Retirement, pensions, social security, retirement, and related matters

[Crafty_Dog]

https://www.youtube.com/watch?v=oG_b2k6O_Ao

[Crafty_Dog]

For the record, I do not agree with the final two paragraphs.


The GOP Does Want to Trim Social Security and Medicare
Biden pointed to Rick Scott’s unpopular proposal, but the RSC plan reveals more.
By William A. GalstonFollow
Feb. 14, 2023 6:20 pm ET


When President Biden said during his State of the Union address last week that “some Republicans want Medicare and Social Security to sunset,” and that “I’m not saying it’s a majority,” he was technically correct. Florida Sen. Rick Scott, head of the National Republican Senatorial Committee in 2022, laid out a plan to do this last winter. But his proposal died for lack of a second.


Other Republican senators, including Mike Lee of Utah and Ron Johnson of Wisconsin, have suggested radical changes in Social Security and Medicare but didn’t go as far as Mr. Scott. Mr. Johnson wants to eliminate these programs as entitlements and subject them instead to the annual appropriations process. But Minority Leader Mitch McConnell was right when he said sunsetting was “not a Republican plan. That was the Rick Scott plan.” So was South Dakota Sen. Mike Rounds when he said Sunday that a “vast majority” of his colleagues disagreed with Mr. Scott about the best way to fix these programs.

Mr. Biden’s focus on Mr. Scott’s ill-considered proposal, however, obscured a larger truth: The vast majority of House Republicans want to alter the structure of Social Security and Medicare in ways that would dramatically cut spending on these programs.

More than two-thirds of House Republicans are members of the Republican Study Committee, which bills itself as “the conservative caucus of House Republicans and a leading influencer on the Right.” In 2022 the RSC published a comprehensive plan to balance the budget in seven years and then begin paying down the national debt. The plan included $729 billion in spending reductions for Social Security and $2.8 trillion in reductions for Medicare over the next 10 years.


The RSC budget specified the changes that would be needed to achieve reductions of this scale. For Social Security, the linchpin is raising the normal retirement age from 67 to 70 by 2040 and then indexing the normal retirement age to changes in life expectancy. The RSC also endorsed increasing benefits for workers with lower incomes, reducing the benefits received by middle- and upper-income workers, and allowing all workers to divert a portion of their payroll taxes to private retirement options. Republicans call this last measure “retirement freedom”; Democrats call it “partial privatization.” Some of these changes are meant to affect current retirees. If they weren’t, the plan wouldn’t yield the first-year spending reductions the RSC budget clearly indicates.

The committee’s Medicare plan is more complicated, but the main thrust is the same. It proposes “aligning Medicare’s eligibility age with the normal retirement age for Social Security and then indexing this age to life expectancy.” If “aligning” means tracking the RSC’s Social Security proposal, it would require increasing the Medicare eligibility age from the current 65 to 67 by 2027 and to 70 by 2040. The RSC plan also calls for transforming Medicare into a system of premium support based on income and wealth, which it claims would cover most of the costs of health insurance for most seniors. Forcing traditional Medicare to compete with private plans would reduce seniors’ premium payments by 7%.

This number comes from a Congressional Budget Office analysis, which also estimates that moving to premium support would reduce federal spending by at most $419 billion over five years and—I estimate based on CBO’s savings projections—about $1 trillion over a decade. This is a lot of money but it’s barely a third of the total savings that the RSC projects its Medicare plan would produce. Congress and voters deserve to know whether medical providers could bear the remaining $1.8 trillion in cost reductions without impairing the availability and quality of healthcare.

Republicans’ response to Mr. Biden’s remarks may mean that changes to Social Security and Medicare are off the table for the 118th Congress. And Donald Trump’s insistence that these programs be untouched could force his challengers for the GOP presidential nomination to toe the line during the 2024 primary election.

But when serious conversations about Social Security and Medicare are able to resume, conservative budget cutters and centrist reformers must face a basic fact: Increasing the normal retirement age for Social Security and the eligibility age for Medicare would have a disproportionate impact on low-income workers. Because high-income Americans live much longer than low-income Americans, raising the threshold age to 70 would reduce the number of years that low-income Americans receive benefits by a much higher percentage than those with higher incomes. The longevity gap between the top and the bottom is stunningly wide—14.6 years for men and 10.1 years for women, according to a study published in 2016 by a team led by economist Raj Chetty.

I don’t think the American people would accept steep increases in the age at which they become eligible for Social Security and Medicare. For the sake of low-income and working-class Americans, I’m quite sure they shouldn’t.

[Crafty_Dog]

The Coming Biden Bailout of Blue States and Cities
Taxpayers will be on the hook for mismanaged pensions and projects from stadiums to subways.
Allysia Finley hedcutBy Allysia FinleyFollow
April 2, 2023 1:32 pm ET


The Federal Reserve’s latest interest-rate hike paired with the continuing bank panic is causing credit conditions to tighten. State and local governments could be the next sinking ships that Washington gets called on to rescue.

More than a decade of near-zero rates allowed state and local governments to borrow cheaply. At the same time, the Fed’s quantitative easing inflated asset values and prompted pension funds chasing high returns to pile into riskier higher-yielding investments. Now that the music has stopped, the bills for years’ worth of monetary exuberance are coming due.

The balance-sheet risks for mismanaged states and municipalities have been hiding in plain sight just as they were at Silicon Valley Bank. Continued financial-market turmoil and a prolonged economic downturn could cause some pension funds to collapse and cities to declare bankruptcy. Taxpayers will invariably wind up on the hook for politicians’ bad financial bets.

Local government economic-development projects are already growing more expensive and less attractive to private investors owing to rising rates. Consider the $124 million minor-league soccer stadium in Pawtucket, R.I., set to receive about $60 million in state tax credits, federal Covid aid and public debt. Construction started over the winter, but the project’s developer is struggling to raise money to complete it as credit conditions tighten. That means taxpayers could wind up paying more of the costs, which explains Rhode Island Gov. Daniel McKee’s outburst at the central bank last week.


“I have taken a very strong position that what the Fed is doing accelerating interest rates is not in the best interest of the people of the state of Rhode Island,” Mr. McKee said. “They need to stop the increases, halt any increases, and start decreasing that interest rate.”

If the Fed is to blame, it’s for leaving interest rates too low for too long, which spurred states, localities and private investors to bankroll dubious projects like a 10,500-seat stadium in a city with a population of some 75,000. The country is littered with profligate public-works projects that politicians use to buy votes.

Take San Francisco’s 1.7-mile Central Subway, which opened in January at a cost of $1.95 billion, three times as much as initially estimated. The subway is drawing fewer than 3,000 daily riders, no doubt because the design doesn’t make sense: Riders have to walk the equivalent of three football fields to connect to other transit lines and take three escalators to reach platforms 12 stories underground. That didn’t stop Rep. Nancy Pelosi, other San Francisco Democratic power brokers and their union friends from championing the project. When borrowing is dirt cheap, why not max out the taxpayer credit card?

Now that credit is more expensive, states and localities have come up with a creative new way to finance their political investments more cheaply: Market their bonds as “ESG.” New York City last autumn floated $400 million in “social impact” bonds to fund construction of affordable housing. Enormous demand from investors reduced yields the city had to pay.


Taxpayers will be stuck paying debt costs on political pet projects for years to come at the same time as public worker pensions bleed them dry. A report by the research shop Equable estimated that the 228 largest public retirement systems were running a $1.4 trillion unfunded liability at the end of last June.

But stock prices haven’t increased much, and the values of other pension-fund investments are falling. Fixed-income assets such as government bonds used to make up about half of pension-fund portfolios but now are only about 20%. To meet their targeted investment return rates—typically between 7% and 8%—pension funds loaded up on higher-yielding stocks and “alternative investments” such as real estate, hedge funds and private equity, which rely heavily on leverage.

These alternative investments now make up about 30% of pension-fund investments and are getting slammed by rising interest rates. Defaults on office buildings are increasing while property values fall, which will ding pension funds and make it harder for local budgets to fund retirement obligations. About 80% of property-tax dollars in Chicago go to pensions.

Yet Chicago’s four pension systems have only enough assets to cover about 25% of what they owe workers and retirees, which is less than Detroit’s pension funds had when the Motor City declared Chapter 9 bankruptcy a decade ago. Pension funds in states like Illinois, New Jersey and Connecticut aren’t in much better shape.

Insolvent cities could declare bankruptcy, but states as a matter of federal law can’t. That means their taxpayers will inevitably have to pay more to cover the pension shortfalls. In Illinois 25% of general tax revenues pay for pensions. Many states—including Illinois—can’t afford to bail out their underwater cities, but they also may not want the stain of allowing them to go bankrupt.


The most likely outcome: A cascade of bailouts by some combination of U.S. taxpayers, the Fed and municipal bond investors. Democratic-run states and big cities are simply too politically important for the Biden administration to let fail.

[G M]

The Coming Biden Bailout of Blue States and Cities
Taxpayers will be on the hook for mismanaged pensions and projects from stadiums to subways.
Allysia Finley hedcutBy Allysia FinleyFollow
April 2, 2023 1:32 pm ET


The Federal Reserve’s latest interest-rate hike paired with the continuing bank panic is causing credit conditions to tighten. State and local governments could be the next sinking ships that Washington gets called on to rescue.

More than a decade of near-zero rates allowed state and local governments to borrow cheaply. At the same time, the Fed’s quantitative easing inflated asset values and prompted pension funds chasing high returns to pile into riskier higher-yielding investments. Now that the music has stopped, the bills for years’ worth of monetary exuberance are coming due.

The balance-sheet risks for mismanaged states and municipalities have been hiding in plain sight just as they were at Silicon Valley Bank. Continued financial-market turmoil and a prolonged economic downturn could cause some pension funds to collapse and cities to declare bankruptcy. Taxpayers will invariably wind up on the hook for politicians’ bad financial bets.

Local government economic-development projects are already growing more expensive and less attractive to private investors owing to rising rates. Consider the $124 million minor-league soccer stadium in Pawtucket, R.I., set to receive about $60 million in state tax credits, federal Covid aid and public debt. Construction started over the winter, but the project’s developer is struggling to raise money to complete it as credit conditions tighten. That means taxpayers could wind up paying more of the costs, which explains Rhode Island Gov. Daniel McKee’s outburst at the central bank last week.


“I have taken a very strong position that what the Fed is doing accelerating interest rates is not in the best interest of the people of the state of Rhode Island,” Mr. McKee said. “They need to stop the increases, halt any increases, and start decreasing that interest rate.”

If the Fed is to blame, it’s for leaving interest rates too low for too long, which spurred states, localities and private investors to bankroll dubious projects like a 10,500-seat stadium in a city with a population of some 75,000. The country is littered with profligate public-works projects that politicians use to buy votes.

Take San Francisco’s 1.7-mile Central Subway, which opened in January at a cost of $1.95 billion, three times as much as initially estimated. The subway is drawing fewer than 3,000 daily riders, no doubt because the design doesn’t make sense: Riders have to walk the equivalent of three football fields to connect to other transit lines and take three escalators to reach platforms 12 stories underground. That didn’t stop Rep. Nancy Pelosi, other San Francisco Democratic power brokers and their union friends from championing the project. When borrowing is dirt cheap, why not max out the taxpayer credit card?

Now that credit is more expensive, states and localities have come up with a creative new way to finance their political investments more cheaply: Market their bonds as “ESG.” New York City last autumn floated $400 million in “social impact” bonds to fund construction of affordable housing. Enormous demand from investors reduced yields the city had to pay.


Taxpayers will be stuck paying debt costs on political pet projects for years to come at the same time as public worker pensions bleed them dry. A report by the research shop Equable estimated that the 228 largest public retirement systems were running a $1.4 trillion unfunded liability at the end of last June.

But stock prices haven’t increased much, and the values of other pension-fund investments are falling. Fixed-income assets such as government bonds used to make up about half of pension-fund portfolios but now are only about 20%. To meet their targeted investment return rates—typically between 7% and 8%—pension funds loaded up on higher-yielding stocks and “alternative investments” such as real estate, hedge funds and private equity, which rely heavily on leverage.

These alternative investments now make up about 30% of pension-fund investments and are getting slammed by rising interest rates. Defaults on office buildings are increasing while property values fall, which will ding pension funds and make it harder for local budgets to fund retirement obligations. About 80% of property-tax dollars in Chicago go to pensions.

Yet Chicago’s four pension systems have only enough assets to cover about 25% of what they owe workers and retirees, which is less than Detroit’s pension funds had when the Motor City declared Chapter 9 bankruptcy a decade ago. Pension funds in states like Illinois, New Jersey and Connecticut aren’t in much better shape.

Insolvent cities could declare bankruptcy, but states as a matter of federal law can’t. That means their taxpayers will inevitably have to pay more to cover the pension shortfalls. In Illinois 25% of general tax revenues pay for pensions. Many states—including Illinois—can’t afford to bail out their underwater cities, but they also may not want the stain of allowing them to go bankrupt.


The most likely outcome: A cascade of bailouts by some combination of U.S. taxpayers, the Fed and municipal bond investors. Democratic-run states and big cities are simply too politically important for the Biden administration to let fail.

[Crafty_Dog]

Social Security Was Doomed From the Start
The fatal flaw was FDR’s decision to make it a pay-as-you-go benefit. We should have fixed it by now.
By Phil Gramm and Mike Solon
Dec. 19, 2023 6:29 pm ET


Americans imagine that the Social Security benefits they are promised belong to them. That’s by design. In 1935, President Franklin D. Roosevelt promised to use “compulsory contributory annuities” to set up a “self-supporting system for those now young and for future generations.” Senate Finance Committee Chairman Pat Harrison (D., Miss.) repeated that claim during debate over the Social Security Act: “The annuity system will give to the worker the satisfaction of knowing that he himself is providing for his old age.”

Yet two years later, FDR’s Justice Department successfully argued before the Supreme Court that Social Security payroll taxes weren’t reserved for future retirees. “These are true taxes, the purpose being simply to raise revenues,” assistant attorney general Robert Jackson asserted in his brief to the justices. “The proceeds are paid unrestricted into the Treasury as internal revenue collections, available for general support of the Government.”

By 1939, Social Security taxes were collecting about 8% of federal revenue and funding part of the explosion of New Deal social spending. None of this revenue was used to purchase marketable equities or private bonds to fund future benefits. Only a notional accounting of the Social Security surpluses was recorded by the issue of nonnegotiable government bonds—which provided nothing to fund future benefits, since it was debt the federal government owed itself.

With Social Security running large cash “surpluses,” Congress started adding new benefits. These included payments for dependents and survivors, cost-of-living adjustments, disability benefits, Supplemental Security Income, a minimum benefit, a death benefit and a student benefit. When the War on Poverty and the Vietnam War triggered—and social spending and monetary expansion sustained—9.2% average annual inflation from 1973-81, the Social Security surplus quickly evaporated. By 1980, the Social Security trustees projected the fund would be depleted in 1981.

But inflation and profligacy alone didn’t bankrupt Social Security. One retiree in 1940 could be supported by a 2% payroll tax paid by 159 workers. By 1981, with growing life expectancy and an aging population, that same retiree needed a 10.7% payroll tax paid by 3.2 workers.

Hammered by demographic changes and inflation, Social Security required immediate action when President Reagan took office. His 1981 budget reconciliation bill, Gramm-Latta, ended Social Security’s adult student benefit and the minimum benefit. It also limited the death benefit. Reagan and Speaker Tip O’Neill quickly agreed to the recommendations of the Greenspan Commission’s 1983 report on Social Security’s rescue. The agreement required most federal employees to pay Social Security taxes, accelerated the implementation of the payroll tax hikes enacted in 1977, gradually raised the retirement age to 67, and delayed for six months the annual cost-of-living adjustment.

The Greenspan Commission also urged, and Congress adopted, a new supplemental federal retirement program for future federal employees that would make real investments and pay benefits based on returns. In retrospect, the biggest failure of the Reagan-O’Neill reform was that it didn’t use the 25 years during which Social Security taxes would subsequently exceed outlays to make real investments to help pay future benefits. As always seems to be the case in dealing with imminent crises, the Social Security reformers of 1983—including the Greenspan Commission, the White House, Congress and the authors of this article—focused all their attention on paying near-term benefits. We never considered investing the cash surpluses created by the reforms. We simply spent them on general government.

The actual annual Social Security cash surpluses grew from $2.7 billion in 1984 to a peak of $90 billion in 2001 and then fell to $3 billion in 2009 before turning negative. Had each annual cash surplus been invested—70% in the S&P 500 and 30% in investment-grade corporate bonds—the invested trust fund would have held $3.9 trillion of marketable assets by 2010.

Warren Buffett and Charlie Munger weren’t surprised that Albert Einstein called compound interest the most powerful force in the universe, but most of us have trouble grasping its extraordinary power. In the past 39 years, the S&P 500, cornerstone of the Federal Employee Thrift Savings Plan, has yielded on average 11% in nominal terms (including dividends). Investment-grade corporate bonds have yielded 8.4%. A 70/30 investment portfolio doubled in value every seven years.

The return on the trust fund would have far outstripped the annual cash deficits after 2010, leaving a 2023 surplus of $13.3 trillion. How long the investment of cash surpluses generated by the 1983 reform would have extended the solvency of the Social Security trust fund would have depended on many factors. How much would the continued buildup of Social Security investments have caused rates of returns to fall? How much would the increase in savings by lowering interest rates have spurred economic growth and federal revenues, including Social Security taxes? But if rates of return equaled those of the previous 39 years since the 1983 reforms, the investment of the subsequent surpluses would have guaranteed the solvency of Social Security’s long-term projections for 75 years.

Whoever becomes president on Jan. 20, 2025, will be forced to address the funding crisis of Social Security’s trust fund, which will be depleted in the last year of the mandatory 10-year budget the president must submit in the spring of 2025. No matter how the government handles the mandatory benefit cuts the depletion of the trust fund will trigger, any cash surpluses generated in the process should be invested in real assets, which must be the private property of those who have paid into the system. Pay-as-you-go systems always go but never pay. Only with private investments and the power of compound interest is a sustainable Social Security program possible.

Mr. Gramm, a former chairman of the Senate Banking Committee, is a visiting scholar at the American Enterprise Institute. Mr. Solon is an adviser to US Policy Metrics.