What's wrong with entitlements? We pay for them, don't we?

A friend and reader asked me those questions the other day.  Pretty good questions, aren't they?

Entitlements loom large in the political disputes over Federal government spending.  Mostly, the word "entitlements" seems to focus on two programs in particular:  Social Security and Medicare.  Even if you choose to define the word to include other social assistance programs, Social Security and Medicare are the two big gorillas of entitlements.

A simple, straight-forward answer to my friend's questions would be:  There's nothing wrong with these entitlements, as long as we pay for them, and as long as what we pay in is managed properly.  And, yes, it's pretty easy to see that each of us, individually and collectively, pays for those programs by way of taxes on earned income.

But since we're talking politics here, few things about the future of Social Security and Medicare are straight-forward.  However, I'm going to do my best to simplify and clarify by describing a few things that are not commonly heard, either in the press or in the political disputes.

Social Security -- an overview and some helpful hints

Let's be clear about something:  there is no coherent rational argument to say that these programs are fiscal basket cases and should be terminated for the good of the country.  That doesn't mean that they are perfect; what it does mean is that both programs are worthy and beneficial.

Should these entitlement programs be run so that each of us will get back from them at least as much as we have put in?  Yes, of course they should be run that way.  That's the way they are being run right now--as long as a person lives long enough--and there's no compelling fiscal reason to change that.

Do these programs need some changes to keep them solvent into the future?  Yes, I think so.  Does future solvency mean that benefits must be reduced?  Maybe so, maybe not so; there's no reason to assume that reducing benefits is the only way to assure future solvency.  Anybody who maintains that benefits reduction is the only way to assure solvency is just engaging in political theater.

Let's look at Social Security.  (I'm not going to get into Medicare right now; maybe another time.)  Every year, the Social Security tax contributions are split between deductions from an employee's paycheck, and contributions by the employer.  (Self-employed people pay the full amount that is the combination of the contributions by both the employee and the employer.)  These taxes stop being levied once the individual's gross income reaches a certain level for the year, currently $113,700.  You can see all the details about the rates, plus lots of retirement calculators and other information on the Social Security Administration's web site.

Information on the exact taxation rates for both Medicare and Social Security is currently available on this Social Security Administration web page.

The various calculators and data retrieval tools make it pretty easy for a person to find out how much he or she has paid in to Social Security (and Medicare, too), as well as obtain estimates for expected Social Security payments at various ages.

Social Security pays back what you put in -- an example

With that information in hand, all it takes is a little simple mathematics to get an idea of how much Social Security will return to an individual over time, and how that compares to the individual's Social Security contributions.

Take me, for example.  If I were to start taking Social Security benefits at age 62, I would need eleven years to have those payments equal the amount that I have already contributed to the program.  If I wait on starting benefits until age 70, then from that point on it would require a little over six years to reach that same milestone.

Which begs at least one question:  How much longer can I expect to live?

Well, accidents aside, the mortality information that I am familiar with gives me a good feeling that I can wait until age 70 to start taking Social Security benefits if I should so choose.

Of course, all of this ignores the time value of money, and the obvious fact that a dollar saved some years ago--and properly managed for investment--should be worth a whole lot more than one dollar today or at some point in the future.

But--and if you remember only one thing from reading this post, make it this one here--Social Security was never designed to be a savings account or investment program, so the concept of a time value of money, or of investment return, just doesn't really apply to it.  Social Security was designed to be pay-as-you-go, in which a portion of the earnings of the younger, more employed and more employable part of the population is transferred to the older, less employed and less employable part of the population.

Nonetheless, some people persist in asking, Wouldn't I do better with my money if I could keep it and invest it myself?

Who would have thought bureaucrats could do this good a job?

Because of the fundamental design of Social Security, the only answer to the self-investment question is, Well, maybe, and only if you are very lucky and well-disciplined; and, on top of that, you would need to reject the established need for Social Security, which, as described above, is that the older, less employed and less employable part of the population has a demonstrated need for this kind of income transfer.

Just how good a job does the Social Security Administration do in managing all that money?

Social Security is more than just a pension payment program -- it also provides disability and survivor's benefits.  As I said earlier, it was never set up as a savings and/or investment program.

However, let's take the growth of my estimated benefits between the ages of 62 and 70 and compare that with some historical investment results.

In my case--and I believe this to be applicable to everybody--my Social Security benefits at age 70 will pencil out to be about 75% greater than they will be at age 62.  If we look at this as an investment decision, then that's a pretty good compounded rate of return of about 7% or 8% annually.

For comparison, consider the mutual fund called The Growth Fund of America (from American Funds).  Its current price of about $43/share is 47% greater than was its closing price on October 14, 2005; that is to say, over eight years, money invested with this fund would have grown by 47% (not including dividends, distributions, and any reinvestment of these monies).  Admittedly, this is an imperfect comparison for numerous reasons.  But it shows that the Social Security Administration does a good job of managing our money.

How about diverting all that Social Security money into individual 401(k)s (and similar programs) instead?

The obvious answer is that any given worker is better off with both programs in place -- invest the 401(k) wisely and carefully, and depend upon Social Security both for providing supplemental retirement income, and for providing assistance for unexpected or unknowable events (disability payments, survivor's benefits).

Math, actuarial assumptions, and other gobbledy-gook

So, why does Social Security say that benefits will have to be reduced by about one-quarter beginning in 2033?

That projection is based on a grab-bag of actuarial and demographic assumptions, all of it put together and massaged with mathematics that I do not understand and probably couldn't explain here even if I did understand them.  But consider that the design of Social Security--both for benefits and for revenues--assumed that the nation's working-age population would be much larger than it now is in relation to the number of retirees, and also that the income subject to Social Security taxation would have a much broader base than it now does.

The last time Social Security tax rates were increased was in 1983.  That was done when the math wizards showed Congress that the impending retirement of the so-called "Baby Boom Generation" would drive the need for the additional funding.

As a fix to the program, that means it will be good for a half century.  That's a lot of years, and so it counts as a pretty darn good piece of legislation and behind-the-scenes technical work.

Social Security, as mentioned above, is not really a savings program, but more of a pay-as-you-go program.  As such, its design requires a certain ratio of paid workers to retirees in order to maintain the benefit payments.  Sometime around 2033 we will fall below that target ratio; at least, according to current demographic assumptions.

Those assumptions might have to be changed--hopefully for the better--if the recent uptick in the nation's fertility rate results in an unexpectedly larger workforce in twenty years or so.  Another potential influence could be an increase in the number of immigrants who could become gainfully employed (and taxed) as a result of an improved national immigration policy.

You've probably heard something about the demographics of the thing, so let's move on to the other design point mentioned above.  This is something that I have not yet seen widely-discussed; perhaps that implies that what I'm about to say is wildly off base, but it might also mean that it's one of those things that just hasn't gotten a lot of attention yet even though it deserves to have the attention.

Another downside of income inequity--read about it here first

America has a real problem with inequities in its income distribution.  For example, recent press has focused on the fact that corporate CEO's now earn about 350 times what the typical corporate employee earns.  By comparison, thirty years ago the multiplier was about 42 times.  That's a huge change, especially when we consider that there's a much larger group than just CEO's who have benefited from the tendency of wealth and income to accumulate much more with the top couple percent of the population than with the vast majority of Americans.

How did the income distribution look at the time of the design of Social Security?

That was in the mid-1930s.  At that time, the share of national income that went to the top 1% was not only significantly lower than it is now--something like 15% as compared to the current 25% or so--it was declining.  Eventually, that chart over time flattened-out with that share bouncing around the 10% figure, where it stayed for decades until beginning its inexorable rise in the early 1980s.

What this means is that a system that was designed to obtain revenues through taxation of a population where the income distribution was flatter and broader than it is now--and will be for the foreseeable future--must now be made to work in an environment where a much bigger piece of that income pie is beyond reach of the taxation authority.

In addition to the adverse effects of income inequality, we are also now in an environment--never envisioned during the design of Social Security--where significant and growing amounts of income are from the relatively elite sources of stock-holder dividends and private equity earnings.

It all adds up to an environment that favors the most fortunate at the expense of the less fortunate.

If you think this sounds like another "tax the rich" scheme, you would be right, because that's where the money is.  And, frankly, Social Security was designed to obtain its pay-as-you-go revenues from the broadest possible base of available earned monies.

There are probably lots of possible ways to improve Social Security's fiscal outlook through minimally-disruptive taxes.  One example that comes to mind is to levy the Social Security tax on dividend income, perhaps on some kind of graduated basis.  Doing away with the maximum income that is subject to the tax is another.  Any of us can probably think of additional ideas.

Maintaining Social Security's solvency through benefit reduction ought to be the choice of last resort.  Updating the program to make it current with the new realities of 21st century sources of income ought to be given first consideration.

America the weary?

The United States of America is the world’s superpower.  At the moment, though, because of the current stalemate over the Federal budget and the national debt ceiling, we are not behaving like a superpower.

Have Americans become tired of being a superpower?  Are we ambivalent about that status, and so just letting it slip away?

Superpower status must first be earned, as the United States had done by the end of World War II.  And it also must be periodically renewed—like a driver’s license—because the status brings with it the obligation of responsibilities, and the rest of the world expects the superpower to live up to those responsibilities.  As with a driver’s license, failure to fulfill the obligations implies a risk that the status is lost or revoked.

And, too, after years of driving some people opt out of the program.  The hassle of the obligations either becomes too demanding, or it just doesn’t fit in with the preferred lifestyle.  The same might be said of Americans’ interest to continue being a superpower.

Are Americans now thinking of opting out of the superpower program?  Or, are we already in the process of losing that status? 

Given the interconnected nature of today’s world—the huge amounts of easy international travel, the importance of cross-border commerce and business relationships—certain changes in America’s relations with the global community could suggest answers to these questions.  One change would be reductions in our opportunities and/or abilities to economically compete for foreign business and influence; the other, a diminishing desire on our part to reach outside the national borders for constructive engagement with the outside world.

Both changes are already taking place.

We don't always make it easy for foreigners to like us

The first decade of the twenty-first century saw a significant slippage of the respect in which the overall world community holds the United States.  Much  of the world feels that we have tarnished our national image with three events:  an overly-long and chaotic armed conflict in Afghanistan; an unethical and poorly thought-out military expedition into Iraq; and, finally, promoting and imposing on others an economic system that contains the root causes and triggers for the financial crisis of 2008 and 2009.  In those events, the feelings are that we showed poor national discipline in a variety of ways—Guantanamo, Abu Ghraib, pooled mortgage-backed securities and derivatives; the names alone are explanatory—and, in general, conducted ourselves in ways that caused far too much harm to others.

Taken together, these events have lessened the desire of the developing nations of the world to avail themselves of the goods, services and ideas that we have to offer.  When others don’t want us in their marketplaces we cannot compete for their business and their hearts and minds.

That’s Exhibit A.  It’s bad enough by itself.

We make ourselves look inept at governing

Exhibit B might be worse.  Now, by way of our polarized and almost frozen political process, it looks to the outside world like we cannot even put together the fiscal mechanisms to run our Federal government, to the point of closing our national parks and turning away foreign visitors.  To add injury to insult, our politics have raised the specter of government default on its monetary obligations—many of which are due to foreign individuals and other nations.

There should be no surprise if this causes people in the rest of the world to think that America is failing to act as a responsible superpower.  Nor should we be surprised if others begin to feel that Americans prefer the self-indulgence of existing separate and apart from the rest of the world.

We have created an internal political environment in which America’s president has had to cancel plans to attend an Asia-Pacific leadership summit. The politics of this development are of importance only to Americans.  What is important to the Asia-Pacific nations is the loss of dialog and engagement as a result of the missing president.  This leaves a participatory vacuum, which the Chinese leadership is happy to fill.  China’s gain, America’s loss.

Perhaps Americans have grown weary of global leadership.  Many say that we should no longer be the “global policeman.”  But without America in that role it would leave a hole—another vacuum—in the world order.  As always, vacuum will suck something in to fill itself.  Before relinquishing this role, we need to ask ourselves:  “What would the world look like with some other nation as the global policeman?”

Foreign policy cannot be just about us

We tell the rest of the world that we might not pay what we already owe to others, some of whom are them, not us; that causes trust issues.  We have a domestic political environment that seems to preclude an official national leadership presence at significant international events; that causes concerns about how much importance we place in working with other nations.

We are beginning to show an apparent willful national intent to start a process of reducing American engagement with the rest of the world community.

If this continues, it is likely that a diminished American leadership presence would soon give way to the leadership of another nation.  It’s hard to see how a United States of America that would allow this to happen could continue to hold on to its superpower status for long.

Not attending one particular international leadership gathering does not by itself set a trend for the future.  Disputing an individual year’s Federal budget is not, of itself, convincing evidence that our national political system is no longer able to extend its view outside our national borders.

What will cause these events to become alarming is when most of the American public scoffs at them and dismisses them as the product of some kind of near-term dysfunction in our governmental system.  Despite any truth in that conclusion, the hidden danger is that it avoids confronting the global implications inherent in understanding—or not understanding--the responsibilities that we have as a superpower.  If we don’t accept the obligations of those responsibilities, we begin to opt out of being a superpower.

Something that we can do -- if we choose to

If America wants to remain a superpower, then we must realize that we need to renew that status with the global community.  That can be done only if we care enough to show other peoples that we are worthy—as they define that concept—to compete in their marketplaces, and if our internal politics support visible and participatory American leadership.

This can be done if we adopt a national awareness that our failures of the first decade of the century have left a legacy of unhealed harm to others.  We must develop and implement overt and visible healing actions that others regard as sincere and valuable, and be convincing about it through consistent diplomatic outreach.  That awareness and those actions must be combined with a national policy to aggressively pursue opportunities for constructive international engagement.  Our political process must recognize that such engagement deserves the highest national priority.

The only alternative is to withdraw behind our borders, avoiding the obligations of superpower responsibilities, and wait for our superpower status to be revoked.

It's a choice between anger management and perversion

Have you heard that lots of people are angry with the government?  Probably so.  Does it really amount to anything?  Well, yes, it does amount to something:  it's made a mess of the government.

Anybody who is really, truly, honestly and sincerely angry with government ought to accept responsibility for the consequences of that anger and act accordingly.  I'm not trying to belittle the sanctity of anybody's feelings here; I'm simply bewildered by people who seem to wallow in anger without taking any kind of constructive approach to resolve the origins of the anger.  Bewildered by them and, frankly, becoming fed up with them, too.

Case in point:  the current partial shut-down of the Federal government.  A recurrent theme expressed by the right-wing Republicans in the House of Representatives is that they are justified in shutting down government operations because they are angry with the government, or because their constituents are angry with government.  (If you haven't heard this, then you've been living under a rock for the last several months.)

The true feelings and emotions of any single Congressperson are an unknown to me, but insofar as the Republican constituencies are concerned they might have a point there.  A Pew Research report just recently released shows that fully 41% of respondents who identify themselves as conservative Republicans are "angry" with government.  In fact, the title of the release is "Anger at Government Most Pronounced among Conservative Republicans."  That by itself tells much of the story.

Being stewards of the public trust, therefore, the Republican members of the House of Representatives are dutifully executing their responsibilities to their home district constituents by conveying that anger through legislative actions to shut down government operations.

In other words, if you're a Republican voter, and you are angry with government, then you are causing it to be shut down.  Well, maybe your elected Representative is contributing a little bit to that event, too, because it's likely that person is also angry at government.  But, it all begins and ends with you, the angry voter.

Feel the power.

Feel the power of perversion, that is.  Because anger without management yields no constructive solution, merely continued anger.  And most truly angry people, I believe, focus their anger on external targets by blaming somebody else for the problem that is causing the anger.  The target of their anger is "the government."  It's a broad-brush indictment, with little or no identifiable and employable management that could be used to discern causes and effects.

For all its faults, we live in a democratically-governed society, and who has elected that government?  Why, come to think of it, it's the angry people who have elected at least some part of that government!  Fortunately for our future, it was the non-angry people who elected most of the government last November.  A fact, of course, that serves only to inflame the passions of the angry voter.

Human nature being what it is, angry people are not going to persist in directing their anger at themselves for long.  Therefore, since they are giving only short shrift to the root causes of their anger, they will develop nothing constructive to offer as a resolution to whatever problems they see in government.  Nonetheless, the anger demands a resolution, even if it is only temporary, and so instead of something constructive we are left with the destructive event of the shut-down.

The logic of anger requires an outlet of righteous pain caused by tear-down and destruction, instead of finding long-term benefits out of building and construction.

Be gone, angry people!  You have nothing of value to offer.  Enjoy the self-flagellating bliss of your anger, because that's the closest you are going to come to gaining satisfaction out of the puerile self-importance that angry people attach to actions of theirs that cause harm to others.

For the government shut-down is not an abstract event.  It has tangible, daily-life implications to the 800,000 or so government workers who are now unemployed, without justifiable compensation for their time and opportunities.  And so, too, for the thousands of employees of private-sector government contractors who have been laid off because of lack of budgeted funding for planned projects; a number which will grow dramatically as this shut-down drags on.

Anger is non-professional; as such, it has no right to a place in a professional work environment.  Government certainly ought to be a professional work environment.  Ah, but perhaps you know a person who is angry at government and believes that there is no such thing as a professional governmental work environment?  What a hypocrite!  The angry voter has no qualification to judge professionalism, since protracted anger precludes professional behavior and thought.  The angry voter is merely projecting his or her own non-professionalism onto others.

Anger, of course, cannot be legislated away, nor can I or anyone else make it go away through arguments such as this that appeal to rationality.  The most that can be done to it is to put it into perspective, which is this:  If we are going to be a successful democracy, it will happen in spite of voter anger, because anger without constructive resolution is non-contributory to the political process, and therefore a perversion of that process.

Which brings us to the question of the day:  How to resolve the current conflict over the Federal budget?  I suppose something will emerge over the coming days, but one side of this argument is clearly driven by anger--anger at President Obama, and anger at the Affordable Care Act--and, if the past is any guide, it just doesn't seem possible that any constructive solution elements will emerge from that anger.  The likely outcome is that the House Republicans will have to swallow their anger, contain the anger of their most conservative constituents, and capitulate.

Unless, of course, they can get control of their anger.  (When pigs fly.)

As much as I would like to see that kind of capitulation, I also have to admit that capitulation will probably lead to more anger, producing an environment that is unlikely to yield anything more constructive in the future than it has yielded so far to date.

And that is likely to be our political outlook until such time as the angry voters can learn how to do anger management, and substitute the constructive results of that management for their current perversion of the political process.