Sunday, December 18, 2005

Paying for retirement

Megan McArdle addresses the question of the demographic time-bomb, and its likely impact on the economy, and on the country's public finances. Specifically, she looks into the debate on healthcare vs. Social Security (as in, which program is in greater need of repair). She writes:
I agree that the people saying "Social Security's not the problem, Medicare's the problem!" in general show an astonishing lack of interest in fixing Medicare; indeed, they are often the same people who want to add nationalised health insurance to the budget, which seems to betray a lack of commitment to solving our budget problem...as discussed many, many times before, the "trust fund" is not, from the perspective of the US taxpayer, funded. I'd argue that the relevant question, for the US taxpayer, is not the accounting distinctions that the US government makes, but what percentage of (tax revenues + borrowing) is devoted to paying Social Security benefits.
Or even more broadly, what percentage of the economy as a whole is devoted to paying Social Security.


My problem, too, with the whole "Medicare/Medicaid is a bigger issue" argument is that, generally speaking, the people making this argument don't want to do anything substantive about either challenge if it doesn't involve raising taxes. The fact is we know of a relatively simple and genuinely pain-free way to reduce the longterm cost of the Social Security program: giving less or no money to retirees who don't need it. Healthcare costs present a more complicated situation, and truly obvious solutions don't present themselves.

Thus, my conclusion is: let's take the low-hanging fruit of entitlement reform -- namely, means-testing Social Security. True, financing Social Security may not be as big a long term threat to living standards as Medicare/M edicaid, but so what? It's still a huge program. It still spends money on rich people who don't need it. Perhaps most perniciously of all, it is funded via a highly regressive tax on jobs.

Yes, maybe we'll only need to be putting an additional 3 points of GDP into Social Security in the year 2050, but that 3 points (nearly $400 billion in 2005 terms) will be wrung out of the relatively narrow base of workers' paychecks and employment prospects if the funding mechanism remains the same as today's. And besides, if the challenges on the healthcare finance front really are as daunting as they appear to be (and I don't doubt they are) we'll need all the help we can get. A smaller Social Security bill can only help the government in this regard.

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