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Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing Community College

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Page 1: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Do the Old Gain at theExpense of the Young?

An Economic View of Social Security, Medicare, and the Government Budget

Jim LukeProfessor of EconomicsLansing Community CollegeJuly 30, 2013

http://econproph.com

Page 2: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

What HaveYou Heard?

Page 3: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

THE BOOMERS ARE OLD!

Page 4: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

We are constantly told that:

“Socialsecuritymedicareandmedicaidare busting the budget.”

“WE HAVE TO……DO SOMETHING SERIOUS!

…CUT BENEFITS!

..PRIVATIZE!

AND NOW!”

“We are mortgaging our grandchildren’s future.”

Page 5: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing
Page 6: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

But it’s not either or..

it’s win-win for both.

Page 7: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Intergenerational transfer programs, such as SS and Medicare, are economically necessary and beneficial for all generations.

Why - Benefits - How - But

Page 8: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Why?

Intergenerational Transfers are necessary because life is

»Uneven

»Unequal

»Uncertain.

Time is the problem.

Page 9: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Earning Power

Page 10: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Cost of Living

Page 11: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Solution: Intergenerational transfer

Page 12: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Intergenerational Transfer Programs

Current working generation pays living expense of:

»Older generation»Children

Page 13: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Examples:

• Families

• Social Compact Programs– Social Security– Schools– Medicare (partly)

• NOT:– Pensions or 401(k)

Page 14: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Why a Social Compact?

• Life is risky

• Moral hazard

Page 15: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Do you know…

• How long you’ll live?• How much you’ll earn?• What the stock market

and economy will do?• When you’ll get sick and

how serious?• Your relatives’ future

too?

Page 16: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Only social insurance intergenerational transfer

programs have proven widely successful.

Page 17: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Benefit for All:Faster Real GDP Growth

Page 18: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Benefit for All:More Stable Economy

SS takes effect

Page 19: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Benefit for All:Only Risk-free Option

Page 20: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Benefit for all:Cheapest and Most Efficient

Administrative Costs:– Social Security: 0.87%– Medicare: 3%

Page 21: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Who needs Social Security?

• 1 in 4 households• 90% of people 65

– 66% half or more of their income

– 21% all their income

• All of us eventually, either direct or indirect.

Page 22: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

But what about the costs and money?

Isn’t

•SS in trouble?

•SS unsustainable – too many retirees?

•The Trust Fund broke?

Page 23: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Social SecurityIs NOT In Trouble

andDoes NOT Need to Be Cut

econproph.com, march 6

Page 24: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

For Social Security to be “bankrupt” and NOT able to pay any benefits….

…GDP must be near zero and nobody is working.

Page 25: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Reality: Support ratio is sustainable

• Overall support ratio is high now

• Productivity matters more

• Boomers ARE

Page 26: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

“Trust Fund” is like a checking account: a cash flow buffer.

$ 807 billionannual income

$ 689 billionannual outgo

$2.5 trillion Trust Fund account balance

Page 27: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Projected Shortfall: 2033-2085

• 20-25 years from now

• Assumes reduced taxable payrolls*

• Then still pay 83% of scheduled bfts– Higher in real terms

Page 28: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Social Security Projections

Page 29: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Easy Fix for 2033 and later Shortfall (if it happens)

Starting in 2030: 1% increase in payroll tax OR eliminate the cap

Page 30: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Strong SS = Strong GDP

• Social Security solvency is positively correlated with more employment and higher real wage

Bruce Webb. Angry Bear

blog

Page 31: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

SS not threat to gov’t. budget.

Page 32: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

But Medicare Appears To Be a Budget Challenge.

Page 33: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

But Not Really.Healthcare Is The Real Problem

• US: $7,538 per person per year

2.5 x average

• Higher prices

• Higher usage per person

• Lower quality, worse outcomes, shorter lives

Page 34: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Medicare Is Solution

• Cheaper: 3% vs. 15-40% costs

• Other developed countries: an aging population does NOT raise healthcare spending

• Best practices & bargaining power

• If Medicare were universal: – Save $400 billion per year: 2.5% of

GDP

Page 35: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

But, but the deficit!Sources of the Deficit.

Deficit is dropping rapidly NOT:

Bailouts and stimulus. Social Security

YES: War, Defense, Security Tax cuts Unfunded Medicare D RECESSION!

Page 36: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

The real deficit problem: Unemployment.

Page 37: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Growth cures deficits. And Intergenerational Transfer programs promote growth.

Page 38: Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing

Credits• Image copyrights – used by fair use rights for non-commercial educational purposes:

– http://imgc.allpostersimages.com/images/P-473-488-90/59/5998/RGPQG00Z/posters/lee-lorenz-i-want-to-take-out-one-of-those-mortgages-on-my-grandchildren-s-future-new-yorker-cartoon.jpg

– http://www.west-info.eu/files/generazioni1.jpg– http://mnigond.files.wordpress.com/2011/12/riskfree.gif– http://1.bp.blogspot.com/_7O65pHPHbwM/SDrQiey_f_I/AAAAAAAAAF0/-wkTYt45Fgw/s320/

Home+and+mobile+broadband+G%C3%87%C3%B4+are+the+cheapest+deals+the+best_.jpg– Calculated Risk Blog: http://www.crgraphs.com/


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