The tallest female econ blogger (and smart and charming in person) Megan McArdle is appalled about Medicare spending.
Our nation's lack of action on Social Security is appalling. Not because it is going to bust the budget--it is going to become a very large, but still supportable, drain on resources. No, the reason it is appalling is that the structural incentives built into Social Security substantially depress labor force participation in a way that makes it harder to pay for Social Security, and especially health care.
But if Social Security appalls, Medicare quite stops the heart. We've seen this moment coming for twenty years and done nothing. Now it's here, folks: Medicare goes into deficit this year. For the first time, the general fund will be sending money to the entitlement programs, not the other way around. And that deficit will keep growing, and growing, and growing . . .
Megan is upset that George W. Bush has done so little about the approaching financial catastrophe. But if we'd had a Democrat in the White House the last 7 years I doubt the outcome would have been any better. The Democrats don't want to admit to the size of the problem because to do so brings up the possibility of scaling back the entitlements commitment. Well, the Democratic Party defines itself as the defender of necessary and justified and just totally beneficial entitlements spending. Megan acknowledges the assortment of forces that come together to cause this clusterfrack. Click thru and read about it.
The fact of the matter is that the currently old oppose reforms because they don't want to see their benefits cut or taxes raised. They figure they can get what they want and leave the bill for latter generations. Their voting power has been strong enough for enough years to assure that they get to shift huge costs onto later generations.
But I think the outlook for the entitlements programs is worse than most of the serious analysts believe. Rising energy costs could hold back economic growth for much of the next 10-15 years. The entitlements costs will then become a larger percentage of the overall pie as the absolute pie slices for Social Security and Medicare grow while the pie size stays the same.
Clive Crook points to a study that shows average educational levels in America have peaked and are declining.
For the first time in decades, and probably ever, workers retiring from the US labor force will be better-educated on average (according to one measure anyway) than their much younger counterparts. Some 12 per cent of 60-64 year olds have a master's degree or better; less than 10 per cent of 30-34 year olds do. More generally, the decades-long rise in the educational quality of the labor force is coming to an end. This is important, because that rise has been one of the principal forces driving American economic growth.
These findings are from a new study by Jacob Funk Kirkegaard of the Peterson Institute for International Economics: "The Accelerating Decline in America's High-Skilled Workforce: Implications for Immigration Policy". If you are interested in the prospects for American competitiveness and continued economic leadership, Jacob's study is mandatory reading.
The demographic change is a reason to be very bearish on the US economy. We can't grow if we don't have enough brains to do all the intellectually difficult jobs. Our immigration policy for the last few decades has dumbed down the population. That dumbing down will weigh down the economy in coming decades.
Crook and Kirkegaard favor letting in more skilled immigrants. But what we really need to do is to stop letting in all but the highly skilled. It is the ratio of skilled to unskilled (which is a proxy for the ratio of smart to dumb) that determines living standards more than any other factor. Verbal IQ is most important in determining the wealth of nations.
People pay extra to be around their own kind.
Using restricted-access Census data, a new study examines a quarter-million households on a block-by-block basis to yield new results about the correlation between household attributes and school quality. The researchers find that, conditional on income, households prefer to self-segregate on the basis of both race and education.
“Economists have long been interested in estimating household preferences for school and neighborhood attributes, given their relevance to many central issues in applied economics,” write Patrick Bayer (Duke University and NBER), Fernando Ferreira (University of Pennsylvania), and Robert McMillan (University of Toronto and NBER) in the forthcoming issue of the Journal of Political Economy.
Specifically, while all households prefer to live in higher-income neighborhoods, college-educated households are willing to pay $58 more per month than those without a college degree to live in a neighborhood that has 10 percent more college-educated households. In fact, the researchers find that households without a college degree would actually need compensating to live in a neighborhood with 10 percent more college-educated neighbors.
Similarly, blacks are willing to pay $98 more per month to live in a neighborhood that has 10 percent more black households, compared to a negative willingness to pay on the part of white households to live in a similar neighborhood. Perhaps unsurprisingly, increases in household income and education also lead to a greater willingness to pay for better schools.
These results are not particularly surprising to those familiar with Robert Putnam's research on how highly diverse communities are low trust communities. People like to be around their own kind. Well, they are willing to pay for that privilege. Why is it that academic advocates of diversity and immigration argue for changing society in ways that will decrease people's perceived sense of well being?
Population growth is the biggest threat to stability in the Middle East today, according to a new report from MEED released this week.
Europeans beware, unless you close your borders to Muslim immigration the pressure from growing populations and stagnant living standards will drive tens or hundreds of millions of Musims into Europe.
Whilst the last 50 years has seen the Middle East experience unprecedented growth in wealth, with record levels of investment in infrastructure, industry, technology, education and health, The 50:50 Report highlights the region’s population boom - which has seen the number of people rise to 377 million today from 162 million in 1957. By 2030 it is estimated to reach 524 million.
The oil sheikdoms in particular are going to see a further decline in per capita GDP as oil revenues must get split among more people.
Industrialized countries need to isolate themselves from growing populations in the less developed countries. The open borders advocates do not appreciate just how much our societies would be changed for the worse if billions of people from less developed countries were allowed to immigrate to the developed countries. First off, land would become very expensive. Second, crime rates would skyrocket. Third, environments would greatly deteriorate. Fourth, incompatible cultures would displace our own culture. Why inflict this upon ourselves?
Update: Also see Audacious Epigone on Muslim hostility toward the United States.
Federal old age entitlements are going to become mind bogglingly expensive over the next decade.
The coming collision of 77 million retiring baby boomers with Social Security, Medicare, and Medicaid represents the greatest economic challenge of our era. What Federal Reserve Chairman Ben Bernanke has recently called the "calm before the storm" will end abruptly on January 1, 2008—less than one year from now—when the first baby boomers become eligible for early Social Security benefits.[5] Three years later, they will become eligible for Medicare. Over the following decades, the cost of these programs will leap from 8.7 percent of GDP to 19.0 percent. Without reform, this 10.3 percent of GDP cost increase would require either raising taxes by the current equivalent of $11,651 per household or eliminating every other government program. Even these changes would not solve the problem over the long term as Social Security, Medicare, and Medicaid spending continues to grow.[6]
How much of the gap between taxes collected and promises made will be closed by raising taxes versus cutting back on the promises? Any guesses?
I went looking for Ben Bernankey's speech. The "calm before the storm" phrase seems to capture so well the moment in time we are at right now. Bernanke sees serious financial problems on the horizon.
Official projections suggest that the unified budget deficit may stabilize or moderate further over the next few years. Unfortunately, we are experiencing what seems likely to be the calm before the storm. In particular, spending on entitlement programs will begin to climb quickly during the next decade. In fiscal 2006, federal spending for Social Security, Medicare, and Medicaid together totaled about 40 percent of federal expenditures, or roughly 8-1/2 percent of GDP.2 In the most recent long-term projections prepared by the Congressional Budget Office (CBO), these outlays are projected to increase to 10-1/2 percent of GDP by 2015, an increase of about 2 percentage points of GDP in less than a decade. By 2030, according to the CBO, they will reach about 15 percent of GDP.3 As I will discuss, these rising entitlement obligations will put enormous pressure on the federal budget in coming years.
George W. Bush wants to charge higher income people more in premiums for Medicare coverage.
WASHINGTON, Feb. 3 — More and more Medicare beneficiaries would have to pay higher premiums for coverage of prescription drugs and doctors’ services under President Bush’s 2008 budget, to be unveiled on Monday.
Single people with annual incomes over $80,000 and married couples with incomes over $160,000 already have to pay higher premiums for the part of Medicare that covers doctors’ services. The income thresholds rise with inflation.
At least these tax increases would be on the actual benefits recipients rather than on the younger people who are getting the shaft for the benefit of older people.
Did you know that in percentage term Medicaid spending is growing more rapidly than old age spending?
“Our budget reduces Medicare’s average annual growth rate over five years to 5.6 percent, from 6.5 percent,” Mr. Bush said, while Medicaid would grow 7.1 percent a year, instead of 7.3 percent.
This is partially a result of the rise of Hispanics as a percentage of the US population. Hispanics are medically uninsured at two and half time the rate of whites. You see, we do not have enough of a financial problem already from an aging population. We need to add to the ranks of the welfare state recipients by importing lots of low skilled workers who, in turn, have lots of children who grow up to be low skilled workers. I'm thinking our elites are sort of like the Manchurian Candidate but on a massive scale. They are doing more damage by supporting mass immigration than all the convicted traitors in US history.
We need to stop the immigration of all lower IQ people. The threshold should be set at 120 IQ or even higher. Also, we should raise retirement ages. One problem with a higher age of retirement: We do not all age at the same rate. Maybe age of eligibility for government retirement benefits should be set according to a test that measures your biological age. Tests for telomere length might serve as part of a test for estimating longevity to determine benefits eligibility.
U.S. Comptroller General David Walker says the retirement of the baby boomers combined with the huge entitlements promised to them are a demographic tsunami and fiscal cancer that could lead to economic disaster for the United States.
WASHINGTON — The comptroller general of the United States is explaining over eggs how the nation's finances are going to hell.
"We face a demographic tsunami" that "will never recede," David Walker tells a group of reporters. He runs through a long list of fiscal challenges, led by the imminent retirement of the baby boomers, whose promised Medicare and Social Security benefits will swamp the federal budget in coming decades.
Walker is right of course. I expect this problem to go unaddressed until the boomers start retiring and the budget deficit becomes huge.
Walker is touring the United States with a bipartisan group of economists policy specialists in a "Fiscal Wake-Up Tour" to try to alert the American public to the scale of the problem. One of the members of this tour, Alison Fraser, director of economic policy studies at the Heritage Foundation, points out that eliminating the Department of Defense would not save enough money to pay for the entitlements.
Project out 75 years, and the magnitude of the problem is stunning. In those projections, "we have gone from $20 trillion to $50 trillion in total liabilities and unfunded commitments in six years, primarily because of unfunded entitlements," says Walker, the nation's chief public accountant. That translates to $440,000 per current US household.
"If we eliminated the entire Department of Defense, it would not solve this problem," notes Fraser.
The relative power of the United States has peaked and will decline for years to come. The demographic trends due to aging and immigration both will cut into per capita GDP and economic growth.
Walker talks to 60 Minutes correspondent Steve Kroft this Sunday, March 4, at 7 p.m. ET/PT.
"The prescription drug bill is probably the most fiscally irresponsible piece of legislation since the 1960s," says Walker, "because we promise way more than we can afford to keep."
A wave of retiring workers will weigh down economic growth in the coming years unless Americans save more and employers take steps to hang on to more of their older employees, experts said.
How the nation responds is a "critical question," said Donald L. Kohn, vice chairman of the Federal Reserve, warning that the costs could "fall entirely on future generations."
A study by Fed economists projected that economic growth would slip toward the 2% range after 2010, about a point lower than the rate of the last decade, largely the result of meager growth in the future labor force, Kohn testified.
The slower economic growth could feed a vicious cycle. Increases in taxes could slow growth. That would reduce tax revenue which could lead to higher taxes to make up for the lost revenue.
Among the experts there's bipartisan agreement that the problem is huge.
Touring with Mr. Walker are: Alice Rivlin, budget director under President Clinton and now a fellow at the moderate-to-liberal Brookings Institution; Alison Fraser, an economic policy specialist at the conservative Heritage Foundation; and Harry Zeeve, a director of the bipartisan Concord Coalition that advocates fiscal reform and balanced budgets. While the foursome, which spans the political spectrum, doesn't agree on solutions, its members acknowledge that nothing can be done politically if Americans remain ignorant of the problem.
The Clinton and Bush Administrations have been years of tremendous wasted opportunity to deal with America's demographic problems. The dumbing down and the aging problems are obvious to anyone who doesn't mind thinking taboo thoughts (i.e. most of the upper half of the IQ Bell Curve when they choose schools and places to live).
What should we do about the demographic problems? I have several suggestions:
We need practical solutions to our huge demographic problems. Do you have any suggestions?
The Wall Street Journal explores some basic facts on tax revenue and wages.
Before taxes, the bottom 40% of U.S. households got 13% of the nation's income in 2004; after federal taxes of all sorts they got about 15%, according to the Congressional Budget Office's latest estimates. Because of the Earned Income Tax Credit, a cash bonus the government offers low-wage workers, many Americans at the bottom get money from the government, rather than having to pay income taxes; they still face payroll taxes on their wages.
Before taxes, the top 1% got about 16% of income; after taxes they ended up with 14%. (Yes, you read that right: The 1.2 million best-off households got about as much income, even after taxes, as the 45.5 million worst-off.) That top 1%, by the way, pays about a quarter of all federal taxes.
If the wealthy produce more new technology, goods, and services then the rest of us benefit from that. Plus, if they make more the rest of us get our government paid for by them. How much of income inequality is due to differences in productivity? How much is due to parasitism? I figure the parasitism argument is equally applicable to the lower classes who contribute little in the form of new designs and methods of production and who make an outsized contribution to total crime and other costs.
We've been seeing news reports on how the US government's revenues are surging and that surge is reducing the deficit more than expected. Why? The more rapid growth in income for the upper few percent means that the government is collecting much more revenue than it would if the people at the bottom were experiencing a big surge in income.
It's simple: Taking all federal taxes into account -- including payroll as well as income taxes, and allocating corporate profits and taxes paid on them to those who hold shares -- the CBO says those in the bottom fifth pay an average of $4.50 in taxes for every $100 they take in. Those in the top 1% pay $31.10 in taxes for every $100 they take in.
The US government makes more money if the wealthy continue to make a growing percentage of total income. But the government then also faces higher costs to subsidize medical care and other costs that the poor are too poor to pay for. Plus, the growing income inequality might cause more crime and the costs such as prisons and police that come as a result. My guess is the government comes out ahead if income inequality continues to rise. But I'm not certain on that point.
The real problem is the tsunami of retirement spending about to engulf us as the Baby Boomers begin to retire over the next few years. The cost of Medicare and Social Security will surge from about 7 percent of GDP today to almost 10 percent by 2020 and to 14 percent of the entire economy by 2050, when today’s college students retire.
That is why the President’s call for confronting these unsustainable entitlements is so important. He and Congress must begin to take action now, before the problem gets worse.
Bush wasted his political capital on entitlements reform by trying to turn Social Security into a private retirement accounts program. I do not expect the Democrats in Congress to go along Bush efforts to slow the rate of growth of old age retirement entitlements.
Will the coming increase in taxes produce a taxpayer revolt that'll provide the political support needed to raise retirement ages and to make Medicare at least partially needs-based?
The President thus must also be clear that raising taxes to reduce the deficit is unacceptable. One reason for drawing this line in the sand is that insufficient tax revenue is not the problem—spending is. The new Congress is itching to spend money on new programs that its Members committed themselves to during the election. Accepting tax increases will merely finance that new spending.
Another reason is that the Bush Administration’s tax cuts only slightly slowed a long-term rise in federal taxes as a percent of the economy. Today the federal government takes about 18 percent of GDP in taxes, roughly the average for the last 50 years. Yet under current law, thanks to tax hikes enacted before Bush came into office, taxes are slated to rise to a record high of over 20 percent within a decade and to over 22 percent within 20 years. So Americans are scheduled for massive tax increases if Congress does nothing. Thanks in part to the Alternative Minimum Tax, and in part to tax bracket creep, even extending the Bush tax cuts shaves only one percentage point off this tax increase.
I predict the federal government's take on the US economy will rise because retiring baby boomers will support tax hikes to pay for their living standards and medical care. Instead we ought to gradually rase the retirement age. If we are going to live longer then we are going to have to work longer as well.
What I'd like to know: Will the growing ranks of retirees manage to get higher taxes enacted on those still working in order to pay for continued old age entitlements hand-outs at plusher levels? Or will working taxpayers get too angry at rising taxes and push back hard enough to cancel out the power of the lobby of those who near and already retired?
What I fear: Rising taxes that choke off economic growth and by doing so cut collected tax revenue, making the old age retirement financing crisis even worse. Will that happen?
About 13 percent of American men in this age group are not working, up from 5 percent in the late 1960’s. The difference represents 4 million men who would be working today if the employment rate had remained where it was in the 1950’s and 60’s.
Most of these missing men are, like Mr. Beggerow, former blue-collar workers with no more than a high school education. But their ranks are growing at all education and income levels. Refugees of failed Internet businesses have spent years out of work during their 30’s, while former managers in their late 40’s are trying to stretch severance packages and savings all the way to retirement.
What percentage of the officially non-working are earning a living with under-the-table work? Is that percentage rising or dropping? The rise in the number of illegals and of men who are not officially working has created a glut of those who are willing to do work off the books. So I would expect off-the-books jobs to be in short supply.
Government has served as an enabler of some of this trend toward not working. About a quarter of the men who aren't working and not looking for a job collect disability benefits from the US government's Social Security program.
But the fastest growing source of help is a patchwork system of government support, the main one being federal disability insurance, which is financed by Social Security payroll taxes. The disability stipends range up to $1,000 a month and, after the first two years, Medicare kicks in, giving access to health insurance that for many missing men no longer comes with the low-wage jobs available to them.
No federal entitlement program is growing as quickly, with more than 6.5 million men and women now receiving monthly disability payments, up from 3 million in 1990. About 25 percent of the missing men are collecting this insurance.
The ailments that qualify them are usually real, like back pain, heart trouble or mental illness. But in some cases, the illnesses are not so serious that they would prevent people from working if a well-paying job with benefits were an option.
The disability program, in turn, is an obstacle to working again. Taking a job holds the risk of demonstrating that one can earn a living and is thus no longer entitled to the monthly payments. But staying out of work has consequences. Skills deteriorate, along with the desire for a paying job and the habits that it requires.
The decline in availability of well paying blue collar jobs leaves a lot of men feeling that work brings in too little money to be worth it. But how are they surviving?
Non-working men have become less likely to be married.
The missing men are also more likely to live alone. Nearly 60 percent are divorced, separated, widowed or never married, up from 50 percent a decade earlier, the Census Bureau reports.
By contrast, only 30% of the working men are not married.
Non-working men sleep too much.
He also gets more sleep, regularly more than nine hours, a characteristic of men without work. As the months pass, they average almost nine-and-a-half hours a night, about 80 minutes more than working men, according to an analysis of time-use surveys by Harley Frazis and Jay Stewart, economists at the Bureau of Labor Statistics.
Those non-working men are not going to live as long as the ones who are working.
The best survival rates were found among those who slept 7 hours per night. The study showed that a group sleeping 8 hours were 12 percent more likely to die within the six-year period than those sleeping 7 hours, other factors being equal. Even those with as little as 5 hours sleep lived longer than participants with 8 hours or more per night.
Stay busy. It is good for your health.
While it has been well-known that homebuyers pay attention to schools when considering which house to buy, this research shows how potential buyers are evaluating school quality, said Donald Haurin, co-author of the study and professor of economics at Ohio State University.
The study of Ohio school districts showed that an increase of about 20 percentage points in the proficiency test “pass rate” increased house values in a district about 7 percent, even after taking into account other factors that impact house values.
Higher performance of kids in public schools mean that more affluent parents do not have to spend big money to send Jill and Johnnie to private school to escape the local schools. $10,000 per year in private school tuition counts up year after year and with multiple kids gets incredibly expensive. Paying more for a house makes much more sense. First, you avoid the cost of private school. Plus, the house will probably maintain its value. So the money you put in will come back to you if you sell. Not so with the money you spend on private school tuition. Plus, by living in a more upper class neighborhood you lower your risk of getting victimized by criminals. I wonder if these researchers controlled for crime rates when comparing housing prices.
Parents were not much interested in relatively higher performance of 9th graders versus 4th graders.
Another measure of school quality – how proficiency test pass rates improved between the 4th and 9th grades – didn’t have such a strong impact on house values.
But higher scoring 9th than 4th graders could be a sign that lower IQ people are moving into an area and having more kids.
Home buyers are interested in the bottom line.
The results suggest that, when evaluating school districts, homebuyers are looking at the end result of education – overall test scores – and not a value-added approach that considers how well schools do in improving students, Haurin said.
These findings add another factor to consider in the debate about whether proficiency tests are good for students, schools and communities.
“If parents and residents are paying attention to test outcomes, and not a value-added approach, that means school boards need to pay attention to outcomes too,” Haurin said. “But focusing on test scores may not be the best way to achieve the goal of educating students to the best of their abilities.”
You can understand from this data why the middle and upper classes have so opposed the libertarian dream of school vouchers. What good is the premium the buyers paid for houses in better districts if the rabble can send their kids to schools in good neighborhoods using vouchers? The libertarians are trying to undermine the ability of the middle class to defend their territory. That's just not going to fly politically.
“In Ohio, there are districts with 20 percent pass rates and some with 85 percent pass rates, so based on our findings that would result in about a 23 percent difference in house values solely because of the schools. It is not trivial amount,” he said.
One problem for school districts is that the value-added approach is difficult for researchers to measure, and difficult for the public to understand. Proficiency test scores, however, are readily available and easy to understand, which makes them more influential with the public, Haurin said.
These results suggest that some school boards may have a difficult time convincing residents, as well as potential homebuyers, that they have good schools in their district.
“The disadvantage that some school districts have is that they may be doing very well in terms of adding value to their students’ education, but still may not be among the top scorers in the state. And the reason may not be because of the schools but because their students don’t have the parental advantages that students in other districts have.”
That "parental advantage" translates from dishonest politically correct liberal-speak into English as "genetic advantage".
How much is the Hispanic influx depressing housing prices in some neighborhoods?
INDIANAPOLIS -- Middle-class neighborhoods, long regarded as incubators for the American dream, are losing ground in cities across the country, shrinking at more than twice the rate of the middle class itself.
In their place, poor and rich neighborhoods are both on the rise, as cities and suburbs have become increasingly segregated by income, according to a Brookings Institution study released Thursday. It found that as a share of all urban and suburban neighborhoods, middle-income neighborhoods in the nation's 100 largest metro areas have declined from 58 percent in 1970 to 41 percent in 2000.
We have less and less in common.
The middle is getting smaller as the two ends get bigger.
The analysis attributed the shrinking number of middle-income communities to, among other factors, gentrification of more marginal neighborhoods and a bunching of high-income families in more homogenous surroundings.
"It sounds like it's a function of changing income distribution," said John H. Mollenkopf, director of the Center for Urban Research at the Graduate Center of the City University of New York. "What happened between 1990 and 2000 in metropolitan New York and especially New York City was that the number of really high-income households went up, and low-income went up and the middle shrank."
"What looks like a shrinking middle is partly an upgrading of income," he added.
The hollowing out was most pronounced in Manhattan, where 51 percent of neighborhoods were identified as high-income, 40 percent as low-income and only 8 percent as middle-income. Long Island ranked second only to Scranton with the highest proportion, 65 percent, of middle-income neighborhoods of any metropolitan areas in the nation.
People are more likely to live in homogeneous neighborhoods. All this talk about diversity is just babbling. People are living near people more like themselves.
This sorting of society by class reminds me of The Bell Curve book's observations about cognitive sorting. The Brookings writers observe that neighborhoods are becoming less middle class even more rapidly than the middle class is shrinking. This is a very important observation.
Although middle-income families have declined considerably as a share of the overall family income distribution, it is noteworthy that middle-class neighborhoods have disappeared even faster in metropolitan areas, especially in cities. This trend suggests increased sorting of high- and low-income families into neighborhoods that reflect their own economic profiles, and increased vulnerability of middle-class neighborhoods "tipping" towards higher- or lower-income status. The resulting disparities among neighborhoods create new challenges for policies to enhance household mobility, improve the delivery of key public services, and promote private-sector investment in struggling locales.
The increase on racial heterogeneity of the United States is contributing to the shrinking of the portion that is middle class. Instead of a single bell curve of abilities with a center representing the majority we now have an increasing number of separate bell curves by racial and ethnic groups with each curve for number of people on the y axis peaking at a different point for IQ on the x axis.
Also the differences between the races contributes to a flight into neighborhoods of more economically similar residents as people react to not just cognitive but racial differences between themselves and people of other economic classes. America is becoming less and less like Mayberry RFD.
Update: An article in The Economist about income trends paints a bleak picture. While most Americans still believe that poor people can strike it big the rising tide in productivity growth no longer lifts the salaries of most workers.
Eight out of ten, more than anywhere else, believe that though you may start poor, if you work hard, you can make pots of money. It is a central part of the American Dream.
The political consensus, therefore, has sought to pursue economic growth rather than the redistribution of income, in keeping with John Kennedy's adage that “a rising tide lifts all boats.” The tide has been rising fast recently. Thanks to a jump in productivity growth after 1995, America's economy has outpaced other rich countries' for a decade. Its workers now produce over 30% more each hour they work than ten years ago. In the late 1990s everybody shared in this boom. Though incomes were rising fastest at the top, all workers' wages far outpaced inflation.
But after 2000 something changed. The pace of productivity growth has been rising again, but now it seems to be lifting fewer boats. After you adjust for inflation, the wages of the typical American worker—the one at the very middle of the income distribution—have risen less than 1% since 2000. In the previous five years, they rose over 6%. If you take into account the value of employee benefits, such as health care, the contrast is a little less stark. But, whatever the measure, it seems clear that only the most skilled workers have seen their pay packets swell much in the current economic expansion. The fruits of productivity gains have been skewed towards the highest earners, and towards companies, whose profits have reached record levels as a share of GDP.
Lots of Americans have noticed their stagnant incomes and are not happy about it.
According to the latest Gallup survey, fewer than four out of ten think it is in “excellent” or “good” shape, compared with almost seven out of ten when George Bush took office.
More of wealth comes from paid work as compared to almost a century ago.
In 1916 the richest 1% got only a fifth of their income from paid work, whereas the figure in 2004 was over 60%.
But I wonder how much of this trend is due to CEOs getting paid well by boards of directors who they chose.
The financial troubles daunting the Medicare system have deepened during the past year, according to a government forecast that says the federal fund that pays for hospital care for older Americans will become unable to cover all its bills a dozen years from now.
The annual report, issued yesterday by the trustees who monitor the fiscal health of the Medicare and Social Security programs, said the trust fund for the health insurance system for the elderly will run out of money in 2018 -- two years sooner than predicted a year ago and 12 years sooner than had been anticipated when President Bush first took office.
That is one very fast deterioration. Bush and Congress helped that deterioration along a great deal by passing the Medicare drug benefit.
The article cites rapid increases in hospitalization costs as the major reason for the most recent two year shift toward an even earlier bankruptcy.
The Heritage Foundation reports that given current trends Medicare and Social Security will consume about half of all federal tax revenue by 2030.
Medicare and Social Security will require growing amounts of federal income tax revenue. Today, 6.9 percent of federal income taxes go towards the two programs. Dr. Thomas Saving of Texas A & M University, a public trustee of the Medicare and Social Security trust funds, estimates that, in 2020, 26.6 percent of all federal income taxes will go to paying for Medicare and Social Security. By 2030, that number will increase to 49.7 percent.
The United States will not be able to afford much of a military, let alone foreign adventures.
The drug benefit added $8.7 trillion to the unfunded Medicare liability. So why do the Democrats think that Bush is a conservative?
Medicare’s Financial Crisis
Of the two programs, Medicare presents the greatest challenge to Congress and taxpayers. The Hospital Insurance Trust fund is projected to be exhausted by 2018, a change from the previous date of 2020, and the cost of the Supplemental Medical Insurance program (SMI) is increasing faster than Medicare trustees had projected. According to the trustees, Medicare’s long-term debt, based on a 75-year actuarial projection, is now estimated to be $32.4 trillion. Of that amount $8 trillion is directly attributable to the Medicare prescription drug entitlement. The trustees did revise the size of the Medicare portion of the debt, which was estimated at $8.7 trillion in 2005, because the drug costs have risen more slowly than projected, as have the rates of enrollment. What is unknown is the extent to which employers, who now get federal subsidies for maintaining approved drug coverage for retirees, will continue to maintain that coverage or drop it with the passage of time. Accordingly, the cost of Medicare’s drug entitlement remains a huge uncertainty.
We need to raise the retirement age and make more old age benefits need-based.
Medicare accounts for about three quarters of the federal taxes that will go to the combination of Medicare and Social Security
Current and future taxpayers will be faced with enormous burdens in trying to sustain the Medicare program as it is today. According to Dr. Saving, without any change in the program, Medicare will consume a larger share of federal income taxes, rising to 23.1 percent of all federal income taxes by 2020 and 37.5 percent of all federal income taxes by 2030.
We will feel a big financial pinch long before Social Security or Medicare run out of money because the Social Security surpluses used to fund deficits in the regular budget won't be there anymore.
What most reports will miss is that Congress will have to start to deal with reduced surplus Social Security tax collections much faster than it or the public expect. Starting in 2009, the roughly $100 billion annual Social Security surpluses that Congress has been borrowing and spending on other programs will begin to shrink. From that point on, Congress will have to find other sources to replace the money that it annually borrows from Social Security or reduce spending. The surpluses will end completely in 2017, the year when Social Security begins to spend more than it takes.
In a little more than 15 years, today’s $100 billion annual Social Security surplus will turn into a $100 billion annual deficit—a $200 billion change. From 2017 on, Social Security will require large and growing amounts of general revenue money in order to pay all of its promised benefits. Even though this money will technically come from cashing in the special issue bonds in the trust fund, the money to repay them will come from other tax collections or borrowing. Moreover, the billions that go to Social Security each year will make it harder to find money for other government programs such as Medicare.
The pressure to cut spending in other areas will become intense. Want a manned space program to Mars? Fuggedaboutit.
The worsening finances of the US federal government is going to become the biggest cause of political battles in the United States in the next decade. The conflict will sharpen conflicts along racial, class, and generational lines. The younger generation of Hispanics won't rise to white levels of income. So they won't be providing the tax revenue needed. At the same time, they will be making bigger demands on entitlements programs due to their lower levels of income, higher rates of illegitimate births, lower rates of medical insurance coverage, and other problems. As the older whites retire the average level of productive capability of American workers will decline and the retirees will go from net taxpayers to net benefits receivers.
Forget about our elected "leaders" trying to get ahead of this problem. They'll continue in their reactive mode and respond only when they can't avoid responding any longer.
We need to deport all the illegal aliens and adopt a restrictive immigration policy that allows in only highly productive people who will earn high incomes and pay far more in taxes than they receive in benefits. We also need to accelerate the development of rejuvenating medical treatments that will slow and reverse aging so that people can work many more years. Treatments to enhance cognitive function would also help boost economic growth and make the unfunded old age entitlements liabilities more affordable.
Taxes will not go up enough to pay for all the promised benefits. The existing entitlements programs will see benefits reductions. The working age taxpayers will oppose tax rises large enough to pay for the promised benefits. But taxes will go up some. It is not clear to me how high taxes will go. Expect to see a big push for value added taxes as a way to fund the old age entitlements. My advice is to vigorously oppose the VAT since it will not replace income taxes but rather will function to increase the total percentage of output diverted into government treasuries.
In an article entitled "Curse of the Young Old: Why Should We Pay For Them" William Saletan argues that the unfunded old age pension liabilities crisis should be solved with tougher benefits eligibility requirements.
To keep the system afloat for the next seven decades, its trustees say the Social Security tax rate will have to reach 19 percent. And if life expectancy keeps rising over that period, academics project a tax rate of 27 to 32 percent.
We are about the enter the age of the battle over tax increases or benefits cuts.
Money for basic living expenses isn't even the biggest problem. Medical care costs are going to cost more than basic expenses like food, utilities, and rent.
Healthy aging is increasing too.
Now for the good news. We're not just living longer; we're staying healthy longer. From 1982 to 1999, the percentage of senior citizens who had chronic disabilities dropped from 26 percent to less than 20. Active-life expectancy at age 65--the average number of additional years a person could expect to live free of chronic functional impairment--rose from fewer than 12 years to nearly 14. That's a five-year gain from what a 65-year-old could expect in 1935, according to Kenneth Manton, a leading scholar of old age. The experience of being 65 to 74 has changed so radically that the Census Bureau now calls this group the "young old."
They could still be working and paying taxes instead of sucking on the teat.
Even as health on old age has improved labor market participation among the elderly has declined. This is clearly not sustainable.
So all these young old folks are working longer, right? Wrong. In 1950, more than 45 percent of men 65 or older were still in the labor force. By 2003, that percentage had plunged below 20. Five years ago, a study showed that men and women were retiring five and six years earlier, respectively, than their predecessors did 45 years earlier. Why? Because they could. Pensions helped, but the bigger factor was Social Security.
By reducing labor market participation Social Security reduces tax revenues needed to pay for the truly old and frail.
Saletan says the most obvious response to the inaffordability of Social Security and the rising number of healthy elderly is to raise the retirement age.
Last year, Manton calculated that if you were designing a system in 1999 for people who could expect as many active years as a 65-year-old could expect in 1935, you'd set the retirement age at 70. And by 2015, you'd raise it to 73.
When the biotech revolution starts to have a large effect on health even these projections will seem too conservative. When will solutions come for how to grow replacement organs? Solutions for cancer and Alzheimer's Disease combined with cheap organ replacements (maybe grown in genetically engineered pigs) will eliminate a lot of causes of death. Crestor will prevent artery plaque build-up. So what's going to kill you? Perhaps infection due to an aged immune system.
Saletan says that since we age at different rates eligibility for Social Security should be based on disability.
The third objection is that people don't age at the same rate. While true, it's not an argument for a low benefits-eligibility age. It's an argument for ending the link between age and benefits. Social Security actually consists of three programs. One pays benefits based on age; another pays if you lose your spouse; a third pays if you become disabled. As of 2002, 70 percent of the money paid out was based on age; only 15 percent was based on disability. That's insane. Inequality of aging means that age is a bad proxy for disability, which is a good proxy for need. If you turn 65 on the same day as your neighbor, but she's disabled and you aren't, we should pay her, not you.
I emphatically agree with Saletan. People could still save their own money if they wanted to retire sooner. But right now Social Security and Medicare are a massive and morally unjustifiable forced wealth transfer from the young to the old.
A larger working population would both reduce the outflow of money to pay for old folks and also increase tax revenues. Plus, this would reduce tax increases. Big tax increases to pay for an old population will reduce labor market participation of younger folks. Faced with higher taxes people will choose leisure time over working and having most of their money go to taxes. Plus, people will do more work for themselves. Rather than hire repairmen or painters they'd do their own repair and painting. This will reduce the efficiency of the economy by causing people to spend less time doing the tasks they are most efficient at doing. A higher tax society means lower living standards for a multitude of reasons.
A new survey shows that median incomes fell for householders under 45, even as they rose for older ones, between 2001 and 2004.
Income fell 8 percent, adjusted for inflation, for those under 35 and 9 percent for those aged 35 to 44. The numbers add new weight to longstanding concerns about whether younger generations of Americans will achieve living standards that are better - or at least equal to - those of their parents.
I'd really like to see these numbers broken out by race. The United States is becoming less white. The rising fraction that is Hispanic is causing some of the decline in income. About half of all Hispanics do not even graduate from high school. They aren't going to earn as much as older whites.
From 1970 to 1997 men under 35 experienced a 19% decline in income.
• The median income for men under age 44 was significantly lower in 1997 than in 1970, after adjusting for inflation, according to a long-term analysis by the Census Bureau in the late 1990s. For those over 45, incomes barely held their own during that period.
• The entry of women into the workforce in those decades has helped push median family incomes up over time. But even when men and women are included together, younger workers (age 25-34) are earning well below what they did in 1970. And at all ages, evidence suggests that families are putting in more hours of work to make their household incomes rise.
• Even with extra time at work, median family income has barely budged since 1995 for householders below 45, up about 5 percent after inflation through 2004.
Some libertarians argue that a rising tide lifts all boats. Well, wrong. A large proportion of the boats have leaks and are sitting rather lower in the water. Think of all the technological advances that have boosted productivity since 1970 and then consider these results. Something is going terribly wrong.
Jail time - Initial plans were completed for a $153 million North County Jail to alleviate years of severe overcrowding at the Santa Barbara County Jail near Goleta. The proposal calls for an 808-bed facility between Santa Maria and Guadalupe.
A couple of books, Generation Debt by Anya Kamenetz and Strapped by Tamara Draut, are drawing attention to the intergenerational change in economic outcomes. Another problem is the rising cost of the education racket.
The dropout rate has risen, while those who earn a degree are taking longer to do so. In 1983, 52 percent of students entering college graduated within five years; in 2005, the figure was 39.5 percent.
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The average student-loan debt for graduates of four-year colleges is pegged at $17,600 to $23,485, depending on which study you consult. College costs rose an average of 7.3 percent a year from 1979 to 2001, compared with a 4 percent rise in U.S. prices over the period, according to the U.S. Bureau of Labor Statistics.
Kids are taking longer to get educated in part due to the need to work. But since they make so little when so unskilled their capacity to work through college is less than it used to be when college cost much less in inflation adjusted terms and the minimum wage was higher in inflation adjusted terms. Plus, the kids have to compete with low skilled illegal aliens for the bottom level jobs.
To repeat a suggestion I've made many times: We need a system of standard tests that people could take to earn degrees without ever enrolling in colleges. See my previous posts Accelerate Education To Increase Tax Revenue, Reduce Costs and Walter Russell Mead For Standard National Tests.
The Texas of that jerk George W. Bush shows us the demographic future of America. See my post "Texas Has Lowest High School Graduation Rates" and behold the wonders of open borders libertarian free market immigration policies.
The Wall Street Journal reports on the causes of the large increases in real estate prices in recent years.
America still has lots of wide-open spaces, but many of them aren't where people want to live. And builders are finding it more difficult to get permits to put up new houses in many of the more economically vibrant metropolitan areas, particularly along the East and West coasts.
"The housing supply has been constrained by government regulation as opposed to fundamental geographic limitations," concludes a paper released in December 2004 by Edward L. Glaeser, an economics professor at Harvard University, and two colleagues.
Homeowners share the blame. Prof. Glaeser's paper says they have grown savvier about organizing themselves to block proposals that would bring new and more densely packed housing to their neighborhoods -- something that they fear could reduce the value of existing homes.
Think about this argument. It sounds like a complaint against people who oppose high density building. Economists argue that housing wouldn't cost as much if it was built more densely. True enough. But isn't higher density housing undesirable for most people. Doesn't the higher density also translate into lower perceived value by most potential buyers?
Consider the interests of existing homeowners. Why are homeowners fearful of higher density housing? The economists say the homeowners fear declining housing prices. But the declines in prices are due to declines in perceived value. Higher density housing lowers quality of life of lower density housing owners living in the same area. If a neighborhood gets more houses built on smaller lots then suddenly more cars are parked on the street, more cars are going by all hours of the night and day, noise levels are higher, and there's more pollution.
Higher density housing mixed with larger and more expensive houses is also redistributionist. The houses that have fewer occupants per dollar of assessed value end up paying more taxes per occupant and therefore those houses effectively subsidize the occupants of higher density housing. Why should homeowners want to subsidize the living standards of other people in the name of the free market?
The classic libertarian economic argument against building regulations just plain ignores the external cost problem. People who organize to resist new building are organizing to avoid external costs that lower their quality of life. They also avoid higher taxes. The higher taxes subsidize people in higher density housing who demand as much or more public services while paying less in taxes.
But why the increased demand for housing? More people. Imagine the United States with half its current population. Housing costs would be much lower in desirable locations for living because lower demand would lower land costs. Of course immigration is driving America in the opposite direction. We are long past the age of unexplored frontiers or sparsely populated coastlines. Every addition to the total population is another person to compete for limited land resources in the most desirable areas. Worse yet, the average immigrant is a member of the recipient class and makes less money, pays less in taxes, and generates more demand for government services and taxes than the white and Asian American populations.
The editors of the Christian Science Monitor argue for a rise in retirement ages in order to better cope with the rapidly decreasing ratio of nonworking retirees to workers.
In a little-noticed news item last week, the Organization for Economic Cooperation and Development, the think tank for 30 industrialized nations, warned that world economic growth will decline to 1.7 percent over the next 30 years if older people aren't encouraged or allowed to work. If nothing is done, the OECD stated, the ratio of nonworking retirees to workers will nearly double in those countries by mid-century.
This demographic reality usually draws a simple political response: raise taxes or lower benefits, or both. In Congress, that way of thinking has led to stalemate on revising Social Security. Both political parties need to discuss a retirement age of at least 70 for both Social Security and Medicare for the next generation.Better yet, it should index the age requirement to rising longevity so this issue can be done with.
All the Western developed countries face very similar demographic problems due to aging populations. We collectively need to admit that as people live longer and have fewer children they are going to have to work longer.
The number of years spent working could be increased at both ends of the working period. Older adults most obviously could work more years. But also children could be educated more rapidly so that they could enter the workforce at younger ages. Recording of high resolution college course lectures and the development of standard tests for highly quantitative college course subjects could provide opportunity for students under the age of 18 to earn credit for many college courses. This would enable them to finish college years sooner and therefore to enter the labor force years sooner.
Developed countries also need to stop the influx of low skilled and low paid immigrants. People who earn low wages pay less in taxes. Therefore they receive more in benefits than they pay in taxes. Immigration eligibility criteria should be designed to allow in only people who are likely to pay far more in taxes than they will receive in benefits over their entire working lives.
Writing for Forbes Dan Seligman reports that inequality in the United States has been rising steadly for almost 30 years and during every US presidency regardless of party in power.
The standard measure of inequality is the Gini coefficient, signifying the extent to which a society deviates from absolute equality. If everybody has the same income, the coefficient is 0; if the entire GDP belongs to one person, the coefficient is 1. In the U.S. the latest reported coefficient is 0.466. In case you are wondering, it rose more under Clinton--from 0.433 to 0.462--than under any of those other chaps. It rose by only 0.004 during George W. Bush's first four years. In case you are also wondering how many times Times editorialists complained about Clinton's inequality record, the answer is zero. The Washington Post has been equally tendentious, and at one point (Sept. 25, 1998) it ran a front-page story on the 1997 income report in which it stated firmly that the census data showed "income inequality did not increase," even though the data clearly pointed to a substantial one-year increase of 0.004. There was no correction.
Compare the total rise in income inequality of 0.004 during five and a half years of George W. Bush's presidency to the 0.029 rise under Clinton. Under Clinton inequality rose about 5 or 6 times faster, and as Seligman notes, yet the New York Times and Washington Post found nothing to complain about as long as a Democrat was in the Oval Office. There's a simple lesson here for rich people: support Democrats as Presidents since the liberal press will not complain regardless of how much richer you become.
But perhaps matters are not so simple. A Republican president is more likely to cut taxes. So while the press will complain during a Republican presidency the upper income will get to keep more of what they make (at least until the financial burdens of an aging population create big pressures for tax increases).
The slower rise in the Gini coefficient under Bush is probably a reflection of two macroeconomic changes. First the burst of the dot com stock bubble obviously hit stockholders most of all and higher income people owned more stocks. Also, the replacement of the stock bubble with the real estate bubble increased the wealth of a much larger portion of the populace than the stock bubble which preceded it.
The Gini coefficient rose under a succession of tax regimes and through many social policy changes. Seligman argues the best explanation for the sustained rise of the Gini coefficient over such a long period of time comes from Richard J. Herrnstein and Charles Murray's book The Bell Curve. The economic value of greater smarts keeps rising. Hence the smarter people make more relative to the rest. This makes sense. Advances in technology enable smart people to do more things. Smart people can coordinate and orchestra more complex arrangements of capital and labor. They can, just working on their own or with other like minds design and develop software, and create building designs, mechanical designs, and electrical designs. They can create complex contracts and negotiate agreements incomprehensible to lesser minds. They can navigate through complex government regulatory systems and find legal ways to circumvent governments.
The computer revolution has reduced the extent to which smarter people rely on the labor of lower IQ workers. For example, where in an earlier era higher IQ engineers also needed lots of moderately high IQ draftsmen to translate their designs into drawings today engineers increasingly can interact with design and engineering software and lay out their own designs in many cases more rapidly than it would take them to explain the designs to draftsmen. Or look at the white colllar workers who used to rely on typists who now type their own reports and documents. It is quicker to type up a report as one thinks of it than to write the report with pen and paper and then have someone else type up drafts. Successive drafts are easier to make if thinkers interact with computers directly.
Another factor at work that relates to IQ and inequality comes from increasing international trade. The liberal enforcement of taboos against discussions of IQ causes one glaring fact about rising trade to be missed: As a larger portion of the world's population gets drawn into a larger international economy the IQ of the average worker whose work gets traded has dropped. Why? Because most countries in the world have populaces with lower average IQs than the averages in the most industrialized countries. So upper class cognitive elite people in the United States and other already industrialized countries do not face as much competition from abroad due to international trade as the lower classes in those same countries.
A new report from The Tax Foundation shows that the portion of the population who are income taxpayers is a shrinking percentage of the total US population.
One of the biggest obstacles facing President Bush’s Advisory Panel on Federal Tax Reform is the fact that America has become divided between a growing class of people who pay no income taxes and a shrinking class of people who are bearing the lion’s share of the burden.
Despite the charges of critics that the tax cuts enacted in 2001, 2003 and 2004 favored the “rich,” these cuts actually reduced the tax burden of low- and middle-income taxpayers and shifted the tax burden onto wealthier taxpayers. Tax Foundation economists estimate that for tax year 2004, a record 42.5 million Americans who filed a tax return (one-third of the 131 million returns filed last year) had no tax liability after they took advantage of their credits and deductions. Millions more paid next to nothing.
As Figure 1 and Table 1 show, the number of Americans who paid no income taxes because of the preferences in the tax code has varied greatly since 1950. While the number of these “non-payers” has averaged about 22 percent of all filers over the past five decades, it has spiked to record levels in recent years and the trend line does not appear to be slowing.
In addition to these non-payers, roughly 15 million individuals and families earned some income last year but not enough to be required to file a tax return. When these non-filers are added to the non-payers, they add up to 57.5 million income-earning people who will be paying no income taxes.
Even 57.5 million is not the actual number of people because one tax return often represents several people. When all of the dependents of these income-producing people are counted, roughly 120 million Americans – 40 percent of the U.S. population – are outside of the federal income tax system.
A lot of people are eligible for credits that effectively give them negative tax rates. So they get a "refund" check far greater than any tax paid.
In 1997, Congress enacted a new $500 per-child tax credit and expanded the Earned Income Tax Credit (EITC) for low-income workers. The 2003 tax cuts increased the value of the child credit to $1,000. These two tax credits – especially the child credit – have had a powerful effect on reducing, and many cases eliminating, the income tax liability for millions of Americans.
These two credits are unique in that a taxpayer can receive the full value of the credit even if they have no tax liability. To see how this works, consider, for example, a family that has three children (and thus should receive $3,000 in tax credits), but only has a tax liability of $1,505. Under the rules of most tax credits, this family would only be allowed $1,505 in tax relief – an amount equal to their tax liability. But a “refundable” tax credit gives this family the full amount they are eligible for -- $1,505 toward their tax liability, and the remaining $1,495 in the form of a refund check. (See Table 2.)
The percentage of non-payers who are white is exaggerated by the inclusion of Hispanics with whites. If I understand this data correctly the 79% of the total non-payers who are listed as white include the 15% who are Hispanic. So really only 64% of the non-payers are white and that is a much lower percentage than they are of the population as a whole.
The racial or ethnic composition of the 42.5 million non-payers roughly mirrors the demographics of American tax filers as a whole. For example, white Americans are 83 percent of total taxpayers, and the percentage of zero-tax filers who are white is 79 percent. African Americans are roughly 13 percent of total taxpayers and 16 percent of zero-tax filers. Asian Americans comprise 3.6 percent of total taxpayers and 3.2 percent of zero-tax filers.
That said, the percentage of non-payers within each ethnic or racial group does vary: 28.6 percent of Asian Americans tax filers get back every dollar withheld, 31.1 percent of white American tax filers will owe nothing, and 41.7 percent of African Americans will file a tax return with no liability.
Absent from these categories are Hispanic Americans. Within Census data, race and ethnic Hispanic origin are not comparable concepts because a Hispanic individual can be of any race. As a result, Hispanics Americans must be considered separately from racial characteristics. Hispanics make up 15 percent of the 42.5 million individuals or households that paid no income taxes in 2004. In contrast, they made up roughly 10 percent of all 131 million taxable American households.
Are they saying that 131 million taxpaying households or 131 million households that in theory could pay taxes? 6.375 million Hispanic households pay no income taxes. What percentage are they of the total number of Hispanic households? Are there 13.1 million total or 13.1 million plus 6.375 million?
These figures understate the size of the problem. Even many of those who pay some taxes pay far less than they cost the government and do not pay enough to fund basic government functions like basic research and defense. Check out a table on the Recipient Class to get an idea of how much money is shifted from higher income earning groups to lower income groups.
The fraction of the US population that does not pay income tax is growing rapidly.
In 2004, a record 42.5 million tax returns – one-third of all returns filed – had no income tax liability because of the available credits and deductions in the tax code. This is a 42 percent increase in the number of zero-tax filers in just four years. In addition to these zero-tax filers are the 15 million individuals or households who do not earn enough to file a tax return. Overall, nearly 58 million taxable households are outside of the income tax system.
A shrinking portion of the population supports the rest of the population. A combination of immigration and aging strongly contribute to this trend. We should stop the flow of low-skilled immigrants both legal and illegal and we should deport all the illegal aliens along with legal aliens who have low skills and low incomes. Also, we should raise the retirement age.
Tyler Cowen of Marginal Revolution points to a story in the NY Times about how the growing burden of paying for the old is being partially offset by the declining burden of paying for children.
The overall burden on the employed will grow, but not to unprecedented levels. The ratio of people of working age to those either under 20 or over 65 will decrease to 1.2 in 2050 from about 1.5 today. But this is still an easier load than in 1965, when the country was awash with children, and the ratio of the working-age population to each dependent was only 1.1.
True, the young are cheaper to maintain than the old. In 1990, economists at Harvard and M.I.T., including David M. Cutler and Lawrence H. Summers of Harvard, estimated that people over 64 consume 76 percent more than children.
Still, Mr. Burtless estimated that in 2050 a worker will have to sacrifice 49.6 percent of his or her wages - through taxes or other means - to maintain society's dependents. That is nearly 6 percentage points more than in 2000, but it is merely 0.8 percentage points more than 1965. And the percentage could well be smaller if people work later in life to pay for more of their keep.
My guess is that the cost of paying for each child is growing for a few reasons. First off, the tax burden for each child has risen in part due to the futile pursuit of improvements in educational outcomes by throwing more money at children who are simply not bright enough to meet expectations. Also, the rise in illegitimacy (see the first graph here) means fewer men are paying for their children and hence more funding for child raising (especially medical costs through Medicaid) is coming via the tax man.
The rising tax burden for child care will have the same effect as the rising tax burden for elder care: People will work less at paying jobs in order to spend more time doing work for themselves. High marginal tax rates to pay for old folks means the harder you work the less you get out of each additional dollar earned. How depressing. I see this as having an opposite effect on motivation than having a newly born baby. In the case of the costs of the new born baby suddenly Dad (at least in intact families) feels the urge to work harder. Got to keep that job. Got to get that raise. The costs for the pediatrician and dentist stretch into the future and more money is needed.
Mom and Dad working for the baby have an incentive to work much harder because with enough hard work so those baby costs can be paid for. The more successful workers can earn enough income that after paying the fixed costs there can still be money left over to pay for enjoyable things. The fact that child costs are more typically fixed costs and not a percentage of income motivates parents to earn more than the fixed costs of child care. This is an incentive for greater economic activity, not less.
Another important difference between paying for child care and for elder care is that a much larger fraction of child-rearing costs are borne by those who have the children. People are more willing to spend on that which is in some sense theirs than on that which is for strangers. Granted, a lot of people are not thrilled to spend time with their kids. But most of those same people are motivated to go to work to earn money for their children. Whereas taxes exacted on them to pay for old folks are not earmarked specificially for their parents. So the incentive to work harder to pay for the elderly is just not there the way it is to pay for one's own children. For someone whose parents have already died no taxes they pay will go to their parents. Similarly, if one's parents are still working one knows that one's taxes for old folks are going to pay for other people, few if any of whom are closely related to you.
Rising illegitimacy, rising uninsurance of children, and the rising number of children of poor illegal immigrants who pay little in taxes are all increasing the fraction of child care that is paid for via taxes. Therefore on average children are not as much a motivation to work as was previously the case pre-welfare state. This partially offsets the declining costs of smaller families and makes the financial outlook for the future bleaker still.
Thanks to Dan Vanzile for pointing me to Tyler's post.
Robert Samuelson worries that tax increases for the aging population may cause wage stagnation or worse.
The great danger of an aging society is that the rising costs of government retirement programs -- mainly Social Security and Medicare -- increase taxes or budget deficits so much that they reduce economic growth. This could trigger an economic and political death spiral. Our commitments to pay retirement benefits grow while our capacity to meet them shrinks. Workers and retirees battle over a relatively fixed economic pie. The debate we're not having is how to avoid this dismal future. President Bush's vague Social Security proposal, including "personal accounts," sidesteps the critical issues. His noisiest critics are equally silent.
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Here are the basic numbers, as calculated by Elizabeth Bell, a research assistant to Steuerle. In 2005 Social Security and Medicare are expected to cost $822 billion (that's net of premiums paid by recipients); by 2030 the costs are projected to increase to $4.640 trillion. That's an increase of $3.818 trillion. Over the same period, annual wages and salaries are projected to rise from $5.856 trillion to $17.702 trillion -- an increase of $11.846 trillion. Despite the big numbers, the arithmetic is straightforward: The increases in Social Security and Medicare represent 32 percent of the increases in wages and salaries.
Note that these numbers are based on assumptions about economic growth rates, labor market participation rates, productivity growth rates, and rates of growth of costs of medical care for old folks. Any of the assumptions might be excessively optimistic or pessimistic. My fear is that future tax increases will make the assumptions excessively optimistic.
I know a wealthy venture capitalist who likes to argue that higher taxes would be ruinous to economic growth. This is the argument that Stephen Moore and the Club for Growth use in lobbying and fund raising for Republican primary challengers against any Congresscritters who vote for tax increases. I keep asking these people a basic question: If the argument that high taxes will choke off economic growth is right then won't the tax increases which will be enacted to pay for old age benefits for an aging society lead to economic stagnation?
Why would higher taxes reduce economic growth? Taxes decrease the incentive to engage in work for pay. For example (and this is a hypothetical just to illustrate a point), imagine you needed to get your house painted, a house painter would cost you $10 per hour, in your regular job you made $20 per hour, that your employer offers you overtime hours, and that you were just as productive at painting as the $10 per hour painter. Either you or the painter could paint your house in 100 hours. If you hire the painter then you would pay the painter $1000 to paint your house.
Does it make sense to hire the painter? On the surface it does. In a system where there are no taxes you could work 50 hours in your day job to make the money to pay the painter to work 100 hours. You save yourself 50 hours of time. If your tax rate was 25% you would still be better off paying the painter. You would have to work 66.7 hours to earn $1000 in after-tax income to pay the painter. But you would still save yourself 33.3 hours. So working to earn money to pay someone else would still make sense. But raise the tax rate to 60%. Suddenly even though your time is valued by the job market as twice as valuable as the time of the painter you'd have to work 125 hours in your day job to earn enough money to pay the painter to work 100 hours to save you 100 hours painting your house. With a high enough tax rate it becomes more sensible for you to work less in your day job and to paint your house yourself.
Here's the problem: If you paint your house yourself and work less then you earn less and therefore you pay less in taxes. At the same time the painter does not earn money painting your house and so the painter does not pay taxes on that $1000 he no longer earns. If people react to a tax rate increase by working less the net effect can be a decrease in total revenues collected. This may explain why even the most advanced European nations have much lower per capita GDPs than America.
Worse yet, keep in mind that the reason you as the hypothetical $20 per hour worker would be worth twice as much per hour as the $10 per hour painter is typically (and there are exceptions) because you are more productive and generate more wealth in the form of goods and services per hour worked. But if tax rates cause you to shift from your paid job to a task that commands less per hour the productivity of the economy as a whole declines. Instead of your doing a job for which you are more productive you do a job for which you are less productive.
This shifting of labor out of the paid workforce as a result of high taxes is my nightmare scenario for the future of the American economy. We might get into a vicious cycle where politicians keep raising taxes to pay for medical care and other expenses for old folks while American workers chooses to do less paid work. They might do less paid work and instead go camping or to fix their own car, paint their own house, cook their food from scratch with raw ingredients, or grow their own food. Or they might just go to the beach or go hiking in the mountains rather than work harder to earn the money to pay for a trip abroad or a bigger house.
For more on this see Tyler Cowen's post "Why don't the French work more?" and Alex Tabarrok's post "The Microeconomics of Social Security Privatization".
Update: In a research paper about Social Security privatization Martin Feldstein says tax increases decrease the size of the tax base. (PDF format)
The elasticity of taxable labor income with respect to the net-of-tax share, i.e., to one minus the marginal tax rate on labor income, is much greater than the traditional elasticity of labor supply as measured by labor force participation and average hours worked. Estimating this elasticity is now a subject of very active research among public finance economists. Although a wide range of estimates has been produced, some studies are more reliable than others. I believe that a conservative estimate is that the compensated elasticity of taxable income with respect to the net of tax rate is one-half.
Using this elasticity and the 2004 size of the taxable payroll implies that a rise in the effective marginal tax rate from 37.7 percent to 44.2 percent increases the annual deadweight loss by $96 billion or nearly one percent of GDP.11 Since the 6.5 percent increase in the marginal tax rate applies only to taxable labor income (about 40 percent of GDP), the deadweight loss is equal to about one third of the incremental tax revenue. Even this understates the relative size of the deadweight loss because it ignores the reduction in the tax base and therefore in the tax revenue that results from the higher marginal tax . When that reduction in taxable income is taken into account, the incremental deadweight loss is nearly 50 percent of the incremental revenue.12 The true cost per additional dollar of payroll tax revenue is there $1.50.
Note that this is just the deadweight loss or excess burden – i.e. the pure waste – associated with the incremental tax. It does not include the deadweight loss of the existing tax or the direct burden of the taxes themselves. And it does not include the deadweight loss caused by the program distortions.
At the end of the next to last paragraph I think he meant to say "is therefore $1.50.".
My guess is his estimate for the economic loss from taxes underestimates the cost because it is a static snapshot. The rate of growth will slow and therefore the amount of the loss will become steadily larger in the out years.
A rise in the retirement age is one way to reduce the extent of future tax increases. If people work longer they will pay in for a longer period of time and receive benefits for a shorter period of time. Feldstein argues for private accounts as a partial replacement for Social Security so that people view the money they put into the accounts as savings rather than as taxes. The thinking is that people will be more willing to work to build up savings than to pay taxes and therefore under a private accounts system labor market participation rates will be higher and the economy will grow more rapidly.
Americans, that is, residents of the United States, work much more than do Europeans. Using labor market statistics from the Organisation for Economic Co-operation and Development (OECD), I find that Americans on a per person aged 15–64 basis work in the market sector 50 percent more than do the French. This was not always the case. In the early 1970s, Americans allocated less time to the market than did the French. The comparisons between Americans and Germans or Italians are the same. Why are there such large differences in labor supply across these countries? Why did the relative labor supplies change so much over time? In this article, I determine the importance of tax rates in accounting for these differences in labor supply for the major advanced industrial countries and find that tax rates alone account for most of them.
This finding has important implications for policy, in particular, for financing public retirement programs, such as U.S. Social Security. On the pessimistic side, one implication is that increasing tax rates will not solve the problem of these underfunded plans, because increasing tax rates will not increase revenue. On the optimistic side, the system can be reformed in a way that makes the young better off while honoring promises to the old. This can be accomplished by modifying the tax system so that when an individual works more and produces
Using per capita GDP measured in purchasing power parity terms France and Germany have 73% of the per capita income of the United States. The reason the gap is not larger is probably because the Europeans also have disincentives in their labor markets for hiring people who are less productive. So some of the labor that is not being used in Europe would be less productive if it was used. However, even among those who do work the Europeans work far fewer hours per year.
Because of the effect that higher taxes have on labor market participation rates the option to raise tax rates to fund retirement may not exist. But that doesn't mean that politicians won't try raising taxes to get the money. This is my fear: Politicians will raise tax rates, lower living standards, slow the economic growth rate (or even reverse it), while not solving the problem of unfunded liabilities in retirement programs. In fact, if economic growth is sufficiently slowed then the tax increases may even make the problem worse.
Thanks to crush41 for finding the Prescott paper.
Social Security's financial projection just got worse.
<The trust fund for Social Security will go broke in 2041 -- a year earlier than previously estimated -- the trustees reported Wednesday. Trustees also said that Medicare, the giant healthcare program for the elderly and disabled, faces insolvency in 2020.