Going for Broke: Deficits, Debt, and the Entitlement Crisis
Michael D. Tanner joins us for a discussion on the national debt and America’s various entitlement programs and their implications on the country’s future.
With the Greek debt crisis in the news, everyone is asking “Are we the next Greece?” Is our current level of debt sustainable? How about our entitlement programs, like Social Security, Medicare, and Medicaid?
Michael D. Tanner joins us fresh from the release of his latest book, Going for Broke: Deficits, Debt, and the Entitlement Crisis (2015). Together we discuss whether or not the American government’s profligate spending can be reined in in time.
Aaron Ross Powell: Welcome to Free Thoughts from Libertarianism.org and The Cato Institute. I’m Aaron Ross Powell.
Trevor Burrus: I’m Trevor Burrus.
Aaron Ross Powell: Today we’re joined by our colleague Michael Tanner, a senior fellow at The Cato Institute and author of the new book Going for Broke: Deficits, Debt and the Entitlement Crisis.
Greece is in the news right now because they’re having their own sort of crisis. Is that where we’re ending up? I mean your book is – things look pretty bad and we’re spending way more money than we have and it’s going to be hard to reformat. Are we on the road to Greece?
Michael Tanner: Well, I think you can overstate that premise because there are some significant differences between us and Greece. We’re a much bigger economy which gives us more room for error. We owe most of our debt internally whereas Greece owed it to foreign creditors who could therefore have a lot more claim over them.
Most importantly of all, we control our own currency whereas the Greeks are basically ad hoc to the European Central Bank. If nothing else, we can always devalue the currency and inflate our way out of debt, which is something the Greeks don’t have the ability to do.
We’re not as export-based as an economy and so on. So there are differences. But if you look at the underlying problems, the thing that basically got Greece where it was, we do seem to be going down along the same trail. They of course have run up unsustainable amounts of debt and particularly debt for dealing with things like their pension and healthcare systems. We’re very much in the same boat. We already owe 101 percent of GDP, which means we owe more than the value of all the goods and services you produce in the country over the course of a year.
It’s sort of like as if your credit card bills were bigger than your entire salary pre-tax. You would have a problem. They have a government that’s growing, that’s more intrusive and just kind of heavier burden on their economy. We’re nowhere near where Greece is but the CBO projects that we could well end up there by mid-century.
Finally they have a business climate that really is too regulatory, too strict too, which is making it very difficult for economic growth in their country and we’re seeing growth and regulations and taxation in this country that also puts a burden on business and slows economic growth. We’re not getting anywhere near the post-war average growth that we used to see.
Trevor Burrus: Now libertarians and conservatives have been writing about the debt for a very long time. The coming physical train wreck is almost boiler plate for libertarians and conservatives. I remember when Aaron and I were setting up The Cato Institute library. We had a special section of books we were setting aside that were saying the collapse of 1984, the collapse of 1987, the coming collapse of 1995. What’s different? Is there anything different this time or we have just been kicking some can down the road? Is there something worse now than there was before the last 20 books that were written about this?
Michael Tanner: Well, I think it’s worse in the sense that our debt is bigger. I do think that there were people, myself included, who sort of underestimated the resilience of the American economy and then thought that we would hit the wall before we did. But I think it’s still out there. In fact they asked the head of the congressional budget office last – about two weeks ago whether or not he thought there was a Greek style crisis coming or when that would hit and he basically said, “We just don’t know.” It could hit. It could not. If it comes, we don’t know when it is.
There’s some point that you simply can’t sustain this amount of debt. The old saying that that which cannot go on forever eventually stops. Well, we just don’t know when it’s going to stop.
Aaron Ross Powell: So I’m curious about with this debt and you mentioned it in passing. Your answer to the last question, you said that unlike Greece, we – a lot of the debt that we have, we owe to ourselves. How does that work? I mean how is that even really debt? Is it different from – I could take money out of one of my pockets and put it in the other …
Trevor Burrus: Or borrow from your wife. You borrow from your wife. Are you just in debt …
Aaron Ross Powell: So it is – to talk about it as debt but we owe it to ourselves. Something doesn’t make sense there.
Michael Tanner: Sure. That has always sort of been the Keynesian approach to this. In one sense – and I say we owe it to ourselves. I mean we don’t owe it to external creditors. About 60 percent of our debt is held by Americans. If you have a 401(k) or a pension fund that buys government bonds, you owe part of the – own part of the American debt. If you have a savings bond, I mean that’s American debt.
So in that sense it’s different than the Greeks where the debt is held by basically German banks or the IMF and the European Central Bank. Now the larger question economically about whether we owe it to ourselves, there is a sense in which you can owe debt to yourself and sort of pay it back. I’m trying to think – I’m thinking in terms of for example if you as a household were to go into debt so that you could go to college and therefore earn a higher salary in the future when that debt comes do and pay it back, you’re actually better off running that debt.
But most of what we spend money on in this country is not that type of investment. If the US were to say borrow money – or like states do. They issue a bond and then they build the roads and bridges and that theoretically increases economic growth in their state and they can pay it back with that.
If the US ran debt for that purpose, you could have an argument about whether or not they achieved that goal, but it would be an understandable economic point. The problem is that only about 13 percent of all federal spending is considered investment spending and that’s even a broad definition of investment that includes human resource capital like education spending.
Trevor Burrus: Considered by who, investment spending? The CBO?
Michael Tanner: Economists.
Trevor Burrus: Economists, OK.
Michael Tanner: By most economists. I mean most of it – and I don’t think there’s much [Indiscernible]. Most of it is transfer payments. It is simply taking money from one person and giving it to another and that does nothing to it to build economic growth for the future and make it easier to pay that money back.
In a sense of course, we don’t just owe it to ourselves. What we do is we owe it to future generations which are not necessarily going to be the same people who are collecting the benefit of the consumers now. In your family, it’s a little bit like if you ran up your credit card bills right now, to go on a great vacation and you get to consume that vacation and have a great time, and then you just leave that credit card bill for when you die, so your kids will pay it off.
Trevor Burrus: Well, the Greeks I’m sure are pretty – or maybe the younger Greeks are somewhat mad at the older generation of Greeks and the next generation might be angry too. So they’re all Greeks but they’re not the same people.
Michael Tanner: You would think so although in the recent vote to turn down the EU offer, actually younger Greeks were more likely to vote against the debt deal than the older Greeks.
Aaron Ross Powell: It’s because they want in on the goodies everyone else had.
Michael Tanner: Precisely, and they were afraid that they were going to get cut off before you got there, that the gravy train was going to stop and then of course they’ve known they’ve been paying. Also it’s worth noting that the Greeks’ so-called austerity didn’t have a lot to do with cutting benefits. It had a lot to do with raising taxes and it was going to be those young Greeks that got to pay that.
Aaron Ross Powell: So if these entitlements – these entitlements cost us money which is what – how we run up the debt because we’re spending it. But if a large portion of the entitlement spending is transfer payments, then we’re taking the money out of the economy in the form of taxes or borrowing it from future Americans, but then we’re turning right around and giving it back to Americans, right? We’re giving – social security is handing people checks and Medicare and Medicaid is paying for their health bills. So how is this ending up – spending the money as opposed to just cycling it around within the US economy?
Michael Tanner: Well, as much as anything, it is just cycling it around within the US economy. The problem comes down in the future to the point where what you’re spending in terms of benefits is less than the amount you’re taking out of the economy in terms of taxes.
We ran about a $65 billion shortfall in social security this year and it’s just never going to get any better. Every year after that is going to get larger and larger. Overall, we owe some $25 trillion in future benefits that the tax revenue is not expected to pay. So that’s money you have to borrow in effect to keep paying those benefits.
If it was just to tax it and give it to someone else, you have a lot of efficiency loss. You could argue about deadweight losses and things like that. But essentially that would just be kind of moving it around the economy. It wouldn’t do anything to gain growth. It’s just redistribution. But it’s not as bad as where we’re going to go.
Trevor Burrus: Now you mentioned the term a few minutes ago “hitting the wall,” like when we’re going to hit the wall. When does it – what does “hitting the wall” look like? Does it look like Greece or does it – who knows exactly? What is it – when we know we’ve hit the wall?
Michael Tanner: Well, to some degree that it – we don’t know what it will look like and to some degree it depends on whether we – they’re making changes now that are going to enable us to make a soft landing in the future or whether we’re going to just go up to the cliff and sort of fall off it.
What it will mean is that we will either not be able to pay the benefits that are promised and there will be people who suddenly find out they can’t – they’re not going to get a check or the check will be 75 percent of what they thought it was going to be for social security for example and be in real trouble if that’s what they were relying on in retirement or it will be that we will continue to pay those benefits because after all, seniors vote and we won’t pay for anything else.
By mid-century, we will be in a position in which essentially social security, Medicare and Medicaid and interest on the debt consume every penny in taxes. So there basically would be no money for anything else the federal government does.
It kind of always amazed me that the folks on the left were such ardent defenders of these social insurance programs like social security and Medicare because they’re ultimately squeezing out all the other things the left would like to do with education, childcare, social welfare spending.
That’s all going to go away. We’re going to be a country that does nothing but mail checks to old people.
Aaron Ross Powell: But isn’t that just because the wealthy incorporations aren’t paying their fair share? I mean we could cover all this if we just taxed people what would be reasonable.
Michael Tanner: Unfortunately, there’s just not enough rich people out there to pay for or fortunately depending on how you want to look at it. The reality is if you didn’t just raise taxes a little bit on Warren Buffett and Bill Gates, if you actually went out and confiscated every penny that was owned by everybody who earned a million dollars or more last year, so just – like all the millionaires and billionaires and took it all, which you could only do once as far as I know. You still wouldn’t get enough to pay off the national debt, let alone enough to pay all the future unfunded liabilities of social security and Medicare.
What you really would have to do is raise taxes enormously on the middle class in order to get there and frankly middle class isn’t going to do that.
Trevor Burrus: But doesn’t that work – isn’t there some sustainability in Scandinavian welfare state or – there’s something out there – we could always sit there and sort of hyperbolically say that the welfare state is unsustainable. But it doesn’t seem that way across the board. Are all these going to teeter on the edge and jump off a cliff eventually?
Michael Tanner: Well, all of them are either going to teeter on the edge or they’re going to make reforms. In fact, many of the Scandinavian countries are already making reforms.
Now you can sort of set aside Norway which is sitting on a sea of oil and sort of like the Saudi Arabia of Northern Europe and that sort of allows them to get away with a lot of things that they wouldn’t otherwise be able to do. But Sweden for example has begun reforming its system. It has drastically reduced government as a percentage of its GDP. It has partially privatized its social security pension system. It has made a number of reforms designed to move people from welfare to work for example.
So, it is – they’re beginning to make changes in their social welfare system to bring their country back into line and then they’re still much bigger than us. There’s still about 50 percent of GDP that the government spends but they were close to 70 percent not so long ago.
Aaron Ross Powell: Before we turn to the specifics of social security, Medicare and Medicaid, are the problems that we’re talking about just the nature of entitlement programs in and of themselves? I mean is there – is it ultimately like there’s just something wrong with having entitlement programs to begin with or is what’s wrong that we just haven’t done them the right way?
Michael Tanner: Well, I think there are two big problems with them. One is sort of something you can’t get away from and that’s the demographics. Well, the fact is that as a society, we’re aging. We have more and more people who are in retirement, collecting benefits for longer and longer periods of time and we’re also having fewer babies which means there’s going to be fewer people to support those retirees. Those are parts of long term trends that really aren’t going to change.
I mean the healthcare, the fact that we’ve had medical breakthroughs and stuff like that, it’s always said if – you know, the day we come up with a cure for cancer, everyone celebrates except the treasury secretary who kills himself. I mean it’s going to be a very tough situation if people started living another 10 years longer than they do now. How are we going to pay them?
So those – and on the other side of it, a fewer babies – women are waiting – going to workforce now. They’re going to college. They’re waiting a lot longer to have babies. The average age at which a woman has a baby I think has gone up about three years in the last couple of decades. Those things are not going to turn around. So we’re going to be stuck with this demographic problem in the future.
On the other side of it, the problem is that there’s no real link between inputs and outputs on these entitlement programs. The contributions you make or the taxes you pay are not directly related to the amount of benefits that you get out of the program and that means there’s always an incentive to increase benefits, to push benefits up and to minimize the amount of payment into the program. You want to keep the taxes low and the benefits high.
So in many ways it kind of runs like a Ponzi scheme if you will and the people at the top are big winners and they demand more and the people at the bottom have to pay. The difference of course is that Ponzi didn’t have a gun. He couldn’t force people to keep contributing and the government could kind of keep making young people pay more and more at least for the time being.
Trevor Burrus: Well that sort of brings up the social security question because social security is often called a Ponzi scheme and as you said, maybe it’s one that works if it is a Ponzi scheme. Maybe it’s one that works because he has a gun in the situation and we can just keep rolling it forward. We can always be in debt to future generations. I mean some amount of debt is sustainable, I would imagine. So a national government is a better prospect for debt and the US is a better prospect for debt than other countries.
So we could have some debt. We could keep rolling it forward and they have the power of the gun. So what’s the problem with social security?
Michael Tanner: Yeah, I think Paul Samuelson was quoted once saying that social security is the best Ponzi scheme ever invented because it works. I mean one of the things people have to realize I think with social security is that when they pay their social security taxes, none of that money is safe for their retirement. People always write to me. I get all these emails telling me that, “I paid into the social security system. I’m just getting my money back.” Well, no you’re not.
When you pay in, that money immediately goes out to pay for people who are already retired. Just like in the pyramid scheme, when you pay – give the money to the guy that’s running the scheme, he uses it to pay for people who are – invested above you or earlier than you. That’s the same way social security works.
You then hope that when you retire, there will be another generation that comes along behind you that will then pay into the system and support you. That works really well when you only have – you know, the top tip of the pyramid. You have only a few people receiving benefits and you have a lot of people who are paying in and getting you the benefits.
But if you go back, in 1950, you had that situation. You had 26 people I believe paying in for every person who has retired. That’s a pretty good deal. Now unfortunately we’re down to about three now and it’s going to continue down to slightly less than two in the future. That’s a big burden on those two people who have to pay you all the taxes in order to support those benefits.
Aaron Ross Powell: I’m curious about the history of how social security came to be particularly in light of – I mean yes, these demographic trends that – you know, longevity and what not have accelerated. But were those trends visible at the time that people were proposing social security? Because it seems once you recognize that, you recognize that people are getting older and that as we get wealthier, we have fewer kids. It seems obvious that the system once put in place could not be meaningfully sustainable.
So was that a conversation at the time when social security was first proposed? Was it intended to last as long as it did?
Michael Tanner: I think it was pretty much intended to be permanent. I mean Roosevelt famously said that the reason they used the payroll tax and this idea of contributing to social security was that so no one could ever touch it in the future.
It’s worth noting that social security was originally very small, that the original tax was one percent on the employer, one percent on the employee to a maximum of $60. So I mean even accounting for inflation, that was a very small tax and the benefits were fairly low. It was intended not to be as a substitute for retirement benefits, to take care of you in retirement. It was supposed to be something that was sort of on top of your retirement, to kind of make sure that people didn’t fall into poverty.
It was done under a sort of enormous – very difficult circumstances in the United States, very rare circumstances – just like the Great Depression and if you look at it, there were a number of things happening at the time. Number one is that people couldn’t rely on their savings because the banks were closed. Their savings had been wiped out.
They couldn’t rely on working because many of them were out of work. We had one-third unemployment at the time nor could they necessarily rely on their children to take care of them because their children were out of work.
So you had a real problem that was taking place and I think drove it. Of course this was – going back all the way to its origins, social security was originally a Bismarck idea out of Prussia in the 1880s or so. I mean it was done essentially as a tradeoff to social democrats to get their support for their war with France and so on. So I don’t think it was ever thought of to be the structure it is today.
Trevor Burrus: Well you also write in the book, which I had never heard before, that it didn’t originally apply to government workers or farm workers I think or non – people from non-profits.
Michael Tanner: Sure.
Trevor Burrus: That’s a very weird assortment of people that it didn’t apply to.
Michael Tanner: It was originally manufacturing workers essentially. It was designed to be laborers in the factories. I mean everyone else was assumed to be able to take care of themselves. I mean farmers were thought to live with their families and they could always grow crops and so on. So it really took a lot of them out and then it also didn’t include household help and things like that who were largely minorities and blacks and they were not considered part of the general population in the Roosevelt years and stuff. So they were excluded.
So yeah, it had a very narrow focus and it was – it also didn’t include disability benefits or survivor’s benefits originally. They’ve been added to the program since then.
Trevor Burrus: Is that sort of a predictable train of increasing the government program? Does this always happen? Because now we have SSRIs for the disability payment and SSDI and all these other sort of things. Is it just sort of – do we always find that they keep getting bigger and bigger?
Michael Tanner: Yeah, exactly. I mean the natural extension of these programs is that they grow. I mean there just seems to be something about government that – if it’s even a modest success, we figure it can do that much more and if it’s a failure, we figure we haven’t spend enough money on it. So we try to spend more.
I will mention just in terms of programs. The SSI which a lot of people sort of conflate with social security, we need to be careful of that one. It is a terrible program. It’s perhaps one of the most fraud-ridden programs in government and there are a lot of reasons to criticize it.
It is run by the social security administration but it is not part of the social security system. It’s not funded through the social security tax but in fact into the – I think around 1980. I could be wrong on that date. But it was funded at the state level and then they said, “Well, but the federal government is so good at mailing out checks.” The social security administration knows nothing – it knows how to print a check and mail it if nothing else. Why don’t we put it in there?
Trevor Burrus: So it’s sort of an illusion.
Michael Tanner: That’s right.
Aaron Ross Powell: One of the weird things – I mean social security is supposed to be insurance against poverty and old age, which seems like a laudable thing. We don’t want our old people dying on the street or not being able to afford heat or air conditioning. I mean sure, this is good. So one of the things that we talk about though, and we’re offering up reforms, is that social security goes to a lot of people who don’t need it. That everybody gets social security. I mean how did we get there?
It seems obvious that yes, if we have an insurance just like Medicaid, if you can’t afford health insurance, it will help you out. But if you can …
Trevor Burrus: Like Warren Buffett should not get social security.
Aaron Ross Powell: Yeah. So is that – how substantial of a part of this debt that we’re in is the result of that? Why can’t we fix that? That seems like an obvious fix?
Michael Tanner: It’s not a huge part in terms of dollars. I mean there are just not enough Warren Buffetts and Bill Gateses out there collecting social security that’s going to make a big difference. You would actually have to mean test it at a very low level.
Means testing is quite popular interestingly. If you go to the public, they actually support means testing as long as it’s done at the dollar amount immediately – whatever their income is.
Trevor Burrus: Which actually says something about the …
Michael Tanner: Yeah, exactly. Don’t touch my benefits. But if you want to take Warren Buffett’s away, that’s fine.
Trevor Burrus: And Warren Buffett says, “You can take the guy above me,” but that there’s no one there.
Michael Tanner: Economists worry about it for a couple of reasons, the means testing. One is that you created this incentive to save on your own. Why should I save on my own if it means they’re going to take away my social security? Now, it’s probably not going to affect millionaires. They’re going to do what they want.
But people who are in that middle range deciding whether they’re going to put a little money – more money in their 401(k) or take that vacation this year. Well, if it makes – it’s going to make the difference whether they get social security or not. The vacation looks that much better.
The second is income doesn’t always matter in retirement. It’s assets and how much you’ve accumulated, things like that. So you would actually have to have not an income test but an asset test, and that becomes very hard to do. How do you value stock options? A house, is it the book value? What happens when they go down like we just had in the last recession and so on? So I think you’ve got to – it’s something that’s popular but much more difficult to put in practice.
Trevor Burrus: I’ve had some of my democrat and other friends who support social security say that one reason they’re against means testing – which does seem like Aaron said a very obvious thing to do – is because even cracking open social security and start asking the question about who deserves it and who doesn’t deserve it. At what level? And will put questions on the table that they don’t want to be on the table at all.
Michael Tanner: Yeah, that’s our position. The AARP has taken that position for a long time, that they oppose any sort of means testing. The argument is that it needs to be a universal program because that’s what generates universal support.
The phrase is “Programs for the poor are poor programs,” that if this becomes a means-tested program that we only see poor people taking advantage of, there will be a move to dis-fund it, to un-fund it because we don’t like programs for the poor. But this is universal. Mom and dad get it. So we all like it.
Trevor Burrus: Yeah. That seems like again part of the public choice analysis of the support of these programs and why they keep going forward.
Aaron Ross Powell: So I guess then on social security – we’re partly answered this. But how bad are things specifically for social security? And then what are the possibilities for reform on that?
Michael Tanner: We can generally estimate the shortfall in the future of social security and do it fairly accurately because it’s really just math. I mean we know how many people will be retired in a given year in the future within a certain range. We know what the law says their benefits should be. We also know roughly what we will be taking in, in taxes in the future, assuming [Indiscernible] economic growth scenarios and stuff. You could find the gap between them.
Right now, that gap is $25 trillion, give or take. Now that’s – for all the accounting nerds out there, that’s a discounted present value over the infinite horizon, which essentially means that if we had $25 million or trillion right now and we stuck it in the bank and it earned with three percent interest rate, then it would pay for the benefits for social security forever.
Trevor Burrus: Interesting. So there’s no like by 2050 that this is going to be a $25 trillion gap?
Michael Tanner: Oh, sure. You can do the – each year, the argument becomes, well, dollar amounts don’t matter as much in the future. You would have to discount what the dollar is worth in the future because it’s better to have a dollar today than it is tomorrow. That’s why banks lend you money and so on.
But yeah, it’s going to be – within about 10 years, it’s about to $200 billion to $300 billion. It’s about $65 billion right now.
Trevor Burrus: And it is the biggest part of the budget, correct? The social security …
Michael Tanner: Social security is 23 percent of federal spending, yeah.
Aaron Ross Powell: So even in Washington, $25 trillion is a fair amount of money. So how – is this fixable? I mean is it – realistically, can we do anything about that $25 trillion shortcoming or do we just have to run into it?
Michael Tanner: Well, essentially, if you’re spending more money than you’re taking in, you only have a couple of options. You can take in more money or you can spend less. To take in more, you would actually have to take in quite a bit. You would have about a 50 percent increase in the payroll tax. It would have to go from 12.5 percent now and have to go to about 18 percent or the equivalent in other taxes of course.
We should recognize that the payroll tax is the largest tax that most families pay. Most families pay more in payroll taxes over the course of the year than in federal income tax. So for all the income tax debates we have here is the payroll tax is the big tax. A big increase on that is very regressive. It would fall heavily on middle class and lower income people and – or else you would have to find some other way to raise that kind of taxes and transfer the money over, which doesn’t seem very realistic.
Taking it outside or the – reducing the spending, you would have to cut social security in the future by about a quarter and there are lots of ways you can do that. I think people talk about raising the retirement age or means testing to get really wonky. I favor something that’s called changing the wage price indexing formula. But there are different ways you can get there and if you phase it in over time, you can minimize the hit.
But frankly, young people have been lied to and one of the first things we can do is face up the fact, look them in the eye and say, “Yeah, we lied and you’re not going to get all the benefits that are promised to you, and that’s just the fact of life.”
Trevor Burrus: Do you see this as being a thing that could happen – I mean I’m interested in the political realities of this because one really interesting thing about this narrative – and I’ve always thought this about economists from our side so to speak, is that it seems like math. It seems like it would be silly for anyone to deny the realities that you’re talking about. But we’re still all denying it or a lot of people are. Some people are denying it.
Aaron Ross Powell: Well, and it’s not just that politicians are denying it or the AARP, which has a constituency, is denying it. But …
Trevor Burrus: Paul Krugman.
Aaron Ross Powell: Paul – I mean other qualified economists seem far less concerned than you are.
Michael Tanner: Well, yeah. I think they think it’s sort of the low-hanging fruit. It’s certainly nowhere near as bad off as Medicare let’s say which we’re going to talk about in the future and they think you can get there by raising taxes on the wealthy or that we will just deal with it in the future. The other answer of course is economic growth. They will say, “Well, if we do all these things and it grows the economy.” I hate using that phrase, grows the – if the economy grows.
Trevor Burrus: If the government grows the economy.
Michael Tanner: [Indiscernible] will beat me up for that, right? So if the economy grows, in that case, there will be more money available and that people in the future will have higher wages and therefore they can afford the higher taxes that will be necessary to support it. I question whether or not you can get that economic grow when you have the type of death overhang that we have, that eventually that begins to slow economic growth for a lot of reasons. Businesses anticipate debt as future tax increases and therefore they slow their hiring and things of that nature.
Politically, the politics of this have really shifted to some degree. It used to be a very bipartisan issue that everybody recognized. Bill Clinton at one point supported social security reform including the personal accounts. You had a number of democrats incentive like Bob Kerrey of Nebraska, John Breaux of Louisiana, Charlie Wilson in Texas who supported social security reform very strongly. They’re all gone.
Now you essentially have Bernie Sanders and even Hilary Clinton talking about the need to increase social security benefits, rather than to cut them back.
Aaron Ross Powell: Who are the constituencies behind this? You mentioned that young people are being lied to and are being told they’re going to get benefits they aren’t. Are the voting blocks that would stand in the way of politicians wanting to reform social security, especially on the reducing benefit side, are those older people who don’t want to see their benefits cut? Are they mostly younger people who are hoping to get their hands on high benefits later?
Michael Tanner: I think it’s – in the United States, it’s mostly older people. Generally, seniors – and it’s interesting because most of the reform plans that are out there don’t involve current seniors. They talk about people under the age of 50 for example making changes there.
Aaron Ross Powell: Yeah, that was why I was asking because it seems like you could fashion a plan that’s like look, all of you old people will be dead by the time this gets to you.
Michael Tanner: Yeah, and we keep trying to say that to them. But they’re very easy to scare. If you are getting a social security check, it’s very easy for them to scare you on this and so there’s a lot of kind of demagoguery that goes on around this. You see people being pushed over cliffs in their wheelchairs and all that sort of stuff every time an election comes. So that’s always a big issue.
At the same time, young people just don’t vote. They certainly don’t vote on the social security issue. So many things are more important to them from foreign policy to gay marriage and so on that really animates young people. But it’s just not an issue. Social security is not one of them and the likelihood of your voting was sort of like the equivalent of your age. About 70 percent of 70-year-olds vote and about 30 percent of 30-year-olds vote, so it’s getting sort of aligned in between and so politicians are always happy to play the 70-year-olds and not to the 30-year-olds.
One other interesting group – which is why there are some problems on the Republican side with this that really like social security is actually – some folks on the Christian right, Gary Bauer for example and the Family Research Council was against privatizing social security because they thought it was too likely to encourage women to enter the labor force if they could have their own accounts rather than rely on their husbands.
Trevor Burrus: Now that’s incredibly disturbing.
Michael Tanner: But not surprising.
Trevor Burrus: Yeah.
Michael Tanner: And also though, if you look at the constituent particularly in the Christian right, there are a lot of older women there. For a lot of these older women, social security just found money. I mean basically they didn’t work back in their generation and now women are more likely to pay social security taxes today. But for a lot of women in the 70s and 80s, they didn’t end up ever paying into the system. Their husband did and now their husband is dead and this check comes every two weeks. They just don’t want anybody touching it.
Trevor Burrus: I can understand that. The other two that are the big part of this are Medicare and Medicaid, which come 30 years after social security more or less. You’re right to break this down that – between these three programs, Medicare, Medicaid and social security, that’s how much of the US budget?
Michael Tanner: About 48 percent of federal spending is just those three programs. If you throw in interest on the debt, you’re over 50 percent. So clearly you’ve got to deal with those issues if you’re going to go in and fix the program. I’m always amused by republicans who want to like balance the budget on the backs of the usual suspects.
Well, foreign aid [Indiscernible] aid is one percent of federal spending and they want to kill Big Bird or right now, we’re going to defund Planned Parenthood. Well, fine. Big Bird and Planned Parenthood combined are one-ten-thousandth of a percent of federal spending. So you’re certainly not going to balance the budget on the backs of Big Bird.
Trevor Burrus: Will the fourth be defense after those three?
Michael Tanner: Well, yeah. In terms of size, defense and discretionary spending are about the same. They’re both around 17 percent.
Trevor Burrus: What has discretionary spending described?
Michael Tanner: That’s everything.
Trevor Burrus: Everything else.
Michael Tanner: Everything else essentially, yeah, the FDA to the FBI, Department of Commerce, Department of Education, essentially all the things that I kind of wish would go away. That’s everything else and frankly, they’re not all going away.
Aaron Ross Powell: So there we go. If we just get rid of everything libertarians don’t think government should be doing besides entitlements, we’ve just balanced the budget and the settlements get paid for.
Michael Tanner: Pretty much, pretty much. It’s sort of a libertarian dream and we dream well. But unfortunately, I don’t think people are going to go along with eliminating all those things, which puts this back into mind.
Trevor Burrus: Well, it would turn the government to like an old folks’ home.
Michael Tanner: Yeah, government – and say we’re going to be in a position – within a half century or less that we will be – that we will have enough tax money to do exactly that, that those four – essentially those three programs plus interest and debt will consume everything that the federal government does. We may even have a little tiny army, but that’s about it.
Trevor Burrus: So Medicare and Medicaid, for those who don’t know, Medicare is for the elderly and Medicaid is for the poor and they’re both part of the same act, correct?
Michael Tanner: They were both passed in 1965. I think that’s a common sort of misunderstanding. Medicare is clearly for the elderly, although there’s a few special things in it for kidney patients for example and things like that regardless of age.
Medicaid is interesting because people largely think of it as the program for the poor and that’s why it gets a lot more criticism than people – than Medicare because of course they think it’s people taking advantage of it.
But the reality is even though most of the people on Medicaid are poor, most of the money spent on Medicaid is actually for elderly people in nursing homes. So this is another program that sends basically checks to older people.
Trevor Burrus: Why is that?
Michael Tanner: They’re hugely expensive. Nursing home care and if you’re going to be in a nursing home for three, four years and Medicaid is going to pay for it –
Aaron Ross Powell: Why is Medicaid covering nursing homes and not Medicare?
Michael Tanner: No good reason that I can think of whatsoever. I mean essentially you have to shelter your income and you have to pretend to be poor. So you’re a senior citizen. Before you go in a nursing home, what you do is you transfer all your assets. You let your kids buy your house for a dollar and you move [Indiscernible] to relatives and stuff like that. Then you have no assets to speak of and then you get Medicaid.
There’s a whole industry that grows up around this. Right now, there has been a series of radio ads when I come in, in the morning and on the radio, there’s a woman who has a law firm that specializes in doing this and all these. You might think you have to give up your house in order to go into a nursing home on Medicaid. You don’t. I will tell you how to shelter your income. The whole industry is out there devoted that.
Trevor Burrus: So what is the fiscal situation for Medicare right now?
Michael Tanner: Well, Medicare is much worse off than social security. Everybody agrees on that. It’s a little bit harder to estimate because in addition to just the demographics, you also have to figure what will happen to the cost of healthcare in the future and nobody has a good estimate of that.
We’ve actually been fortunate there for about the last decade. The rise in healthcare cost is moderated somewhat, but no one knows whether that’s going to continue or not and you go to three different government agencies. You get three different guesses as to what’s going to happen in the future on that.
But even if you use the best case scenario, then the unfunded liabilities in Medicare are about $50 trillion or so, so about twice as bad as social security. If you use more pessimistic numbers, it could be upwards from $80 trillion to $90 trillion.
Trevor Burrus: A lot of these accounting things which I noticed in your book were just something I think we were talking about in the abstract for how government does accounting. When they make these projections based off of things that will happen or growth rates or laws that will be passed or elimination of three of my favorite words, “waste,” “fraud,” and “abuse,” and they just put that into the budget and they say, “Well, we’re definitely going to eliminate $500 million of waste, fraud and abuse. We will just take that off.” Can you explain a little bit more about how they do this budgeting and then secondly, can you explain how they get away with this stuff?
Michael Tanner: Well, essentially – I mean the CBO actually I think is a very good organization and actually does a very good job. But they’re very constrained by law that they have to do exactly what Congress tells them. If Congress tells them, “Perform your estimates assuming two percent growth,” then that’s what they have to do. So you often get these weird kind of garbage-in-garbage-out numbers from them.
If you’re looking at the budget, what’s interesting too with the CBO is they always produce two budgets. They produce the budget that they’re sort of required to produce and then they produce something called the “alternative fiscal scenario,” in which they predict what they actually think will happen and that always shows a much bigger deficit, much – you know, problems down the future because Congress will say, “Assume we don’t extend any of the tax extenders this year.”
Trevor Burrus: Like we haven’t done for …
Michael Tanner: And so then they will produce a budget that shows, oh, the deficit went down and then that produces the alternative [Indiscernible] but if you didn’t – if you did extend those tax extenders, then it will go up. So you have to look at both numbers I think to really get it. The media of course doesn’t dive into that kind of depth. They just look at the top line number and say, “Oh, well, [Indiscernible] budget deficit is going to be lower next year.”
Trevor Burrus: What’s the genesis of that? What is the genesis of the alternative budget? I mean do they just do this on their own or there’s a statutory mandate that they do that?
Michael Tanner: I actually don’t know.
Trevor Burrus: Is there some sort of guideline …
Trevor Burrus: Well, that’s probably what it is. But the CBO is kind of interesting because at least according to your book, they seem to agree with you in many, many ways about the unsustainability broadly speaking of what we currently are in.
Michael Tanner: Well, sure, and it has been bipartisan. The new director that the republicans put in, of course as I said – just said a couple of weeks ago that he thinks that we are potentially down the road in line for a Greek style crisis. But Doug Elmendorf, the previous director of CBO thought that and Doug [Indiscernible] who gave me a very nice blurb for my book that he agrees with what I said. So this is something that CBO directors have recognized for a long time.
Trevor Burrus: It’s not just Michael Tanner’s wild dreams apparently.
Aaron Ross Powell: I know that – I mean reforming Medicare would be rather difficult often for the same reasons social security, the constituencies and what not. But how necessary is Medicare to begin with? How many – I mean most of us – all of us who aren’t on Medicare get health insurance or those of us who do have health insurance get it. We buy it ourselves. We get it through our employer. We could get it other ways. So how many of the senior citizens who are currently getting Medicare through all these transfer payments could afford their health insurance on their own?
Michael Tanner: Well, it’s very hard to say. People would have to save for it, which they don’t do now and health insurance has become very different than what it was in 1965 when essentially it was Major Medical and that’s one of the problems with Medicare is Medicare is almost as backwards as insurance would go. The deductibles in Medicare are much lower than they are in traditional insurance. Essentially, you could go to the doctors almost for free, essentially to get your check up and all those routine things, which people use a lot, which is why Medicare is very expensive.
But if you’re actually sick in Medicare, it actually doesn’t cover very much. The longer you’re in the hospital for example, the less Medicare pays and after 90 days, I believe it is, they stop paying. So that’s why you have to then go into Medicaid for the long term care. You have to go into the nursing home because Medicare essentially cuts out.
So it’s actually kind of reverse from what real insurance would be. A lot of it is based through 1965, dealing with what corporate hospital insurance looked like back then when they put it together and it just hasn’t changed a great deal.
Trevor Burrus: Well, that seems to sort of highlight Aaron’s question and your answer seemed to highlight what might be the core of this debate, which is not just whether or not it’s unsustainable, which is important, but whether or not the spending is doing anything worthwhile. If you think that it’s doing worthwhile things, then you want to figure out a way to keep it going. Budget – debt or not, deficit or not and if you think that it’s not doing very worthwhile things, then you want to figure out a way to end it and really it’s just a debate about the role of government at the end of the day.
Michael Tanner: Well, what’s interesting is the constituencies aside – the constituencies all believe it’s doing wonderful things for them because they’re all getting the goodies from it. But you actually look at the sort of democratic and republican approaches to this. They’re pretty much in agreement that a lot of the spending is not doing anything.
There are some very good academic studies, what’s called the Dartmouth Atlas study, which looked at how much is spent in various counties around the United States and found there’s no difference in health outcomes even when you – no matter how much Medicare pours in, in terms of spending. It comes out the same. There are a lot of studies that suggest that Medicare just subsidizes a lot of waste.
So what you actually have is an agreement. If you actually looked at the budget proposals by President Obama and Paul Ryan for example, their goal in terms of future Medicare spending is the same. They have the same projected future [Indiscernible] which is about one percent about GDP. In my opinion, it’s still too high but interesting that they’re the same.
The difference is in how they get there. President Obama essentially wants a top-down approach where he basically wants the government to set prices for doctors and then he hopes that they set the prices low enough, the doctors will then be the intermediaries and will stop doing stuff and that that sort of rationing will occur and that will reduce costs.
So it takes the blame and shifts it to the doctors, which is why doctors hate it. Paul Ryan essentially wants to limit the amount of money that individuals get. Say you can spend that on whatever you want. If you want all the benefits you’re getting today though, you’re going to have to spend more money, which means that people – some seniors are going to have to pay a lot more out of pocket than they pay today and essentially do it from the bottom up, if you will, with it.
That’s kind of the argument of who’s going to make those decisions, whether it’s going to be the consumer or some expert at the top and who’s qualified to make those decisions better. That’s an interesting debate. It doesn’t come across that way in the media. That’s what they’re actually debating.
Trevor Burrus: Well, it’s interesting. The debates seem to be – at least sort of the democrat side, which I’m – I’m somewhat biased I guess and to some extent. But any cut in the current amount of spending or the rate of spending that is proposed is synonymous with anarchy? I mean often what seems to be the debate is – this is – like the current level of spending is necessary at any given point in time. It’s the way republicans treat military spending.
Michael Tanner: Yeah.
Trevor Burrus: It’s the way they treat entitlement spending. How can we get anywhere if that’s the sort of [Indiscernible] we’re talking about?
Michael Tanner: No, that is a problem. It’s more of a congressional problem I would say. I will give President Obama credit for actually having tried to limit the growth in Medicare spending. I don’t necessarily agree with them on the way he’s going about it. Congress sort of tried to do this as part of the Comfortable Care Act. They created something called the Independent Payment Advisory Board, which essentially takes the responsibility. It’s sort of like the Base Closure Commission. You liken it to military spending. It’s the same sort of thing where they create this independent commission that would come up with recommendations for how to save money and then Congress could veto it, but they couldn’t amend it.
So essentially both houses of Congress would have to vote no and then they would get rid of it.
Trevor Burrus: … compared those to Congress trying to perform an intervention on itself.
Michael Tanner: Exactly.
Trevor Burrus: If you’re an alcoholic, you give the bottle to another committee and say, don’t even give me – unless I ask. They know that they won’t cut basically.
Michael Tanner: That’s right. The problem was going to be – we will see what happens when the rubber hits the road in 2018 when the commission is actually supposed to go into effect and it’s something that – just like in a bipartisan basis, you see both democrats and republicans wanting to repeal this and of course it has a number of problems. I mean it is going to – it’s sort of a blunt instrument to kind of try and have this group of experts decide what everyone’s healthcare should be and impose it on one size fits all across the board, which isn’t a good approach. But it would reduce Medicare spending if it’s imposed. We will have to see.
Aaron Ross Powell: I also feel like I should pop in and – I mean there’s a moral issue at play here too in that setting aside Medicaid, Medicare and social security are going to older people and by and large, older people are wealthier than younger people. So we have a system where – I mean you talked about in the – what? In the 1950s, there were 26 working people I think you said.
Michael Tanner: Something like that, yeah.
Aaron Ross Powell: Yeah, and then now it’s down to …
Trevor Burrus: Two point eight, I think.
Michael Tanner: Yeah.
Aaron Ross Powell: But those are younger people who are working.
Michael Tanner: Right.
Aaron Ross Powell: And that the payroll taxes are aggressive tax that hits lower income people more than higher income people. So what we’ve got are relatively wealthier people with more assets living off the backs of poorer people that this could have been fixed. They could have saved. They could pay for their own thing and this just seems fundamentally wrong regardless of like the voting blocks, regardless of what the law says.
Like, there is something wrong about wealthy people living off the backs of the poor and that’s precisely what the left is always accusing say capitalism of being.
Michael Tanner: Yeah, I think that that’s true and it’s true in a couple of ways in its immorality. Particularly I think it’s [Indiscernible] form of taxation without representation. You get to vote yourself with benefits paid for by people who aren’t even born yet. That’s a pretty good deal for you but it doesn’t seem to be something that’s moral and justifiable under any stretch.
Second, in terms of redistribution is redistribution, as you mentioned, exactly the wrong way. We use the regressive tax and the benefit formula benefits high income people essentially. Combine that with the fact that what you get in say social security benefits or even Medicare to some extent. It depends on how long you live. If you live to be a hundred, you’re going to get a lot of checks. If you die at 66, you’re not going to do so well.
In fact you die 64, you don’t get anything if you haven’t taken your early retirement. So, what you – and like longevity is linked to income and race in the United States and essentially – and sex, gender. Essentially, rich, white women live a long time. Poor, black men die early.
So what you have is a system in which actually one out of every three African-American men pays social security taxes and then dies before they collect benefits. You would think that liberals would be up in arms about something that works that way.
Trevor Burrus: Yeah. Well, I’m sure that the injustices that they’re dying early which is a very disconcerting fact, that they would like …
Michael Tanner: Sure. We all like to change that.
Trevor Burrus: Yes, everyone to get many checks for social security. I guess - I don’t know what the right answer to that question is. Now the last little thing we’ve added on to this trio is ObamaCare or the Affordable Care Act. Has that adjusted the prognostications about the budget in any way?
Michael Tanner: That’s going to add significantly to the debt over the long term. The costs are generally underestimated and you see some of the numbers coming out of the CBO and the cost has actually been declining according to CBO and that’s true for a couple of reasons. One is that not as many people signed up for ObamaCare as they thought. So there are fewer subsidies that are out there.
If they’re ever successful in getting all the people signed up, which is the purpose of the law in the first place, then the cost will go up. But right now, they’re down and the numbers state it did not expand Medicaid under the program. So they didn’t have to spend the money on that. That did bring down the cost from earlier projections. So we should keep that in mind.
That said, there are a lot of costs that are off the books on ObamaCare and the Affordable Care Act. For example implementation costs are considered part of the regular budget. They’re not a part of the ACA appropriations. They’re considered authorized but not appropriated funds in Washington speak, which means we’re not counting them.
There’s a lot of double-keeping in the bookkeeping entries where they essentially funnel money through the Medicare trust fund for example and extend the life of the trust fund, but then spend the money. Washington is the only place you can spend the same dollar in two different places and count it both times.
So you have a lot of those sort of bookkeeping games down there. We estimate that in – over 10 years or so, the ACA will cost a little over $2.2 trillion or so. About a trillion of that is paid for through new taxes. But at least about $2.2 trillion that it’s going to add to the deficit over the next 10 years or so.
Trevor Burrus: So the situation is not terribly rosy. We’ve already asked this a couple of times but you’re probably not optimistic I would imagine. But what can we actually do? What do you think we should do? And then secondly, what do you actually think will happen?
Michael Tanner: Well, I think we have to face up to the fact that we are making promises we can’t keep and that there are going to have to be changes and I’m hoping they start the changes sooner rather than later. We actually have a bit of a window. If you look at just the budget deficit, it has come down and I think there’s a lot of argument of who gets the credits for it and all that, but it wasn’t so long ago, about five years ago, we had a $1.4 trillion deficit. Now it’s going to be about $450 billion. I mean good is relative.
Trevor Burrus: But truly unless – that’s a lot.
Michael Tanner: But that’s a lot of success. A lot of that has to do with the sequester that we put in place there. It has to do with the fact that TARPs run out and the stimulus bills have been done and things like that. So some of the spending went away and we – bipartisan basis, we sort of held that down, kicking and screaming all the way. But that’s only going to last for a couple of years. According to CBO, the budget deficit starts to rise again in about 2 years and within 10 years, it’s back to a trillion dollars again.
So if we can do something in the next let’s say four to five years, before that deficit really starts to shoot up again, then I think we can assure a soft landing. If we wait and we have trillion dollar deficits again and the debt has got the 26, 28 trillion dollars on the books, plus we still have these huge unfunded liabilities, then I think anything we do is going to be very painful. Then we begin to look more like Greece in terms of the out – not economy crashing but in terms of the pain that’s going to be – have to be inflicted.
Aaron Ross Powell: So given that this podcast is about libertarianism and we’re – I mean obviously we’re stuck in this non-libertarian world and so most of these reforms that will be proposed are second best at best solutions. But the first best solution, would it be to get rid of these entitlement programs entirely? I mean if we could wave a magic wand and just end them. If we could, how would we address the concerns that these programs exist to address themselves? Like, I mean how would we in the absence of social security deal with old people who might not be able to support themselves in retirement or deal with poor people who might not be able to afford healthcare?
Michael Tanner: Yeah, I think that these programs are put in place based on the idea that people were myopic, that people would not save and take care of themselves. I’m not sure that the studies bare that out. I’m not sure that the evidence is there, that people wouldn’t save if they were given the opportunities. In many ways, social security squeezes out savings for those people who need it most.
If you’re a minimum wage worker, you have to pay 12.5 percent of your income into social security, between you and your employer combined. That’s not leaving you a whole lot of money to save on your own. Maybe you wouldn’t save 12.5 percent. But maybe you might save five or six percent if you were left to your own devices and then we can deal with that.
Now, you do have a sort of moral hazard issue. You have to deal with the fact that with the welfares that we have, if you chose not to save for yourself, you can fall back on taxpayers to support you and things like that. So it’s not as easy as just saying, “Get rid of it,” but I do think that in an ideal world, people and their families would be responsible for taking care of themselves.
Aaron Ross Powell: Thank you for listening. If you have any questions, you can find us on Twitter, @FreeThoughtsPod. Free Thoughts is produced by Evan Banks and Mark McDaniel. To learn more, find us on the web at www.Libertarianism.org.