Tuesday, March 27, 2012

We Can Work It Out

Do we understand our future?

If there is one thing I would like to see our government take on more than any other issue, it is entitlement reform.  I do not think people understand the incredible benefits to our country of moderate changes to these programs.  Social Security and Medicare are plunged so deeply in demagoguery that the mere mention of repairing these entitlements is met with spending millions making sure you are adequately scared of and confused by the proposal.

What should be done about these programs?  I would vote on phasing both out totally, but I would take any reforms that put entitlements back on a sustainable path.  Below are some of the moderate approaches being debated today.

Social Security:

Raise the retirement age to 70 - Life expectancy has gone from 63 years-old to 78 years-old since the 1930s, yet we have not raised the retirement age even close to that rate (we are gradually moving this up to 67 from 65).  Since a greater portion of this money is being borrowed against or children, let me ask you a question:  Would you retire at age 65 and ask your kids to cover your retirement for 5 years until the government provides you a check?  No, of course not, but essentially by voting for those who do NOT support entitlement reform, you are choosing to let your kids and grand kids pay for your retirement. 

Move to Price Indexing - Currently each new generation retiring gets a bigger real benefit than the previous one. The reason is the benefit is based on wage inflation.  Since average wages have risen faster than the average cost of goods, people on Social Security are getting a bigger real dollar benefit than previous generations.  Thus the actual benefit received keeps going up.  If we just make the purchasing power the same for each generation, we could save massive amounts of money and seniors would continue to do just as well as they are doing now.


Premium Support Model - Simply stated, the proposals I have seen mainly suggest moving to a premium support model, in which workers would get a choice of private health plans or the traditional fee-for-service Medicare option.  Under a plan like this you can choose the average plan which your premiums would be covered or you could choose a more expensive plan and pay more out of your own pocket or a less expensive plan and receive a government rebate.  Basically, the idea is that creating choice allows for better competition which allows for higher care at lower costs.     

Remarkably, the benefits for changing Social Security and Medicare even 10 years into the future (for people 55 and under) would have an immediate and wonderful impact on our economic lives:

1) Reduce Long Term National Debt - Obviously, our current budget (no entitlement changes) keeps shoving our debt burden higher and higher.  Changing just these things will dramatically flatten this curve, and thus the burden your children and grandchildren are left to pay.

2) Increase Dollar Value - Have you noticed that everyday items like food and gas keep getting higher and higher in price.  Much of this can be explained by our weak dollar.  A weak dollar makes imports much more expensive and takes a big bite out of your pocket book.  The cause of a weak dollar is unwillingness of other countries to invest in U.S dollar based securities.  The stronger our long term financial outlook, the more the investor will value the dollar and buy them.  This will strengthen the dollar and reduce inflation pressures greatly lowering energy prices in the process.     

3) Stabilize Long Term Interest Rates - At the same time, a better financial outlook for the United States will increase investment in U.S. Treasuries keeping rates lower.  This means you and your children will find it much easier to pay for a loan for a house or car or college.  I know interest rates are at historic lows right now, but that took a massive financial meltdown to achieve.  These RATES WILL GO UP MASSIVELY as investors start to worry the United States cannot pay its bills and will require a big interest rate premium to support the risk they are taking investing in U.S. debt.

Basically, the only way to increase the value of the dollar AND keep interest rates low at the same time is to reduce long term debt.  Otherwise, you get to choose:  would you prefer your children deal with massive inflation so milk is a luxury item or incredibly high interest rates so they cannot afford a house.    

I do not understand people who pretend to want to help future generations, but do not see the link between reforming entitlements and helping our children.  Could you imagine a country in which instead of stepping out of college and being told that your share of the national debt was $100k, you were told that your share of the surplus was $100k.  Beyond just improving our children's prospects, taking action to secure our future will have dramatically positive implications our current situation.


Brian Scott said...

Andy, I take a break from your blog for 2 weeks and come back to find that you would vote to eliminate Social Security and Medicare. I think we need to have an exorcism! Paul Ryan - get out of my friend’s body! However, it seems like there is a little compassion is still in there (maybe the voice of FDR) because you offered up some more moderate cuts. I am an avid defender of these programs, but I do think we should do some reforms to cut costs. I think increasing the age limit for Social Security is reasonable. Concerning Medicare, I think we need to address the root issue – not just focus on premiums. I think we can save a lot of money by educating people on eating healthy, not smoking, and exercising. No free rides people – I think I sounded like a Republican just there! Also, I would like to hear you thoughts on reforming the defense budget to address the debt problem.

Andrew Blankenship said...

Hey Brian,
Good comments as always. I would vote to eliminate Social Security and Medicare but of course you cannot just drop these things like a hot rock as people were told to count on them and thus need to be reformed to first maintain solvency, and then address how we move people into a more self reliant system as opposed to government dependence.

I do believe focusing on premiums addresses the root issues. If you are forced to pay more for better coverage because you know you are overweight and will need diabetes treatment or if you are a smoker and will need cancer treatment, you will have a deterrent from doing these things.

Education is great but will not get you there. If you want people to stay healthy, you have to come up with financial incentives to stay healthy, that is the only stick the government has, unless you want them to ban potato chips and cigarettes. I personally want to be allowed to make bad choices and accept the consequences, but I should not have to pay for others bad choices.

I will have to do some research on defense spending to give a more educated opinion. I take a Ron Paul view on the whole. We are not the world's police force and should only get involved when there is a direct threat to our national security. Under this premise, I would imagine big cuts could be made, but I won't hazard the exact details.

The reason for this blog was to highlight the results of unconstrained long term spending (all driven by entitlements): higher interest rates, higher inflation, higher debt. Paul Ryan had the guts to come up with a plan to address it and yet still keep entitlement programs.

Brian, this is where you need to do some soul searching, you say you are for reforms to cut costs. Your party of choice has delivered zero solutions that will curtail the costs of entitlements (and added another huge one). They have taken the Timothy Geithner approach of "we don't have a solution, but we know we don't like yours". They recognize we have a problem but are unwilling to address it. Very disturbing. The Democratic President and Senate has run up 4 straight $1 Trillion Dollar Deficits and have not yet passed one budget IN 4 YEARS!!!

How can the left spend so much time and energy bashing the other sides plan, when they have no plan of their own.

Brian Scott said...

Hi Andy, good point about the financial incentive to get people live healthier. I agree that we should be able to put bad things in our body in moderation and pay some sort of penalty if you go overborad. I would like to see a no premium system (single payer) for everyone. And for those who abuse food and cigarettes - they should be shamed (within reason) when problems arise. As for the deficit problem - it was the Democrats who had a balanced budget. Remember how we were running a surplus under Bill Clinton?! Then your party decided to cut trillions is revenue and start some very expensive wars?! Obama is cleaning house, and yes running up the defict, in orger to keep things afloat. But when he tried to fix the problem (remember the attempted Grand Bargian?) he gets gridlocked by the Tea Party caucus in your party yet again! It seems like "my" party is the only one with a feasible long-term solution. The Democrats have been willing to work with Republicans; I just wish they were willing to do the same.

Andrew Blankenship said...

Lets start with your comments about the deficit:

First, you claim Bill Clinton NOT his Republican Congress generated surpluses. Then you blame the Republican Congress and NOT Obama for the inability to fix the massive deficits of today. That is some very convenient history.

Second, I am truly amazed at your take on the "Grand Bargain". The only reason we had any bargaining being done was because the House wanted to curb spending before raising the debt ceiling, Obama wanted it raised no questions asked. Then, with a tentative agreement in place "Grand Bargain" to raise an extra $800B in revenue, The Dems decide to up it at the last minute to $1.2T. Whats funny is I bet you could NOT name a single detail of what the Dems offered that would curb long term entitlement spending.

Third, you said you think the Dems have a feasible long term solution? Go back and look at the chart above. THAT IS OBAMA'S BUDGET PLAN. And the Democratic led senate has not bothered to produce any kind of plan in 4 years, so I'm not sure how you can claim a feasible solution unless you like bankruptcy as a credible option.

Finally, a word on Health Care. I do not believe we have the right to health care and thus the government should just step aside. We can offer rights to free speech,
religious freedom, etc. because they are in unlimited supply. But since Health Care will always be in limited supply, I do not believe we have the right to someone else's time or money which is required under any system. Enslaving a part of society for the benefit of another is just immoral. Just because you feel they can afford it is not justification.

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