On Sun, May 16, 2004 at 03:52:02PM -0500, Dan Minette wrote: > http://www.ssa.gov/OACT/TR/TR03/II_project.html > > the future of SS is discussed. As things stand now, SS is expected to > be about 3.5 trillion in the hole in 75 years.
Actually, that $3.5 trillion number is significantly understated. As your reference observes "Even a 75-year period is not long enough to provide a complete picture of Social Security's financial condition. Figures II.D6 and II.D7 show that the program's financial condition continues to worsen at the end of the period. Some experts have noted that overemphasis on summary measures for a 75-year period can lead to incorrect perceptions and to policy prescriptions that do not move towards a sustainable system. In order to provide a more complete description of Social Security's very long-run financial condition this year the Trustees present actuarial estimates over a time period that extends to the infinite horizon. These calculations show that extending the horizon indeed increases the unfunded obligation, indicating that much larger changes would be required to achieve solvency over the infinite future as compared to changes needed according to 75-year period measures." A better estimate for the present value of the SS obligation is about $7 trillion. This is called the "fiscal imbalance", and is the present value of the difference between future social security payments and future social security payroll taxes. See http://www.aei.org/docLib/20030723_SmettersFinalCC.pdf > Assuming a 3% growth in the ecconomy/real ROI for treasury bills over > that time, I'd guess we'd only be talking about 0.25% of the GDP per > year in reduced benefits/increased taxes to pay for this. Moving the > retirement age up a year and modest increase in the maxium real wages > (the inflation adjustment plus a modest real adjustment) for which SS > taxes are applied would work. Your reference, which UNDERSTATES the problem grossly, indicates that the cost of social security as a percentage of taxable payroll will grow from 10.95 percent in 2002 to 19.92 percent in 2077 (that is assuming quite high productivity growth, I think 2.2%, whereas productivity growth has averaged only 1.7% since 1959, so that number may be even higher) Also, the $3.5 or $7 trillion is a PRESENT VALUE of the obligation. It has already been discounted by a suitable discount rate (expected inflation plus real interest rate). In other words, we'd have to come up with $7 trillion TODAY. If we wait 15 years to pay it off, we would have to come up with much more, about $12 trillion. So, to correct your calculation, one way is to look at the $7 trillion as a debt in perpetuity on which we pay interest, say 5.5% (current 30 year treasury bonds yield 5.375%, and a perpetuity should be a little higher). That comes to 385 billion per year in interest. With a GDP of about $11 trillion, that comes to 3.5% of GDP. In other words, we need to come up with an extra 3.5% of GDP *TODAY*. You might argue that as GDP increases that the interest payment becomes a smaller percentage of GDP -- I'd counter that since we aren't starting to pay off the debt today, that percentage is going to be getting higher and higher until we finally do start paying it. > Let us next go to Medicare. That is definitely worse. The yearly > shortfall is expected to be about 3.5% of GDP by 2075. The worst part > of the added Unfortunately, that is not even close to giving an accurate picture of the severity of the Medicare shortfall. The present value of the obligation from Medicare is more than $36 trillion!! If we look at that again as interest on a perpetuity, it comes to more than 18% of GDP per year in interest. We would have to come up with, *TODAY*, an extra 18% of GDP for Medicare! And since we are not actually starting today, it is going to be even higher when we do start. > This can be addressed. It won't be easy, but its not unsolvable. We > can have a very good health care system for all, and still not break > the economy. We just can't have the best for most. It can be addressed. But it will be much, much more difficult than your comments suggest. If we start today, all federal income taxes (individual and corporate) need to be raised by about 69% to cover the SS and Medicare shortfall. But that rises to 74% if we don't start until 2008. Alternatively, we could immediately and permanently cut SS and Medicare benefits by 45% (or 47% starting in 2008) and watch as the baby boomers, who haven't saved nearly enough, retire and subsist on dog food and inadequate medical care. More realistically, we could spread the pain across several areas, but it will still be extremely painful: starting today we would need to simultaneously: * raise income taxes by 17%, * raise payroll taxes by 24%, * cut federal purchases by 26%, and * cut SS and Medicare benefits by 11%. What do you think are the chances that the government will do that, when they are still in denial about the severity of the problem and are doing a good job of hiding the real numbers, even from someone like you? > A real tax increase/cut in other spending will probably be needed > though. 1%-2% of GDP should be enough. Unfortunately, that number is not even close. As I said above, try 21% to include both SS and Medicare. > Further, if we decrease the real national debt (national debt as > a % of GDP), aside from this, over that period, then we will have > more flexibility. That's why the change in economic strategy is so > important. No, the $45 trillion shortfall is *10 TIMES* the official national debt. Decreasing the official debt is peanuts in comparison -- it will barely make a dent in the problem. -- Erik Reuter http://www.erikreuter.net/
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