Saving Social Security and Medicare: Fixing the Retirement and Health Care Crises
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By , 1 in 5 of us will be eligible for that senior ticket at the theater. As more people live longer, the social and economic systems designed to care for them are changing. Moreover, in the s, a large portion of families had access to stable, fixed pensions in retirement, and about a quarter of all workers were covered by generous, union-negotiated contracts. Staying in the same job for decades was common. None of that is true anymore.
There is a Retirement Healthcare Crisis: Be Prepared
Meanwhile, fixed pensions have all but disappeared, and union membership has fallen by more than half. Nearly 1 in 3 nonretired Americans has no retirement savings at all. Much of the U. Spending on long-term care is expected to more than double from 1. The result is a social tension: As health care companies seek to reap not only efficiencies but also profits from a jury-rigged, outdated and overburdened system of elder care, how do we protect those who are often most vulnerable to exploitation? In nursing homes and assisted-living centers, ever more ubiquitous arbitration agreements leave the elderly without access to a basic civil trial.
Hospice care, beloved by many, is seen as a potential profit center by companies seeking government contracts while providing diminished service to those at the end of their lives. And Medicaid, once intended to be a last-ditch safeguard for the poorest of the poor, is creaking under the weight of new obligations. But millions of U. But neither the privatizers nor even the actuaries who made the projections for the recent Advisory Council on Social Security have taken these facts into account when projecting the rate of return for equities.
But if the economy is going to grow at less than half the rate of the past 75 years, as the Social Security trustees predict, then the return on equities cannot maintain its past performance.
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Over the past 75 years, the stock market has averaged a real after-inflation annual return of 7 percent. Privatizers argue that the extra risks of the market smooth out over a long period of time, making the market the best place for retirement savings. And they complain that employees whose savings are primarily diverted to Social Security are unfairly prevented from cashing in on these higher returns. But it is precisely the long haul that one can actually say something about. In the short run, all kinds of speculative bubbles are possible.
Psychological factors—most obviously, the expectation of either higher earnings in the future or simply higher stock prices—can drive the stock market to seemingly unlimited heights.
While awareness about future healthcare needs—and their associated costs—is growing, only a minority of financial advisors and their clients are starting to integrate healthcare costs into retirement plans, says Healthview Insights. How much do you keep as a lump sum for emergencies? Those include restoring Social Security to a secure financial footing by making changes to both benefits and taxes. If you are lucky and do not require that this income be used for long term care, then it can be spent in anyway you want. There is a Retirement Healthcare Crisis: If prices continue to rise faster than profits, this ratio could go higher still. Portland Planning Board gets ball rolling on Commercial Street hotel, condo project.
But over a long period of time—certainly well within the enormously long year planning horizon for the Social Security system—the price of stocks is limited by the earnings of their underlying assets. That is, stocks are ultimately valuable because the companies they represent earn profits.
Saving Social Security and Medicare now seems hopeless
And it will be higher as long as enough people believe that it will. But this process has an upper limit, as the Japanese learned all to well in At that time the Nikkei index of Japanese stocks had reached 38,; it now stands below 14, No one can safely predict when the stock market will reach its upper limit—anyone with such forecasting acumen could get rich overnight. But there are certain things we can pretty much rule out when we look at a long enough period of time. For example, the price-to-earnings ratios of stocks in the United States are now at near-record levels of 33 to 1. If prices continue to rise faster than profits, this ratio could go higher still.
But would investors still hold stocks if it reached to 1?
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It strains the imagination that they would, yet these are in fact the consequences of assuming that the market will continue to provide a 7 percent return. As noted above, returns on stocks depend on profits, and the growth of profits is proportional to the growth of the economy. If the economy grows at half of its past rate, which is the assumption underlying the dire Social Security forecasts, then profits cannot grow as fast as they used to. And so, if we are to accept the projections of a 7 percent rate of return, we must also believe that the price of stocks will rise meteorically in relation to earnings.
The arithmetic tells us that we would see a price-to-earnings ratio of to 1 by So we can safely conclude that the forecast of the privatizers and of the Advisory Council on Social Security of a 7 percent real rate of return on equities is, for all practical purposes, impossible. It turns out that the rate of return that is compatible with their projected economic growth is about 3.
Adding these in knocks the return to privatized accounts down another percentage point, to 2. And this is still a very charitable evaluation of privatization. Its advocates would like to maintain the mandatory character of Social Security while channeling this money into private accounts. They could hardly choose otherwise. Most households have not taken advantage of existing tax breaks for private savings. According to the most recent data available, of the Forcing people to save and invest their money into privatized accounts raises a host of interesting but not easily resolvable problems.
The government will be to certify certain mutual funds for participation in this system. It will have to protect against fraud and other forms of abuse. There will be a lot of political pressure to bail out funds that go bankrupt. And will the government prevent people from borrowing against their forced savings? How will it enforce the conversion of these savings into a stream of retirement income?
Even if all these problems could be resolved at reasonable expense, and without creating an enormous, hateful bureaucracy, the big question remains: That means a major tax increase, enough to guarantee a negative return for the first generations of privatized savers. A number of other dubious arguments advanced in favor of privatization are addressed in chapter 5. These arguments have been put forward with increasing urgency as the privatizers struggle to achieve their goals before the public discovers that stock prices can go down as well as up.
For example, many people would like to raise the normal retirement age. The idea might seem reasonable enough at first glance, since average life expectancy is increasing each decade. But consider what it means in light of the vast discrepancies in life expectancy among demographic groups. A typical black male worker who is 39 years old today can expect about 2. Do we really want to drastically worsen that ratio by taking a year or more away from each?
Differences in life expectancy along class lines—income, occupation, and education—are about as big as the disparity by race. Raising the retirement age is therefore one of the most regressive ways to cut Social Security spending.
It is analogous, in the realm of tax policy, to a per capita income tax increase. Other proposed fixes are similarly regressive, and unjustifiable on economic grounds, yet they seem to get serious attention. One of the more prominent of these discussed in chapter 4 is the proposal to cut the Social Security cost-of-living adjustment COLA , under the assumption that the consumer price index CPI , on which COLAs are based, overstates the true rate of inflation see Baker A panel of economists was appointed by the Senate in for the purpose of determining how much the CPI overstates inflation.
If this change had been made 10 years ago, there would be at least , more senior citizens in poverty now than there are currently Weisbrot , For example, if we have been overstating inflation by as much as the commission claims, then real income has been growing a lot faster than we thought—so fast, in fact, that most Americans must have been living near or below the poverty level in a year in which 57 percent of households owned their own homes and 76 percent had cars. Furthermore, the whole history of declining real wages for the majority of workers over the last two decades will also need to be rewritten—conveniently for some—as an illusion.
It means not only that we have underestimated real wage growth in the past but that we are similarly off the mark in forecasting the future.
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The irony of this effort to redo the CPI is that, if its proponents are correct, their rationale for cutting Social Security benefits disappears. Even the most shameless granny-bashers should have a hard time justifying this kind of redistribution. To take just one example: In , the CPI rose 1.
This is a large adjustment, but the Boskin Commission, without conducting any original research on the subject, asserts that this is not enough. Their arguments are not convincing. In the case of cars, the BLS asks auto companies how much of their price increases are due to quality improvements. It is hard to imagine that these companies would respond with severe understatements.
The Boskin Commission was stacked with five economists who had previously proclaimed their belief that the CPI seriously overstates inflation. They looked for everything that might support this conclusion while overlooking evidence and arguments that pointed in the opposite direction. The scenario is a sad illustration of what happens when those pursuing a political agenda—in this case the Senate Finance Committee—attempt to corrupt the process of estimating fundamental economic statistics. Congress has thus far failed to incorporate the Boskin changes, but the issue is far from settled. Social Security and Social Insurance.
Saving Social Security and Medicare now seems hopeless - The Washington Post
In , the poverty rate among the elderly was more than 35 percent; by , it was twice the rate of that for the general population. Largely as a result of the Social Security program, it has since fallen to For two-thirds of the elderly, Social Security makes up the majority of their income; for the poorest 16 percent, it is their only source of income SSA b.
The coverage of the program is nearly universal—about 95 percent of senior citizens either are receiving benefits or will be eligible to receive them upon retirement Advisory Council , For a society that wants to ensure some minimum standard of living for its elderly, this is an important achievement in itself. But it also allows for other accomplishments that would be difficult or impossible to replicate in the private sector. And the benefits are portable from job to job, unlike many employer-sponsored pension plans.
The success of Social Security also owes much to the superior economic efficiency of social insurance as a means of providing core retirement income. On these strictly economic grounds alone, the case for Social Security is strong. But social insurance also embodies a different ethic and a different conception of the relation between the individual and society. The ethic is a solidaristic one, which is different from either self-interest or altruism. It transcends this dichotomy in favor of a collective self-interest that promotes the advancement of everyone.
Most of us will grow old and will, either before, or during that time, experience health problems or reduced capacity for work. We can contribute when we are relatively young, healthy, and working, and draw benefits when we are not. Some will draw a luckier number in the genetic lottery or inherit wealth or even be more successful or healthy or live longer by virtue of their own efforts or wisdom; but this is no reason to deny the necessities of life to anyone else, any more than we would want our local fire department to ignore calls from the poor, or even from those whose fires were caused by their own carelessness.
The case for social insurance is also grounded in a view of society that differs considerably from the agglomeration of atomized individuals, each maximizing his or her own utility, that forms the foundation of contemporary neoclassical microeconomics. In this broader context, the national product is seen more as a social product, which requires the efforts and cooperation of all who work. Despite the political resurgence of a market-driven ethic in the last two decades, the majority sentiment is probably still closer to the solidaristic ethic embodied in the principles of social insurance.