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Dean Baker: The Good News and the Bad News in the Social Security Trustees’ Report

by Dean Baker on May 16, 2011

Huffington Post…

There was both good news and bad news in the Social Security trustees’ report released last week. The bad news is that the program is projected to cost somewhat more in the latest report than in the 2010 report. As a result, its projected 75-year shortfall was increased by 0.3 percentage points of covered payroll from 1.92 percent to 2.22 percent. The year when it was first projected to face a shortfall was moved up a year from 2037 to 2036. This bad news about the program is also the good news. The main reason that the program’s finances deteriorated between the 2010 report and the 2011 report is that in the 2011 report the trustees assumed that we would enjoy substantially longer life expectancies than they did in the 2010 report. They increased their projected life expectancy for men turning age 65 in 2010 from 18.1 years to 18.6 years, a gain of 0.5 years. The trustees increased their projected life expectancy for women turning age 65 by 0.3 years. Remarkably, virtually no one in the deficit-obsessed media even noticed this projected increase in life expectancy, simply highlighting the bad news about Social Security’s finances. Of course the trustees likely anticipated how their report would be received. It is important to recognize that this is the report of the Social Security trustees, not the professional staff of the Social Security Administration (SSA). The six trustees include three Obama cabinet members, the head of the Social Security Administration, who is a holdover Bush appointee, and Charles Blahous, an independent trustee who was President Bush’s point man on his Social Security privatization drive. The professional staff of SSA does make recommendations to the trustees, but these recommendations are held as carefully guarded secrets, like battle plans in the war on terrorism. Even accepting the 2011 report at face value the picture is hardly as dire as many politicians in Washington are claiming. We have seen much worse before. For example in 1997, the trustees projected a shortfall that was equal to 2.23 percent of payroll . At that time, their projections showed the trust fund first being depleted in 2029. The 1997 report also assumed a slower rate of real wage growth than the 2011 report. A lower rate of real wage growth meant that any tax increase that might have been imposed to maintain long-term solvency would have taken up a larger share of the growth in the real wage of the average worker. Alternatively, any cut in benefits would have done more to slow the improvement in the living standards of retirees over time. There can be little doubt that the most recent projections show a much brighter picture of Social Security and the economy going forward than what was projected through most of the 1990s. It is also important to keep the Social Security numbers in context. Proponents of cuts to Social Security have spent fortunes on pollsters and focus groups trying to put the program’s finances in the most dire possible light. They are fond of reporting things like the program’s $17.9 trillion shortfall over the infinite horizon . The focus groups show that this one is really good for scaring people. After all, “trillion” is a really huge number and $17.9 trillion must be really really huge. Of course no one has any clue what “infinite horizon” means. So no one knows that this is a projection of what the program looks like in the 23rd, 24th, and 25th century and beyond, if we never change it in any way. The vast majority of this $17.9 trillion shortfall comes in years after 2200. Social Security does have a long planning period, but if anyone thinks that we are actually making policy for the 24th century then we should keep this person far removed from the levers of power. The best way to make the size of the projected Social Security shortfall understandable is to put it in context. Relative to the size of the economy, the projected Social Security shortfall is equal to 0.7 percent of GDP. By comparison, annual spending on the military increased by more than 1.6 percentage points of GDP between 2000 and 2011. So the burden imposed by the wars in Iraq and Afghanistan are almost 2.5 times larger than the money that would be needed to eliminate the Social Security shortfall. To take another point of reference, the Congressional Budget Office’s analysis of the Ryan Medicare privatization plan implied that it would increase the cost of buying Medicare-equivalent policies by more than $34 trillion , a sum that is almost five times as large as the projected Social Security shortfall. If the Social Security shortfall is a really big deal, then the additional costs attributable to the Ryan plan are five times a really big deal. Interestingly, almost no one in the media seems to be talking about that burden.

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Dean Baker: The Good News and the Bad News in the Social Security Trustees’ Report

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Dean Baker: Why Does Senator McCaskill Want to Bankrupt Our Children?

by Dean Baker on May 2, 2011

Huffington Post…

That is what people should be asking Missouri Senator Claire McCaskill along with her fellow senators who are advocated strict caps on government spending. The idea being pushed by Senator McCaskill, together with Tennessee Senator Bob Corker and several other prominent senators, would limit federal spending to 20.6 percent of GDP. It would require difficult to obtain super-majorities to exceed this cap. Spending would be cut across a variety of programs if the cap is not reached. This proposal is hugely deserving of ridicule for a variety of reasons. First, it operates from a blatantly wrong premise – that government spending has grown out of control. Those familiar with arithmetic know that government spending had increased by little as a share of GDP prior to the downturn caused by the collapse of the housing bubble. In 2007, the last year before the onset of the recession, spending as a share of GDP was 19.6 percent. That is 1.1 percentage points less than the 20.7 percent share 30 years earlier in 1977. So the idea that there is a long-term trend of out of control spending is simply not true, or what they call outside of Washington, a “lie.” Spending has risen in the wake of the downturn, but this was not due to a flood of new and expensive government programs. It was overwhelmingly attributable to the expansion of safety net programs like unemployment compensation and Food Stamps and a decline in GDP, which raises the spending-to-GDP ratio even when spending remains constant. If McCaskill and the other senators are upset about this recent rise in spending then they should be going after the incompetents at the Fed and Treasury who somehow could not recognize the $8 trillion housing bubble whose collapse wrecked the economy. This was indeed a horrendous mistake that has been devastating to the country, but it has nothing to do with government spending. Over the long term government spending is projected to rise, but this also has nothing to do with the profligacy of Congress. There are two reasons for the projected increases in spending. The first is an aging population. As a result federal programs that provide for elderly like Social Security, Medicare, and Medicaid will cost more money. The second reason is that health care costs are still rising out control. The United States already pays more than twice as much per person for health care as other wealthy countries. This disparity is projected to grow even larger in coming decades. If this proves true then it will both impose enormous costs on the private sector and lead to growing strains on the budget. By contrast, if health care costs were brought under control we would be looking at huge budget surpluses in the decades ahead. Of course controlling costs would mean confronting the insurance and pharmaceutical industries and other powerful lobbies. Unfortunately Senator McCaskill and her colleagues lack the courage to confront such powerful elites. In fact, McCaskill and her colleagues do not even have the courage to propose cuts for specific programs. Does McCaskill wants to cut Medicare, Social Security, Head Start, unemployment insurance? She won’t tell her constituents or the country. She just wants to cut generic spending. This one might sell well with the Wall Street crew, but it is incredibly bad policy. First off, any budget expert can quickly devise 100 ways to game spending caps, the most obvious being tax expenditures, where the government gives a tax break for items it wants to subsidize. This does not count as spending. More importantly, a strict limit on government spending that is binding would prove enormously costly because there are some things that the government does more efficiently than the private sector. Providing Medicare to retirees is one of the items in this category, according to the non-partisan Congressional Budget Office (CBO). CBO’s analysis of Representative Ryan’s plan for privatizing Medicare showed that having private insurers take over the Medicare program would add more than $34 trillion to its costs over its 75-year planning period, an amount that is almost seven times the size of the projected Social Security shortfall. CBO’s analysis implies that the Ryan plan, which was approved by the Republican House last month, would increase the cost of paying for retirement health care for someone turning 65 in 2022 (the first year the plan takes effect) by almost $170,000. This doesn’t count the cost transferred from the government to beneficiaries. This is pure waste associated with using a more inefficient private system rather than the public system. There is a similar story with Social Security. The administrative costs of privatized systems like those in the United Kingdom or Chile are 20-30 times as high as the administrative costs of the Social Security system in the United States. This would cost a typical retiree close to $40,000 in higher fees (which is income to the financial industry) that would come directly out of their retirement income. If Senator McCaskill and her colleagues really expect their caps to be binding then they must want to privatize either Social Security or Medicare or both. Arithmetic leaves few other options. By 2030, CBO projects that spending on Social Security, Medicare and Medicaid would take up 14.5 percent of GDP. If we assume, conservatively, interest payments of 3.0 percent of GDP, this brings us to 17.5 percent of GDP against a proposed cap of 20.6 percent. Any reasonable level of spending on the military, education, infrastructure, the environment and research and development would push the country far over the cap. This would leave little choice except to privatize Social Security and/or Medicare imposing an enormous and unnecessary burden on our children and grandchildren. The higher costs associated with privatized programs will leave all but the wealthiest workers struggling in retirement. Of course, the senators who want to impose this enormous burden on our children and grandchildren will mostly be enjoying a comfortable retirement themselves by the time the effects of their policy are being felt. In the meantime, they will have enjoyed the praise of the Wall Street crew and the elite media for having the courage to destroy the programs that the middle class depends upon. Welcome to Washington.

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Dean Baker: Why Does Senator McCaskill Want to Bankrupt Our Children?

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Video: Purisima Says Spending Cuts Won’t Hurt Philippine Growth: Video

August 9, 2010

Aug. 10 (Bloomberg) — Philippine Finance Secretary Cesar Purisima talks with Bloomberg’s Susan Li about the country’s finances and economy. President Benigno Aquino plans to more than halve spending growth next year, instituting a freeze on hiring and new buildings and cars, to narrow the budget deficit from the projected record this year. Purisima speaks from New York. (Source: Bloomberg)

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Dan Dorfman: PIGGS Problems Could Pepper U.S.

March 12, 2010

A few months ago, if you read something that mentioned PIIGS, chances are you would probably mutter, hey, some goofball out there doesn’t know how to spell pig. No more. Now we all know what PIIGS stands for: Portugal, Italy, Ireland, Greece and Spain, five countries in the Euro-zone that foolishly did what a lot of big-time spenders do, borrow way too much during good times and then run into problems repaying their debt. That, of course, raises the specter of debt defaults, the kind of news that rattles investors and pounds world markets. As we all know, the pounding has already begun, what with Greece wreaking international havoc with its sovereign debt woes, causing stock markets around the world to slide. The general Wall Street consensus is that if the PIIGS undergo more financial and economic pain–which a number of overseas economic trackers consider a foregone conclusion–markets around the globe will get slammed again. So the $64,000 question is whose next, although some global market trackers insist Greece’s problems, contrary to some expectations, are far from over. Why, some might wonder, should any of us give a hoot, about the debt difficulties of such countries as Portugal, Italy, Spain, Ireland or Greece? The relevance, as investment adviser Michael Larson explains it, is the symptoms that provoked the financial difficulties of the PIIGS–too much debt, oversized federal deficits, shaky economies, politicians spending money like drunken sailors, and government lack of fiscal discipline–are all present in the U.S. Wall Street, Larson says, is clinging to the misguided notion that the debt and deficit problems will stay bottled up in the PIIGS countries. “That’s hogwash,” he says. “Mark my words, the PIIGS problems are coming to American shores.” Larson, the associate editor of the Safe Money Report newsletter in Jupiter, Fla., says the U.K. and the U.S. face the very same dismal underlying fundamentals vexing the PIIGS. And that means, he says, they will suffer a similar fallout–a sharp decline in government bond prices, a drastic rise in long-term interest rates and tanking stock markets. He’s hardly alone in his sour view that that the U.S. could copycat the PIIGS. Bill Gross, the managing director of Pimco, the world’s largest bond house, and Marc Faber, publisher of the Gloom, Boom & Doom report, recently expressed similar thoughts. Gross, in fact, in a recent “ring of fire” commentary, lumped both the U.S. and U.K in with the PIIGS and took note of the negative implications–namely that hefty debt levels slow growth by 1%, or more, which, in turn, reduces returns on both investment and on financial assets. In simple terms, observes Costa Rican money manager Felix Heligmann, “if the problems of the PIIGS expand to the point to where they embrace the U.S. and U.K. in a substantial way, “a lot of global investors will follow the PIIGS to the slaughterhouse.” To grasp it all, Larson gives us an insight into what he views as the most “blatantly obvious debt disasters,” which are most conspicuous in the PIIGS. Greece, for example, is running a deficit equivalent to 12.7% of its GDP, more than four times the 3% cap mandated for the 27 countries in the European Union. Both Standard & Poor’s and Fitch’s have recently responded by slashing Greece’s sovereign debt ratings and Moody’s is also contemplating its own ratings cut. In reaction, Greek bonds have collapsed in value, with yields surging to a decade high. Portugal’s economy is in freefall, with last year’s GDP shrinking to 2.7%, the worst showing in more than six decades. The unemployment rate there just surged to a 23-year high of 10.1%. In response, the rating agencies downgraded Portugal’s credit outlook, sending its government bond prices down and their yields up. Ireland is even shape, what with the collapse of its real estate bubble devastating its economy, which plunged 7.5% last year. What’s more, the nation’s budget deficit is closing in on 12% of GDP. As for Spain, its economy has been shrinking for almost two years, while unemployment has ballooned to 19.5% and to 45% for the 25 and under age group. In addition, its deficit now stands at 11.4% of GDP. Making matters worse, instead of cutting back, the Spanish government has ramped up spending to reinvigorate the economy, a move that’s starting to backfire as global investors rush for the exits. Discussing Italy, Larson notes that its debt load this year should hit 117% of GDP, the second worst in the European Union, right behind Greece. Again, the common thread is too much debt, oversized deficits. And the market’s response is also the same–plunging bond prices and surging interest rates. Typically, rates fall in a weak economy, but in this case they are rising despite severe recessions and declining inflation. In another ominous note, Larson recently put together a table which shows the projected 2010 debt-to-GDP ratios and the projected budget deficit-to-GDP ratios for the PIIGS, the U.S. and the U.K. The key conclusion: The U.S. is not the least vulnerable. Quite the contrary, other than its shaky status as the world’s dominant economic power, it is actually among the most vulnerable with the third worst debt-to-GDP ratio and the fourth worst deficit-to-GDP ratio. The inference here is we, too, could face plunging bond prices and rising rates. The only reason, observes Larson, the U.S. has gotten away with relatively lower borrowing costs–so far at least–is its elite status as the center of a dollar-dominated global financial system. “But that special privilege,” he says, “does not give us a free pass to use and abuse the good-will of foreign creditors. Nor will it prevent us from an avalanche of bond selling similar to what struck Greece and the U.K. in recent weeks.” As Larson sees it, a sovereign debt crisis is unfolding before our eyes, what with government bond prices falling, long-term rates climbing and insurance against government defaults rising. He ends with an ominous warning: “A bond collapse is beginning, with massive losses now looming. If you’re in long-term government notes and bonds (10 and 30-year durations), you’re going to get crushed.” Likewise, he sees a similar fate befalling investors in bond mutal funds and bond ETFs (exchange traded funds). What do you think? E-mail me at Dandordan@aol.com .

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Oman’s growth ‘good for construction and real estate’

March 3, 2010

03 Mar 2010 Projected growth figures for Oman’s economy over the next year could provide a boost to the country’s real estate and construction sectors. Kuwaiti-based thinktank Global Investment Hou…

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Video: Brill Says Press+ Software Lets Publishers Levy Web Fees: Video

February 8, 2010

Feb. 8 (Bloomberg) — Steven Brill, co-founder of Press+, talks with Bloomberg’s Margaret Brennan about the company’s software which offers an online payment model to newspaper publishers allowing them to charge users for access to content. Brill also discusses the projected implications for the newspaper industry and the level of control by individual publishers. (Source: Bloomberg)

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New York’s Budget Deficit May Grow to $3 Billion This Year, Paterson Says

September 23, 2009

By Michael Quint Sept. 23 (Bloomberg) — New York Governor David Paterson said the state’s budget deficit this year may reach $3 billion, up from $2.1 billion the Division of Budget estimated July 30. The $3 billion deficit for the year ended March 31, 2010, “is a revenue problem more than anything else,” Paterson said at a legislative leaders meeting in Albany, the state capital. Personal income tax collections are down about 35 percent rather than the projected 15 percent, Paterson said. The $133.5 billion spending plan for the year that began April 1 and updated in July included $86 billion of state funds, with the remainder coming from the federal government. To contact the reporter on this story: Michael Quint in Albany, New York, at mquint@bloomberg.net .

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