Urban Institute calculation of lifetime payroll taxes and entitlement benefits

[DSpencer]

Re: Urban Institute calculation of lifetime payroll taxes and entitlement benefits

you can scam by saying you did more than you really did, but not by charging more for anything in particular.
and, yes, at least for outpatient services, the quoted price for a cash-paying customer bears no relationship to what medicare pays.

Right, I'm not disputing that fraud can and does happen.

I just feel like I'm "taking crazy pills" sometimes when reading threads like this:

"Medicare and SS are paying out more than they receive."
"Yeah of course. Didn't you see the article that hospitals charge all kinds of different amounts for cash procedures?"
"But isn't that totally unrelated to what Medicare pays?"
"Well yeah. So what's your point?"
???

Am I the one missing something here?

[ASH]

Re: Urban Institute calculation of lifetime payroll taxes and entitlement benefits

Right, I'm not disputing that fraud can and does happen.

I just feel like I'm "taking crazy pills" sometimes when reading threads like this:

"Medicare and SS are paying out more than they receive."
"Yeah of course. Didn't you see the article that hospitals charge all kinds of different amounts for cash procedures?"
"But isn't that totally unrelated to what Medicare pays?"
"Well yeah. So what's your point?"
???

Am I the one missing something here?

As I parse this thread, all you're missing is a (kinda) rough segue. I wanted to talk about the details of a particular calculation of who pays for -- and receives -- what. That calculation is part of an inter-generational and inter-class propaganda fight over taxation and entitlement spending policy... fighting over pieces of a pie of fixed size, as it were. That whole thing is sort of a "blame game" which doesn't address the bigger policy issue of whether we can perhaps get more value for less money (larger pie). The way I read jk's comment is that the blame game isn't all that productive, since it distracts attention from where the money is going. So that's where the thread took a detour from my original post.

I agree with you that because Medicare has a fixed pricing schedule, the specific issue of price discovery and bargaining isn't directly relevant to Medicare's program costs. As c1ue points out, the standard form of Medicare fraud is to perform unnecessary procedures and provide unnecessary or ineffective services. Also, there are issues about the structure of pay-for-service versus pay-for-outcome/maintenance systems. I think the price discovery issue does speak to the bigger matter of US healthcare costs, which probably feeds back into Medicare indirectly. Also, there's a tie-in here to the simple fact that folks with most any sort of coverage (Medicare or employer-sponsored) are insulated from the cost of their care, and so aren't strongly incentivized to control costs.

So I guess I see the thread as branching several different ways that are fundamentally related to the cost of healthcare but which don't always address each other specifically.

[Thailandnotes]

Re: Urban Institute calculation of lifetime payroll taxes and entitlement benefits

Klein has debated in other columns whether Medicare overpays or underpays. He concluded that it overpays specialists. I would argue that what Medicare pays is related to the price for cash procedures and what private insurance pays, shrinking the pie.

[dcarrigg]

Re: Urban Institute calculation of lifetime payroll taxes and entitlement benefits

I agree. I think that the authors of the Urban Institute's report are conflating two different types of analysis. One analysis would look at whether workers were getting "a good deal" for their payroll taxes, under the (false) model that the entitlements are a type of saving program, and so can be compared to the rate of return for private investments with a similar risk profile. Put X in and get Y out; what would have happened if X had been put into a different "investment". However, for an analysis of payments into and benefits out of a pay-as-you-go government program, it doesn't seem proper to count the opportunity cost of the payments in.

Well, even that gets muddled. You're technically correct, but the social security trust fund and intragovernmental debt also exist. So some interest is paid on top of some of the payroll taxes that come in. But it's no formal savings account or 1 to 1 relationship.

That's part of the problem with these discussions. The system is damned complicated. And there are few systems in the states less complicated than Social Security. Even still, it's not easy to keep track of all the moving pieces.

[Polish_Silver]

Ash vs Kotlikoff

Ash,
some of your reasoning and terminology is similiar to Laurence Kotlikoff. I am wondering if you are familiar with his ideas, and whether you agree with his judgement of the problem and his solution.

For example, he claims that on a long term basis "generational accounting", the US is about $50 trillion in debt.

I'd be glad to get your opinon on that, because EJ focuses on other things. I have never heard him comment on how the ageing and entitlement issue affects the US balance sheet.

[ASH]

Re: Urban Institute calculation of lifetime payroll taxes and entitlement benefits

Well, even that gets muddled. You're technically correct, but the social security trust fund and intragovernmental debt also exist. So some interest is paid on top of some of the payroll taxes that come in. But it's no formal savings account or 1 to 1 relationship.

True. I've never accepted that interest paid between government accounts actually counts as revenue, so true to form, I wouldn't have counted that in this case, either. That issue boils down to whether you regard the entitlement programs as separate financial entities from the rest of government. The government account series bonds are a legal obligation for the Treasury to collect taxes or issue debt in order to put money into the trust fund accounts, but the principal and interest don't themselves bring any money into the Treasury with which to do so. If you're concerned about paying for stuff, then the interest accrued by the trust funds is as irrelevant as the interest that payroll taxes might have earned had they been invested. But if you're concerned about getting paid benefits, then there is a bright and sacred line between the trust funds and the Treasury, and the interest is a real thing that everybody else owes for your benefit. (The technical trouble with this latter view is that the trust funds aren't technically held "in trust" for anyone, and so could be repurposed by Congress were it politically expedient to do so -- which it's not.) But anyway, I ought not get started on this whole topic, because the topic of interest on GAS bonds is the one thing that makes me apoplectic with rage.

[dcarrigg]

Re: Urban Institute calculation of lifetime payroll taxes and entitlement benefits

True. I've never accepted that interest paid between government accounts actually counts as revenue, so true to form, I wouldn't have counted that in this case, either. That issue boils down to whether you regard the entitlement programs as separate financial entities from the rest of government. The government account series bonds are a legal obligation for the Treasury to collect taxes or issue debt in order to put money into the trust fund accounts, but the principal and interest don't themselves bring any money into the Treasury with which to do so. If you're concerned about paying for stuff, then the interest accrued by the trust funds is as irrelevant as the interest that payroll taxes might have earned had they been invested. But if you're concerned about getting paid benefits, then there is a bright and sacred line between the trust funds and the Treasury, and the interest is a real thing that everybody else owes for your benefit. (The technical trouble with this latter view is that the trust funds aren't technically held "in trust" for anyone, and so could be repurposed by Congress were it politically expedient to do so -- which it's not.) But anyway, I ought not get started on this whole topic, because the topic of interest on GAS bonds is the one thing that makes me apoplectic with rage.

The same thing happens in the private sector with pension accounts. They simply have more freedom with investment choices. But the idea is functionally the same. Take some portion of money that is supposed to be set aside (almost never the right amount), set it in a semi-restricted account, and invest it in your own enterprise, which most of them did once upon a time despite this freedom.

There are reasons for this to fill you with rage, although I think in the case of the US they are less solid reasons than in the corporate case. At least the US can create money, and the money should be created at a discount in the future at an amount equal to the interest rate paid out upon the trust fund securities. Whether or not this happens is debatable. But it's a much more stable scheme, at least in the medium run, than the corporate alternative, which is almost dead.

In the end of the day, the truth may be that predicting the future is hard. Offering future benefits are hard. And hence every finance firm, insurance firm, and government will get it wrong in the long term. Personally, I'd bet that governments will outlast the other two options, but I can understand why people would argue that the opposite is true.

[ASH]

Re: Ash vs Kotlikoff

Ash,
some of your reasoning and terminology is similiar to Laurence Kotlikoff. I am wondering if you are familiar with his ideas, and whether you agree with his judgement of the problem and his solution.

For example, he claims that on a long term basis "generational accounting", the US is about $50 trillion in debt.

I'd be glad to get your opinon on that, because EJ focuses on other things. I have never heard him comment on how the ageing and entitlement issue affects the US balance sheet.

Hi Polish Silver. I am aware of some of Kotlikoff's work, and I think it is highly likely my opinions have been influenced by him, but I think there are probably pretty big gaps in what I know of his work. I can't call to mind the solution he proposes.

My opinion about multi-decade projections is that they are useful as a rhetorical device, but they can't realistically be made a basis for policy, and they're not a good measure of currency crisis risk. Whereas I put a lot of faith in demographic projections, nothing in the economy, politics, or even our monetary system can be projected accurately that far into the future, so concrete numbers like $50T that are derived from calculations that begin "if present trends hold over the next 75 years..." aren't worth much. For the US, the dirty secret is that Congress can, at any time, legislate a change in entitlement benefits. Heck, because the entitlement programs aren't actually contractual agreements (and the trust funds aren't actually funds held "in trust" for future beneficiaries), Congress could repurpose what payroll tax revenue is spent on or reassign trust fund "assets" to other purposes. In my opinion, they absolutely won't do this unless forced to by a nascent currency crisis, but I believe the knowledge that they can do this in exigency means creditors don't view the non-tradeable debt held by internal government accounts in the same light as the stock of tradeable bonds. They mostly care about our immediate cash flow and its immediate future prospects (i.e. can we service our debts?) and the size of the debt that is not on the Fed's books or held in intra-governmental accounts (and therefore which has to be serviced).

That said, we are getting pushed into a fiscal corner in the short-to-medium term, and I think that's within the range of reasonably accurate projection. Creditors probably do care about 5- and 10-year projections, and whether or not we're on a path to remain solvent in the near-term. But in my view, the biggest threat posed by our as-yet unfunded entitlement commitments is a massive misallocation of resources: under-investment in physical infrastructure and human capital. There's some finite danger of a currency crisis, but moderate-to-high inflation rather than an actual collapse seems vastly more likely to me. That, and a grubbier, inglorious future of diminished opportunity and cultural accomplishment.

And this actually loops back to my basic issue with the rhetoric of who paid how much into the entitlement system, and expects to receive what. As long as people believe they are owed a specific thing, and as long as they are convinced they're only asking for what they are due, it will be very politically hard to establish a fiscal policy that is fair to the interests of all citizens, and not just the retiring generation. Because we can't accurately predict future resources, expenses, and contingencies I am strongly against accruing "legacy costs" in the form of prior debts and commitments. I think that every culture at every point in history ought to look at its resources, look at its needs, and then decide how to commit those resources. In my view, all practices that establish past claims on present resources are pernicious. Whether it is a union worker accepting a smaller paycheck today in exchange for a promised pension tomorrow, or a tax-payer agreeing to pay higher payroll tax today in exchange for the promise that those taxes will be paid back with interest to support their retirement tomorrow, there are symmetric dangers. On the one hand, the union worker may get screwed over when his former employer under-funds the pension, goes bankrupt, and is ultimately unable to honor its commitment; on the other hand, the employer may go bankrupt due to the legacy costs. Today we have retirees who are counting on receiving a certain level of benefit which they've been promised, but also the prospect of those costs squeezing out just about everything the federal government does which plausibly has a positive return on investment (or, at the very least, supports the young and the working). We should be spreading society's resources across all of society instead of planning to eat our seed corn; the attitude that "I paid into the system and now I'm claiming what's mine and how you pay for it is your problem" is destructive, and it's what the Urban Institute's basic calculation purports to address.

[Polish_Silver]

More outrage!

My old boss was a dyed in the wool Marxist.

I remember him complaining that the SS surplus was used to finance the Viet Nam war.

By which he meant that since FICA bought many of the T-bonds of those years, the war was financed with less inflation and tax increase than otherwise.

[dcarrigg]

Re: More outrage!

My old boss was a dyed in the wool Marxist.

I remember him complaining that the SS surplus was used to finance the Viet Nam war.

By which he meant that since FICA bought many of the T-bonds of those years, the war was financed with less inflation and tax increase than otherwise.

That's a rather extreme view. But I suppose if he was a true Marxist, perhaps it was par for the course. Still, there's a Grand Canyon sized chasm between FDR and Karl Marx. I'd hope it's recognized in a place like this.

[vt]

Re: Ash vs Kotlikoff

I think 2% is way to low an amount of return. State and local pensions assume 6% to 8%, and if you compounded social security and medicare contributions at those levels you'd get an entirely different picture.

It's bad enough what corporations have done with pension assets, but the government has been just as bad by borrowing from the trust fund and giving IOUs. Then the poor has to pay more taxes to pay the IOUs to their own pension fund. The government is totally out of control.

I'd like to see an analysis using a 6% assumption of return over many decades.

[ASH]

Re: Ash vs Kotlikoff

I think 2% is way to low an amount of return. State and local pensions assume 6% to 8%, and if you compounded social security and medicare contributions at those levels you'd get an entirely different picture.

In the Urban Institute's calculation that's 2% in excess of inflation rather than a flat 2%. They defend it as risk-adjusted; pension funds assume 6% to 8% nominal returns because they are invested in equities and assume the risk of losses. In fact, 2% plus inflation is generous for essentially risk-free Treasurys. But anyway, the yield on the trust fund assets is a totally different topic than the notional 2% real return applied to the Urban Institute's calculation. Neither is justified.

It's bad enough what corporations have done with pension assets, but the government has been just as bad by borrowing from the trust fund and giving IOUs. Then the poor has to pay more taxes to pay the IOUs to their own pension fund. The government is totally out of control.

Oddly enough, in the viewpoint (which I don't hold) where accounting of payroll tax and entitlement benefits is separate from the rest of government, the poor don't really pay the IOUs to their own pension fund. Depending how you define them, the "poor" basically only pay payroll tax, whereas they get income support from refundable credits on their income taxes. Notionally, repayment of the IOUs held in the trust funds comes from the Treasury's general funds that don't include payroll tax money but do include income tax, corporate taxes, etc. So if you want to pretend the government has different pockets, individuals whose payroll taxes in excess of current entitlement program expenses were borrowed to pay for general fund purposes are having those excess payroll taxes repaid with interest to the trust funds from the general fund; if they're poor, they only pay payroll tax so technically the poor aren't the ones paying back the IOUs because their taxes don't go into the general fund. (In reality, no one is paying back the IOUs -- or they're only paying a fraction and borrowing the rest -- and the separate accounting of payroll tax & entitlements from other taxes and general fund expenses is bogus, anyway.)

[Polish_Silver]

Re: Ash vs Kotlikoff

Because we can't accurately predict future resources, expenses, and contingencies I am strongly against accruing "legacy costs" in the form of prior debts and commitments.

Jefferson was also against accumulating debt that future generations would pay. Kotlikoff has called it "fiscal child abuse".

What can be predicted is the size of the work force for the next 20 years, because all of it has already been born. Also, productivity never rises more than about 1%/year, and might do worse because of peak oil. So there are some constraints that you can use to make a "best case" analysis of tax revenues.

[Polish_Silver]

Re: More outrage!

I think he was partly right about that. If the war had been paid by an additional tax, and the draft had been universal, it would have ended a lot sooner. As it was, the revenue came from a payroll tax on the working class, and those same people were drafted. College students were exempt. How convenient!

[c1ue]

Re: Ash vs Kotlikoff

I agree. I think that the authors of the Urban Institute's report are conflating two different types of analysis. One analysis would look at whether workers were getting "a good deal" for their payroll taxes, under the (false) model that the entitlements are a type of saving program, and so can be compared to the rate of return for private investments with a similar risk profile. Put X in and get Y out; what would have happened if X had been put into a different "investment". However, for an analysis of payments into and benefits out of a pay-as-you-go government program, it doesn't seem proper to count the opportunity cost of the payments in.

I would also note that - while your comments on the treatment of entitlement payments as investments are spot on - at the same time there is a perfectly legitimate question about how well the 'float' is being managed.

In a significant sense, the SS program is much like insurance. You pay some premium in return for an outcome which may or may not happen.

In the case of SS - it is that you'll live beyond 65.

However, while it is not strictly accurate to measure insurance payments on an 'investment' growth comparison, it is perfectly legitimate to measure the performance of the float. Granted, generally performance of float is looked at to make sure the insurance company doesn't fail - which isn't an issue for the federal government due to its ability to create money - but then again the same ability to create money does have far greater implications than just the federal government's SS float.