The Budget Debate
By Arnold Kling
Jagadeesh Gokhale and Kent Summers. point out that for entitlement programs, “pay as you go” is actually bad Budget policy.
Pay-as-you-go in this context usually implies benefit increases — for which retirees obviously don’t pay — and tax increases for workers and future generations. ..
Pay-as-you-go, therefore, is precisely the approach that has created a financial mess in Social Security and Medicare. Our future benefit commitments now far exceed our ability to pay. The financial imbalance is now estimated by Social Security’s independent actuary to equal $10.4 trillion. For Medicare, the overall shortfall is even larger — $62 trillion. Using the official numbers, we estimate that rejecting an attempt to control the growth rate of costs implies an immediate and permanent tax hike of 17.4 percentage points. That would more than double the current payroll tax rate of 15.3%. Inaction over another four years will increase the required hike to 19.7 percentage points.
I would add that another canard that must be addressed is that there would be a “transition cost” to privatizing Social Security.
We could incur the “transition cost” without privatizing Social Security. It is simply a matter of being honest in our accounting. Let us suppose that when I pay $5000 in Social Security taxes that in return the government owes me, in present value terms, $5000 in retirement benefits. As the government spends that money, it could issue debt of $5000 to cover my future benefits. If it were to do so, then its balance sheet would reflect its future obligations. This would be a “transition” to transparent accounting, rather than the Ponzi methodology employed today. As it stands now, the government is incurring future obligations without putting them on the balance sheet.
For Discussion. Do you think that doubling the payroll tax will bring in enough revenue to pay for Social Security benefits in the future?