About Me

In writing the "About Me" portion of this blog I thought about the purpose of the blog - namely, preventing the growth of Socialism & stopping the Death Of Democracy in the American Republic & returning her to the "liberty to abundance" stage of our history. One word descriptions of people's philosophies or purposes are quite often inadequate. I feel that I am "liberal" meaning that I am broad minded, independent, generous, hospitable, & magnanimous. Under these terms "liberal" is a perfectly good word that has been corrupted over the years to mean the person is a left-winger or as Mark Levin more accurately wrote in his book "Liberty & Tyranny" a "statist" - someone looking for government or state control of society. I am certainly not that & have dedicated the blog to fighting this. I believe that I find what I am when I consider whether or not I am a "conservative" & specifically when I ask what is it that I am trying to conserve? It is the libertarian principles that America was founded upon & originally followed. That is the Return To Excellence that this blog is named for & is all about.

Sunday, January 29, 2017

The Autopilot Relationship Of Social Security, Medicare, & Medicaid To Economic Growth

Early in BO's administration Ann Coulter recommended the elimination of the Departments of Health & Human Services, Education, Commerce, Agriculture, HUD, Transportation, the EPA, the National Endowment of the Arts, the National Endowment for the Humanities, & the progressive income tax & instituting a flat tax.  At the time, I seconded Ann's recommendation except I recommended eliminating the progressive income tax & replacing it with the FairTax.
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The above graph shows the relationship of so-called federal Mandatory spending1 (growing as a percent of total spending) – mostly entitlements like Social Security, Medicare, & Medicaid – & federal Discretionary spending (declining as a percent of total spending) – like the topics Ann Coulter listed above plus items like Defense.  The so-called Mandatory entitlement topics are funded automatically, following the practice of continuing from year to year with no required input from Congress, hence they are on autopilot, whereas the Discretionary topics must be voted on & appropriated each year by Congress.
Since both Mandatory entitlements & Discretionary spending are each increasing in actual dollar amounts the above graph means that Mandatory entitlements are increasing faster than Discretionary spending. 
The Heritage Foundation reports that from 1992 to 2012 real inflation-adjusted (2012 dollars) Mandatory entitlement spending increased by 110% from $976 billion to $2,053 billion while Discretionary spending increased by 60.5% from $803 billion to $1,289 billion. Over this twenty year period total spending (includes net interest) grew 71% faster than inflation.
The point is that even if the above recommendations for eliminating the Discretionary programs – although significant - were implemented, the Mandatory entitlement & net interest portions of the federal budget would soon overwhelm the revenue projections.  See graphs below that show how Entitlement & Interest are crowding out other spending & how Entitlements & Defense spending have reversed positions over the past 50 years.  
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The graph below shows that between 2030 & 2040 Mandatory entitlement spending plus net interest will exceed government revenue.  Of course the portion of government revenue available for Discretionary programs becomes less each year during this time if no corrective action occurs.
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The Washington Examiner reports that Trump's plans call for 10% spending cuts & a 20% reduction in federal workers – all in Discretionary programs but no cuts or reductions in Social Security or Medicare.  Trump also is looking to reduce federal spending through attrition, a hiring freeze he has already authorized, & reorganization as well as making bureaucrats accountable to the American taxpayer.
Most significantly Trump has said that he will reduce federal regulations "by 75% or more" - the total business cost of compliance of federal regulations has soared (cost of compliance in 2012 was $2.028 trillion in 2014 dollars) – the annual compliance cost burden for an average U.S. firm is 21% of its payroll thereby leaving little or no room for investment of any kind so this reduction in regulations will have a liberating effect on businesses & therefore the economy.
Trump's selection of SC Congressman Mick Mulvaney, one of the nine founding members of the House Freedom Caucus – a group of about three dozen House Republicans that support limited government, the Constitution, & the promotion of liberty, safety, & prosperity - to head the Office of Management & Budget (OMB) only adds to the impression that spending cuts & addressing the deficit will be a top priority in the Trump administration.  Mulvaney favors a balanced budget amendment to the Constitution & has recently learned Spanish so he can appear on Spanish-language TV to explain the importance of the various programs to Hispanics.
Congressman Mulvaney is considered a deficit hawk & was grilled in his appearances before the Senate budget & homeland committees particularly by Senator McCain who pointed out that Mulvaney chose fiscal responsibility over defense spending in his years in the House.  Mulvaney is one of several Cabinet nominees whose positions directly contradict Trump's campaign pledges – in this case especially pertaining to Trump's pledge to continue Social Security & other entitlements as they are.
Trump has already said no to wasteful spending when he challenged Boeing regarding the $4 billion cost of a new Air Force One – see Tweet below.  Retired Oklahoma senator Tom Coburn still identifies waste, fraud, & redundancies each year – totaling $400 billion in 2017 that Mulvaney will be sure to consider.
Trump plans to solve most of the country's budget & financial problems by meeting his aggressive annual economic growth assumption of 4% year over year growth in real GDP ("we think it could be 5 [percent] or even 6 [percent]. We are going to have growth that will be tremendous.").   This type of growth has been realized before – see graph below.  In fact it is low by China's recent standards.  By comparison, GDP growth under BO averaged 2.1% for the seven & one half years since the recession ended in June 2009.
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But entitlements, like Social Security, don't totally cooperate with the Trump/Mulvaney principle that the best solution to any budget problem is faster economic growth.
Economic growth is a measure of a country's economic health – more jobs, prosperity, & wealth will be created with fast economic growth than with slow economic growth.  Prosperity & wealth creation for people in the middle class are functions of wages which in turn increase with increasing productivity.  These are the principles that built a strong America – long before Social Security appeared in the 1930s.
The problem with the major entitlements of Social Security, Medicare, & Medicaid, & we are experiencing it right now, is that their liabilities are growing faster than inflation or real GDP.  The declining ratio of workers to retirees (see table below for Social Security) means that entitlement payments to beneficiaries won't be able to keep up with the future liabilities of the entitlement programs which in turn will overwhelm the economy.  For instance, when three workers currently working in 2015 retire they will receive benefits based on two workers funding the system in 2035 – this is unsustainable.
click on table to enlarge
Social Security was originally a pay as you go system meaning that benefits are provided by current payments like payroll taxes.  In the 1980s & 1990s the baby boom generation's payroll taxes exceeded the annual amount of benefits paid & the surplus was used to create a Social Security trust fund.
Today Social Security is funded as shown in the following graph – meaning it is a hybrid combination of pay as you go & a fully funded insurance scheme.  Net interest income refers to money taken from the trust fund.
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The problem is that the number of retirees in the baby boomer generation grew much faster in the 2000s than the number of workers & this phenomenon is projected to continue – see graphic below that shows a 3:1 ratio in 2015 & a 2:1 ratio in 2035.
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The initial amount of a person's Social Security retirement benefit is indexed to real wage growth so the faster the economy grows it can be expected that real wages, & therefore the Social Security liability, will grow commensurate with it.  The calculation for benefits switches to consumer price index adjustments once a person starts to collect their retirement benefit.  There is a little more to the calculation but I think this summary suffices for the purpose of this post.
The 2016 annual report of Social Security's trustees indicates that the above graph for funding Social Security will change & that by 2034 the trust fund will be depleted & there will not be enough workers to maintain the projected level of benefits from the projected payroll tax level; accordingly, a 21% across-the-board benefit cut will be necessary unless Congress raises payroll taxes by a like amount.  Social Security has been paying out more in benefits than it collects in taxes since 2010.
Healthcare spending comprises almost twenty percent of the economy & it also grows faster than general inflation or real GDP.  The growth, & hence liability, of Medicare & Medicaid falls right in line; in fact, John Fund reports that the individual spent 50% of healthcare dollars when Ronald Reagan was president – today it is 12% so it is only human nature for this growth in healthcare spending to occur because people do not think they are spending their own money.  This uncoupling of spending & personal responsibility is a large driver of the rapidly rising costs of both healthcare & healthcare insurance.
See graph below that shows the projected growth of the federal government's healthcare spending including a projection of ObamaCare if left unchecked.
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The 2016 trustees annual report for Medicare, the federal government's healthcare insurance program for people 65 years & older, said Medicare's hospital-insurance trust fund will exhaust its reserves by 2028 – two years sooner than projected in 2015 – after which reductions, projected to be 13% below current levels, will have to be made to that program if there is no action taken by Congress.  Medicare Parts B (doctors) & D (drugs) are both financed by a 75% subsidy that comes from the general tax revenue collected by the U.S. Treasury.
Medicaid, the government insurance program for people of all ages whose income and resources are insufficient to pay for healthcare, is funded by the federal government providing funds from the general treasury to the states based on each state's per capita income ranging from 50% for high income states to 75% for low income states.  The individual states make up the difference in providing Medicaid services to the poor.
Now Trump has repeatedly said he wants to protect Social Security & Medicare spending with no cuts or changes, but his choice for OMB director Mick Mulvaney prefers to reduce spending on both programs as well as raise the retirement age eligibility to join the programs, reduce benefits for younger workers, & raise the Social Security payroll tax cap – Medicare has no payroll tax cap.  The future of Medicaid is unknown since it is also a large part of ObamaCare which is being considered for repeal by Trump.
This post shows the relationship of Social Security, Medicare, & Medicaid to economic growth – & it is a complicated one.  But the post clearly shows that the only real long term autopilot feature of these programs is the automatic reductions in benefits – 21% for Social Security in 2034 & 13% in Medicare's hospital coverage in 2028.
For my solution to solve America's entitlement problems that will return us to the liberty to abundance stage of our history click on the two referenced posts below.
Reference posts: 
1several places in this post referred to the subject entitlements as so-called Mandatory spending on autopilot – this is a misnomer.  There is really nothing mandatory about the programs.  Congress can change Social Security benefits in an instant regardless of how much or how long people have paid into the system – the annual notice Social Security mails to people who have not set up a Social Security account says so (from page two of sample statement on the Social Security website – "Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2034, the payroll taxes collected will be enough to pay only about 79 percent of scheduled benefits.") & so did the Supreme Court in 1960 in Flemming v. Nestor & 1937 in Helvering v. Davis – this is where the aforementioned 21% reduction in benefits comes into play or additional taxing of benefits like those that occurred in the 1980s & 1990s.  Medicare & Medicaid programs can likewise be changed or eliminated by Congress.

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