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Our treasured colleague Kulak is at it again with another post on his Substack.
I know that a slow-moving budget crisis is not the spiciest meatball, but the fiscal situation in the United States is looking bad. Debt to GDP is now above the previous high set at the peak of WWII. But whereas the post-wars years saw demographic and technological tailwinds, the current epoch is characterized by low fertility and productivity growth.
It gets worse:
While it might be possible to split a shrinking pie and remain friends, it is definitely IMPOSSIBLE to split a pie when more than 100% of the pie has already been promised to one person or another. Give a person a dollar, they are mildly happy. Take a dollar away and they are FURIOUS.
At this point, I'd encourage you to find a nearby senior citizen. Please explain to them that they don't deserve their social security check. You see, the money that was supposedly SAVED was in fact already SPENT. Far from saving money, their generation actually left a sizeable DEBT to future generations. So not only would seniors have to give up their government checks, they would have to pay hundreds of thousands of dollars in additional taxes just to get to even.
I'll wait.
Just how irrational are the expectations of our Boomer rulers? Slobodan Milošević understood.
The last politician to even contemplate reforming Social Security was George W. Bush, who claimed to have earned "political capital" shortly after his re-election in 2004. By March of 2006, his approval rating had fallen from the high 50s to just 31. Nowadays, politicians in either party don't even mention Social Security except to praise it effusively and promise to defend it at all costs.
We are well and truly fucked. The Federal government will be forced to default or inflate away its debts within the next 10-20 years. And this is BEFORE the numerous suggestions to somehow EXPAND the welfare state, whether they be student loan forgiveness, payments to favored racial groups, or universal basic income. After all, ours is a great laboratory of democracy. So while the Federal government enters a slow fiscal doom loop, some states like Illinois, California, and New York seem to be attempting a speed run.
How do we get out of this? Kulak has a few ideas, but I'm a little less dramatic.
AI. Maybe we will somehow thread the needle between doom and nothingburger. 🤷
Immigration. The U.S. could escape this problem by cherry picking the best citizens from other countries and telling everyone else to GTFO. We are still, after all, the best country (>10 million population subdivision). This would work, but it would never happen and it's probably a bad thing for the world at large.
Inflation. Many liabilities are indexed to inflation such as Social Security and Medicare. But we could inflate away all the existing debt. Debt to GDP actually decreased in 2022 because of 9% inflation. That level of inflation for a decade or two could make the problem less bad. It would also be helpful if the official inflation numbers were even more fake.
Things are just shittier in the future. Brazil is still a country. This is your future.
Surely the obvious answer is to raise taxes. According to some projections from CBO data if we had the same tax rates we did under Clinton debt to GDP would be
60% and falling. Were tax rates in the 90's really so awful?According to the CBO itself we could also raise payroll taxes by 4.9 percentage points, which would keep Social Security paying 100% through 2096. Even if we take no action Social Security will be able to pay out around 77% of benefits through 2096 and ~65% of benefits indefinitely.
I feel like the "at some point" is pretty key here. Is this money we have to spend in the next year? 10 years? 100 years? Because the feasibility of doing so is very different depending on the relevant time horizon. Obviously the US couldn't pay that over the next year, but it almost certainly could over the next 100. Comparing it to the present number of citizens only makes sense if those are the total pool of citizens who are going to have to pay for it, but they obviously aren't if the relevant time horizon is a century or more.
Scaremongering about the US national debt or unfunded liabilities or whatever basically requires you to conceptualize the issue as Big Scary Number That Must Be Paid Off Soon. When you actually look at analysis of the fixes required to resolve these issues, and the time horizon relevant for their calculation, they become much less scary. Of course, "everyone pays five percentage points more in payroll tax" sounds a lot less scary than "AMERICAN ECONOMIC COLLAPSE IS IMMINENT."
I think it would be helpful to clarify by what you mean by paying "5 more percentage points". The current Social Security tax is 12.4%, half paid by the employer and half by the employee. Are you proposing increasing the tax to 13.02%, to 17.4%, or to 22.4%? Certainly this matters.
But as messed up as Social Security is, Medicare is worse. It's tough to find good recent stats, but here's what Wikipedia says: "Households that retired in 2013 paid only 13 to 41 percent of the benefit dollars they are expected to receive". So I guess we'll have to raise Medicare taxes by 150-670% to cover that too. (This assumes that each person pays only for their own benefits. In reality, they will have to pay more as each generation is smaller than the last).
But even if we fixed those problems, we still have to deal with the fact that the rest of the budget is not balanced either. There's another tax raise. Not to mention the myriad local and state taxes that will have to be increased as well.
Endlessly raising taxes on productive members of society to pay for unproductive members of society might "solve" the problem for some definition of solve. But it leads to a country that is much poorer and more miserable. As the demands on the productive members of society grow, the temptation to drop out will grow apace, leaving even fewer workers taxed much more highly. As tax rates increase above 50%, as is now possible in New York City and California, future increases will lead to less revenue, not more.
We are already seeing this. The number of people on disability as a percentage of the workforce has grown from 0.5% in 1960 to 5% today. The labor participation rate is still well below the peak from 2000, despite record low unemployment. .
As the rewards for work shrink, the temptation to shirk will grow.
So, no, it's not a matter of just raise taxes by 5%. That won't get us anywhere close to a solution.
My understanding is the 5 percentage points refers to the total rate, so it would be the 17.4% number.
Sure, but there are other ways to tame Medicare spending than "double taxes" or "abolish it." A big reason why Medicare spending grows so rapidly is because US healthcare spending in general is growing rapidly and Medicare covers a population (old people) that tend to be much sicker than average. We could tweak the retirement age, or Medicare coverage, or allow Medicare to negotiate drug prices (as they now can), or raise taxes, or some combination of all these things.
I feel like I addressed this somewhat (on the federal level) with my point about Clinton-era tax rates. Were those really so horrible? Were the 90's so much more poorer and more miserable than today due to taxes? You cite the labor force participation rate as of 2000, but federal tax rates were much higher then than they are now! Apparently it didn't have that much of a depressing effect!
My general point is there are a zillion things we could do and almost certainly would do if the alternative was economic collapse.
This one is pretty shocking, and I didn't realize until my mother got cancer right around her retirement age. It pushed her retirement date a little earlier than she had originally planned, which was a little annoying to her, but probably for the best. In any event, she asks me to help her look through some financial stuff, because even though she's normally pretty good with that sorta stuff, "chemo brain" is a bitch, as is just aging in general. When she was able to get on to Medicare was my first real exposure to how the system works, what it costs (I'm not even sure if I really had much of a grasp on which parts were truly free and which parts you had to pay extra for), what all the options are, etc. I shouldn't have been surprised that it had similar terms to normal health insurance, with things like premiums, out-of-pocket maximums, etc. What I was definitely surprised about was just how shockingly cheap it was, with incredibly low maxes. Like, simply insane. Like, better than the best monetary value I've seen out of even the top tier, most expensive insurance I've ever been offered by an employer, with premiums significantly lower than I've see out of even the bottom tier, most cut rate insurance I've ever been offered by an employer. That was when I realized just how massive of a wealth transfer the program is from young to old. It was also when I realized how the incentives worked. Out-of-pocket maxes so low that if you have literally anything happen to you in a year, then you simply do not even have to consider the price of any other medical service that you might think about consuming.
That's when it sort of clicked, why the large conglomerate that is managing her care has bundled in everything imaginable into what seems to be their "cancer package". If you can squint your eyes and think that it might be helpful for the cancer, for managing or recovering from the chemo, whatever, it's part of their package. They'll pay for Ubers to your appointments, every therapy under the sun (physical, occupational, mental, etc.), even your gym membership (at their extra fancy, extra expensive gym that just so happens to be a part of the conglomerate). Feel like you're not sleeping the best? We'll send you to some sleep specialists, do the full workup. Not fully happy with a rapid recovery of mental faculties from chemo? We'll give you some brain scans, a variety of tests, and surely, more weekly therapy of various sorts. The list goes on. It's a good thing that she's retired now, because she has basically a full-time job just managing and going to all of the myriad of possible appointments and offerings they provide in their neatly-packaged conglomerate, and all of the expenses can be justified in some way or another with respect to the cancer or side effects from the treatment, or something.
On the one hand, cool that she can get so much attention to get every month of vitality possible; I really do value the additional time spent with her, especially with her still being able to be as clear-minded and engaging as she is. Moreover, cool that she doesn't have to constantly worry about money. She hadn't really saved as much for retirement as she would have liked, and pre-retirement, I really got the sense that she was kinda constantly worried about it and how things were going to work out. Now that all the paperwork has been done and the numbers are on the table, she can see how it's going to work, that it's going to be okay, and that she no longer has to worry about it. On the other hand, hot damn, that means that she (and we, by extension) literally do not even have to think for a millisecond about a cost-benefit ratio for literally any possible option within their menu. From her perspective, it is all literally completely and totally free. There is not a single moment where she has to think, "How much tangible benefit do I think this is going to provide for me, and how much do I really value that benefit, to the point of being willing to give up some amount of my own resources for it?" If anything, the only thing that she trades off is just the time of going to the thing and doing it, but of course, she's retired now and has a lot of time in the week. So if she assesses that the tangible benefit has any decent probability of being literally any value more than epsilon>0, why not? How much does it 'cost'? Who knows? Who cares? It doesn't come out of my pocket. I personally benefit from this, because 100% guaranteed that if there was any real expense, she'd be leaning on me to help figure out what's worth it and how to make the finances work. A nice burden off my shoulders, too. I can see the 'cost' now, but damn if the incentives don't do their best at making me apathetic, just because then I don't have to think about that stuff.
A couple final scattered thoughts. First, there was a moment where I thought, "Damn, I don't always sleep the best, and I've had some recurring sleep problems before. It would be nice if I could get a full workup and see if we could fix it. But that would be suuuuuper expensive, and I don't know that I can justify it, given the solid probability that they're not actually going to be able to help me in the end even after I wrack up huge bills." And even some jealousy that she can just go do that for free. I also sort of wonder, society-wide, if we'd be serving our population's health and productivity better if we did stuff like figure out people's sleep problems and fix them when they're young and have many years for those benefits to accrue, rather than make it prohibitively expensive for most of your life and then free right near the end.
Second, I almost wanted to make an analogy to the public school system. People often joke that the school system is mostly a daycare, with incidental ability to help educate children, primarily for the purpose of freeing up parents from having to take care of them. It almost is like getting hooked into one of these big health programs while on medicare is like that. "We'll take your elderly parents, give them constant care, keep them busy coming to appointments and such, and make sure they're at least doing alright," and it's not that genuine medical care isn't there (like how genuine education is not absent from public schools), but that it's more minor or incidental. "We make it so that you don't have to worry about your parent most of the time," just like, "We make it so that you don't have to worry about your child most of the time." A useful service, yes, with some amount of real value, for sure. Like I said, I realized that I genuinely benefit from it in that way. But how effective is it? How costly is it? How efficient compared to possible alternatives? Who knows? Who cares? The bureaucrats and the unions and the conglomerates control all that and don't really want you to know the answers even if you did want to know. All the incentives are just about perfect, so long as the whole thing doesn't blow up spectacularly at some point, and so long as the schools aren't so ineffective that China eats our technological lunch and conquers us via warfare.
When my father got cancer was the first time I discovered a very imaginable gap: long-term care. This turned out to be only a hypothetical problem in his case (there wasn't such a long interval between "brain damage sufficient to prevent living at home" and "brain damage sufficient to prevent living" after all...) but it's something to think about supplementary insurance for, despite how complete Medicare coverage is for so many other costs.
That's not to detract from the rest of your excellent point, though. His last several months of treatment had a price (at printed value; who knows what fraction of that was real cost vs weird provider-vs-insurer negotiation ploys) that would have bankrupted him out-of-pocket, but that was nearly free with Medicare plus a little supplementary insurance. Of course he still fought for every month, when it just took willpower rather than a life's savings otherwise aimed at his grandkids' college tuition, but if he'd had to weigh price vs benefits himself I wonder if he'd have turned it all down. (if he'd seen the future I'm sure he'd have just picked out cheap in-home hospice care instead, but the trouble with those "most medical care expense is in the last year of life" statistics is that you don't know it's going to be the last year without seeing the future)
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