It’s Wednesday and I just finished a ‘Conversation’ with the Economics Society of Australia, where I talked about Modern Monetary Theory (MMT) and its application to current policy issues. Some of the questions were excellent and challenging to answer, which is the best way. You can view an edited version of the discussion below and…
Ageing, Social Security, and the Intergenerational Debate – Part 1
Today, I am writing material for our textbook, given that we are pushing to get it finished before the end of the year and there is one macroeconomics class already using the trial draft version. In that context, we are having to keep feeding material to the lecturers and students to keep up with their schedule. So that is why I am departing from my usual practice of Friday textbook writing. I have also had a disrupted day, having earlier presented a workshop on professional ethics and responsibilities to a group of postgraduate students. And besides, today is September 11 and so it is our duty to honour the victims of the Pinochet coup in Chile, which occurred on that Tuesday morning in 1973. At least 60,000 people perished under the oppression of the right-wing junta that illegally seized control of that democratic nation with US support.
Chapter 25 Recent Policy Debates
In this Chapter we consider the following policy debates:
- 25.1: Ageing, Social Security, and the Intergenerational Debate
- 25.2: Twin Deficits and Sustainability Of Budget Deficits
- 25.3: Fixed Versus Flexible Exchange Rates: Optimal Currency Areas, the Bancor, or Floating Rates?
- 25.4: Economic Growth: Demand or Supply Constrained?
- 25.5: Environmental Sustainability and Economic Growth
25.1 Ageing, Social Security, and the Intergenerational Debate
The ageing society debate is at the forefront of calls to reduce government deficits. The debate is driven by the proposition that national governments will not be able to afford to maintain the spending necessary to support the growing demands for medical care and pension support as populations age.
At some points, the argument goes, governments will run out of money and other public spending programs will become heavily compromised.
Some economists support this narrative by advancing arguments about so-called financing gaps which are attempts to extrapolate future drains on public spending in relation to the projected scale of the economy.
In this Section we will show that these estimates of spending shortfalls are in fact constructed on flawed premises, which have led to the erection of an array of complex and voluntary accounting structures that give the impression that a currency-issuing government is financially constrained.
A dominant theme used by governments, business lobbyists, and economists to justify a preference for the pursuit of budget surpluses has been the so-called aeging population or intergenerational issues. Simply put, it is claimed that a number of government programs (such as health, social security, and education) are sensitive to demographic factors, and with population ageing, the budget ‘blow out’ will be unsustainable.
For example, in the US there is constant pressure on government to privatise the US social security system as a means of keeping it solvent. Similarly, in Australia, the so-called intergenerational debate, which began in the mid-1990s and is still a powerful political force, was central to the pursuit of budget surpluses by successive federal regimes.
The argument used to support the preference for surpluses in the context of an aeging population is simple: (a) the budget cannot be allowed to reach the projected level because the increasing public debt would push interest rates up and ‘crowd out’ productive private investment; (b) increasing debt will also impose higher future taxation burdens for future generations, which will reduce their future disposable incomes and erode work incentives; (c) the economy must produce more jobs and people must work longer (retirement ages must be lifted) to accumulate more funds to finance their own retirements; and, in some nations it is argued that (e) higher levels of immigration are required to reverse the ageing bias in the population.
In this section, we will examine the veracity of these arguments from the perspective of the macroeconomic framework we have introduced and developed within this textbook.
It is often suggested that budget surpluses are equivalent to accumulation funds that a private citizen might enjoy as a result of persistent saving. Using this metaphor, accumulated budget surpluses are seen as being ‘stored away’ for the future and thus provide the government with the means to deal with increased public expenditure demands that may accompany the ageing population.
TO BE CONTINUED
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Advanced material: The US Social Security and Medicare Systems
The US Social Security and Medicare systems are organised into two separate Trust Funds, each having six trustees – including the current Secretary of the Treasury (the Managing Trustee), the Secretary of HHS, the Secretary of Labor, and the Social Security Commissioner. Two Public Trustees are added (one Democrat and one Republican) to provide scrutiny on the conclusions of the other four. The Trustee’s Reports are annual legal requirements under the US Social Security Act and aim to report on the “financial status” of each of the “trust funds” to the US Congress. They provide elaborate projections of the revenues and outlays expected of each the funds based on actuarial and economic assumptions and modelling. The US Social Security Administration is underpinned by two separate funds. First, the Old-Age and Survivors Insurance Trust Fund is the accounting device that the US government uses in relation to the payment of future retirement benefits. Second, the Disability Insurance Trust Fund is the accounting device that the US government uses in relation to the payment of disability support pensions. Collectively, these funds are known as the Old-Age, Survivors, and Disability Insurance (OASDI) program. The US Social Security Trustees Report 2011 notes that:
This type of reporting is very common and suggests that in operational terms, should there not be a positive balance in the Trust Funds then the attached social security programs will be unable to pay the benefits. It is argued that the so-called “funding gap” will grow over time as the number of dependents on the funds grow. The US Social Security Trustees Report 2011 said that 2035, social security benefits will be about 13-15 per cent of taxable dollars and the Trust Fund will be exhausted by 2036 whereupon the projected incomes would only match 77 per cent of scheduled benefits. Clearly, these Trust Funds are the final responsibility of the US government, which can always ensure benefits are paid (in nominal terms). To obscure that intrinsic capacity, successive generations of politicians have placed a series of restrictive administrative layers, which they use to justify their claims that the government is financially constrained. These claims reflect the ideological distaste for government programs held by many conservative politicians. The organisation of the Trust Funds and the way they are funded exemplifies the way the public are mislead into thinking their future pension and health entitlements are in doubt as a result of the alleged inability of the US government to honour all its liabilities. For example, the accounting smokescreen manifests through the US government’s decision to allocate payroll tax and income tax revenue to the revenue side of these Funds. Such an explicit gesture, which is totally unnecessary from a financial perspective, gives the impression to the general public that: (a) their taxes are being put to some specific use; and (b) that without those taxes funding those uses there would be not capacity to provide the services. Of-course, both perceptions are false. Taxpayers do not fund anything in a fiat monetary system and the US government doesn’t need any “funding” to provide whatever goods and services to the non-government sector it chooses. In the US Social Security system, the deception is very powerful. Should the current revenues be insufficient to match current obligations then the prior Trust Fund balances are used (which mainly represent past surpluses). These past surpluses were then invested in Treasury bonds. It looks to be an elaborate mechanism for the government lending to itself and pretending to raise revenue that is necessary to “fund” pension and medicare entitlements. In fact, the US government (via the Congress) can always pass legislation which transfers “General Funds” into “Trust Funds”. While in an accounting sense, these Trust Funds can become insolvent, in the way they are currently constructed and accounted for, there is never a possibility that the US government will not be able to provide the requisite US dollars to pensions and health care, should it wish to do so. The summary facts are:
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Conclusion
MORE ON THIS ON FRIDAY. Tomorrow, the Australian Labour Force data comes out and I am sure to be discussing that release.
A long flight awaits …
Remember Chile – September 11, 1973
Today we remember Chile.
Tuesday, September 11, 1973 – right-wing forces aided by the US overthrew the elected government Chile. It was a terrorist act we should continue to remember like other terrorist acts!
Here is my band – Pressure Drop – recalling the event (song written in 1978, this recording May 2011).
You can see the band in Melbourne tomorrow night – September 12, 2013 – at The Retreat Hotel, Brunswick, which is located at 280 Sydney Rd, Brunswick.
Details are available – HERE.
That is enough for today!
(c) Copyright 2013 Bill Mitchell. All Rights Reserved.
Bill, this is very good and extremely important, thank you for including it in your textbook.
Just a few questions, typos, or clarifications to suggest:
First
“…which is totally unnecessary from a financial perspective, gives the impression to the general public that: (a) their taxes are being put to some specific use; and (b) that without those taxes funding those uses there would be not capacity to provide the services.” Letter (b) maybe should at the end read “…there would not be any capacity…” or maybe “… there would be no capacity…”
Second
Bill, sorry for doing this in two posts, but working from my iPad doesn’t seem as flexible for some reason…
My second comment relates to this paragraph “The US Social Security Trustees Report 2011 said that 2035, social security benefits will be about 13-15 per cent of taxable dollars and the Trust Fund will be exhausted by 2036 whereupon the projected incomes would only match 77 per cent of scheduled benefits.” This confuses me a bit. For example, in which year will payments into fund from designated taxes fall short of yearly expenditures? Maybe this has happened already? And in which year will the fund then be forecasted to be fully depleted? I do not know the answer to either question, but if you have that information it would help this reader to understand dynamics a bit better.
Lastly, I seem to remember reading (maybe in the trilogy by Art Sleschinger about the Roosevelt years, not sure) about the political rational for setting up the idea of a trust fund to sell to US congress, a bit of Rooseveltian slight of hand maybe. This might be an interesting point to include?
I eagerly await the text. By the way, I have just now discouraged my 17 year old son from taking the economics course offered as an elective in his last year of US high school because I did not want him to be subject to the neo liberal propaganda that permeates the text, especially as we live in the rather affluent city of Santa Barbara, CA (and also have home in the terribly depressed Dublin, Ireland), where he is surrounded by children of rich parents with neo liberal views. Instead, when your book comes out, I may attempt a bit of last effort home schooling before he goes off to university. I am afraid that will be my only chance to try to give him any formal foundation to try to combat the institutionalised rubbish from the standard economics courses he will encounter from the universities he is considering.
Keep up with this excellent work, for our children’s sake if for nothing else.
William Allen
Thanks for the Pressure Drop video Bill.
The names of 2 Nobel laureates come to mind when I think of those sad events.
I wonder how Thatcher missed out.
William Allen: Yes, you are referring to this Famous Roosevelt Quote which was indeed made famous by Arthur Schlessinger.
I share your concern about the nonsense perpetrated in high school “economics” education.
As an IT dude with a strong interest in full employment for the Kenyan working class, I can’t wait to buy your textbook. Make sure there’s an Amazon.com e-book version. Also please have plenty of questions and answers, not just 3. He he. Any plans for a reasonably-priced distance learning economics degree?
Nice reggae song Bill but very sad video. You’re a man of many talents. People need to understand that they can get the change they desire through the 4Ps (persuasion, patience, perseverance, and persistence), not violence. I mean, how did we get stuff out of dad and mum when growing up? He he.
there was an intersting video realted to pinochet coup, and is about Kissinger (another from the peace nobel price’s black list) being confronted as mass murderer for supporting (and organizing) that coup.
http://www.infowars.com/kissinger-confronted-as-mass-murderer/
today also is remembered the end of the siege to barcelona, with the defeat of cathalan population and subsequent 4 centuries of submission to spain.
on the subject of ageing population I always wonder about a little extremist example:
wether the social security faces a bigger constraint:
– having loads of money in the vault but no real resources to meet the needs
– having a lot of real resources and not a dime in the pocket
I think the answer is clear, but of course budget terroris will say that with al the money you can import the resources which is not wholly truth…
This is a difficult matter to get people to grasp, and maybe to explain it in any form possible would at last succeed…
Re: Benson N
If you do not know https://www.coursera.org/ you might find it interesting. They do not offer degrees but they have a wide variety courses. Take a look at “Economics of Money and Banking”. I just started it and find it interesting and focused on how things actually work, not ideology, so far. About 32,000 people from all over the world are currently signed up for this course.
This may be a way to get the MMT message to a wider audience. It would be interesting to see Professors Mitchell and Wray make a couple courses available.
While I don’t dispute anything you’ve written, I’d like to see more discussion of real resources being a constraint, rather than money, in posts like this. I think that tends to dampen the not-always-intentional strawman-ing of MMT arguments of this type. Absent at least some discussion of real resources, some will take it as though you are suggesting that “printing money” is a magical elixir for all possible ills.
Not having real resources mean, for example:
not having hospital infrastructure, not having adecuate medical equipment, not havin nurses and doctors available to work, not having food, not having drugs etc.
you could have money but if you do not have the real resources you can do nothing with it to help the disease for example. I think that’s what we mean by real resources.
Indeed the point bill is making is exactly the opposite to “suggesting that ‘printing money’ is a magical elixir for all possible ills”. Printing money is a solution to the lack of money only. If you do not have the real resources, you still have nothing, and can do nothing to enhance the lives of the population not in labour force. BUT if you DO have the real resources you can always “print money” as a solution of last resort.
At juanbeard, but part of Bill’s argument is that what you invest in development now that will affect what resources you have at your disposel in the future, and that if you neglect development — both human and otherwise — in the short run it isn’t going to mean that you have more money for future spending, but that you are going to be noticeably poorer for not investing more in development of making people more productive and capable.
keith, sorry but i didn’t get your point.
my argument is printing money is a solution to the lack of money (today, tomorrow, and always) that is maybe a financial claim. Bill’s argument of investing today for a better living tomorrow is about real resources: mobilize real resources today, build infrastructure today, create employment today, and surely you will be better tomorrow. That’s not a financial claim but a real one. And if you are out of money today you can print that money if you have idle resources, and mobilize them.
While I certainly agree with the premise that we can always fund the government-backed pension programs so long as the economy keeps producing sufficient real goods and services (and I don’t lie awake at night fretting over “money printing” nor do I own much gold beyond some collectible coins), I am not opposed to offering a voluntary opt-out for those pensioners who want to invest their own Social Security holdings. If we take the idea seriously that we should be able to at least take out what we put in, then the SS system should allow those who want to give it a go to try their hand in the investment markets. I currently run two investment clubs in my area of Naples, Florida – one of these is pitched toward less aggressive options, while the other is involved with the futures markets and trend-based trading. We have a lively time and it puts the lie to the notion that retirement in a place like Naples amounts to golf and yachting.
At the same time, I realize not everyone wants to take risks and is therefore prepared to accept the meager returns they get from SS, but there is one advantage for them – they are not limited to the amount they put into the system as the payments continue for as long as they can remain alive. Seems like a good deal for some. While I realize that Chile (and perhaps México) are not high on the list of approved systems here, there is little doubt that the voluntary option has worked well for those countries. In the US we can use the often-cited example of Galveston, Texas to see how an alternative to SS worked out.
I don’t find Social Security Funds of any use, except for directing investment to particular productive activities the government should want to encourage.
Otherwise I would just take it as simple tax receipts and government spending, and not as hoarding up for the future in any way.