Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing Community College July 30,

What Have You Heard?

THE BOOMERS ARE OLD!

We are constantly told that: “Socialsecuritymedicareandmedicaid are busting the budget.” “WE HAVE TO… …DO SOMETHING SERIOUS! …CUT BENEFITS!..PRIVATIZE! AND NOW!” “We are mortgaging our grandchildren’s future.”

But it’s not either or.. it’s win-win for both.

Intergenerational transfer programs, such as SS and Medicare, are economically necessary and beneficial for all generations. Why - Benefits - How - But

Why? Intergenerational Transfers are necessary because life is »Uneven »Unequal »Uncertain. Time is the problem.

Earning Power

Cost of Living

Solution: Intergenerational transfer

Intergenerational Transfer Programs Current working generation pays living expense of: »Older generation »Children

Examples: Families Social Compact Programs –Social Security –Schools –Medicare (partly) NOT: –Pensions or 401(k)

Why a Social Compact? Life is risky Moral hazard

Do you know… How long you’ll live? How much you’ll earn? What the stock market and economy will do? When you’ll get sick and how serious? Your relatives’ future too?

Only social insurance intergenerational transfer programs have proven widely successful.

Benefit for All: Faster Real GDP Growth

Benefit for All: More Stable Economy SS takes effect

Benefit for All: Only Risk-free Option

Benefit for all: Cheapest and Most Efficient Administrative Costs: –Social Security: 0.87% –Medicare: 3%

Who needs Social Security? 1 in 4 households 90% of people 65 –66% half or more of their income –21% all their income All of us eventually, either direct or indirect.

But what about the costs and money? Isn’t SS in trouble? SS unsustainable – too many retirees? The Trust Fund broke?

Social Security Is NOT In Trouble and Does NOT Need to Be Cut econproph.com, march 6 econproph.com, march 6

For Social Security to be “bankrupt” and NOT able to pay any benefits…. …GDP must be near zero and nobody is working.

Reality: Support ratio is sustainable Overall support ratio is high now Productivity matters more Boomers ARE

“Trust Fund” is like a checking account: a cash flow buffer. $ 807 billion annual income $ 689 billion annual outgo $2.5 trillion Trust Fund account balance

Projected Shortfall: years from now Assumes reduced taxable payrolls* Then still pay 83% of scheduled bfts –Higher in real terms

Social Security Projections

Easy Fix for 2033 and later Shortfall (if it happens) Starting in 2030: 1% increase in payroll tax OR eliminate the cap

Strong SS = Strong GDP Social Security solvency is positively correlated with more employment and higher real wage Bruce Webb. Angry Bear blog Bruce Webb. Angry Bear blog

SS not threat to gov’t. budget.

But Medicare Appears To Be a Budget Challenge.

But Not Really. Healthcare Is The Real Problem US: $7,538 per person per year 2.5 x average Higher prices Higher usage per person Lower quality, worse outcomes, shorter lives

Medicare Is Solution Cheaper: 3% vs % costs Other developed countries: an aging population does NOT raise healthcare spending Best practices & bargaining power If Medicare were universal: –Save $400 billion per year: 2.5% of GDP

But, but the deficit! Sources of the Deficit.  Deficit is dropping rapidly  NOT:  Bailouts and stimulus.  Social Security  YES:  War, Defense, Security  Tax cuts  Unfunded Medicare D  RECESSION!

The real deficit problem: Unemployment.

Growth cures deficits. And Intergenerational Transfer programs promote growth.

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