Thursday, May 21, 2009

In Their Own Words: The Budget is on an Unsustainable Path

Part III, on pp.191-192 of theFederal Office of Management and Budget's "analytical perspectives" for 2010 indicates that the nation's finances are on an "unsustainable path" regarding its long term outlook. The following chart and excerpt is interesting:

"Increasing health costs and the aging of the population will place the budget on an unsustainable course without changes in policy to address these challenges. Medicare and Medicaid have grown faster than the economy for decades, and if they continue to do so will exert tremendous pressures on the budget. Additionally, the first members of the huge generation born after World War II, the socalled baby boomers, reached age 62 in 2008 and became eligible for early retirement under Social Security. In 2011, they turn 65 and become eligible for Medicare. In the years that follow, the elderly population will steadily increase, putting serious strains on the budget."

The percentage of GDP, which ranges from 10% to 20% of the total, is particularly alarming since the burden of supporting it falls to the young. In fairness to President Obama, this excerpt could come from any budget analysis during the last 30 years probably. However, what Obama is currently proposing will make this even worse with the pain realized even more quickly than anicipated. For social security, the only option was to privatize a portion of what people contributed through the 6.2% or 12.4% in their payroll taxes so people could invest it. The proposals during the Bush administration and others such as Kerrey-Moynihan in the late 1990's were to divert about 2% of the 12.4% payroll tax to private investment plans. These were reasonable reforms that, naturally, were scare-mongered to death.

The normal objection to privatizing a portion of social security is that this would have led to people losing the value of their money. What these critics fail to realize is that the alternative of "protecting social security" leads to an even larger loss of value through either the higher taxation that will be required to finance it. Or, they could inflate, stop the cost of living adjustments, and dilute the value of what's owed. They could let it go bankrupt. Or, they could just outright cut the benefits. At least investing a portion provided people some ownership and some opportunity for gains. The stock market, unlike, government entitlements, could actually yield positive long run returns.

As for the health and medicare cost entitlements, I have no answer for that. Ideally, there would be a private market for health services. Health insurance would work more like any other types of insurance but there might be room for government assistance to cover catastophic cases. But, instead, we went the HMO route and now we're going the government run route. Both are flawed. Health care requires a far more radical shift in paradigms. Eventually, from an economic perspective, the way we're going must lead to rationing if people are unwilling to move to a market based system and reform it entirely. I am genuinely not hopeful on healthcare.

1 comment:

Foxwood said...

Obaminamics is failure, but by design. He's done so much so fast, it can't be stupidity, but design. The list is so long for just 100+ days.