Fundamental misunderstandings

Something jumped out of this Washington Post story (Many Americans accumulating debt faster than they’re saving for retirement) at me.

Currently, workers with retirement savings accounts put aside more than 11 percent of their pay for retirement — 5 percent in their own accounts, and 6.2 percent in Social Security.

Note to Michael A. Fletcher, who wrote the story - that 6.2 percent for Social Security is a TAX, which goes into the treasury, and is then used for whatever the Federal Government is currently spending money on. It is NOT savings. There is no Social Security "trust fund," there is no account with your name on it, there is just a transfer from current workers to current retirees, in the hopes that currents workers, when retired, will be supported by future workers. But that 5% that workers with retirement savings accounts are saving doesn't magically become 11% just because the Federal Government is taking 6.2% of their money and giving it to others.

Niall Ferguson: "If the young knew what was good for them they'd join the Tea Party"

The thing that most concerns me, as look out across the political landscape, is that any of this is considered controversial.

“It is surprisingly easy to win the support of young voters for policies that would ultimately make matters even worse for them, like maintaining defined benefit pensions for public employees,” he says in an article ahead of the lecture.

He adds: "If young Americans knew what was good for them, they would all be in the Tea Party."

Professor Ferguson argues the true size of government debt in Western democracies is many times larger than "deeply misleading" figures issued in the form of bonds because they do not record unfunded liabilities of social security and health care schemes.

"The last corporation to publish financial statements this misleading was Enron," he wrote.

Well, yeah.

It's horrifying how many people - how many voters - don't understand, or believe, that...

Should We Be Bullish on Solar?

Megan McCardle has an interesting and worthwhile piece on the likelihood of solar energy costs falling below those of conventional energies any time soon. But she finishes it with a pretty silly question...

I'd close by restating Tyler's question in a slightly different way: if the price of solar is really likely to keep falling until it's cheaper than coal, why don't we see this revealed in the behavior of global warming activists? Where are Greens saying "We've decided to move on to more pressing issues, because clearly, the carbon emissions problem is just about solved."

For some people, maybe even most, the concern is, in fact, carbon emissions. For many of the activists, however, all of the evidence suggests that the concern is not carbon emissions as much as it is concern about the consumption and lifestyle of the US population. For my entire lifetime, the people in the vanguard of this movement have responded to any proposed crisis with the same set of policy prescriptions - more central control, more rationing, less freedom for individual movement, less individual autonomy. In short, for the most dedicated of the global warming activists, carbon emission control is simply a pretext for the actual goal - socialism.

Will The US Be Different From Greece?

Jeffrey Carter:

We are in a situation that calls for pretty radical change from the perspective of a socialist. But if you are a capitalist/entrepreneur, the changes we need to make aren’t that big a deal. It’s more like the normal course of daily existence.

The Greeks are on the march. No doubt, their kin in the US, public employee unions and socialists, will hit the streets here. They will make a lot of noise, and create a lot of fear. The reality is we cannot afford them anymore.

Things like that are a legacy of the past, just like buggy whip manufacturers.

The demographics of the United States allowed us to maintain, for the last 70 years or so, the fiction that the government could fund everything that anyone wanted funding, that we could pay for care from the cradle to the grave, and there would always be enough money available to do that without running out.

The demographics are changing...

The dangers of poll driven politics

It has long been known that the answer to a question depends, in many cases, on the circumstances under which it is asked. Successful salesmen are always asking "yes" questions - that is, questions that virtually require the potential customer to answer "yes." Successfully framing the issue is the first and most important part of making a sale. This is why polling is more art than science. Consider, for example, this discussion of polling techniques between Sir Humphrey Appleby and Bernard Wooley on the brilliant 80s British TV show Yes (Prime) Minister:

Sir Humphrey: "You know what happens: nice young lady comes up to you. Obviously you want to create a good impression, you don't want to look a fool, do you? So she starts asking you some questions: Mr. Woolley, are you worried about the number of young people without jobs?"
Bernard Woolley: "Yes"
Sir Humphrey: "Are you worried about the rise in crime among teenagers?"
Bernard Woolley: "Yes"
Sir Humphrey: "Do you think there is a lack of discipline in our Comprehensive schools?"
Bernard Woolley: "Yes"
Sir Humphrey: "Do you think young people welcome some authority and leadership in their lives?"
Bernard Woolley: "Yes"
Sir Humphrey: "Do you think they respond to a challenge?"
Bernard Woolley: "Yes"
Sir Humphrey: "Would you be in favour of reintroducing National Service?"
Bernard Woolley: "Oh...well, I suppose I might be."
Sir Humphrey: "Yes or no?"
Bernard Woolley: "Yes"
Sir Humphrey: "Of course you would, Bernard. After all you told you can't say no to that. So they don't mention the first five questions and they publish the last one."
Bernard Woolley: "Is that really what they do?"
Sir Humphrey: "Well, not the reputable ones no, but there aren't many of those. So alternatively the young lady can get the opposite result."
Bernard Woolley: "How?"
Sir Humphrey: "Mr. Woolley, are you worried about the danger of war?"
Bernard Woolley: "Yes"
Sir Humphrey: "Are you worried about the growth of armaments?"
Bernard Woolley: "Yes"
Sir Humphrey: "Do you think there is a danger in giving young people guns and teaching them how to kill?"
Bernard Woolley: "Yes"
Sir Humphrey: "Do you think it is wrong to force people to take up arms against their will?"
Bernard Woolley: "Yes"
Sir Humphrey: "Would you oppose the reintroduction of National Service?"
Bernard Woolley: "Yes"
Sir Humphrey: "There you are, you see Bernard. The perfect balanced sample."

There have been many psychological studies which demonstrate that peer pressure can influence people to give incorrect responses on even fairly straightforward factual questions.

Which is why this kind of thing is so concerning.

A CNN/ORC International Poll released Wednesday also indicates that the public doesn't want the super committee to propose major changes to Social Security and Medicare or increase taxes on middle class and lower-income Americans.

Well, of course it doesn't. In a vacuum, of course people don't want to increase taxes on the middle class. In a vacuum, of course people don't want to cut Social Security, because of the millions of people currently dependent on it. In a vacuum, of course people don't want to cut Medicare, because of the millions of people currently dependent on it.

But none of those is really the question, is it? My response to someone that posted this yesterday on facebook, with the comment that, "OK Leaders, there are your orders. Get 'er done!" was, "You understand that you can't actually fix the problem that way, right? You understand that even confiscatory taxes on the wealthy and deep cuts in all discretionary budgets won't even close the current deficit, never mind the projected deficits that the rising costs of entitlements create?"

FBF: The position that politicians should somehow ignore the public and do as some see as "the right thing" seems pretty idealistic.

Me: I agree that it's unlikely that they'll "ignore the public." But some of them will - some always do. The key thing is that this is a Republic, not a Democracy, so they're elected to defend the Constitution and represent our interests, even when that's not what we want. (Obviously, most of the time that's not what happens. "Representing our enlightened best interests" and "pandering to the popular will" never been, are not now, and never will be synonymous. Sometimes, the latter looks like the former, and everything's spiffy.

But right now, we're caught in a trap that our elected representatives have built over the years. Every time the government creates an "entitlement," it also creates a client cohort dependent upon it. Every program that the government funds will have voters receiving those funds. Eventually you reach a point where the math just doesn't work anymore, where, in Margaret Thatcher's memorable phrase, "you run out of other people's money." If the public says "don't raise tax rates on anyone other than the rich AND don't cut Social Security AND don't cut Medicare" - well, guess what? That simply doesn't work as public policy, and the public's got to be educated and enlightened or imperiled.

Or ignored.

I'm not suggesting ignoring, because the will of the people matters. But if the will of the people is for an unachievable combination of programs that can't be sustained, the will of the people is going to be thwarted, one way or another. Right now, the people can't have all of what they say they want, and the longer we go before that's made clear and the problem is addressed, the more painful the eventual reality is going to be.

If you ask people what they're looking for in a car, you'll get a long list, including things like safety, style, fuel economy, price, acceleration, towing capability, loading capabilities and the like. But people seem to understand that they can't have all of them. There are trade-offs to be made. If you want spectacular fuel efficiency, you're not going to be able to tow your boat to the lake. If you want a lower price, you're not going to have a super sports-car.

There are trade-offs that have to be made at the national level, too. If we want a cradle-to-grave welfare system, guess what? It has to be paid for. And there's not enough money in the pockets of the "rich" to pay for it all. So poll results like the above CNN poll are not useful. They're not helpful. They offer a bunch of a la carte options that people can't actually simultaneously get. They present "or" choices as "ands." You can have a cradle-to-grave welfare state which provides all things for all people OR you can have low middle class tax rates and economic freedom. One or the other. Not both. The math doesn't work.

One of the reasons that approval ratings are so low for politicians right now is that the government has built a power-structure which rewards short-term thinking and behavior that damages the country. But another reason is that we, as a society, have been told for the last forty-plus years that we can have everything. We can have food, housing, clothing, education, retirement, all at someone else's expense.

The real world doesn't work that way. And the bill's coming due...

This lie exposes that lie...

As already noted, the Treasury is not going to run out of money to pay Social Security benefits on August 3, so Obama's threat to seniors is both morally bankrupt and fundamentally dishonest. But Investors Business Daily points out how this specific lie from this specific Democrat reveals that all things that all Democrats have said about Social Security over the years have been lies...

In 1960, the Supreme Court ruled that workers do not have a legal right to their Social Security benefits. Congress can cut them any time it wants, which it's done several times. And, because there are no ownership rights, if you die the day you retire after making a lifetime of payments into Social Security, your heirs get nothing.

Indeed, Social Security's only guarantee is that today's workers will get an incredibly lousy return on the huge amount of money they've "invested" in the program.

And what about that Social Security "Trust Fund" the Democrats rhapsodize about? Isn't it supposed to guarantee benefit payments for another 30 or 40 years?

Truth is, the fund is nothing more than an accounting gimmick designed to make the program look healthier than it is. Obama exposed this scam as well by showing that retirees can't trust the "Trust Fund" for anything.

Which side, exactly, is "reality-based"?

In The Republic, Plato related Socrates' description of a cave in which prisoners are chained to the wall, facing the wall, and know nothing but the shadows of things behind them and the echoes of distant activity. Knowing nothing else, these men perceive the shadows and echoes as reality and know not reality itself.

In the parable of the blind men and the elephant, (which probably originated in China or India), men who were born blind are asked to touch and describe an elephant. One man touches the ear and describes the elephant as something like a fan, another touches the legs and describes an elephant as a pair of tree trunks, another touches the tusks and says that an elephant is something like a spear, while yet another touches the trunk and says that an elephant is like a snake.

Differing incomplete perceptions of reality result in different analyses.

This is something that concerns me greatly at the moment, as I contemplate our political system and government budget.

Let us consider a couple more scenarios.

• Two men, walking down a road together, meet an obstacle, and cannot continue. They perceive the obstacle as a downed tree, and disagree on whether to try to move the tree, to climb over it or to light a fire and burn the tree until a gap is opened through which they can pass. Or they perceive a huge hole and disagree on whether to cut down a tree to bridge the gap, or to climb a tree on the left side and move from branch to branch to pass, or whether to climb a cliff on the right side and scale it sideways to the other side of the hole. Whatever they choose will require cooperation, and they disagree on the solution, but they each perceive the same obstacle.
• Two men, walking down a road together, meet an obstacle, and cannot continue. One of the men sees a giant tree across the road, and wants to burn it. The other sees a giant hole, and want to cut down a tree to make a bridge.

Differing incomplete perceptions of reality result in attempts to solve different problems.

In the first scenario, there is a good chance that, agreeing on both the goal and the obstacle, the two men will eventually come to mutual decision and work together to surmount the obstacle. In the second case, no discussion is likely to be fruitful, no productive decision will result, because they have fundamentally different perceptions of the reality of their situation.

When I read things like this, therefore, it scares the hell out of me.

While the plan put forward by the co-chairs of the National Commission on Fiscal Responsibility and Reform did not gather enough votes to make a formal recommendation, we remain concerned that the Bowles-Simpson proposal may serve as a starting point for budget negotiations. We consider this plan to be flawed inseveral key areas, especially with respect to its proposed cuts to Social Security Benefits. We believe that any proposal that includes cuts to a popular, fiscally sound program lacks credibility and does not reflect the political center.

That's from a letter to the President signed by Democrat Representatives John Conyers and Raul Grijalva. And it is horrifying. When I look at Social Security, I see a Ponzi scheme, a plain and simple wealth transfer from the young to the old, the economics of which get worse with each passing day as life expectancy increases and birth rate drops and/or stabilizes. Any surpluses are illusory.

It has to be fixed. And the fact that their perception is that it's a "fiscally sound program" means that they'll resist any attempt to fix it.

The people who claimed for themselves the mantle of the "reality-based community" in the last decade are those that predominantly believe, right now, that the big problems facing the United States government are not the deficit and the debt, but the fact that the government is not taxing enough or spending enough. That the stimulus was too small. That the health care plan didn't go far enough. That Social Security is a "fiscally sound" program.

Which side is really perceiving reality?

It is one more illustration of the fact that the biggest problem facing this country right now is that the right and the left don't look at the government and see different solutions to the same reality. They look at the government and see fundamentally different realities.

Is it really a myth if no one actually thinks it?

In the Washington Post today, Robert J. Samuelson takes the President to task for his unwillingness to address reality during his campaign State of the Union lies speech the other night:

it was a teachable moment - and Barack Obama didn't teach. Unless public opinion changes, we won't end our budget deadlock. As is well-known, Americans want budget deficits curbed. In a new Kaiser Family Foundation poll, 54 percent urge Congress and the president to "act quickly" and 57 percent prefer spending cuts to tax increases. But there's little support for cuts in Social Security (64 percent opposed), Medicare (56 percent) and Medicaid (47 percent), which together approach half of federal spending. The State of the Union gave Obama the opportunity to confront the contradictions and educate Americans in the unpleasant realities of uncontrolled government. He declined.

What we got were empty platitudes.

True, if trivial. It's a good column anyway.

But there's one thing that I'd like to, well, quibble about.

Myth: The elderly have "earned" their Social Security and Medicare by their lifelong payroll taxes, which were put aside for their retirement. Not so. Both programs are pay-as-you-go. Today's taxes pay today's benefits; little is "saved." Even if all were saved, most retirees receive benefits that far exceed their payroll taxes. Consider a man who turned 65 in 2010 and earned an average wage ($43,100). Over his expected lifetime, he will receive an inflation-adjusted $417,000 in Social Security and Medicare benefits, compared with taxes paid of $345,000, estimates an Urban Institute study.

Maybe he's right, and that there is some non-trivial, or even large, segment of the population that believes that. I don't know.

And I guess, now that I get here, that I'm not really quibbling with him, rather using his comment as a starting point for some comments of my own.

Social Security is a Ponzi scheme. It is utterly and completely unsustainable without major modifications. (Medicare is the same, but I'm just going to address Social Security right now.) It is a Ponzi scheme because, contrary to the way that government officials like to talk about it, it's not a savings plan, it's not an investment plan, it's not a retirement account. It's a tax, a direct transfer from working Americans to retired Americans. And the ratio of workers to retirees has fallen significantly since the law went into effect, and continues to fall. Where each retiree was supported by about 16 workers in 1950, it's now down to about three and headed to about two as the baby boomers retire¹. And there is no "trust fund." The money comes in to the treasury, the money goes out of the treasury.

So it can't be sustained. The problem is, it can't be eliminated, either. I think it's a bad plan, I think it's bad public policy, bad economics, and would have fought against it if I were around when it was proposed, but since it's now been in effect for 70 years, it cannot just be eliminated. The fact is, the government has made a commitment to those who are retired, and those nearing retirement age, to provide this program, and the government is morally obligated to follow through. Those people have lived their lives under the assumption that that commitment was real. They've paid their Social Security taxes, on the belief that, when it was their turn, funds would be provided for them, too. So you can't just cut it. Unfortunately.

It's got to be "fixed," though, because if it's not, it will eventually consume the whole government, and then it will be eliminated by the fact that there just isn't any more for it by any means. A fix that would, over some period, phase it out, would be a good thing. The fact is, the taxes paid in by workers over the last fifty years are gone, spent, and there's nothing that can be done about it. But those who would be stewards of our national resources must find a way to stop throwing good money after bad and deal with this unsustainable program.

For years, they've called Social Security the "third rail" of electoral politics, the electrified rail that would kill anyone touching it. We the people have got to elect some people who are willing to touch that third rail².




¹ - http://www.cato.org/pub_display.php?pub_id=3523

² - George W. Bush was willing to spend his considerable political capital on Social Security reform following his re-election in 2004. The Republicans in Congress, unfortunately, had been co-opted by the system, and the Democrats were unwilling to be serious about anything other than driving him out of office. There was a moment - the moment passed. The problem has, over the intervening six years, continued to get bigger.

The Truth about Entitlements

I strongly recommend this excellent paper by Arnold Kling, The Truth About Entitlements:

Social Security is not protected by its trust fund. The trust fund contains no real assets. It is simply an accounting device that indicates the promises that have been made to current workers to provide benefits to them in retirement. There is no way to avoid having Social Security absorb a large share of the budget during the years when the Baby Boomers are collecting benefits.

He addresses five myths about our current financial situation and the impending disasters that are Social Security and Medicare. It's not cheerful but it is important. It is an excellent presentation of the issues, clearly explained.

"I promise that I won't fix Social Security, but my opponent might..."

I am not certain whether I'm more amused or frightened by how many Democrats are running ads promising to not do ANY of the things that might actually "fix" the already bankrupt Social Security system. Actuarially and demographically speaking, the math just doesn't work. People retiring and taking full benefits at age 65 are taking far more out of the system than they ever paid in, and there are fewer workers supporting more retirees every year. If something can't go on indefinitely, it's a good bet that it won't go on indefinitely, but there's a lot of advertising out there promising that it will...

(Yes, I'm looking at you, Barney Frank, and you, Chellie Pingree, and you're not alone...)

Big wheel, keep on turnin'...

This isn't a problem, is it?

The retirement nest egg of an entire generation is stashed away in this small town along the Ohio River: $2.5 trillion in IOUs from the federal government, payable to the Social Security Administration.

It's time to start cashing them in.

For more than two decades, Social Security collected more money in payroll taxes than it paid out in benefits — billions more each year.

Not anymore. This year, for the first time since the 1980s, when Congress last overhauled Social Security, the retirement program is projected to pay out more in benefits than it collects in taxes — nearly $29 billion more.

You know what we need? What will make everything better?

A new multi-trillion dollar ENTITLEMENT PROGRAM!!! YAY!!!

Government run health care? Socialized medicine? It's got to work at least as well as Medicare. And Social Security. And Fannie Mae and Freddie Mac. And the Post Office. Right?

What could POSSIBLY go wrong?