Means of deficit reduction: Medicare and Social Security

Edward Harrison is the main writer at Credit Writedowns.

Yesterday, I argued that the United States faced a policy dilemma in avoiding debt deflationary forces while maintaining fiscal prudence. The reality is that President Obama faces political constraints in Washington right now in regards to budget deficits. He is not likely to get another stimulus package through the Congress unless he can credibly demonstrate a longer-term deficit reduction outlook. In my view, this necessarily means changes to Social Security and/or Medicare.

Last June and July, I presented five charts from Ross Perot’s website which demonstrate the future budgetary problem:

Fiscal Year 2007: before the bubble burst

What becomes apparent if you look at these charts is that the United States faces a very large fiscal problem under present tax and spend scenarios given likely future growth outcomes. In plain English: there is a gigantic hole in the U.S. Government’s balance sheet under normal GAAP accounting. Let’s look at the balance sheet for 2007 because John Williams at has already done the analysis and this was a budget that was created before the housing bust was apparent.

On December 17th, The U.S. Treasury released the annual Financial Statements of the United States Government for fiscal year 2007 (year-ended September 30th), prepared using generally accepted accounting principles (GAAP), audited by the General Accountability Office (GAO) and signed off on by Treasury Secretary Paulson.

The statements still show that the federal government’s fiscal woes continue to careen wildly out of control. Based on my estimate of the 2007 GAAP-based deficit exceeding $4.0 trillion (see discussion below), the term “out of control” is not used loosely. If the government were to raise taxes so as to seize 100% of all wages, salaries and corporate profits, it still would be showing an annual deficit using GAAP accounting on a consistent basis.

The number $4 trillion is the number you would see if the U.S. Government reported its accounts as businesses do on an accrual basis using Generally Accepted Accounting Principles (GAAP). GAAP accounting means that all promises i.e. future pension and healthcare spending must be accounted for on today’s financial statement. If we did not do accounts on an accrual basis, then many companies would go bankrupt when the unaccounted for future liabilities not addressed on their balance sheet came due. In the case of General Motors, future liabilities for pensions and healthcare are a large part of their financial problem.

The U.S. government reports its accounts on a cash basis. That means it matches the cash that comes in the door against bills it must pay in that current year. This is how small businesses run their accounts. Under this methodology, the accounting looks very different. Here is how George W. Bush summed up his 2007 budget deficit (Fiscal Year 2007 Overview).

For 2007, the Budget forecasts a decline in the deficit to 2.6 percent of GDP, or $354 billion. By 2009, the deficit is projected to be cut by more than half from its projected peak to just 1.4 percent of GDP, which is well below the 40-year historical average deficit.

As last year’s dramatic increase in receipts demonstrates, the most important factor in reducing the deficit is a strong economy.

His last words are well-placed because we know that the course of events was quite a bit different than was predicted in this budget. In sum, there is a large hole in the government’s accounts that an order of magnitude larger when you use GAAP. This was true even before the housing bubble and makes plain that the U.S. government’s budgetary problems are structural. (Also see Wikipedia’s entry on the 2007 Budget. It gives a good overview)

Honing in on the problem: Medicare and Social Security

The problem, of course, is Medicare and Social Security. Looking again at 2007 and the composition of spending (Chart of the day: US federal spending and receipts), one can see that 40 percent of the budget went to spending on Medicare/Medicaid and Social Security. This percentage will rise inexorably as the Baby Boom generation retires starting in 2011. If you look at the government’s own accounts (PDF), they tell the story. Notice the over $40 trillion in unfunded liabilities associated with Medicare/Medicaid and Social Security

Social Security and Medicare

How this fits in to today’s debate

These unfunded liabilities fit into today’s policy debate in that reducing Social Security and Medicare benefits would not only eliminate structural budgetary problems, it would also allow Obama to demonstrate fiscal prudence – even while the present deficit balloons. I guarantee you that Summers, Geithner, Orszag and Romer are on to this and that this is a debate of huge importance inside the Administration. I anticipate we will see a Social Security/Medicare change under Obama. The question is how would this change be achieved. There are four possible ways:

  1. Raise Taxes. To satisfy liberals, who have become more and more worried about Obama, one could see the Administration allowing Congress to eliminate the payroll tax exemption on some of the income earned above $100,000. If you listened to Joe Biden on Meet the Press on Sunday, it was clear that the President is going to make pragmatic decisions on budget issues and will not veto bills unless their totality is “wrong for America.” Translation: he would not necessarily add in a payroll tax increase himself, but he would sign a bill that has one if he could tout this as a tax increase for the rich and stress the fact that the middle class would see no rise in the income tax.
  2. Reduce Benefits. Another way to reduce entitlement liabilities is to reduce the net benefits. Obviously raising tax on benefits for those earning a specific threshold outside income would be the taxation way of achieving net benefit reduction. Again, this would be touted as a tax on the rich. Cutting benefits outright is a non-starter and political suicide. On Meet the Press, Biden was unwilling to dismiss the potential that the President would sign a Universal Health Care bill that taxed health care benefits. I think this is a crucial statement regarding both UHC and entitlement programs.
  3. Reduce Coverage. Because medical care has advanced hugely over the last decades, we are now able to keep patients alive (and often healthy) who would have died years ago. As a result, medical costs have skyrocketed. The simple fact is that using all available medical science to treat patients costs a lot of money. This makes attractive the potential cut of Medicare coverage i.e. reducing which procedures and care will be paid for. I expect, this is another option that is going to be explored.
  4. Delay Benefits. This is my preferred option. The average lifespan of Americans has increased tremendously particularly since Social Security was enacted. As a result, retirees today receive many more benefits than they did in the 1940s. (“The 2000 U.S. census revealed that the number of Americans over 65 years old has more than doubled since 1950 and increased from 31.1 million to 34.91 million from 1990 to 2000, largely because of continuing advances in medical science and nutrition.” – MSN Encarta Encyclopedia). These demographics are killing the U.S. and they are going to get worse. Given relatively low fecundity rates among young American women, they will get worse still. Therefore, the U.S. government is going to have to raise the age at which Americans are eligible for Social Security.

In sum, while I prefer a delay of benefits, all of these ways of reducing entitlement benefits are going to be researched and suggested. The Obama Administration does seem willing to address these issues, potentially as a quid pro quo for another round of stimulus.

An alternative view

I would be remiss if I didn’t present you with links to the other side of this argument. This is handled capably by Dean Baker of the Center for Economic and Policy Research, one of the few economists to have spotted the housing bubble early (see his 2002 article here). In April, he penned a piece at Andrew Cockburn’s site called “Hands off Social Security.” I suggest you read this for an alternative view. In addition, I would also recommend his book with CEPR colleague Mark Weisbrot “Social Security: The Phony Crisis.”

One reason Baker is so vehement in his arguments is that he knows ideologues are orchestrating a battle against social security in order to deprive you of your retirement benefits. Remember the 2004 Bush plan to privatize Social Security? What lies underneath this is a desire to give the financial services industry even greater power by allowing it to control the funds for Social Security. So, be forewarned.

In the end, while I have great respect for Baker – and agree with many of his arguments, I disagree with his conclusions (summarized here in his opposition to the film I.O.U.S.A.). Social Security and Medicare must be changed.


In the end, if you are looking for ways to increase stimulus to prevent a double dip or debt deflation while remaining fiscally prudent, a cut to entitlement programs is going to be necessary. As I see it, you can’t have your cake and eat it too.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. Jack

    Social Security is not a major problem. Medicare has immediate funding and structural needs. The source of funding for both is to cut a significant amount in the DOD budget that is obscenely bloated.

  2. mattw

    Combining Social Security and Medicare is not enlightening. The dynamics are completely different, and Social Security is a completely manageable problem compared to Medicare.

    Since the administration is trying as hard as it can to reform health care, I don't think this commentary is really on point.

  3. Edward Harrison

    Unfortunately, I have to combine these programs as they are generally combined in the budget. For example, the $45 trillion GAAP funding cost is detailed as "Social Insurance Exposures" which is essentially Medicare, Medicaid and Social Security combined.

  4. Brick

    There are 3 separate issues here. The first is medicare and it is noticeable that you do not mention some of the solutions used in other countries. Namely that drug prices could be capped as in the UK, all hospitals could be nationalized, doctor's remuneration packages could be performance linked. Each has their problems, but most importantly each is not in the interest of strong lobby groups. My suggestion would be to limit drug prices while encouraging new drug development with grants and removing some of the red tape around patenting new drugs.
    The second issue is unemployment benefit and social security and here the target should not be to remove the safety net, but to actively encourage those on it to seek employment. Most other countries expect their unemployed to go into education or to spend their time in organised (in an office) job search. The risk is that this puts a downward pressure on wages.
    The third issue is pension provisions and the most obvious solution is to raise the retirement age. While I think some of the state retirement rules where people can retire below 50 years of age are ridiculous, I am not a great fan of this solution even if it is phased as other countries are doing. This is the one area where I think people should just be paying more money in whether in taxes or contributions.

  5. we_are_toast

    In your Delay Benefits section, you imply there has been a huge increase in the number of people receiving benefits due to better medical treatments. In fact, almost the entire increase is due to a doubling of the population and the baby boomer demographic bulge now reaching retirement age.

    The life expectancy for someone reaching 65 today, is only 3 years longer than someone reaching 65 in 1950. As soon as the baby boomers die off (Since I'm one, I'm in no hurry to see that happen), the demographic conditions will ease the pressure on the system. Means testing would easily take care of the problem.

  6. Edward Harrison

    we are toast, I didn't mean to imply that there is a huge increase in those receiving benefits yet. I meant to say that this is what we should expect in the future. This is true both because of the size of population and the life expectancy.

    Your figures for life expectancy increases seem low:
    "Life expectancy has been increasing in the United States in recent decades, resulting in welcome gains for individuals but higher costs for federal programs.1 Improvements in life expectancy at birth have occurred for both men and women and across races. Life expectancy at birth for men born in 2004 was 75.2 years, almost 10 years longer than men born in 1950. Life expectancy for women born in 2004 was 80.4 years, more than 9 years greater than for women born in 1950.2"

    The source here is the National Center for Health Statistics

    As for means testing, it does seem fair as long as the bar is set high and inflation-adjusted. The AMT shows what kind of problems a lack of inflation adjusting can do.

  7. "DoctoRx"

    Dr. Harrison

    What did you mean when in "Delay Benefits" you said:

    "These demographics are killing the U.S."?

    How are my retired parents and their cohort in their 80s harming this country?

  8. zorgon the malevolent

    Naturally we can't cut the 1.4 trillion dollars per year we currently spend on the U.S. military-industrial system, broadly defined to include the CIA, NSA, NRO, black projects, DOE Buck Rogers laser beam death rays mounted in Boeing 727s, military pensions, the VA, the Pentagon budget, 2 failed wars (number 3 coming up in Afghanistan), etc.

    Instead we must cut health care for kids and old people so we can fight more lost wars in third-world hellholes.


  9. we_are_toast

    Mr. Harrison, May I suggest that the raw number of people receiving benefits is not what is significant? Since Social Security is like an insurance program, the ratio of those paying for the benefits to those receiving the benefits is far more important. Due to the temporary demographic bubble of the baby boomers, that ratio is temporarily being distorted.

    I would also suggest that since most people think of the beneficiaries at age 65+, that lifespan at age 65 would be a more appropriate number to use to determine future recipients than life span at birth. In fact, if life span at birth is increasing more rapidly than life span at age 65, it would indicate fewer deaths in pre-65 life and have a positive affect on the supporters/recipient ratio.

    This is the source for life expectancy at age 65.

    Thank you for the nice article, it is well worth the read.

  10. zak822

    It always seems to come down to reducing coverage, especially coverage for older people.

    It's doubly interesting to hear this argument made when people are losing their jobs in record numbers and their healthcare coverage with it.

    Cost and coverage are not the same thing, as demonstrated in a number of other countries.

    Cost containment through the use of normal business practices, like negotiating prescription prices or mergers to increase back office efficiencies, are not even in the discussion.

    Most everyone here will be old one day, and employer provided health care is rapidly becoming a thing of the past. How many of you will really be able to afford to pay for insurance (or care), out of pocket?

    I'm not anonymous, I'm zak822

  11. Brian

    Of course, the real problem is that someone currently feeding from the federal trough is going to be told "no."

    Our elected represenatives have been uniquely unwilling to tell anyone "no" in the past 30-ish years.

    Demographics change, however. The older generation shouldn't be too sure that younger ones are going to continue to put up with the budgetary shenanigans of the past few decades, especially after our debtors decide to make additional borrowing more and more expensive,damaging the rest of the economy in the process.)

  12. jerrydenim


    Because of the changing life expectancy of Americans and the accompanying changes in lifestyles a small adjustment to the age of eligibility for S.S. benefits is reasonable. Higher taxes on the very wealthy, and closing some loopholes so more people towards the bottom of the income pyramid pay at least something in exchange for the benefits they receive makes sense. But I tend to side much more with Mr. Baker, this is a classic 'slippery slope' argument. The dark neo-liberal forces who would love to implement a flat 10% tax and eliminate ALL social spending are lurking in the shadows with alarmist screams about debt and insolvency but why is social spending the only government spending these deficit hawks ever care about? I agree with other posters about the insanity of our mind boggling defense spending, but how am I supposed to believe that our government is so broke that it can't meet its obligation to pay grandma's meager social security allowance but Uncle Sam has money all day long for failed banks and can write a 180 billion check on the spot to cover AIG's obligation to pay out 100% on naked CDS contracts to foreign banks and billionaire derivative traders? The untold, unaccounted trillions this country has dumped down a flaming rat hole of fire called the American Financial industry makes all this talk about the urgency of reducing social benefits sound very suspect. I think these people should be told to F' off and find your cuts elsewhere. The posters here have already identified several trillion dollars of low hanging fruit that don't include social welfare benefits.


  13. Hugh

    Single payer universal healthcare would take care of the problems in Medicare. Taking the caps off the Social Security tax, adding means test for high income Americans, and delaying retirement for one year would deal with Social Security.

    It is important to remember that Social Security projects that in 2040, with no changes at all, it could still pay 74% of benefits and could do so for at least the following 40 years. (Caveat: this is a very long term projection and we all understand the weaknesses of them)

    I think the real battle ground is in the 2017 to 2040 area. This is the period when Social Security surpluses are supposed to make up for shortfalls in Social Security receipts. There is only one problem with this. The government spent that money. So just as the surpluses went into general revenues. The shortfalls will have to be funded out of general revenues and this will sharply decrease the amounts available for discretionary spending.

    This is a pet gripe of mine. The government could have made the same commitment to fund 2017-2040 shortfalls out of general revenues even if the surpluses had never existed, or it could have used some mix of the methods suggested in the post to cover the expected shortfalls. Instead it did something very dishonest and deceitful. It was Alan Greenspan, yes that Alan Greenspan, back in 1982 who was the architect of the reform plan. He came up with the idea to overtax lower and middle class Americans to create Social Security "surpluses". These extra monies were simply traded for IOUs to the Social Security Trust fund. These monies were then added to the government's revenues and spent. This was a win-win-win for lawmakers. It gave them more money to spend. Since this money was treated as revenue, it decreased the apparent size of deficits.

    [This resulted in our use of what is called the off-budget number for the deficit, which is the one everyone cited when talking about the deficit. The on-budget deficit is the number where the Social Security surpluses aren't added in. I suppose you could say that since Social Security taxes were in fact a hidden tax on lower and middle class Americans this was an inadvertent piece of honesty.]

    The final win was, of course, that most politicians (of both parties) could enjoy the fruits of this system and be long gone before the day of reckoning arrived.

    So recap briefly, most working Americans have paid a hidden tax for nearly 30 years now. And in 2017, they, their children, and their grandchildren will face the same financial commitment (if there had been no surpluses) to fund shortfalls in Social Security from 2017-2040 to the tune of several trillion dollars. This will mean some combination of higher taxes, reduced benefits, or reductions in other government discretionary spending.

  14. Edward Harrison

    Hugh, thanks for your comments. Your points echo some of the things Baker says.

    As for UHC, I have added a video of Chrissie Romer making some points on that issue to my site. I will probably post a link to the post in the links tomorrow.

  15. Tortoise

    I could not disagree more with the premises of this article. It is filled with politically motivated myths that Edward repeats perhaps without even being aware that he is just writing propaganda.

    Let me focus on one point. “The average lifespan of Americans has increased tremendously particularly since Social Security was enacted.” Tremendously, indeed, and we all have a lifespan than exceeds that of Methuselah. However, reality is that the last twenty years life expectancy has been increasing very slowly. In fact, it would be interesting to see whether one could correct for the six miserable months many terminally ill patients see their life extended (at a cost of more than what they spent for health care in the rest of their lives); I would not be surprised if, after this correction, life expectancy had not stagnated.

    “The 2000 U.S. census revealed that the number of Americans over 65 years old has more than doubled since 1950 and increased from 31.1 million to 34.91 million from 1990 to 2000, largely because of continuing advances in medical science and nutrition.” That is information from Encarta? Let us first correct for population growth. The population grew by a factor of 1.82 from 1950 to 2000. Furthermore, age distribution changed dramatically as birth rates were dropping in the postwar years and immigration patterns changed. We were a "younger" nation in 1950. Correcting for all these “small” things, I wonder how “largely” the over-sixty population went up because of continuing advances in medicine and nutrition. (The nutrition part is a particularly funny joke – how about the obesity and Diabetes B epidemic?)

    Life expectancy has certainly increased after antibiotics and immunization shots and increased some more thanks to decreased mortality in heart disease and cancer but "tremendous" does not seem to be the right word. It is not a foregone conclusion that life expectancy in ten years will be higher than it is today. Sadly.

  16. Tortoise

    jerrydenim said…"Because of the changing life expectancy of Americans and the accompanying changes in lifestyles a small adjustment to the age of eligibility for S.S. benefits is reasonable." I fully agree but the catch is how much is "some adjustment". The life expectancy at 65 (which is what should matter) increased by 1.5 years in the period 1980 to 2000. The age of eligibility for full benefits increased by about that much in the same period. There is no more need for additional changes. Certainly not a need due to the over-hyped increase in life expectancy.

  17. jerrydenim

    "Small" adjustment may be reasonable, but due to the more nefarious goals of the cut social benefits crowd and the obvious glut of other low hanging government largess for the defense industry and corporate welfare for the financial class my conclusion is the "cut social benefits" people should be told to F' off, and to find their cuts elsewhere.

  18. zak822

    Some interesting comments here from those who are willing or eager to cut Medicare benefits.

    People who thought their retirement was secure watched that retirement go the way of Bear, Stearns and Lehmann. Portfolios were decimated, and with them the ability to pay for health insurance if they retire. Employer paid healthcare for retirees is disappearing. Anyone who believes we should lower Medicare benefits should explain what will happen to these people when they can't pay for their own insurance.

    This is not solely an economics issue. It's about what kind of country we want to be.

  19. LIL

    Quite frankly an American ought to be able to opt out of Social Security. I am 35 and I dang well know I will pay into a system I will NEVER see a dime from. Don't you guys and gals see that the USA is an intellectual Bell Jar ? If idiots make up our policies now, what will happen in 30 years? Today's idiot will look like a genius. As Churchill wants said Americans exhaust every other option until finally, they do the right thing. I really rather take my chances on my own and not be part of that system and save my own money I would have otherwise put into that program.

    Just a thought.

  20. Bill

    Unfunded liabilities are tricky to deal with because they assume future economic growth rates.

    I recently heard a good idea from Steve Conover about government reporting of unfunded liabilities: "I, for one, would be interested in (at least) a sensitivity analysis as an addendum to the FRUSG, showing the NPV result for several levels of real growth above and below that used in the base case. Heck, a good start would be clear statement revealing the growth rate they assumed for the base case."

    One option not discussed by Edward Harrison is for those Americans who do not need the Social Insurance programs (Medicare, Social Security) to not receive them. A millionaire doesn't need Social Security. If the programs are intended to be Social Insurance programs, then whether or not you contributed to them during your productive years shouldn't determine whether you receive benefits from them. Means Testing should determine whether you receive benefits from them. I'm sure this would save a lot of money. This idea has been mentioned in the comments, and that's encouraging.

  21. juan

    Dean Baker and some others are quite good but – if interested in the nitty gritty – Bruce Webb is the go to guy.

    I would suggest taking a look at what he and associates call "The Northwest Plan" – (it's my understanding that a few people in the present administration are also doing so) – links to which can be found here

  22. bobn

    Dean Baker says:

    "The Congressional Budget Office projects that Social Security, by drawing down its trust fund, will be able to pay benefits until the year 2049 with no changes whatsoever."

    This fully and completely neglects the fact that there is nnothing in the trust fund but government IOUs. With *or without* that farce, this can only end by selling debt, raqising taxes or cutting benefits. He may have seen the bubble early, but he's just lying on this one. Krugman does it too.

  23. VG Chicago

    May I suggest a few items to consider:

    Stop these stupid wars we are currently engaged in

    Scale down the DOD to 1/10th its current size? There’s no bogeyman I can identify to justify its current size.

    Scale down the US prison system to 1/10th its current size. There’s no reason to keep one percent of the US population behind bars for decades on end and another 3 percent of the US population on probation on frivolous charges just to enrich the lawyers.

    That alone should more than cover social security and universal single-payer health insurance for the country.

    Failing to enact the items above, may I simply suggest a revolution? 230 years since the last one is just too long – we need to clear some bad blood.

    Vinny G.

  24. juan


    Through very small and triggered increases in FICA, the 'plan' mentioned above brings long-run sustainability. I would like to say this might bury the often misinformed critics but it might, instead, only drive their ideological fervor to higher levels.

    Bonds are also 'IOUs'.

    Is the actual argument here that government will be forced to selectively default…and that this will not have more global consequences, even to the detriment of whoever might hope to gain.


    I'm in favor of means testing entitlements, posthumously.

    A diseased person's estate in excess of $x million (name your figure) has an obligation to return y (name your figure) percent of the Medicare and Social Security benefits received over a lifetime. Otherwise, it's just a pass through to heirs.

    There are two strong arguments for this approach: the diseased will not feel any pain of curtailed benefits; on the contrary, they will enjoy tremendous gains from the restoration of our nation's fiscal credibility.

  26. Tortoise

    bobn says "This fully and completely neglects the fact that there is nnothing in the trust fund but government IOUs." Well, money is fungible and you cannot say that one pocket is empty while the others are full. I hope that next time you go to the bank they will tell you that the vault where they put your money is empty so better luck next time. If America defaults on the loans it got from the working class, then it has just defaulted.

    The means test is a Trojan Horse and shame to anyone who does not understand it. If it OK to default on the government's obligations to the wealthy owners of an asset, why not to everyone? How about a means test in paying back the owners of US bonds or in distributing dividends? Anyone thinks it is a good idea?

    The means test will save little but will undermine the legitimacy of Soc. Sec. claims.

  27. coberly


    actually most of the comments here are much better than the main article.

    there are a few commenters who have bought the propaganda and are unable to think their way out of their favorite sound bites.

    i have tried to help them in the past, but they just put their fingers in their ears and shout louder.

    you don't need to raise the retirement age… and it would be cruel to do so.

    you don't need to means-test. the whole point of Social Security was to avoid "welfare." People pay for their own Social Security… even if you are too dumb to understand that.

    The rise in life expectancy since the last time the tax rate was set may have something to do with a need to set the tax rate a little higher.

    The higher rate would not even be noticeable, and you will get the money back when you retire, and you will be so glad that someone smarter than you made you put a little more away for your own retirement.

    But we can't have that. Run and shout. We are all going to die. Medical costs are going to go up because we are going to be living longer. Better to cancel our insurance and cut off our heads.

  28. Edward Harrison

    In response to an e-mail, I just wrote the following:

    I did leave out means testing. At a minimum, I hope people realize that changes are probably coming – especially if Universal Health Care gets rejected. One way or another Obama will get a grip on health care costs and many will not like the methods.

    The reason I favor delayed benefits is that this can be staggered in over time (say starting for people born after 1950 or 1955) in a way that gives people ample opportunity to adjust. Moreover, it does not require a whole new bureaucracy. It is a simple edict – all the other proposals are complicated and onerous.

    Additional thoughts: Obviously, I can't do justice to this subject in a short blog post. But, the major themes have been covered in the post and by commenters.

    Thank you for your insights.

  29. Johnny Oops

    Mr. President, Please Don’t Take My Medicare Insurance Away

    Just because I’m a Senior Citizen doesn’t mean you should write me off in favor of a younger generation who never worked for the benefits you are trying to transfer from me to them.

    If I need a hip operation, please don’t deny me because I’m old and going to die anyway.

    If I need a knee replacement, please don’t tell me with the time I have left I can limp around or use a cane or a wheel chair.

    Who are you and your Congressmen henchmen to decide when I do or don’t need an MRI that might detect a problem that could save my life?

    What happened to us all getting insurance that is as good as the health insurance that members of Congress have?

    Why are you trying to take our benefits away?

    Why are you trying to make it unprofitable for our doctors to give us the care we need?

    Why are you doing this to us?

    Do you think we’re disposable?

    Do you think we won’t notice what you’re doing?

    Do you think we don’t care?

    Do you think we don’t vote?

    Hi, this is Arthur Levine. To find out more about what’s happening with Medicare, please go to

  30. coberly


    the cost of fixing social security, given the Trustees numbers, would average a 22 cents per week raise in the tax each year. a better way to do it would be to trigger a one tenth of one percent (80 cents per week) tax increase whenever the Trustees report short term actuarial insolvency.

    the cost of fixing Medicare is higher but not unaffordable… not even close. the question you have to ask yourself is how are you going to pay for health care without it. and what else are you going to use the money for: the Trustees numbers show an increase in Medicare costs that will be much much less in actual dollars than the increase in wages that is occurring at the same time. you are saying you don't want to have to spend any of your money on living longer. you need it all for six new cars a year?

    i assume "delayed benefits" means forcing granny to work a few more years even if her knees have gone out and she really hates her job, and would have paid the 2% tax increase if only she had known… because by forcing her to work a couple of extra years she can make more money for her boss.

    i am going to get a little hysterical here: raising the retirement age is stupid and cruel. but it is the kind of "bright idea" a young person who likes his job would come up with when he can't think too clearly.

    after all: you are going to live longer. what else could you possibly want to do with that time but work for money you could have saved for at the rate of 22 cents per week increase each year.

  31. run75441


    Gonna agree with coberly plus some. I believe Bruce Webb has some excellent articles on SS over at Angry Bear and he, along with coberly, are the acknoledged experts in this arena. In 2017 if payouts exceeded revenues, how badlky would we be for the first payout? By SS own calculations under an Intermediate Cost scenario, the first payout from the GF would be ~$20 billion. In 2037 when the GF is at the bottom and no more can be drawn from it as taken from the GF, the amount withdrawn is ~$340 billion. This is under an Intermediate Cost scenario as forecasted by the SS Trustees and in reality the cost scenario is somewhere between Low Cost and Intermediate Cost. The CBO has a much better outlook.

    Leave SS (OASI) alone and concentrate on Medicare/Medicaid, DI, and HI. They need the help and are entirely solveable as coberly points out. If the plan is to never touch the TF and make it "our" gift to the federal government, then coberly's plan is all that is needed. Hopefully we can convince a few senators coberly's plan will work.

  32. Edward Harrison

    So, coberly, as I indicated offline to you by e-mail, we are probably in agreement on the desire to use the wealth we have earned in the U.S. on things that really add value like health care.

    You seem to be agreeing with me that these programs are underfunded, particularly medicare. The question then is how to adequately fund them. I presented the possibility of increasing taxes as a way to fund the shortfall – that is what you are suggesting we do. My preference would be to stagger in an increased age requirement for those under the age of, say 55, so that by the time those now 40 retire, the retirement age is 70.

    On the whole, as I understand it, your view and mine are not that far apart. What does separate us is that you want higher taxes, I want delayed benefits.

  33. Bruce Krasting

    All of this discussion assumes that we can fix SS by delaying benefits a few years or raising taxes a tad.

    You are all wet. This problem is much bigger than you think it is. SS puts the NPV of the unfunded amount at $14 Trillion currently. Folks, there is no 'fix' to that number.

    There has to be a means test. The test has to be both on income and assets. We have to cut at least 1/3 of the beneficiaries of SS.

    Anything short of that and you are just kidding yourself. The economy would have to grow by 3%+ each year for the next twenty years for their to be a soft landing here. That is simply not going to happen.


  34. Tortoise

    Some people are so misinformed about the finances of Social Security. I am talking about you Bruce Krasting.

    I suggest that there should be a means test every time you want to withdraw money from your bank. This should help the banks, I am sure.

  35. coberly


    in a longer forum we could discuss the relative merits of raising the tax vs raising the retirement age.

    my argument would be basically that raising the tax is much much cheaper than you have been led to believe, and the raising the retirement age involves cruelties you have not yet thought about.

    you objected to my use of strong language regarding your article. here is the problem:

    you said " If the government were to raise taxes so as to seize 100% of all wages, salaries and corporate profits, it still would be showing an annual deficit using GAAP accounting on a consistent basis."

    this is very alarming. i was taught that the purpose of accounting was to give an outsider an accurate understanding of the financial condition of the entity under consideration. there is no way that "seizing 100% of all wages etc" is an accurate picture of the annual deficit… or even the infinite horizon deficit."

    a reasonable reading of the Trustees Report shows an annual deficit in Social Security and Medicare in the latter part of this century amounting to about 15% of wages. Added to the current 'tax' of about 15% of wages, that adds up to a bill for retirement and medical care in retirement of 30% of wages.
    This sounds like a lot until you consider two things:
    what you are getting for your money, and what your income stream will look like. What you are getting is your living expenses and medical care paid for for up to and beyond one third of your adult life. And what you have to pay for it with is an income that is 230% of what you get today.

    You seem to think that paying 30% of your wages for the ability to not have to work in an old age that may be long but may not be free of health problems, job losses, or better things to do… is an intolerable burden, even if you have twice as much money after paying for the kind of retirement that most people think is the only reason to work after you have paid for the groceries for the kids.

    you can of course believe this. but it is not honest to hide the choice from the people whose money and whose choice it is. it is not even good accounting.

    and i can't help adding that if atul gowande is right, and i think he is, health care costs can be cut in a third, eliminating all but that 2% increase i spoke of that is needed just to pay for more years in retirement.

  36. coberly

    Harrisons reply to tortoise leaves me perplexed.

    tortise is right that collecting your social security check is more like withdrawing money from your savings account than it is like asking for welfare.

    so the "means testing" argument is right on.

    if Harrison finds that bizarre, he needs to think a little more about what Social Security is.

  37. coberly


    having a strong opinion based on a one sentence "understanding" of the problem does not constitute
    actually knowing what you are talking about.

    may i kindly suggest you learn something…say, read the Trustees Report, especially the numbers, and get back to us.


    i read Kristoffs essay and generally agree with it, but I am not sure what your point is. That the discussion here and elsewhere is mostly emotional blats by people not well informed, and some very elaborate self deception (to give them the benefit of any doubt) by "non partisan experts" is true enough.

    I like to think my own position is rather carefully fact based, and neither liberal nor conservative nor "non partisan expert"… which appears to mean "educated and paid for by Peter Peterson Foundation."

    but sometimes it is necessary to know which facts are important and which merely lead you on a merry chase after your own tail.

  38. Edward Harrison


    you consistently seem to misconstrue my arguments. I never made the quote you referenced: "If the government were to raise taxes so as to seize 100% of all wages, salaries and corporate profits…"

    I also never addressed Tortoise's means testing argument in any shape or form. I suggested he not make personal attacks.

    The same is true again with you. You say: "the raising the retirement age involves cruelties you have not yet thought about."

    If you want to push my buttons, that is certainly a way. Given the fact that I have an 80 year-old mother in deteriorating health, given the fact that I have seen a whole generation of my family wiped out by cancer and stroke, given the fact that three immediate members of my family have suffered long, debilitating illnesses, I have actually thought a lot about these very issues, sir.

    Rather than make false assumptions, I suggest you stick to your facts and let them do the talking because those arguments have merit.

    Here is a post you might enjoy, given your pre-disposition:

  39. Tortoise

    Ed, I really do not like making "personal" attacks but I do need to address those who make arguments that I consider totally unfounded. If someone comes to your house and claims that he owns it, then you make sure you refrain from personally attacking him. Or, if your Fidelity or Vanguard account suddenly disappears, you be magnanimous and let it be. Having one's social security money taken away is exactly this thing.

    Projections about SocSec viability vary among experts but let us use our own common sense. Perhaps you are not an expert in actuarial science but I know that you will appreciate the following: A man works from age 22 to age 67 and he and his employers make contributions to social security. Using some average numbers for today, that is about $10,000 per year in today's dollars. After 45 years, he goes on social security and enjoys (on average) 9 years of hardly extravagant pension, roughly $22,000 per year. Is that welfare? Is that philanthropy? Or it is just getting back PART of what he should get?

    Those who say that they would like to opt out of the S. S. system are right in the sense that, the same amount of money invested in US Bonds would have done better. But asking that S. S. benefits be curtailed on the basis of any justification and for anyone (even Bill Gates) is tantamount to arbitrary nationalization of private property or EMBEZZLEMENT.

  40. coberly


    I said "you said." Apparently you merely quoted someone else who said. You did not make your disagreement with that someone very clear, at least to me.

    Social Security and Medicare have nothing to do with the budget deficit. They have separate funding. The deficits projected in their own accounts are only an indication that it may become necessary to increase the taxes that pay for them. Or to make some other changes that reduce costs.

    The possible tax increases are so small they are never discussed in polite society because that would cause the whole "looming entitlement crisis" to be laughed off the front pages. About an 80 cents per week increase in the Social Security (OASDI) tax from time to time over the next 75 years… at a DECREASING rate, not the increasing rate dishonestly implied by the Trustees narrative, but not their numbers.

    Even Medicare costs will only increase if medical care costs increase. Even if nothing is done about medical care costs… there is good evidence they could be cut in half from those projected… would the prospect of increased medical care costs be the best time to cut your Medicare insurance? And it turns out that under the worst case scenario the increase in Medicare costs is a small fraction of the increase in wages expected over the same time. So you want to cut Medicare and so what? go to the private insurance folks and ask for a policy that will keep paying after you have quit work and gotten your first expensive illness?

    Nope, you want granny to keep working into deep old age because "she is going to be living longer." She may have arthritis, but she will be living longer. She may hate her job, but she will be living longer. She may be willing to pay the 2% tax increase that would allow her to retire young enough to enjoy her last years, but she will be living longer… and don't you know, the "benefit to the economy" of every worker who does not retire is 90,000 dollars per year. Of course the worker does not get that. And he doesn't want to work. So what we have is forced labor. Based on fraud instead of the whip and the slave catchers. And that reminds me, guess which section of the population will not live to collect any benefits if the retirement age is raised.

    Yep, the poorest with the worst jobs and the worst health and the worst life expectancies: exactly the people Social Security was invented to help.

    And they pay for their retirement themselves. But we have highly paid highly educated non partisan experts who can look at graphs and tables all day and say.. lets raise the retirement age, and no, don't tell the people that all it would cost them to be able to retire just like rich people is 80 cents more per week.

    If I have again misconstrued your argument, I remain open to correction.

  41. coberly


    you are correct in principle. your numbers are a bit off. and social security is a better deal than bonds. the insurance effect to start with.

    and when you actually calculate the "returns on investment" Social Security beats most investments except in the case of the fairly rich, self employed, with no spouse, and not long life expectancy. and even these people are in the position of someone who has never had a fire, so he complains that his fire insurance was a bad investment.

  42. coberly

    Harris says

    "if you are looking for ways to increase stimulus to prevent a double dip or debt deflation while remaining fiscally prudent, a cut to entitlement programs is going to be necessary"

    this seems to involve collapsing time. the present recession, the present debt, wouldn't seem to have much to do with the "projected deficit" in Social Security which will not arrive until 2037.

    or if you are of the school that says that money borrowed from poor people doesn't have to be repaid, then the Social Security "deficit" does not appear until about 2016.

    Still seems hard to see how this affects the current recession.

  43. coberly


    seems to have left the building.

    he said that "there is no fix" to the Trustees present value 13 Trillion dollar deficit.

    he is wrong. if he read and understood the next line in the report, he would see that the fix is "3.4% of payroll." that's a 1.7% increase in his payroll tax. hardly a crippling burden. especially when you know that by the time the bill comes due, his income will be 230% of what it is today… again those are the Trustees numbers. but it is asking too much for even the non partisan experts to read ALL the numbers and think about what they mean.

    Shouting "we're all going to die!" is so much more fun.

  44. Bruce Krasting

    I am sorry that I missed this discussion. I was fighting a flood.

    I have read the Trustee report. I wrote a total of three articles on this topic in the last 6 weeks.

    It is my view that there is a zero chance for tax increases to fix SS. The economy is still weak. We are not out of the woods. SS is a regressive form of taxation. It would be very bad economic policy to raise taxes on 90 million working people. That idea is simply off the table.

    So the option is to cut availability. There is no other choice.

    Okay all you nay sayers. Here is my plan. I would love to have your thoughts on the fairness of this. I think we could "fix" SS if:

    An individual who has taxable income of $120k per year, or, if they have net assets in excess of $1mm they are not entitled to receive SS benefits. (this does not impact availability of medicare benefits).

    Just assume I am right that these limits would fix the problem.No new taxes. Possibly there could be cuts in payroll taxes. Much better economic impact.

    I think America is on very poor financial footings. To be indelicate I think we are broke, but we do not know it yet.

    We have to tax wealth. We have to tax baby boomers. We have to think of the future.

    Under my plan I would lose the benefits that I paid for.

    Would a plan on these terms be fair?
    Keep in mind that as of today we are talking of paying $15,000 to someone who already makes $120K, or has $1mil in the bank.

    I look forward to your comments.


    Links to my articles on SS:

  45. coberly

    Bruce Krasting

    flood fighitng always makes a person feel better.

    but your dogmatism about Social Security is misplaced. You really don't know enough for your opinion to be taken as seriously as you take it.

    The tax increases that might be needed by Social Security are far in the future and very small. And they aren't really "tax" increases. They are in increase in the amount of money you need to save if you are going to be living longer than your grandparents. The reason your savings has to be collected by a tax is that most people are not smart enough to save enough. Your ideas to the contrary are based on emotion and the emotion is not called for by the facts.

    Your plan in fact raises new taxes on "the rich." That would turn Social Security into welfare, and it is not necessary. That person "we" pay 15k/yr to paid that money into the system. It is "his" money. That's the whole point about Social Security. As it happens, your "regressive tax" turns out to be quite progressive if you are smart enough to turn the penny over and look at the back: the more money a person has paid into social security the smaller is his RATE of return. He gets more money back because he paid in more, but he doesn't get quite as much effective interest, because that money is used as in insurance premium to help out the folks who paid in their money, but didn't pay in enough to support them at a decent level when they retire.

    then ask yourself what is the logical significance of "a tax on 90 million"?

  46. Tortoise

    I agree with Coberly. Social security is not welfare and is not philanthropy. It is a program of self-insurance of all the working men and women, devoid of insurance transaction costs (hurray!) and managed by a government agency (Oh oh!)

    Bruce, If you want to "stick it to the rich", social security is not the right place. The issue is not just economic. It is also political and cultural. Imagine if, next time you go to money you deposited in the bank, you have to provide proof that you need the money; then you go to the welfare (I mean withdrawals) cashier to get your money. So much about dignity!

    And, again Bruce, if you think the US is broke, what do you propose? Have you written any articles suggesting that taxes be increased, defense spending be curtailed, and the departments of Energy, Education, and other useless agencies by abolished? Have you suggested that lobbying become illegal or whatever? How is social security the problem?

  47. dwight baker

    Mr. Max Baucus Personal Empire Builder while Stealing from the American People
    The Real Dirt on MAX BAUCUS
    Health Care Reform led by him—-Don’t think so


    Apart from all the destruction, lost government revenues from the law have opened some eyes. According to the Mineral Policy Center, mining operations on federal lands produce $3 to $4 billion worth of minerals each year–and the public doesn't get a cent. Royalties, which nearly every other developed country charges, would add hundreds of millions of dollars to the federal treasury.

    The 5,000-acre Stillwater Mine outside Yellowstone National Park holds platinum and palladium deposits worth $30 billion. The Johns Manville and Chevron companies have jointly applied to buy the land for $20,000–less than $5 an acre. "Clearly, the American people, who own the $30 billion worth of minerals, ought to get a fair return on that," Lyon says. "And the land should not be sold," he added. "That's in violation of the Federal Land Management Act, which says that the land policy should encourage the retention of public land, not create in-holdings."

    The Clinton Administration, under the aegis of deficit reduction, last spring asked for a 12.5 percent royalty on minerals extracted from federal lands, but Western Democrat Senators convinced the President to back down.

    Industry has countless arguments against real reform. They claim that royalties and expensive environmental measures will close down mining operations everywhere. They present scenarios of thriving communities turned into ghost towns, skyrocketing consumer prices and general economic disaster. But Lyon replies: "Mining has never been a sustainable industry. It's always been boom or bust. We think that the idea of reform putting the industry out of business is a red herring." The 1872 Mining Law only covers one-third of hardrock mining in the U.S. The rest is on private, state, or tribal lands, where the industry has no trouble paying royalties, and companies often lease lands to each other, charging royalties ranging from five to 20 percent. Even the family of Senator Max Baucus (D-MT) gets royalties for mining on its land. Yet Baucus has told Clinton that collecting royalties from federal lands will break the industry. "If royalties are good enough for the Baucus family ranch," Lyons asked, "why aren't they good enough for the American people?"

    A MAX BAUCUS INSIDE DEAL–interview-with-bill-donald-3rd-generation-montana-rancher-


    Research by Dwight Baker

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