Hypothetical Mean

Commentary from an Actuarial and Economic Perspective

Archive for the ‘Social Security’ Category

Do I want a fiscally responsible President?

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I think so.  But this article gives me pause.  It quotes Obama:

“Social Security, we can solve,” he said, waving his left hand. “The big problem is Medicare, which is unsustainable. . . . We can’t solve Medicare in isolation from the broader problems of the health-care system.”

I suspect this quote reveals that he and I view these programs from fundamentally opposite perspectives.  I see Medicare causing broader problems in the healthcare system and rarely suffering from them.  The fundamental Social Security problem is how to maintain the program’s popularity with ever-declining benefit-to-contribution ratios.  Both contibute to the overarching problem of how to manage the overall impact of these programs on the general finances of the US government.

I am not particularly concerned, per se, about the long-term projected deficit in Medicare, and am only moderately more concerned about Social Security’s actuarial deficit.  I fear “solutions” to these problems that emphasize policy options that exploit weaknesses in the assumptions and calculations rather than focusing on the fundamental issues.  Saying we can “solve” Social Security suggests to me a very narrow version of what that “problem” really is.  Saying that we must reform the private healthcare market to reform Medicare is tantamount to avoiding the tough healthcare financing issues facing that program.

I’m not unhappy yet.  He vagueness leaves much to the imagination.  But I am becoming concerned.  Tyler Cowen is much happier.


Written by Victor

January 16, 2009 at 6:09 pm

This is how we are going to save the economy?

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Like Cowen, I’m confused and disappointed about Obama’s economic stimulus plan (from Calculated Risk).  To expand on Cowen, here’s how I read his objectives:

1) Increase the share of energy-efficient technologies purchased by government.  Given the supply difficulties in the solar panel market, (here’s just one example), it’s hard for me to see how increased government purchases in that sector will act as an efficient stimulus;

2) Decrease the cost of using carbon-based transportation by building new roads (and repairing old ones).  Setting aside the direct carbon costs of laying tons of new concrete, one has to question his goal of “millions” of job creation.  Using an estimate of 35,000 jobs per $1.25b in federal expenditures (from this FHWA study) plus a 20% state match, that means that a total of $43b (federal + state) is required to “support” one million jobs.  Notice also that the FHWA explicitly says that these jobs are NOT created, but just supported.  Lastly, the FHWA suggests that only 27% of projects are spent in the first year, suggesting that you’d need more than $160b to “support” one million jobs in the first year alone.

3) Purchase thousands of new computers and repair thousands of new schools.  Again, is the computer industry in crisis?  I can only imagine the bureaucracy associated with applying for new school renovations.  Such a construction stimulus might begin to be effective in time for the 2012 Presidential run, I suppose.

4) Increase broadband adoption.  I’ll pass on this other than to again ask: does Cisco need our help, too?

5)  Reduce administrative salaries in the healthcare sector via electronic medical records.  Obama, physician office assistants are people, too.  How does taking their jobs away qualify as “stimulus”, no matter how much you good you think will come of it.  And are you absolutely sure doctors will be able to cut staff after you’ve mandated the filing of government mandated electronic forms?  Remember the 1996 HIPAA claim form simplifications that were going to accomplish the same thing.  How will this differ?

And how in the heck do any of these get us out of our current mess?

Written by Victor

December 8, 2008 at 2:05 am

Global Warming v. Social Security

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Global warming and Social Security are both long-run problems.  Both rely on long-run projections fraught with uncertainty.  Can you support reform to address one problem without also supporting the other?

Over the years, Megan McArdle has argued “no”: that if you care about one, you should care about the other: deferral of these sorts of problems is not a good strategy. (see here and here (the recent instigating post from her co-blogger Jon Henke))

Kling argues “yes”, there are differences:

The most important difference is that we can improve the entitlement outlook costlessly. The problem with entitlements is that we are promising more than we can deliver (at least if the economic projections are reasonably correct). Suppose that we raise the age of eligibility for Social Security and Medicare for people under 50 to something like 72, and then we index that age for longevity. This will change what we promise. We still have the option, down the road, of delivering more benefits to people now under 50. But lowering what we promise them helps forestall the situation in which we either renege on our promise or we raise tax rates ginormously to try to keep our promises.

To appease the economic models of entitlements, we don’t have to make any sacrifices today–we just have to make more conservative promises going forward. To appease the global warming models, we have to make rather large sacrifices of output.

Kling is correct in that the Social Security funding deficit can be eliminated strictly through benefit cuts.  Personally, I support a similar proposal and therefore would agree with his analysis.

However, others are concerned with the deeper problem implied by the actuarial forecasts: that it may be almost impossible to simultaneously achieve our pre-defined notions of “fair” benefits and “fair” levels of taxation.  Many of these other people would also presumably argue that Kling’s (and my) position on benefit cuts is not “fair”.  Therefore, they would argue that simply eliminating the funding deficit is not sufficient: you have to solve the funding deficit in a way that is equitable.  This is a much more difficult task.  Indeed, our notions of “fairness” may make it impossible to achieve.

Therefore, it is reasonable for well-educated people to disagree about whether it is consistent to care about one problem but not the other.  There actually isn’t even agreement about what the deep problems truly are, or which solutions are truly “solutions”.

Written by Victor

June 7, 2008 at 3:14 am

Selective Perspectives on Fiscal Responsibility

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Econbrowser‘s Menzie Chinn writes critically on the sudden and arguably selective fiscal restraint of the Bush II administration. Chinn argues that a $5 billion per year SCHIP expansion is small potatoes compared to Part D and other fiscal ills of the current administration.

Relatively speaking, I agree. However, he mixes and matches time horizons, thereby making his suggested comparison flawed.

David Walker from the GAO has been on a Fiscal Wake-up Tour. Here’s his latest chart.

David Walker's 2007 Fiscal Wake-up Tour

Notice that the implicit exposures are actually the present values of 75-year liabilities. For example, the Medicare Part A liability of $11.3 trillion comes from the 2006 Medicare Trustee Report (Table III.B9).

On a 75-year present-value basis, what is a better estimate for the cost of SCHIP expansion? My quick answer is $439 billion. This would be the apples-to-apples comparison. This is still dwarfed by the size of Part D. However, it is also not small potatoes, to mix my fruit metaphors.

Lastly, although all of these numbers are shockingly large, it is important to remember that they may occur over a very long period of time. The collective resources available to the American economy over the next 75 years are likewise immense. Therefore, perhaps the best practice is not to mix 75-year cost projections into the SCHIP argument at all.

Regardless, if anyone wants more details on my calculations and assumptions, see below the fold.
Read the rest of this entry »

Written by Victor

September 27, 2007 at 6:08 pm