June 14, 2016
It undoubtedly was very disappointing for Robert Samuelson, the Washington Post, and the rest of the Very Serious People (VSP) to see President Obama’s call for increasing Social Security. For the time being, their plans to attack Social Security and Medicare seem completely dead in the water. After all, President Obama had earlier been a grand bargainer, willing to put both Social Security and Medicare on the table, now he actually wants to increase benefits. And even Donald Trump, the presumptive Republican presidential nominee, says he is opposed to cuts, at least for the moment.
But it is important to remember that in our nation’s capital, no bad idea stays dead for long. For that reason, no one should view Robert Samuelson’s latest column as an admission of defeat. It is a call for resurrection. So let’s get out that stake and see if we can nail this vampire once and for all.
The basic theme is the standard one: it is an effort to divert class warfare into generational warfare. Over the last four decades we have seen the greatest upward redistribution of income in the history of the world. Rather than have the losers blame the gainers, Robert Samuelson wants them to be angry at their parents.
Samuelson’s basic story is that the elderly are actually doing quite well; therefore, we should be looking to take money away from them rather than give them more. His main piece of evidence is a subjective question on well-being which shows the over age 65 age group consistently answers that they are most satisfied with their financial situation.
There are many points that can be made about this sort of subjective assessment. The most obvious is that the sense of satisfaction depends on expectations. People who are in retirement or the last years of their working career have little hope of substantial improvements in their living standard, so it may not be surprising that most would answer they are satisfied with what they have. Younger people can of course hope for, and in fact expect, better times ahead as they advance in their career.
In fact, there is useful information in this survey and it goes in the opposite direction of Samuelson’s complaints. If we look at recent and near retirees, the group between the ages of 50 to 64, we see a sharp decline in their sense of satisfaction over the period since the survey began in 1972. In 2014, the most recent year in the survey, just 25.2 percent of those in this age group expressed satisfaction with their financial situation. This is down from 38.4 percent in 1972 and a peak of 41.4 percent in 1978.
If we are talking about cutting Social Security this is the age group that we should be looking at because they would be the ones most directly affected. No one is proposing substantial cuts in benefits for the current group of retirees.[1] If we want to reduce benefits for the program, these are the people who will be seeing lower benefits in retirement with little chance to adjust for it during their working careers.
Samuelson’s other measure of subjective well-being also fails to make his case. Referring to a recent Gallup poll, he tells readers:
“Among retirees, 75 percent said “yes” compared with 67 percent of non-retirees.”
There is an obvious problem with this story. A far larger percentage of older people are working today than ten or twenty years ago. The employment-to-population ratio of people over age 55 has risen from just over 29 percent in 1996 to more than 38 percent in most recent data. For people between the ages of 65 to 69 it has risen from 21 percent to more than 31 percent.
Clearly some of this increase is attributable to better health among the elderly and the fact that more workers have desk jobs that allow them to work at older ages, but much of the story is that people feel they don’t have enough money to retiree and therefore they continue to work later in life than they had planned. For this reason, it’s hard to be very impressed to find that those who are retired think of themselves as better off than those who are still working.
Samuelson does turn to some objective evidence, but misuses it. According to the Census Bureau, the median income for households with an individual over age 65 is $36,900. While that doesn’t look very high, Samuelson turns to a point made by economist Andrew Biggs that our standard measures of income for the elderly likely understate their income because they miss withdrawals from IRAs and 401(k)s. The point is accurate — if people get $20,000 a year from a traditional pension, it shows up as income in our standard measurements. However, the surveys will often not pick it up if retirees are withdrawing $20,000 a year from their retirement account.
While this an important measurement issue, it primarily affects people in the top quintile. We know this because we know how much wealth each quintile has from the Federal Reserve Board’s Survey on Consumer Finance. The 2013 survey (the most recent one available) showed that the middle quintile of families headed by someone between the ages of 55 to 64 had an average net worth outside of their home of just $89,300. That will not allow for annual withdrawals of $20,000 for very many years in retirement. Their total wealth, including equity in their home, was $168,900 in 2013, down from a peak of $319,300 in 2004. It’s also worth noting that the Census Bureau has been picking up more of these withdrawals in its most recent survey.
Samuelson also tells readers that older households are likely to have a mortgage paid off. This is far less likely for the current group of retirees and near retirees than in prior decades. According to the Survey of Consumer Finance, the middle income quintile of households between the ages of 55 to 64 had just a 54 percent equity stake in their home. This indicates that they will likely be paying on a mortgage well into their retirement.
But aside from getting the financial situation of the elderly badly wrong the most infuriating part of the Samuelson piece is that it frames the issue as a story of generational equity. Somehow we are supposed to measure generational equity by the taxes people pay. This is unbelievably ill-informed on almost every level.
First, taxes are just one way in which the government makes us pay for services, and increasingly a less important one. A huge and ever growing way in which the government finances goods and services is through patent and copyright monopolies. It continually makes these monopolies longer and stronger. As a result of these monopolies, we are forced to pay much higher prices for a wide range of goods and services than if the government did not provide this monopoly protection.
This is most evident in the case of prescription drugs. We will spend more than $430 billion this year on drugs that would likely cost less than one-tenth of this amount in a free market. This means the government is effectively taxing us on the order of $380 billion a year to finance the research and development of new drugs. For some reason, this massive diversion of resources (more than 2.0 percent of GDP) never gets mentioned by Samuelson or any of the other VSP.
If a presidential candidate was proposing a tax increase of 2.0 percent of GDP (around $5 trillion over the next decade), we would hear screams of bloody murder and howls of “job killer” would reverberate across the land. But if we let drug companies raise their prices by this amount due to government granted monopolies, somehow we aren’t suppose to notice? That might pass for serious analysis at the Washington Post, but it doesn’t pass the laugh test in the real world. (Oh yeah, that was just for drugs. Double or triple the number if you add in medical equipment, software, video games, chemicals and everything else that enjoys patent and copyright protection.)
Even the basic story on Social Security and Medicare doesn’t make any sense. The main reason that our children and grandchildren may see larger costs for these programs is that they will live longer than we do. According to the Social Security Trustees Report, people born in 1950 could expect to live an average of 20.5 years after turning age 65. Today’s 20-year-olds can expect to live an average of 23.0 years. If we think of age 65 as the age of retirement, this translates into a retirement that is on average more than 12 percent longer. Other things equal, a retirement that is 12 percent longer costs 12 percent more money. Should baby boomers feel guilty about this?
Baby boomers also paid much higher taxes for Social Security and Medicare during our working lives than our parents and grandparents. Most of us paid the current 12.4 percent Social Security tax and 2.95 percent Medicare tax most of our working years. Our parents and grandparents would have paid less than half this amount over most of their working lives. Was that a generational injustice?
Even Samuelson’s argument that Obama has done nothing to reduce the projected burden of these programs can’t withstand the light of day. When President Obama took office in 2009, the combined projected shortfall for Social Security and Medicare was 5.88 percent of payroll. In the most recent trustees report it is projected at 3.36 percent of payroll. That’s a reduction of more than 40 percent.
It’s true that this reduction is due entirely to a slower projected growth rate in health care costs, but why should that matter? Should our children feel better if the savings were the result of denying health care to their parents and grandparents? And much of the slowdown is almost certainly attributable to the reforms in the Affordable Care Act, so it was policy related.
Finally, the whole idea that generational equity can be measured by tax burdens is absurd on its face. If we closed down our schools so we could give our children a tax cut have we improved generational equity? How about if we let the infrastructure collapse to save money? Or better yet, wreck the planet by doing nothing on greenhouse gas emissions?
For actually serious people, generational equity is determined by the quality of the economy, the society, and the environment that we pass onto our children. On this account, Samuelson may have some case, but not for the reasons he gives.
The environmental dangers from global warming are well-known outside of the Republican Party. The state of a society wracked by gross inequities and poverty, and a current prison population of more than 2 million also a big strike against the current generation of power holders.
And the disastrous economy of the last decade is also a huge strike. If we compare the Congressional Budget Office’s current projection of potential GDP with its pre-crash projection, it is down by more than 12 percent of current output. That comes to more than $2 trillion a year, or more than $6,000 for every man, women, and child in the country.
The reason for this needless waste was that our political and intellectual leaders could not see the growth of an $8 trillion housing bubble whose collapse would inevitably sink the economy. The Washington Post has a big part of this failure. During the bubble years its main source on the real estate market was David Lereah, the chief economist for the National Realtors Association and the author of Why the Housing Boom Will Not Bust and How You Can Profit From It. After the collapse, the Washington Post was a leading voice among the deficit hawks that helped to prevent the sort of spending that could have returned the economy to full employment.
Our children and grandchildren should certainly blame us for allowing these folks to have any say over economic policy. In that story Samuelson has a real case for generational inequity. Unfortunately, he is the problem, not the solution.
Note: The income figure for the over 65 population was changed from an earlier post to use data from the Census’ publication, Income and Poverty in the United States: 2014.
[1] Reducing the cost-of-living adjustment is a cut for current retirees, but even here it is the younger group of beneficiaries that is hardest hit, since they will see the largest cuts over their retirement.
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