DANA CHASIN | Social Security as a Political Hotcake

Dana Chasin has just commented on  the Social Security Board of Trustees  annual report, issued on Tuesday. Posted here by permission:

The Trustees' Report highlights the continued fiscal challenges that face the Social Security program (SSA). 

Based on current trends, without supplemental taxes or other changes, the SSA would not be able to pay 100 percent of benefits in 16 years:

• Disability Insurance (SSDI) has income sufficient to pay full benefits on program only though 2032
• Old Age and Survivors Insurance (OASI) has income sufficient to fund program only through 2034
• In 2011, the Board projected that Social Security would be unable to provide full benefits only through 2036; they have now adjusted that projection to 2034.
• Social Security is now paying out more in benefits than it receives in total revenue, years earlier than previously projected.

The Report describes the above dates as the years when these programs will be “depleted.” The debate around the status of the OASI and DI programs has centered around the program’s looming “insolvency.”

Social Security, of course, does not go insolvent. Suggesting Social Security is or may become insolvent or bankrupt raises hackles needlessly even as it delights ideologues.

While looming benefit cuts are a serious concern that can and should be avoided, the SSA is not a business. It is a facet of the American government that has committed to guarantee retirement funds to the American worker.

Looming Shortfall; Several Simple Solutions 

Experts warn that the longer Congress waits to solve Social Security’s pending shortfall, the more expensive it will be to fix. In 2011, the Social Security Board of Trustees estimated it would take $6.5 trillion to avoid benefit cuts over the next 75 years. This year, they calculate that it would take $13.2 trillion.

Fixing the program that economists call the most “valuable component of our retirement system,” will be relatively straightforward. House Republicans propose cutting benefits and raising the retirement age to buoy the SSA. Thankfully, this solution appears dead on arrival, given the public’s overwhelming support for maintaining or increasing current levels of Social Security benefits.

A particularly promising proposal in the House Ways and Means Committee is H.R. 1902, the Social Security 2100 Act. The bill currently has 172 Democratic cosponsors and would strengthen Social Security benefits by:

• increasing monthly benefits by two percent
• indexing cost of living adjustments to Consumer Price Index- Elderly (CPI-E)
• creating a new special minimum benefit equal to 125% of the poverty line

The bill would keep the Social Security Trust Fund “solvent,” ie paying out full benefits, for the next 75 years according to the SSA Board of Trustees. It would accomplish this by applying the payroll tax to income over $400,000 and gradually increasing the payroll tax rate on both employees and employers, among other measures.

Congress could also consider applying unearned income such as capital gains to Social Security tax. If we were to FICA a tiny portion (1-3 percent) of capital gains, we would solve the Social Security problem easily -- in fact, it would present a significant opportunity to increase benefit levels substantially, possibly by two times.

Midterm Political Challenge and Opportunity 

With straightforward solutions available, Congress has no excuse not to address Social Security’s long-term shortfalls. Exacerbated by a brand new $1.5 trillion hole in the budget, this is a year when people will hear threats to Social Security. They may believe it. Democrats, as they have in the past, will provide reassurance. This cycle especially, this reassurance is likely to provide a large benefit for them in the midterms.

RIP | Dorothy Pechman Rice, Health Economist

Dorothy Pechman Rice (1922-2017)

Dorothy Pechman Rice, a government economist and statistician whose research helped establish the case for Medicare in 1965, died on Feb. 25 in Oakland, Calif. She lived in Piedmont Gardens in Oakland.

She was 94. She was associated as a professor at the Institute of Aging at School of Nursing at the University of California, San Francisco.

The UCSF Institute website shows photos of 32 faculty and staff associated with it today. But Rice was working in a new field when she was an analyst at the Social Security Administration in 1964. A study she worked on highlighted that half the population 65 and over had no health insurance. The number was then 8.5 million uninsured older people, she wrote in a 1964 issue of the Social Security Bulletin. Jonathan Oberlander, author of The Political Life of Medicare (2003), called Mrs. Rice an “extraordinary researcher.” The timing was good, as President Lyndon Johnson had widespread support for an expansion of government services in the wake of the assassination of JFK.

Interest in elderly people as a political force as well as a market was growing at that time in part because of the creation of the American Association for Retired People, backed by the Colonial Penn Insurance Company. My father, E. R. Marlin, was recruited after he retired from the State Department to create the International Federation on Ageing [sic] in the late 1960s. He had devoted two decades creating and then helping to manage the International Civil Aviation Organization, the U.N. agency devoted to commercial airline safety. http://warriors-families.blogspot.com/2015/10/october-24-un-opens-for-business-and-my.html

Rice was born in Brooklyn on June 11, 1922. She attended Brooklyn College for a year, then transferred to the University of Wisconsin, earning a B.A. in economics. She moved to Washington to become a statistical clerk for the Department of Labor, then worked as an economist at the U.S. Public Health Service. She said she "did well" as a female economist because of the shortage of analytical staff during World War II. http://www.abhow.com/news/2010/12/24/a-pioneering-perspective-dorothy-rice.192976.

Dorothy Rice became director of the National Center for Health Statistics, where she worked on estimates of the costs of treating people with heart disease, cancer, Alzheimer’s, disabilities and strokes. This is the work that Rice said in her 2010 interview that she was proudest of.

At UCSF, she participated in studies on the financial costs of cigarette smoking, estimating in 1998 that smoking-related illnesses cost Medicaid $12.9 billion a year ($19.2 billion today). Mrs. Rice told The Los Angeles Times: “Any global settlement with the tobacco industry should go beyond $368 billion.” It was eventually cut to about $250 million over 25 years.

Rice is survived by her sons Tom, a UCLA economist, Kenneth and Donald. Her brother, Joseph A. Pechman, a well-known tax scholar and director of economic studies at the Brookings Institution, died in 1989. Her husband died in 2005.

Sources: Obituary by Richard Sandomir, The NY Times, and sources cited above.

JOBS | Rep. Tim Bishop and the Suffolk County

When Rep. Bishop was challenged two years ago for a second time by Randy Altschuler, Altschuler distributed tens of thousands of flyers accusing Bishop of having "forced more than 30,000 jobs to leave" Suffolk County.

That grossly erroneous number was based on an improper use of the household survey, which is based on a telephone interview of small sample of households to determine the unemployment rate.

Looking at the correct database, in September 2012, I showed that employment in Suffolk County had increased by 36,300 jobs, a difference of 66,300 jobs from that claimed by Altschuler.

Lee Zeldin, who has challenged Tim Bishop before in 2008, when Barack Obama swept into office, is back again in a different environment. When Zeldin first entered the 2014 race, he said his campaign would be based on economic issues.

In fact, Zeldin has avoided raising economic issues, and for a good reason. The national economy has been perking along to the point where recovery to an unemployment rate of less than 6 percent has finally occurred. Recovery is at a slower rate than anyone predicted, because the depth of the financial stress left in 2008 was greater than anyone knew at the time.

The economies of Suffolk County, Long Island, and Greater New York, have been doing fine, better than most of the rest of New York State and New Jersey.

To his credit, Zeldin has not attempted to argue that Suffolk County has lost jobs. His economic arguments, as outlined in this week's East Hampton Press (p. A5), have instead been drawn from the general ideology of the Tea Party, as follows:

• He opposes raising the Federal minimum wage, on the basis that it would be a burden on some small businesses.
• He argues that Medicaid is being abused and people should be denied the benefits.
• He says the Federal tax code should be simplified to reduce exploration of deductions and exemptions. He favors a flatter tax.
• He wants to cut Federal spending.
• He says he has had 48 new laws passed in Albany during the past four years.
• He voted for repeal of the MTA payroll tax and for a tax credit for New York State craft brewers.

Bishop answers that he is pragmatic and non-ideological, looking for solutions that benefit his constituents:

• He favors a minimum wage of $10.10 by 2016 to keep pace with inflation and help the working poor make ends meet. (The minimum wage and overtime laws have many exemptions based on type of business and type of employee; they reduce the impact on small businesses most concerned about the impact on their costs.)
• He has voted for tax cuts to help small businesses hire U.S. workers, has worked to eliminate tax loopholes to benefit companies outsourcing American jobs and favors tax cuts for the middle class.
• Having opposed efforts to end existing Medicare programs, he supports a guarantee of Medicare and Social Security. 
• He supports Federal spending on infrastructure spending, education and training - he led the fight for the Federal science and technology budget that was threatened and would have eliminated thousands of jobs at the Brookhaven National Lab.
• He is working with the FAA to ensure that a replacement of the air traffic control facility at Westbury is kept on Long Island.

Regardless whether one is a Democrat or a Republican, Tim Bishop has one huge advantage over Lee Zeldin - he has been in Congress since 2003. He knows his way around Washington. Zeldin does not. Bishop has built relationships with other Members of Congress, and has seniority on the committees he is a member of. He can do more for businesses and workers and jobs on the East End of Long Island than his challenger, who will be starting over from scratch.

U.S. BUDGET | How Candy Cigs Hike the Deficit

Exhibit A. Candy Cigs for Sale

Gawker in 2010 said farewell to candy cigarettes. But the death of these products was exaggerated—they are still for sale. I argue they have a high social cost and contribute to the U.S. budget deficit. Bear with me. Follow the dots, 1... 2... 3... 4.

1. Candy Cigs Are Still Sold to Children

Candy-cigarette promotions are clearly targeted at children, and are packaged for stores that sell to them, on several sites via Amazon, accessed in December 2011. Grade school children are pictured smiling at "World's King Size Candy". (See Exhibit A at left.)

Candy cigs are wrapped in packs that look just like packs of cigarettes, with external markings that imitate those of regular cigarettes. The product is a box of 24 packs of candy cigs in three layers of eight. It weighs two pounds and costs about $5, sometimes more.The candy is not allowed to have the red tip that you may remember from your childhood, according to a "Government ruling".

2. Health-Care Costs Loom Large in the U.S. Budget

Now let's look at the U.S. budget. Dr. Peter R. Orszag headed the Congressional Budget Office (CBO) in 2007-2009. Then he headed the Office of Management and Budget (OMB) in Washington. He presented his views on the cost of medical care in a speech in New York City on November 15, 2011 to the New York Association for Business Economics (after leaving OMB he became Vice Chairman of Global Banking for Citigroup in New York City).

Exhibit B. How Health Care Costs Drive the 
Deficit. (Source: CBO.)

Orszag shows that medical care costs are almost entirely responsible for  worrisome long-term federal budget projections.

CBO data from 2007 make clear that as a share of GDP, projected Federal spending on activities other than health care has not been growing much. (See Exhibit B at left.)

Projected higher federal spending comes almost entirely from one spending sector, health care. Health care took 20 percent of GDP in 2007 but is projected to rise to one-third of GDP in 2082. The growth is all in the top layer of spending, i.e., Medicare and Medicaid.

NYU Professor William Baumol warned 20 years ago  that the cost of education and health care have been growing unsustainably because of the "cost disease" of high-labor-input activities such as teaching and medical care. Technological innovation and overseas manufacturing have saved money, but many labor inputs in health care have been harder to reduce.

To bring down the cost of health care, governments can:

• Target excessive use or cost of individual health-care procedures. Newspaper stories about excessive Medicare charges for specific procedures help focus public attention on them.
• Ration "elective" procedures. The British National Health Service has long had a queue for elective (for non-life-threatening illnesses) surgeries or other procedures.
• Limit demand for health-care services by providing more education to the public and doctors about the potential for making healthy life-style choices.
• Develop incentives for the public (consumers of health care services) to make better lifestyle or health-care choices.

These last two options lead to the relevance of candy cigarettes to health-care costs.

3. Kids Get Addicted to Cigarettes and Over-Eating

Two of the big drivers of higher health-care costs are cigarette smoking, which is usually begun during teen years, and obesity, especially an epidemic of childhood obesity

Private health and life insurers recognize the need to rein in these costs, and many give discounts to nonsmokers. The State of Arizona is probably the first state government to propose charging childless adults on Medicaid who smoke a $50 fee as partial compensation for the extra burden they impose on the state's health system. Here is Arizona's rationale, which includes a reference to medical problems caused by obesity.

Since the beginning of the recession, unemployment increased, State revenues decreased and enrollment in Arizona’s Medicaid program increased by more than 30%. The Medicaid program now makes up nearly a third of the State’s budget – second only to K-12 education. According to the Centers for Disease Control (CDC), 49% of Medicaid recipients smoke, in sharp contrast to the approximately 16% of Arizonans overall who are smokers; 25% of all Arizonans are obese. But what do those figures mean in terms of the cost of our health care? In 2004, taxpayers spent $377 million on smoking-attributable expenditures for the Medicaid population. Meanwhile, annual per capita medical spending for an individual who is considered obese is 42% higher than for someone who is of normal weight. That percentage translated to roughly $148 billion nationally in obesity-attributable medical spending in 2008.

The big problem with smoking and obesity is that they are easy to start and hard to stop:

• Smoking cigarettes is addictive. 
• Obesity, it turns out, is hard to reverse. A child that is obese is almost certainly going to be an adult that is obese. Pounds are easy to add and hard to shed.

A child that is eats poorly and does not exercise and becomes obese may as a teenager take to cigarettes in the misguided belief that this is a good way to lose weight, because smoking doesn't add calories. Not a good tradeoff. The United States needs to tackle both teenage obesity and teenage smoking.  

4. The Social Costs of Candy Cigs Far Exceed Their Price

Given the role of health care costs in the economy, and the role of smoking and obesity in Federal, state and local government health care budgets, the true cost of candy cigs exceeds the price that consumers pay of $5 per carton or 20 cents per pack. The additional social cost is called a "detrimental externality" or a "negative externality" to the product. It is the cost of attaching glamor to cigarettes, of getting children used to something pleasurable continually in the mouth.
The connection created between cigarettes and candy goes both ways:

• It gets children used to taking long thin sticks out of convenient branded packs and putting them in their mouth for pleasure. This creates a predisposition for cigarette smoking among teenagers.
• It lends the stimulus of widespread advertising of cigarettes to candy. This encourages consumption of candy.

Remedies

If you are with me so far, the three approaches to changing public behavior are (1) a ban on candy cigarettes, (2) a Pigou-type tax, (3) an exhortation to parents not to buy this product.

I'll start with #3. Maybe individual educational action might work. So I put my head into the lion's den and posted some negative comments about candy cigarettes on the review page of a candy-cigarette product offered on Amazon. I asked: "What is the point of the candy cigarettes?" and I answered: "The point seems to be to get kids used to having a cigarette in their mouths..." Here is a summary of the responses to this post:

• Of the 56 people who had commented on my review when I last looked, all of whom were presumably looking to buy candy cigarettes, none of them found my review helpful. That should not be a surprise, since some of the commenters may have an interest in sales of the candy cigarettes and the rest are at the site because they want to buy the product and are looking for information on choices among the available options.
• Some of the commentators took the trouble to think up names to call me, such as "candy cig police", someone "looking for something to blame". Most broadly I was tarred and feathered for hijacking a quality-assessment site to question the social responsibility of the product itself.
• But one person went beyond that and said that candy cigarettes are good for people who are trying to stop smoking because they need something to put in their hands while they go through nicotine-withdrawal symptoms. This user can't be the target market, given that packaging is designed as a counter-top appeal to children, but no reason why an adult can't find a product designed for a child to be useful or fun.
• A person who identifies herself as the mother of two young children says she had no intention of buying the product for her children — it is for adults ("I'll eat my candy smokes and love it. Get over it. I ain't shoving them down your kid's throats.").
• A late post asks plaintively: "Do we really need to ban everything?"

Individual action doesn't seem promising.  So let's move on to public policy. The three basic options are:

• Educate the public on the health effects of smoking. These programs work. Television advertising about the health effects of smoking is effective. 
• Ban candy cigarettes. This may be too harsh — conceivably some grown people really do need something to hold in their hand or put in their mouth while they are trying to quit smoking. The United States tried prohibiting alcohol and the experiment was not a big success. But some countries (Finland, Norway, the Republic of Ireland, Saudi Arabia and Turkey) have reportedly banned candy cigarettes. 
• Tax candy cigarettes.  A ban equates to an infinite tax. A tax (a "Pigou tax"), is preferable because it uses the marketplace to make the price of candy cigarettes reflect its social costs. Tax them the same as cigarettes. Teenage smoking has fallen because cigarettes are so expensive, so why not try the same approach to candy cigarettes? Make them expensive. Do our kids a favor, and help close the budget deficit!

What do you think?

Creating U.S. Jobs - Six Avenues

What are the real choices before Washington this fall?

The number one issue before the nation is economic recovery. Unemployment rates have been too high for too long. Here are a few ideas about what we can expect and hope for during the next few months:

1. Don't Depend on an Out-of-Ammo Fed. Federal Reserve Chairman Bernanke wants to appear to be doing everything he can. However, there is little more the Fed/FOMC can do to help the economy since December 16, 2008 when the Federal Funds rate was lowered to the Zero Bound. Quantitative Easing hasn't made much difference. How much can the Fed spend buying long-term Treasury bonds to lower long-term interest rates, even if it sells short-term Treasurys at the same time? How much difference does it make for the Fed to buy up long-term bonds if the Treasury is selling new ones at the next window?

2.  Implement Dodd-Frank to Help Address the Liquidity Trap. The economy would turn around if the Fed's easy-money policies led to more bank lending. But bankers are still worried about their balance sheets. Lax oversight by bank regulators has been replaced by close questioning. Bad loans are still not all recognized and new categories of potentially bad loans have opened up, e.g., the sovereign debt of the PIIGS countries, whose debts are freezing bank liquidity despite  of banks EU rescue programs. Speeding up implementation of Dodd-Frank financial reforms would improve confidence in and among U.S. banks.

3. Pass the President's Second Jobs Program. Another $450 billion for job creation may not be sufficient. However, it is necessary and a CNN poll and others show, by wide margin, that the U.S. public wants this program implemented.

4. Encourage Entrepreneurship. Creating jobs is not just about getting existing firms to hire more workers. It's about encouraging people to start up new businesses. Incubators help. Entrepreneurship can be taught - it's like a language. Governments at all levels can do big and small things to make it easier for people to create businesses.

5. Modify Fuel Prices to Encourage Green Jobs. Federal subsidies of alternative energy and energy efficiency didn't work as well as hoped because prices for fossil fuels don't reflect their full costs (and also because many states and localities did not have staff ready in 2009 to respond to stimulus programs offering money for green jobs). Subsidies for fossil fuels need to be ended and a tax on gasoline or carbon should be imposed. Tom Friedman had a good op-ed on this topic today ("Is It Weird Enough Yet?"). The last Congress rejected cap-and-trade and a carbon tax, but the pressure to find money to pay for Medicare and Social Security, as well as more evidence on global warming, might bring these proposals back to debate and action.

6. Most of All, Reform the Tax Code to Encourage Job Creation. If U.S. payroll tax rates are lowered significantly, as President Obama has suggested, this will have a dual benefit, encouraging employers to hire and putting money in the hands of middle-class consumers, who will spend it. This could be paid for by raising the top tax for those earning, say, $500,000 or more, and gradually raising the cap on the payroll tax (as Sen. Bernie Sanders, I-VT, has proposed). This would return the income tax to a semblance of progressivity and would tax those best able to bear the burden and least likely to spend new money.

George Magnus in the Financial Times describes the world's predicament as a "once-in-a-generation crisis of capitalism", bequeathed by the excesses of the 1980s-2008 period. The stakes couldn't be higher.