle-class households.
P.S. If you are not Biden or Trump and want to do what’s best for America, I suggest learning about reforms in Australia, Chile, Switzerland, Hong Kong, Netherlands, the Faroe Islands, Denmark, Israel, and Sweden.
Social Security’s Inevitable Decline
It’s understandable that we’re now paying a lot of attention to Joe Biden’s risky proposals for higher taxes and a bigger welfare state.
After all, it’s a very bad idea to copy the economic policies of nations such as Italy, France, and Greece
(unless, of course, you want much lower living standards).
But let’s not forget that that the United States also has some big economic challenges that existed before President Biden ever took office.
Most notably the entitlement programs.
Medicaid and Medicare are the biggest problems, but let’s focus today on Social Security.
Richard Rahn has a column in the Washington Times that summarizes the program’s grim outlook. Here are some excerpts.
Politicians love to talk about the Social Security “trust fund” and assure us that it will not be raided. But the unfortunate fact is the “trust fund” is an accounting fiction without any real assets. In actuality, Social Security is a
giant Ponzi scheme operated by the government. Benefits that are paid to existing retirees come from the current taxes from those working today and borrowing. …But now, Americans have fewer children, and life expectancies are growing rapidly. …There is no easy way out. Future Social Security benefits will be cut (probably by not fully indexing for inflation), and/or taxes will be greatly and continuously increased until the system collapses.
The fact that Social Security is a Ponzi scheme isn’t necessarily fatal. After all, the government has the ability to coerce new workers into the system.
The problem is that there are fewer and fewer of those new workers to support the growing number of people getting benefits.
Here are the numbers from Richard’s column. As the old saying goes, read ’em and weep.
Richard ends his column by fretting that the United States is on a dangerous path.
The world has seen this play before. In 1906, Argentina on a per-capita income basis was one of the richest countries in the world, rivaling the United States. It has bountiful agricultural and mineral resources and had a relatively well-educated population of mainly European origin. But after a century of fascist/socialist/welfare-state governments, it is now a poor country. Venezuela went from a rich country with civil liberties to a poor oppressed country in only two decades. As Margaret Thatcher famously said, “the problem with socialism is that eventually, you run out of other peoples’ money.” The Greeks built a nice welfare state, largely using German taxpayers’ money – the Euro – until the Germans said, “no more.” As a result, the Greeks have seen a drop in real incomes of more than 30 percent in seven or so years.
The good news is that our economic policy won’t be nearly as bad as Argentina and Venezuela, even if some of Biden’s crazy ideas – such a massive per-child handouts – are enacted.
The bad news is that we could become a lot more like Greece.
And that’s where Margaret Thatcher’s famous warning could become an American reality.
There is a solution to this problem, by the way. It’s been implemented in a couple of dozen nations around the world.
Sadly, American politicians are more interested in making the problem worse (with predictable consequences).
P.S. Here are a couple of humorous items about Social Security.
The first one actually understates how bad the trade is because workers actually pay 12.4 percent of their income into the program (the so-called employer share simply means lower pre-tax pay).
And the second item points out that Bernie Madoff was an amateur.
P.P.S. If you want more jokes and cartoons about Social Security, click here. There are other Social Security cartoons here, here, and here. And a Social Security joke if you appreciate grim humor.
Sunk Costs, Inertia, and the Burden of Government Spending
Back in 2009 and 2010, when I had less gray hair, I narrated a four-part series on the economic burden of government spending.
Here’s Part II, which discusses the theoretical reasons why big government reduces prosperity.
I provide eight examples to illustrate how and why government spending can hinder economic growth.
The last item is what I called the “stagnation cost,” which is the tendency of politicians and bureaucrats to throw good money after bad
because there is no incentive to adapt.
When giving speeches, I usually refer to this as the “inertia cost.”
But, regardless of what I call it, I explain that every government program has a group of beneficiaries that are strongly motivated to keep their gravy train moving even if money is being wasted.
And since politicians like getting votes from those beneficiaries, it’s very difficult to derail programs.
In an article for National Review, Sean-Michael Pigeon offers one very plausible explanation for why this happens.
He says politicians fall victim to the fallacy of sunk costs.
…we need an understanding of government inefficiency… One reason government spending is so needlessly costly is somewhat paradoxical: The state is wasteful precisely because people are so concerned about wasting money. …This is a classic sunk-cost fallacy: Costs that can’t be recovered are “sunk,” and therefore irrelevant for future decision-making.
But while this fallacy is well known in economics, sunk costs are a big deal in the practical world of politics. Nobody wants to waste money, and politicians don’t want to cause waste directly. No member of Congress wants to be publicly responsible for a half-built bridge, especially when they have to tell taxpayers they still have to foot the bill for it. …Congress’s unwillingness to cut the funding of poorly run projects is a significant reason government projects always spend too much. …Politicians are nervous about cutting ongoing projects because they don’t want to leave taxpayers empty-handed, but stomaching sunk costs is worth it. Not only is it economically sound to stop government agencies from bleeding money, but it also sets the precedent that shoddy work will be held accountable. …to save money, sometimes you have to lose money.
In other words, it would be good to stop the bleeding.
But that’s not politically easy. Mr. Pigeon has examples in his column, but he should have included California’s (supposed) high-speed rail project.
That boondoggle has been draining money from state and federal coffers for about a decade. Cost estimates have exploded (something that almost always happens with government projects), yet construction has barely started.
Yet now Biden wants to increase federal subsidies for that money pit, along with other long-distance rail schemes.
And you won’t be surprised that a big argument from supporters is that we’ve already wasted billions and billions of dollars on the project, so therefore we should continue to waste even more money
(sort of like hitting yourself on the head with a hammer because it feels good when you stop).
The big-picture bottom line is that the burden of federal spending should be reduced so that politicians have less ability to waste money.
And that also means that Americans will be able to enjoy more growth and more prosperity.
The targeted bottom line is that we should get Washington out of infrastructure.
Demographic Decline = Fiscal Crisis
As a libertarian, I don’t care if couples have zero children or 10 children.
But as an economist, I’m horrified that big changes in demographics are going to lead to fiscal crises thanks to poorly designed entitlement programs.
Simply stated, modest-sized welfare states are sustainable if more and more new taxpayers enter the system to finance benefits for a burgeoning population of old people.
But that’s not happening any more. In most nations, traditional population pyramids are becoming population cylinders because of falling birthrates and increasing longevity.
That’s the bad news.
The good news is that there is growing awareness the demographic changes are happening. Indeed, Damien Cave, Emma Bubola and have a big article on population decline in the New York Times.
All over the world, countries are confronting population stagnation and a fertility bust, a dizzying reversal unmatched in recorded history that will make first-birthday parties a rarer sight than funerals, and empty homes a common eyesore. Maternity wards are already shutting down in Italy. Ghost cities are appearing in northeastern China. Universities in South Korea can’t find enough students, and in Germany, hundreds of thousands of properties have been razed, with the land turned into parks.
…Demographers now predict that by the latter half of the century or possibly earlier, the global population will enter a sustained decline for the first time. …The strain of longer lives and low fertility, leading to fewer workers and more retirees, threatens to upend how societies are organized — around the notion that a surplus of young people will drive economies and help pay for the old. …The change may take decades, but once it starts, decline (just like growth) spirals exponentially. With fewer births, fewer girls grow up to have children, and if they have smaller families than their parents did — which is happening in dozens of countries — the drop starts to look like a rock thrown off a cliff. …according to projections by an international team of scientists published last year in The Lancet, 183 countries and territories — out of 195 — will have fertility rates below replacement level by 2100.
Plenty of interesting data, though remarkably little focus on the fiscal implications. Sort of like writing about 1943 France with almost no reference to World War II.
In any event, the article takes a closer look at the challenges in certain nations., including South Korea.
To goose the birthrate, the government has handed out baby bonuses. It increased child allowances and medical subsidies for fertility treatments and pregnancy. Health officials have showered newborns with gifts of beef, baby clothes and toys. The government is also building kindergartens and day care centers by the hundreds. In Seoul, every bus and subway car has pink seats reserved for pregnant women. But this month, Deputy Prime Minister Hong Nam-ki admitted that the government — which has spent more than $178 billion over the past 15 years encouraging women to have more babies — was not making enough progress.
I was struck by the statement from the Deputy Prime Minister that his nation “was not making enough progress”?
That’s a strange way of describing catastrophic decline in birthrates, as noted in the article.
South Korea’s fertility rate dropped to a record low of 0.92 in 2019 — less than one child per woman, the lowest rate in the developed world. Every month for the past 59 months, the total number of babies born in the country has dropped to a record depth.
Maybe, just maybe, government handouts are not the way to boost birthrates.
I’ll conclude by noting that the real problem is tax-and-transfer entitlement programs, not low birth rates.
Both Singapore and Hong Kong have extremely low birth rates, for instance, but they aren’t facing a huge fiscal crisis because they have very small welfare states and workers are obliged to save for their own retirement.
Other Asian jurisdictions, however, made the mistake of copying Western nations, meaning entitlement programs that become mathematically impossible when populations pyramids become population cylinders (or even upside-down pyramids!).
In addition to South Korea, Japan also faces a major challenge.
And the situation is very grim in Europe, even though birth rates haven’t fallen to the same degree (though the numbers is some Eastern European nations are staggeringly bad).
P.S. The United States isn’t far behind.
P.P.S. We know the answer to this crisis, but far too many politicians are focused on trying to make matters worse rather than better.
P.P.P.S. You can read my two-part series on this topic here and here.
Security from CRADLE TO GRAVE never quite works out!!!
Free to Choose Part 4: From Cradle to Grave Featuring Milton Friedman
The Entitlement Disaster that Hillary Clinton and Donald Trump Are Ignoring
July 8, 2016 by Dan Mitchell
I’m like a broken record when it comes to entitlement spending. I’ve explained, ad nauseam, that programs such as Medicare, Medicaid, Obamacare, and Social Security must be reformed.
In part, genuine entitlement reform is a good idea because you get better economic performance when you replace tax-and-transfer schemes with private savings and competitive markets.
But reform also is desperately needed because ofchanging demographics. Simply stated, leaving all the entitlement programs on autopilot is a recipe for a Greek-style fiscal crisis.
If you want a rigorous explanation of the issue, my colleague Jeff Miron has a must-read monograph on the topic. You should peruse the entire study, but here’s the key conclusion if you’re pressed for time.
…this paper projects fiscal imbalance as of every year between 1965 and 2014, using data-supported assumptions about gross domestic product (GDP) growth, revenue, and trends in mandatory spending on Social Security, Medicare, Medicaid, and other programs. The projections reveal that the United States has faced a growing fiscal imbalance since the early 1970s, largely as a consequence of continuous growth in mandatory spending. As of 2014, the fiscal imbalance stands at $117.9 trillion, with few signs of future improvement even if GDP growth accelerates or tax revenues increase relative to historic norms. Thus the only viable way to restore fiscal balance is to scale back mandatory spending policies, particularly on large health care programs such as Medicare, Medicaid, and the Affordable Care Act (ACA).
Jeff’s report is filled with sobering charts. I’ve picked out three that deserve special attention.
First, here’s a look back in history at the growing fiscal burden of entitlement programs.
Second, here’s a look forward at how the fiscal burden of entitlement programs will get even worse in coming decades.
Keep in mind, by the way, that the two above charts only show the fiscal burden of entitlement programs (sometimes referred to as “mandatory spending” since the laws “mandate” that money be given to anyone who is “entitled” based on various criteria).
When you add discretionary (annually appropriated) spending to the mix, as well as interest that is paid on the national debt, the numbers get even more grim.
Jeff adds everything together and shows, for each year between 1965 and 2014, the “present value” of the gap between what the government is promising to spend and how much revenue it is projected to collect.
These numbers are especially horrific because “present value” is a measure of how much money the government would have to somehow obtain and set aside in order to have a nest egg capable of offsetting future deficits.
Needless to say, the federal government did not have access to $118 trillion (yes, trillion with a “t”) in 2014. And if there were updated numbers for 2015 and 2016 (which would probably be even higher than $118 trillion), the federal government still wouldn’t have access to that amount of money either.
Especially since the total annual output of the American economy is about $18 trillion.
So now you can understand why international bureaucracies like the IMF, BIS, and OECD estimate that the fiscal challenge in the United States may be even bigger than the problems in decrepit welfare states such as France and Italy.
Let’s get another perspective on the issue. James Capretta of the Ethics and Public Policy Center warns about the scope of the problem.
Despite what presidential candidates Donald Trump and Hillary Clinton have been saying on the campaign trail, the need to reform the nation’s major entitlement programs cannot be wished away. The primary cause of the nation’s fiscal problems, now and in the future, is the rapid rise in entitlement spending. In 1970, spending on Social Security and the major health care entitlement programs was 3.6 percent of GDP. In 2015, spending on these programs was 10.3 percent of GDP. By 2040, CBO expects spending on these programs to reach 14.2 percent of GDP. …entitlement reform is needed to put the federal government’s finances on a more stable foundation.
He outlines his preferred reforms, some of which I heartily embrace and some of what I think are too timid, but the key point is that he succinctly explains the need to act soon to avoid a giant long-term problem.
…reforms are not intended to create budgetary balance in the short-run. Large-scale change cannot be implemented in the major programs without significant transition periods, which means the reforms need to be enacted soon to reduce costs in fifteen, twenty, and twenty-five years. Skeptics may say it’s pointless to worry about fiscal problems that are more than twenty years off. They’re wrong. …The result is a misallocation of resources that undermines long-term economic growth. …Entitlement reform is an absolute necessity, as will soon become evident to everyone, one way or another.
The recent testimony by Nicholas Eberstadt of the American Enterprise Institute also is must reading.
In just two generations, the government…has effectively become an entitlements machine. …transfers have become a major component in the family budget of the average American household-and our dependence on these government transfers continues to rise. …Fifty years into our great social experiment of massive expansion of entitlement programs, there is ample evidence to indicate that the unintended consequences of this reconfigutation of American political and economic life have been major and adverse.
You should read the entire testimony, which is a comprehensive explanation of how entitlements are eroding American exceptionalism.
And I’ve previously shared some of Eberstadt’s work on the growing dependency crisis in America.
In effect, our “social capital” of self reliance and the work ethic is beingreplaced by an entitlement mentality.
At the risk of understatement, that won’t end well. Heck, I don’t know which part is more depressing, theever-growing burden of spending or the fact that more and more Americans think it’s okay to live off the labor of others.
All I can say for sure is that this combination never was, is not now, and never will be a recipe for national success.
Let’s conclude with some sage observations by George Melloan of theWall Street Journal. He summarizes the problem as being a combination of too much spending and too little political courage. Here’s the too-much-spending part.
…we seem richer than we actually are because we have borrowed so heavily from future generations. …the nation’s slow growth and rising debt are already reducing the opportunities for upward mobility. …Recent projections of the future cost of current government obligations certainly won’t relieve…people’s worries. Those promises have expanded far beyond any reasonable projection of the government’s ability to extract enough revenue to cover them. …The Congressional Budget Office projects a steady rise in “mandatory” (i.e., entitlement) costs as a share of GDP out into the distant future. …The upshot: Americans are deep in debt, mainly thanks to government excesses.
And here’s the too-little-political-courage part.
The only real answer is that the entitlement programs will have to be reformed, and sooner better than later, because the longer reform is postponed the greater the fiscal imbalance will become and the greater its drain will be… Donald Trump is out to lunch on this issue, as he is on most questions that require more than a fatuous sound-bite answer. As for Hillary…, forget about it.
Sigh, how depressing. It seems like America will be “Europeanized.”
For additional background on the issue of debt, unfunded liabilities, and present value, this video is a great tutorial.
P.S. I must have taken LSD or crack earlier this year. That’s the only logical explanation for saying I was optimistic about entitlement reform.
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