Category Archives: Entitlements

Working Longer Versus Saving More

One of the big decisions Americans must make as they plant their retirement is when to start collecting Social Security benefits. The popular wisdom is that each year you delay collecting Social Security translates into an 8% increase in annual benefits. The Social Security Administration can afford to goose the payout because (1) it pays you one year less than it would have otherwise, and (2) it collects the interest on the money.

Now comes Sita N. Slavov, a George Mason University economics professor, and four colleagues with a paper, “The Power of Working Longer,” that compares the monetary rewards of working longer versus saving. The bottom line:

Delaying retirement by 3-6 months has the same impact on the retirement standard of living as saving an additional one-percentage point of labor earnings for 30 years.

I’m not smart enough to follow their methodology, so I’ll just assume that they’re right. But they’re making one critical assumption — that Social Security payouts remain the same, even though the Social Security Trust Fund is scheduled to run out in 2033. At that point, payroll taxes will cover only 75% of promised payouts.

For readers of Bacon’s Rebellion, who from my observation are more affluent than the average American, the news gets worse. When the Social Security Trust Fund runs out of money — as seems inevitable, given the bipartisan refusal of presidents and Congress since George W. Bush to touch the issue — you won’t even get 75% of what you were promised. Too many senior Americans rely upon Social Security as their sole source of income, and a cut of 25% would prove devastating. Inevitably, Congress will tweak the program to soften the blow. Thanks to the chronic budget deficits and the massive national debt that will prevail 15 years from now, the United States will be in no position to bail out the program entirely through borrowing.

There is no way to know what a future Congress will do, but I expect it will resort to some combination of borrowing, higher payroll taxes, and redistribution of Social Security benefits from higher-income Americans to lower-income Americans. There’s no way around it: The middle-class will get hosed.

I’ll qualify for Social Security benefits next year. Even though I plan to continue working and earning income, I’m going to start cashing in on the program while I’m still entitled to 100% of my benefits. I fully expect the Trust Fund to run out by the time I’m 80, and I’m arranging my financial affairs to accommodate a 25% to 30% cut in my Social Security benefits by then. In the meantime, I’m making sure I get what I’ve been promised.

I’m also telling my Millennial kids both to start saving now and to plan to work well into their late 60s. Hopefully, modern medicine will help them remain healthy, active and vigorous a bit longer than our generation, so a few extra years of work won’t prove too burdensome.

Nobody should trust the American political class to live up to its promises — especially when the consequences are 15 years down the road.

Race, Responsibility and the Welfare State

by Vic Nicholls

What is the justification for taxing people to provide healthcare? There is no mandate for it in the Constitution. The “general welfare” was never considered to include health care. The campaign slogans of the Founding Fathers never included, “Free leech treatments for all!”

Are all men “created equal”? No. Everyone has different talents. I can’t get on a football or basketball team. They can’t do what I do in Information Technology. Is it the job or responsibility of the United States government to make me equal to them or them equal to me? No. Are we equal in the sight of God? Yes.

Should people who sacrificed to made the personal choices to earn college degrees and delay having children until they were married be penalized for making those choices by forcing them to pay for others who didn’t? Would you expect to pay higher insurance because your neighbors’ kid wrecked two of his parents cars? Is it fair to discriminate against those with bad driving records? Should the government require equal insurance premiums for everyone?

If we institute Medicare/Medicaid for all, where would personal responsibility start and end? If there is a shortage of doctors, how do we determine who gets one and who doesn’t? Since we were given the right to “life, liberty and the pursuit of happiness,” how does freedom from the tyrant’s power to tax me to fund his armies and empire translate into the power of my fellow countrymen to tax me to provide them 21st-century medical care?

Nowadays, appeals to personal responsibility and initiative are described as justifications for white privilege. If you earned a B.A. degree, got a job in your field, married, and then had kids, would you expect your children to have a better start in life than one who’s parents didn’t? Of course! Does that make you “privileged”? Not at all.

Notice that in listing the essential requirements for success in life, I didn’t mention race. That’s because I know non-white spouses who followed the formula and live as well as I do.

Many assume that all differences between the races are due to racism. But once you factor out marriage, education, in-wedlock birth, age (whites are older on average than blacks and Hispanics and have had more time to climb the income scale), and inheritance from parents who made the same responsible choices, what difference is there left?

If it’s racism that keeps people down rather than hard work and grit that allow people to rise, how do we explain the career of the noted African-American economist Dr. Walter Williams? He grew up in the projects with his mother and sister, but no father. He earned a Ph.D. in 1972, and has been teaching at George Mason University since 1980, and he publishes a nationally syndicated column. Racism was worse back then than it is now. How do we explain his success?

Explain Mae Jemison. She was born in Alabama in 1956. Her mother was an elementary English/math school teacher and her father was a maintenance supervisor. Her family moved to Chicago to give her better educational opportunities. She graduated high school in 1973 and went to Stanford at age 16, graduating 4 years later with a B.S. in chemical engineering and B.A. in African/Afro-American studies. Engineering professors would pretend she wasn’t there. Her family was always encouraging, though. She got her M.D. in 1981 at Cornell.

Explain Dr. Ben Carson, Dr. Charles Drew, or countless others less famous. Explain my African-American next-door neighbors, both of whose kids have masters’ degrees. I can explain their success: My neighbors married before the kids were born and have lived in the same house since the ’80’s. They sacrificed a ton to make sure their kids got a solid start in life. 

It’s time we asked a different question: When government takes away from those who worked for their success and gives it to those who didn’t, does it subsidize failure? When government subsidizes failure, do we get more of it?

Vic Nicholls lives in Chesapeake. For more on the topic, she recommends viewing Walter Williams’ speech, “How much can discrimination explain?” on the video above.

The Cult of Personal Fragility

Once upon a time, Americans prided themselves for being tough and resilient. They were strivers. They were survivors. They bounced back from adversity. Now they have become a nation of wimps, whiners and victims.

In writing a column about the absurd proliferation of “emotional support animals” on airplanes, George Will absolutely nailed what is happening:

A cult of personal fragility is becoming an aspect of the quest for the coveted status of victim. The cult is especially rampant in colleges and universities, which embrace the therapeutic mission of assuaging the anxieties of the emotionally brittle.

Well said! I predict that the phrases, “cult of personal fragility” and “anxieties of the emotionally brittle,” will enter the national lexicon. People are fed up with this nonsense.

Trigger warning, crybabies: Nobody cares about your anxieties. It’s time to grow up and act like big boys and girls.

Entitlements, Fiscal Limits and the Looming Age of Rage

Now that Democrats are close to parity with Republicans in the House of Delegates, there is renewed talk of Medicaid expansion in Virginia. Meanwhile, in Washington, President Trump and Republicans are pushing a tax-cut plan that would spur economic growth but, even with stronger growth, would increase deficits by $1.5 trillion over the next ten years. Nobody is talking about the $14.6 trillion national debt except as a cudgel against partisan foes. Even as Medicare, Disability, and Old Age and Survivors trust funds are projected to run out within a single generation, entitlement reform is not up for discussion.

Just a reminder… Here’s are U.S. budget deficits forecast by the Congressional Budget Office without counting proposed GOP tax cuts:

The “on-budget” deficit is what we conventionally think of the deficit. It does not include the draw-down of “off-budget” Medicare and Social Security trust funds. Data source: Congressional Budget Office.

Within eight years, the U.S. will be running $1 trillion-per-year deficits every year, pretty much forever. And the CBO forecast does not take into account the likelihood of a recession or two over the next ten years, in which case deficits will metastasize.

And here’s the off-budget forecast. Payouts for Medicare hospitalization, Social Security disability and Social Security old-age programs exceed tax revenues, but interest income on the assets will keep the respective trust funds in the black for the next couple of years. By 2020, however, the off-budget numbers shift  into deficit mode and plunge rapidly thereafter.

Barring major changes in U.S. spending programs or economic growth, here’s when the trust funds are expected to run out, according to Medicare and Social Security trust estimates:

  • 2028: Disability trust fund runs out of money.
  • 2029: Medicare hospitalization trust fund runs out of money.
  • 2035: Social Security trust fund runs out of money.

Back when the Simpson-Bowles commission tackled the deficit issue in 2010 — the last time Americans thought seriously about entitlement reform — the county had 25 years before keystone social safety net programs imploded. If Congress had acted then, it could have put the trust funds into fiscal balance with relatively minor tweaks (slightly higher payroll taxes, slightly reduced benefits, slightly older retirement ages) that had a large cumulative effect over many years. But a decade of delay will require more painful sacrifices, which means they likely never will be made.

If nothing gets done until the trust funds run out of money — what I call Boomergeddon — the programs will have to cut benefits to match revenues generated. We are only twelve years from massive dislocations to the Medicare program, and 17 years from disruptions to Social Security. Baby Boomers beware, your retirement will be a lot uglier than you realize.

As for those $1 trillion+ on-budget deficits every year, they put Virginia at special risk. Any Congressional effort to tame deficits without touching entitlements will require cuts to discretionary spending, the biggest pot of which is related to defense, intelligence and homeland security…. which happens to be Virginia’s biggest industry sector. Son of Sequester will subject the Virginia economy to chronic economic stress and fiscal pain. But instead of dealing with Virginia’s long-term structural issues, the next session of the General Assembly could well consume itself in a renewed debate over expanding Medicaid.

As Americans speak no evil, see no evil, and hear no evil, we hurtle toward an era of brutal fiscal limits, broken promises to millions of Americans, and polarization and rage that will surpass anything we see today.

How Medicaid Is Cannibalizing Virginia’s Budget

Source: JLARC

Three big trends are worth noting from the Joint Legislative Audit and Review Commission 2017 state spending update, a review of state spending over the previous 10 years.

First, General Fund spending has been constrained by limited revenue growth resulting from Virginia’s weak economy. The increase in spending has averaged 2.0% per year. Adjusted for inflation and population growth, General Fund spending actually declined 1% over the decade.

Second, the Medicaid program has crowded out spending for other priorities. Medicaid hogged 60% of all General Fund revenue growth over the decade. Medicaid’s share of the General Fund pie increased by 73%.

Third, the healthy growth in non-General Fund spending was driven in large part by tuition increases at Virginia’s colleges and universities. In other words, when faced by stagnant revenue and untouchable Medicaid spending increases, legislators cut what was cuttable. They reduced state support for higher education knowing that colleges and universities could fall back upon the expedient of raising tuition.

Cheerful thought of the day: As Virginia’s population ages, Medicaid spending will go one way — up — and it will continue to squeeze other spending categories. Here’s the spin that Republican legislators put on the JLARC report:

House Speaker William J. Howell, R-Stafford: “Once again, this annual report from JLARC shows that the increasing cost of Virginia’s current Medicaid program is crowding out needed funding for our public schools, colleges and universities, roads, and law enforcement officers. We consistently argued that Virginia can barely afford its existing Medicaid program, let alone the massive cost of expansion, and this report vindicates that position.”

Speaker-designee Kirk Cox, R-Colonial Heights: “It’s a simple proposition: if you cannot afford your mortgage payment, you don’t build a new addition to your house. Virginia’s current Medicaid program covers around 1 in every 8 Virginians, and as this report shows, the costs are staggering and continue to climb, despite ongoing reform efforts. It would be financially irresponsible to ask taxpayers to fund the massive expansion contemplated under the Affordable Care Act.”

Del. S. Chris Jones, R-Suffolk: “Even as we instituted major reforms aimed at bending the cost curve, and controlled spending growth in other areas of state government, Medicaid costs continue to increase dramatically. This growth eats into funding that could be used for our teachers, law enforcement officers, and hard working state employees.”

Bacon’s bottom line: Yeah, the Republican leaders are stingy bastards for not expanding Medicaid. But the alternative is worse. Latest news on the Boomergeddon front: The state of Illinois, which expanded its Medicaid program in 2013, incidentally, and now has to cover 10% of the expanded costs not funded by the federal government, has $16.5 billion in unpaid bills. The state also has $200 billion in total liabilities, including pension debt. Meanwhile, pundits are asking if debt-ridden Chicago will become the next Detroit. One good recession, and it will be.

To see what it’s like to operate a government bordering on insolvency, watch Puerto Rico flail as it tries to recover from Hurricane Maria. It’s not a pretty picture. It’s easy to be compassionate when you’re paying with other peoples’ money. When other peoples’ money runs out, everything goes all to hell.

Poverty and the Virginia Welfare State

Greetings from the Virginia welfare state

Greetings from the Virginia welfare state

Let’s say you’re a woman living in the City of Richmond. Let’s say you have two children, ages three and seven, but no husband. Let’s say you work 40 hours a week earning the minimum wage, or $15,080 per year. How much can you potentially receive in public benefits?

Sean Gorman, the Richmond Times-Dispatch PolitiFact reporter, added up the numbers based on a report by the Virginia Department of Social Services:

  • Welfare — $3,840
  • Food stamps — $2,268
  • Women, Infants and Children food basket — $600
  • Child care assistance — $12,468
  • School lunch — $1,296
  • Housing voucher –$10,692
  • Family Access to Medical Insurance Security Plan — estimated $9,807 (based on comparison to Medicaid)
  • Total — $40,971

Add that $40,971 to the wages the woman earns, and we’re talking $56,000 a year. Then consider that the $40,971 in benefits are not taxable income. To earn the same amount in take-home pay– accounting for social security, Medicare, federal income taxes and state income taxes — the same woman would have to earn $5,000 to $10,000 more, depending on what assumptions you make. (That is a back-of-the-envelope calculation derived from running numbers through a federal tax calculator.)

Thus, under the Virginia welfare state, a woman with two young children working for minimum wage enjoys roughly the same standard of living as a woman with two young children earning $60,000 to $65,000 a year. Then consider that the 2015 median household income in Richmond was $60,700, and consider the fact that the median household income includes many two-income families.

Discussion questions:

  • Income inequality. What do these numbers imply for the debate over income inequality in the United States? Does it make any sense to decry the disparity in income without taking into account benefits that low-income households receive from the welfare state?
  • Upward mobility. What do these numbers imply for social mobility? If a woman cannot better her material condition by working diligently and acquiring the skills needed to earn more pay, do welfare benefits act as a deterrent to self-improvement?
  • Poverty and marriage. Given the incentives of the welfare state, what reason do poor women have to get married and to raise their children in a stable partnership with their father? To what extent do welfare benefits render low- and working-class men economically peripheral and irrelevant for any role other than as sexual partners?
  • The nature of poverty. To what extent is the scourge of poverty in Virginia — substance abuse, domestic violence, child neglect, ill disciplined behavior, crime, dropping out of high school, out-of-wedlock births, and associated dysfunctional behaviors — the result of material deprivation or the consequence of welfare-induced family breakdown?

I would guess that the $40,000 tally of welfare benefits is a high number — not all similarly situated women apply for and receive the full gamut of benefits. Even so, the number is extraordinary. It is a testimony to the upward-striving nature of American society that anyone makes an effort to improve themselves at all.

Medicaid, the Blob that Ate the Budget

Medicaid, the blob that ate the budget

The Medicaid blob swallows all in its path.

Details on that runaway Medicaid budget…

Spending per Medicaid enrollee has been relatively flat the past five years, having increased less than 0.4% annually (adjusted for inflation) between FY 2011 and FY 2015. The cost driver has been enrollment, which increased 16.5% over the same period, according to a Joint Legislative Audit and Review Commission (JLARC) report, “Managing Spending in Virginia’s Medicaid Program.”

JLARC summarizes the consequences for Virginia’s General Fund budget:

Medicaid general fund spending has grown by an average of 8.9 percent annually over the past 10 years, while total general fund spending increased by just 1.3 percent. Medicaid spending comprised 22 percent of the general fund budget in FY16, increasing from 14 percent in FY07.

Chart source: JLARC

Chart source: JLARC

No wonder the Commonwealth can’t afford to give employees a pay raise and shore up their pension benefits (see previous post).

But there is potentially good news. The state still has room to squeeze costs by as much as $40 million per year.

In FY16, Virginia could have saved $17–36 million by not paying [Managed Care Organizations] for the inefficient provision of services. [Medicaid] also does not adjust administrative spending for enrollment increases, and these adjustments would have reduced spending by as much as $8 million in FY16.

Chart of the Day: Disabilities in Virginia

One in nine Virginians has a disability.

Source: StatChat blog

One in nine Virginians, nearly one million people, has a disability, according to numbers extracted from the 2015 American Consumer Survey by the Demographics Research Group at the University of Virginia.

The incidence of disability is strongly correlated with age — the elderly suffer a significantly higher rate of disabilities. But hundreds of thousands of the disabled fall into the 35- to 65-year-old age group, accounting for 9.3% of the working-age population. Of those disability_work_statuswith disabilities in the working-age population, most did not work, according to the SnapChat data, but about 44% of them did work full- or part-time jobs.

The snapshot in time is interesting, but not as interesting as the trend lines. As an aging population swells the number of elderly, one would expect an increase in the number of disabled. By contrast, with the decline of hard manual labor and continual advances in medicine, one would expect that the number of disabled in the working-age population would shrink.

But the number of disabled working-age Americans has steadily increased over the years. According to Social Security Administration (SSA) data, 5.3 million Americans were receiving disability benefits in 2001. That number increased relentlessly at a rate of 4% to 6% yearly through 2011. Then the rate of increase began slowing, and the number shrank by half a percent in 2015.

One theory to explain the increasing number of disabled is economic insecurity and unemployment. One might expect people to seek disability benefits during times of economic distress. Yet that is not borne out by the SSA data — there was only a modest increase in the number of disability applications during the recession and its immediate aftermath.

disability_trendline

The change that jumps out in this graph is the dramatic fall-off in the increase in Americans receiving disabilities in recent years. Has the “market” been saturated — have so many people been designated as disabled that there’s no one left who remotely qualifies? Alternatively, have the standards changed — has there been some kind of administrative crackdown that received no news coverage? I don’t know. But the change is dramatic, and it deserves an explanation.

Virginia Welfare Trends

I came across some interesting data on the Virginia Department of Social Services website showing the number of Virginians receiving social welfare benefits. I offer the data without commentary. — JAB

Temporary Assistance for Needy Families (TANF)

Temporary Assistance for Needy Families (TANF)

Supplemental Nutrition Assistance PrograM (SNAP), formerly known as food stamps.

Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps.

medicaid_enrollment

Medicaid

Children's Health Insurance Program (CHIP)

Children’s Health Insurance Program (CHIP)

Energy Assistance -- heating and cooling

Energy Assistance — heating and cooling

Energy Assistance -- crisis

Energy Assistance — crisis

Hospitalization claims

Hospitalization claims

General relief

General relief

Boomergeddon Watch: Student Debt Relief

debt_reliefby James A. Bacon

It should surprise no one that Hillary Clinton is advocating free college tuition and  loan forgiveness for millions of students in an attempt to appeal to the Millennial vote. But the pandering of presidential candidates doesn’t begin to plumb the depths of perversity in the American political system. Now industry is joining the cause. Reports the Wall Street Journal:

Real estate agents, farmers, architects, startup lenders, lawyers, tech companies, benefits administrators — even podiatrists — have sent lobbyists to Capitol Hill over the past two years to push for legislation to forgive or at least reduce what workers and consumers owe on their student loans. … Many industries argue that freeing up student debt, even for well-paid workers, would help the economy.

The proposal with the most traction, says the WSJ, would allow employers to contribute up to $5,250 a year toward an employee’s student debt without it being taxed.

The bald self-interest of these industries is appalling. To be sure, forgiveness of all or part of the $1.3 trillion in student debt would stimulate consumer spending — Millennials could buy more houses, more cars, more consumer goods. But such measures would pass on the cost to taxpayers, and it would ratchet up moral hazard to unprecedented levels.

It is mind-numbing to me that anyone is considering massive debt relief that would reward the profligate and irresponsible while punishing those who dutifully paid off their obligations. But why not? After all, we bailed out Wall Street after the real estate crash. We bailed out Detroit. We hand out tax breaks to big business like John D. Rockefeller tossed out dimes. We allow affluent home owners to deduct mortgage interest from their taxes. Now Donald Trump wants to hand out billions for a day care entitlement. There’s no end to the goodies we dispense, so what’s one more multi-billion-dollar giveaway?

The blindness is breathtaking. Despite sequestration, despite the expiration of the Bush tax cuts, despite a zero interest-rate monetary policy, despite continued (though tepid) economic growth, the Congressional Budget Office says that the post-recession trend of declining deficits is over, and that spending shortfalls will continue to increase every year, pretty much forever, and so will the national debt.

projected_deficits

Adding another entitlement — a higher-ed entitlement — rather than addressing the underlying problem of rising college tuition will only accelerate America’s march to Boomergeddon. This cannot possibly end well.