Paul Krugman’s column in today’s NYT laments the lack of a national policy to combat global warming. He writes:

It’s true that scientists don’t know exactly how much world temperatures will rise if we persist with business as usual. But that uncertainty is actually what makes action so urgent. While there’s a chance that we’ll act against global warming only to find that the danger was overstated, there’s also a chance that we’ll fail to act only to find that the results of inaction were catastrophic. Which risk would you rather run?

He then cites the work of Harvard economist Martin Weitzman, who surveyed the results of a number of recent climate models and found that (in Krugman’s words) “they suggest about a 5 percent chance that world temperatures will eventually rise by more than 10 degrees Celsius (that is, world temperatures will rise by 18 degrees Fahrenheit). As Mr. Weitzman points out, that’s enough to ‘effectively destroy planet Earth as we know it.’”

Krugman concludes, “It’s sheer irresponsibility not to do whatever we can to eliminate that threat” and he calls for opprobrium against those who might impede global warming legislation: “The only way we’re going to get action, I’d suggest, is if those who stand in the way of action come to be perceived as not just wrong but immoral.”

There is merit to the argument that society should consider a policy response to the threat of global warming. A small chance of an enormous calamity equals a risk that may deserve mitigation. That’s why people buy insurance, after all.

However, Krugman doesn’t accept that argument — at least, not when applied to other worrisome risks that trouble people with political beliefs different from his own. Less than two months ago, he wrote this about another future crisis:

[O]n Friday Mr. Obama declared that he would “extend the promise” of Social Security by imposing a payroll-tax surcharge on people making more than $250,000 a year. The Tax Policy Center estimates that this would raise an additional $629 billion over the next decade. But if the revenue from this tax hike really would be reserved for the Social Security trust fund, it wouldn’t be available for current initiatives. Again, one wonders about priorities. Whatever would-be privatizers may say, Social Security isn’t in crisis: the Congressional Budget Office says that the trust fund is good until 2046, and a number of analysts think that even this estimate is overly pessimistic. So is adding to the trust fund the best use a progressive can find for scarce additional revenue?

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Congratulations are due once again to the Department of Homeland Security for engaging in open dialogue about its programs, even controversial ones like “E-Verify” — a system that Congress may require all U.S. employers to use for running federal background checks on every single new employee.

Openness is healthy, and the comments to a recent post on E-Verify by my old friend DHS Assistant Secretary for Policy Stewart Baker are poking some holes in his somewhat facile analysis. I’ll weigh in with a little more, based mostly on my recent paper “Electronic Employment Eligibility Verification: Franz Kafka’s Solution to Illegal Immigration.”

Baker says that critics claim the error rate in E-Verify is as high as 4% and will lead to millions of Americans losing their jobs by mistake. To refute this, he points to a study commissioned by the Department of Homeland Security showing that 94.2% of new hires in a sample of 1,000 E-Verify queries were automatically verified, 0.5% resolved a mismatch, and 5.3% received a final nonconfirmation (that is, they either didn’t try or couldn’t challenge the finding that they were ineligible for employment under U.S. immigration law).

Unfortunately, Baker doesn’t point to the actual study. He just links to a picture of a conclusion from it, so we can’t do much to analyze these figures. If these are the results from reviewing only 1,000 new hires by current E-Verify users, that is far too small a sample and too skewed a group to reflect what would happen were the program taken national.

And he concludes: “Of the thousand, 942 are instantly verified. Instant verification of legal workers surely can’t be an error.” Of course it can! Any number of the 942 might have been illegal immigrants who submitted the name and Social Security Number of a legal worker to the employer.

But putting Baker’s glib, erroneous conclusion aside, I believe the 4% figure cited by critics is not about today’s small E-Verify program. It’s the error rate in the Social Security Administration’s Numident database found by the SSA’s own Inspector General (and it’s 4.1%!). Simple math suggests that this would produce a tentative nonconfirmation in 1 out of 25 new hires in the country were E-Verify to go national.

In fairness, that simple math may actually be simplistic — perhaps some cohorts have higher error rates and others lower. We know, for example, that naturalized citizens suffer error rates in the area of 10%. Perhaps older citizens that are leaving the workforce have higher error rates, leaving a lower error rate among current workers. And over time, the error rate would drop as workers were sent from their jobs to Social Security Administration offices trying to get their paperwork in order. (Put aside for now that the SSA takes more than 500 days to issue disability rulings.)

Baker’s conclusion that the 5.3% of workers finally nonconfirmed are illegal workers is without support. The statistic just as easily could show that the 5.3% of law-abiding American-citizen workers are given tentative nonconfirmations, and they find it impossible to get them resolved. More likely, some were dismissed by employers, never informed that there was a problem with E-Verify; some didn’t have the paperwork, the time, or the skills to navigate the bureaucracy; and some were illegal workers who went in search of work elsewhere, including under the table.

American workers pushed out of the workforce by E-Verify — Baker treats it as “common sense” that they’re illegal aliens, and he doesn’t look any further. The E-Verify program does the same - it has no system for contesting or appealing final nonconfirmations.

With his post, Secretary Baker has only raised the question of error rates in E-Verify. There are many sources of error in a system like this, and making it bigger would reveal more. Just because you have a glass coffee table, that doesn’t mean you can build a glass sundeck.

And we shouldn’t take our eye off the ball. “Mission creep” is a governmental law of gravity. Once in place, a national E-Verify system would be used to give the federal government direct regulatory control over law-abiding Americans. Federal authorities would use it to control not just work, but housing, financial services, and access to alcohol, tobacco, and firearms — for starters. Secretary Baker himself recently suggested using a national ID to control our access to cold medicine. The list of things his successors might do is endless.

USA Today reporter Dennis Cauchon is an expert at distilling complex data about governments down to bite-size pieces. Today he finds that:

Taxpayers are on the hook for a record $57.3 trillion in federal liabilities to cover the lifetime benefits of everyone eligible for Medicare, Social Security and other government programs, a USA TODAY analysis found. That’s nearly $500,000 per household.

When obligations of state and local governments are added, the total rises to $61.7 trillion, or $531,472 per household. That is more than four times what Americans owe in personal debt such as mortgages.

Kudos to USA Today for running such hard-data stories on the front page. Too many newspapers opt for the ”human interest” angle when reporting on government economic policy.

Cauchon’s data raises many questions. For one, how could governments have gotten away with imposing $62 trillion of unfunded obligations on young Americans?

At the state and local level, taxpayers have been sleeping as union-backed politicians have jacked-up compensation levels for the nation’s 16 million state and local workers. 

The Washington Post pointed to an example of state and local irresponsibly yesterday. The paper lambasted Montgomery County, Maryland, for its “staggeringly generous” compensation increases for county workers, increases that will add to the $62 trillion total and likely push up county taxes down the road.  

Get ready for Washington D.C.’s Mall to be filled with seniors in the not-too-distant future.

About 25 percent of seniors depend entirely on Social Security for their consumption. And for two-thirds of them, Social Security makes up the majority of their monthly income. With soaring fuel and food prices, they are beginning to complain about being unable to make ends meet — as in, having to cut down on leisure and travel activities.

The rise in gas, food, and commodity prices is unlikely to be a bubble and won’t ”burst” anytime soon. Furthermore, the Fed’s recent interest rate–cutting binge has promoted a weaker dollar and risks higher future inflation and inflation expectations. That means our itinerant seniors will soon demand a larger inflation adjustment on their monthly checks than allowed by Social Security’s post-retirement benefit formula.

No prizes for guessing whether Congress will capitulate!

This week marks the 10-year anniversary of El Salvador’s adoption of a private social security system. Following the example of Chile 17 years earlier, El Salvador moved from a government-run (and bankrupt) pay-as-you-go system to one of individual accounts for workers administered by private operators. Salvadorians are free to choose who runs their pension accounts as well as the conditions of their own retirement.

Today, the combined value of the pension operators’ assets — that is, the savings of the Salvadorian workers — represents 21.5 percent of the country’s GDP.

An editorial yesterday in the local newspaper El Diario de Hoy lauds the success of the reform and credits Cato’s José Piñera as the father of the “pension revolution.”

Steve Entin recently wrote in the Wall Street Journal (“The Folly of ‘Family Friendly’ Tax Policy,” April 9, 2008; Page A15): “…proponents of greater family tax credits also claim that society owes families a big child credit because the children will face huge payroll taxes to support childless retirees who never paid to rear the next generation. Another claim is that payroll taxes make it hard for families to afford children, and we need families to have more children to pay for Social Security and Medicare. These arguments don’t wash. Most people have children because they want them, not because the state needs future taxpayers to fund social programs.”

On the 1st claim of the child tax credit proponents: Higher child tax credits today would strengthen the defense against cuts in future benefits by everyone, and especially by childless retirees.  But that goes in the wrong direction relative to what’s required–cutting future benefits because they’re not payable, even under today’s high payroll taxes.

On their 2nd claim: If payroll taxes are a hurdle to procreation by young adults, the correct remedy should be to lower them rather than introduce yet another entitlement for young adults in their children’s names — which they would use to extract resources from those children in the future by way of retirement benefits. But today’s high payroll taxes on parents are not for saving and investing for their own future retirements.  Those taxes are for paying benefits to today’s retirees under our pay-as-you-go Social Security system.  Cutting payroll taxes, therefore, would require today’s retirees, in turn, to accept smaller benefits—which is, of course, a big no-no for proponents of child-tax credits.

According to Mr. Entin, however, both of these claims don’t wash because of the rather tepid idea that people have kids because they want them, not because they (or the state) wants more future taxpayers.

However, according to studies on the potential links between fertility and entitlement spending, (for example, Michele Boldrin’s) it appears that fertility rates correlate negatively with generous government entitlement expenditures across countries.  They also correlate negatively with better access to financial markets which enables people to securely transfer purchasing power to old age. So positive fertility seems to reflect, however indirectly, a desire to “save/invest” for the future in the absence of other public and private vehicles of achieving economic security during old age.

The bottom line: Along with its well-established negative impacts on saving/investing and labor supply, unfunded entitlement promises potentially erode yet another pro-growth factor–fertility.  An estimate of net benefit promises to current adults under current entitlement policies — compiled from various tables of the latest Social Security and Medicare Trustees’ reports — shows that such underfunding amounts to $44 trillion in present discounted value!  That’s a promise of almost $200,000 in today’s dollars of future Social Security and Medicare benefits for each person aged 15 and older today.  Why would you, then, work, save, and have children to safeguard your future?

A column in the Wall Street Journal discusses Senator Obama’s plan to boost the top tax rate on entrepreneurs and investors from less than 38 percent to more than 50 percent. This huge tax increase will significantly undermine incentives to both earn and report income. As a result, the author, formerly with the Social Security Administration, explains that behavioral responses will result in far less money than projected by “static” revenue estimates:

Mr. Obama has recently veered sharply left. He now proposes to solve the looming Social Security shortfall exclusively with higher taxes. …Currently, all wages below about $100,000 are subject to a 12.4% Social Security payroll tax. But all wages above that amount are not subject to the tax. Mr. Obama wants to eliminate the cap, but, in a concession to taxpayers, exempt wages between $100,000 and $200,000. …Mr. Obama’s plan would keep Social Security in the black for only three additional years. Under his proposal, annual deficits would hit in 2020, instead of 2017. By the 2030s the system would still run an annual deficit exceeding $150 billion. Mr. Obama’s modest improvements to Social Security’s financing come at a steep cost. …The top marginal federal tax rates would effectively increase to 50.3% from 37.9%, equivalent to repealing the Bush income tax cuts almost three times over. If one accounts for behavioral responses, even the modest budgetary improvements from Mr. Obama’s plan are likely to be overstated. If employers reduce wages to cover their increased payroll-tax liabilities, these wages would no longer be subject to state or federal income taxes, or Medicare taxes. A 2006 study by Harvard economist and Obama adviser Jeffrey Liebman concluded that roughly 20% of revenue increases from raising the tax cap would be offset by declining non-Social Security taxes. Assuming modest negative behavioral responses, Mr. Liebman projected an additional 30% reduction in net revenues, leaving barely half the intended revenue intact. Mr. Obama’s plan would also dramatically raise incentives for tax evasion, further degrading revenue gains. Many high-earning individuals evade the Medicare payroll tax by setting up “S Corporations,” paying themselves in untaxed dividends rather than taxable wages. John Edwards avoided $590,000 in Medicare taxes this way in the 1990s. …The U.S. already collects far more Social Security taxes from high earners than other countries do. Social Security taxes here are currently capped at about three times the national average wage — far above other developed countries. In Canada and France payroll taxes are levied only up to the average wage. In the United Kingdom, taxes stop at 1.15 times the average wage; in Germany and Japan at 1.5 times.

Obama also wants to let the Bush tax cuts expire, which means the top tax rate would rise even farther - to more than 55 percent. But the bad news may get even worse. It is unclear how Obama will “fix” the alternative minimum tax. If his Social Security plan is any indication, he may propose to raise the top rate even further. What would all this mean? Simply stated, European-style tax rates will mean European-style stagnation.

Like many newer office buildings, Capitol Hill’s Hart Senate Office Building has automatic doors that make access for handicapped people much easier. They are activated by a pressing large blue button, which causes the glass double-doors to swing outward.

On several occasions recently, I have noted able-bodied Senate staff taking advantage of this convenience. Though they could open the doors themselves and enter more quickly, they press the button and pause a moment as the doors slowly open.

There is a lesson here for policymakers (including those Senate staff): Offered help, people of all abilities will accept it, whether they need it or not. Over time, their abilities to help themselves may atrophy.

So it goes with economic and social policies. A few years ago when Social Security reform was a hot topic, my father (who still wants to be a trucker when he grows up) observed casually that the truckers he talks to wouldn’t know what to do if they were responsible for their own retirement. The complexities of investing are too much for them.

I believe the contrary, that given responsibility for their retirement security, truckers would swarm over the problem and figure it out. The CB radios of the nation would crackle with investment advice. Like most cohorts, this group is fully capable of handling savings and investment. And just as able-bodied Senate staff can get through doorways more quickly on their own, truckers in aggregate would have more retirement security and more comfortable retirements. But they’ve been offered enough help (indeed - mandated to accept it) that they’ve ceded the field.

Assistive devices for the handicapped are a good thing, but I rue the day when able-bodied Americans come to expect automatic doors and regard it as an imposition or impossibility to reach forward, grasp a handle, and pull. Something to think about the next time you’re standing on an escalator because the stairs make you winded.

Presidential candidate Hillary Clinton has proposed new 401(k)-style savings accounts. But the proposal is not really a savings program, it is a new entitlement program. Savings is about people being frugal today in order to improve their prosperity tomorrow. Real savings helps families and benefits the broader economy. But Senator Clinton’s plan would impose $20 billion per year of damage on families paying the cost, while distorting the economy with higher taxes.

The plan would take money from people who earned it, and simply give it to other people to spend on retirement, buying a house, paying for college, and other items. Those eligible could receive $1,000 a year, but at the expense of others who would bear the burden. I see no justice in that, nor any economic benefit.

I’ve got a better idea: Let’s allow Americans to keep their own money, downsize the giveaway factory in Washington, and reduce government hurdles to individual savings.

Senator Clinton should consider supporting expanded and simplified Individual Retirement Accounts. These accounts would not rob Peter to pay Paul, while boosting real savings and spurring growth to the benefit of all families.

Robert Samuelson gets one thing wrong in his Newsweek/Washington Post column this week: Cato isn’t a conservative think tank. At least, I think it would be odd to call scholars “conservative” when they criticize the war in Iraq, the Patriot Act, the growth of executive power, the war on drugs, the holding of American citizens without habeas corpus, the federal marriage amendment, the late lamented sodomy laws, and the general attempts by both right and left to impose their moral values on all Americans through government.

But he’s right on his main point: The growth of entitlement spending, especially for the elderly, is not only a looming fiscal disaster but a fundamental shift in the nature of American government. He proposes

that some public-spirited sugar daddy (the MacArthur Foundation? Warren Buffett?) sponsor a short book. A possible title: “Facing Up to an Aging America.” Six leading think tanks would be invited to participate: three liberal — the Brookings Institution, the Center on Budget and Policy Priorities, and the Urban Institute– and three conservative: the American Enterprise Institute, the Cato Institute and the Heritage Foundation.

We accept. We’ve been writing about the entitlements crisis since 1980 or thereabouts. We’d be glad to join other research institutions in a grand public debate about how big we want government to be and what its appropriate responsibilities are.

Just when you thought partisan idiocy in Washington couldn’t get any worse, the House voted last night to cut off the salary of Andrew Biggs, the new Deputy Commissioner of Social Security. No one doubts Biggs’ qualifications for this position. But his sin is having supported proposals to allow younger workers to privately invest a portion of their Social Security taxes through individual accounts. Apparently holding a position that Democrats disagree with is now so abhorrent that it disqualifies you from public office.

Last week top Chinese and American economic officials met in Washington for the second “Strategic Economic Dialogue.” While trade and exchange rates grabbed all the headlines, one less publicized subject was advice from the American side on how the Chinese can promote consumption in their domestic economy.

More consumption would presumably mean the Chinese would buy more American products and send less of their excess savings to the United States, leading eventually to a smaller Chinese trade surplus with the United States and the world.

How did U.S. government officials propose to promote more consumption in China? The Chinese were advised by their American friends to “create a social safety net for its population, similar to the Social Security and Medicare programs in the United States, so Chinese residents do not need to continue to save as much as 50 percent of their income for their retirement and future medical needs,” according to one trade newsletter.

Whoa. Would China’s economic managers really want to saddle its population with the same unsustainable government promises that characterize our two biggest entitlement programs? As my Cato colleagues have long noted, and as USA Today reported on its front page this week, the unfunded liabilities wracked up by those two programs has now reached more than $45 trillion (yes, that’s trillion).

I suppose saddling the Chinese economy with a huge, unfunded government obligation would be one way to “level the playing field.”

Atul Gawande writes,

Little of what the geriatricians had done was high-tech medicine: they didn’t do lung biopsies or back surgery or PET scans. Instead, they simplified medications. They saw that arthritis was controlled. They made sure toenails were trimmed and meals were square. They looked for worrisome signs of isolation and had a social worker check that the patient’s home was safe.

How do we reward this kind of work? Chad Boult, who was the lead investigator of the St. Paul study and a geriatrician at the University of Minnesota, can tell you. A few months after he published his study, demonstrating how much better people’s lives were with specialized geriatric care, the university closed the division of geriatrics.

“The university said that it simply could not sustain the financial losses,” Boult said from Baltimore, where he is now a professor at the Johns Hopkins Bloomberg School of Public Health. On average, in Boult’s study, the geriatric services cost the hospital $1,350 more per person than the savings they produced, and Medicare, the insurer for the elderly, does not cover that cost. It’s a strange double standard. No one insists that a twenty-five-thousand-dollar pacemaker or a coronary-artery stent save money for insurers. It just has to maybe do people some good.

En passant, he writes, “We cling to the notion of retirement at sixty-five—a reasonable notion when those over sixty-five were a tiny percentage of the population, but completely untenable as they approach twenty per cent.”

So it seems that Medicare is letting down the elderly when it comes to geriatric care.  And Social Security is untenable.  Who would have thought that government would make mistakes?

Yesterday, the Social Security Trustees released their annual report on the programs finances and much of the national news media thought they saw good news. “Extra Year Expected for Retirement Funds,” was a typical headline, with nearly all the media reports focusing on the Trustees’ projection that the Social Security Trust Fund would be exhausted in 2041, a year later than was projected last year.

But, of course, that date is meaningless. The Trust Fund is not a pile of money that can be used to pay Social Security benefits. It is simply an accounting measure of how much money the system owes, a collection of IOUs. No one explained it better than the Clinton administration in its 2000 budget message.

These Trust Fund balances are available to finance future benefit payments…but only in a bookkeeping sense….They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large Trust Fund balances, therefore, does not by itself have any impact on the government’s ability to pay benefits.

The important date in the Trustees’ Report is 2017, just 10 years from now. That is when Social Security will begin running a deficit. At that point, Social Security will have to begin redeeming the special issue bonds held by the Trust Fund. Since the federal government has no extra money with which to redeem these bonds (note our ongoing budget deficit), it will have to raise taxes, borrow more, or cut other government spending.

Moreover, the failure to reform Social Security has allowed the program’s financial problems to get worse. The system’s total unfunded liabilities are now $15.6 trillion (in discounted present value terms). That’s $100 billion worse than last year, despite $600 billion in savings from changes in technical assumptions.  And, of course, workers still have no legal, contractual, or property rights to their benefits.

That doesn’t sound much like good news to me.

A common criticism of Social Security choice (and defense of the Social Security status quo) is that there are dishonest actors in private markets who would put people’s private account assets at risk of (in the words of the AFL-CIO) “corruption, waste and Enron-ization.” These critics argue that society is much better off keeping Social Security in the honest, benevolent hands of Uncle Sam.

What must these critics be thinking about today’s NYT above-the-fold article on teacher pension fund shenanigans in New Jersey? The lede says it all:

In 2005, New Jersey put either $551 million, $56 million or nothing into its pension fund for teachers. All three figures appeared in various state documents — though the state now says that the actual amount was zero.

Like many state and local government pension systems, New Jersey’s is woefully underfunded compared to the benefits it will have to pay in the future. (This situation will make headlines in the coming years, as state and local governments begin to disclose their pension fund and retirement benefit system shortfalls in accordance with a recent GASB requirement.) In New Jersey’s case, the shortfall is more than has been publicly acknowledged, however: “an analysis of its records by The New York Times shows that in many cases, New Jersey has overstated even what it has claimed to be contributing, sometimes by hundreds of millions of dollars.”

Talk about the Enronization of retirement benefits…

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Sweden is widely considered a cradle-to-grave welfare state, but that is somewhat misleading. The burden of government is significant, to be sure, but there have been some impressive market-oriented reforms. Sweden, for instance, has eliminated its death tax and implemented school choice.

Perhaps most surprising, Sweden has partially privatized its Social Security system. The amount going into private accounts is small — just 2.5 percent of earnings, so the system is not nearly as good as Chile’s, but it is much better than the American system.

In addition to small private accounts, Sweden also has created a direct link between taxes paid and benefits received. This shift to a “notional” defined contribution system represents a significant departure from traditional Social Security systems, which are akin to defined benefit schemes containing widespread redistribution.

The Wall Street Journal reports that the Swedish reform is inspiring other nations to move in a similar direction:

By pegging public pensions to individual earnings and overall life-expectancy rates, Sweden has given its citizens incentives to be more productive and retire later — and sidestepped the political paralysis that has stymied change elsewhere.

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Anyone who thinks that Democrats might be prepared to work in a bipartisan manner to reform Social Security should be quickly disabused by their disgraceful treatment of Andrew Biggs, President Bush’s nominee to be the next deputy administrator of the Social Security Administration.   Biggs, who once worked for me, is a distinguished economist and expert on Social Security, who has earned the respect of people on all sides of the Social Security debate.  During the time we worked together, he proved to be a rigorous analyst, who followed the numbers wherever they led, always choosing facts over ideology.  No one ever criticized his character or the quality of his research.

However, Biggs is an advocate of personal accounts.  As a result, some Democrats in Congress, the New York Times, and the National Committee to Preserve Social Security and Medicare have embarked on a campaign to smear him and scuttle his nomination.  Democrats appear to be saying that holding any opinion with which they disagree makes one unfit for public office.  If that’s the course they plan to pursue in the next Congress, more than just hope for Social Security reform will go down the drain.

Q: Should the lame-duck GOP Congress, as its final act, implement the recommendation of the Federal Accounting Standards Advisory Board that deficit estimates include the cost of future Social Security and Medicare benefits as well as current benefits?

A: ?

In a speech to the Economic Club of Washington yesterday, Federal Reserve Chairman Ben Bernanke became the latest top policymaker to warn that we will face an economic crisis if Social Security and Medicare are not reformed. Unfortunately, Bernanke’s warning is unlikely to become part of the political debate. So far this election season, Democrats have been demagoguing the issue, while Republicans run away from it. Meanwhile, because Congress failed to act last year, Social Security’s unfunded liabilities increased by another $550 billion.

A website called TheBudgetGraph.com offers a visual representation of federal spending based on President Bush’s proposed budget for fiscal year 2007. (Click here, then click on “View the Graph.”) It is truly a monstrosity.

But look more closely and you’ll notice that it only counts budget items to which Congress must fix a dollar amount every year. It completely ignores those parts of the federal budget where the dollar amount is set automatically by formula. (Those two categories are usually called “discretionary” versus “mandatory” expenditures, but that bifurcation is misleading. Nearly all expenditures are discretionary, with the possible exception of interest payments on the national debt.)

That latter category — which includes Social Security, Medicare, Medicaid, interest payments on the debt, etc. — comprises 63 percent of the federal budget. That makes “The Budget Graph” more like “a visual guide to where one-third of your federal tax dollars go.”

Were the graph to count the entire budget, heck, I’d probably buy the poster.

(HT: Frederic Sautet.)

Social Security may still be something of the political third rail in this country, but the rest of the world continues to turn away from the traditional government-run model for retirement programs. A new survey by HSBC of industrialized countries finds that only 30 percent of their citizens believe that government should be primarily responsible for funding their retirement, compared to 43 percent who believe that individuals should bear the cost of the own retirement.

Regardless of country, there is little confidence in Social Security. Just 29 percent believe that their governments will be able to pay the benefits it has promised. When asked how to reform their country’s Social Security systems, 37 percent favored the introduction of some form of mandatory savings or personal account program, while just 13 percent would increase taxes to pay for promised benefits.

Wired News reporter Annalee Newitz has compiled a “top ten” list of privacy debacles. 

It’s easy to quibble with the results, but I was delighted to see “The Creation of the Social Security Number” at #1.  Our national identifier has used its government backing to push aside all others and enable government and corporate surveillance on a scale that would never have occurred under natural conditions.

In Identity Crisis: How Identification is Overused and Misunderstood, I discuss how the uniform identification system we’ve built around the Social Security Number is insecure for individuals, making information about them too readily available to governments, corporations, and crooks. 

The fix is nothing so ham-handed as banning uses of Social Security Numbers.  Rather, it will be necessary to remake our identification systems so that they are diverse and competitive, and thus solicitous of individuals’ interests.

Social Security turns 71 today. One can argue about whether or not the program was a good idea in 1935, but there should be no question about its inadequacies today. And its flaws just get worse with each passing year.

Social Security will begin running a deficit in just 11 years. Of course, in theory, the Social Security Trust Fund will pay benefits until 2040. That’s not much comfort to today’s 33-year-olds, who will face an automatic 26 percent cut in benefits unless the program is reformed before they retire. But even that is misleading, because the Trust Fund contains no actual assets. The government bonds it holds are simply a form of IOU, a measure of how much money the government owes the system. It says nothing about where the government will get the money to pay back those IOUs.

Overall, the system’s unfunded liabilities—the amount it has promised more than it can actually pay—now totals $15.3 trillion. Yes, that’s trillion with a “T.” Setting aside some technical changes in how future obligations are calculated, that’s $550 billion worse than last year. In other words, because Congress failed to act last year, our children and grandchildren were handed a bill for another $550 billion.

Moreover, Social Security taxes are already so high, relative to benefits, that Social Security has quite simply become a bad deal for younger workers, providing a low, below-market rate-of-return. In fact, many young workers will end up paying more in taxes than they receive in benefits. They will actually lose money under the program.

But the single most important problem with the current Social Security system is that workers have no ownership of their benefits. The U.S. Supreme Court has ruled, in the case of Flemming v. Nestor, that workers have no legally binding contractual or property right to their Social Security benefits, and those benefits can be changed, cut, or even taken away at any time. This means that workers completely dependent on the goodwill of 535 politicians when it comes to what they’ll receive in retirement. And because workers don’t own their benefits, those benefits are not inheritable. This particularly disadvantages those groups in our society with shorter life expectancies, such as African-Americans.

Social Security reform was once a bipartisan issue. Democrats like Senators Bob Kerrey and Daniel Patrick Moynihan were outspoken in warning about the program’s looming insolvency, and in calling for innovative approaches to fixing it. The Democratic Leadership Council and its think tank arm, the Progressive Policy Institute, explored many approaches to reform, including personal accounts. Congressmen like Charlie Stenholm reached across the aisle in search of compromise. Even President Clinton led a national debate to “Save Social Security First.”

But since President Bush called for reforming the nation’s troubled retirement program, congressional Democrats have had only one answer: “No.” No to personal accounts. “No” to changes in benefits. “No” to offering a real reform plan of their own. “No” to any discussion or negotiation.

At the same time, Republicans—apparently terrified of offending AARP and other special interests—have scurried for cover, running from positions they should know are correct. Republicans seem to believe that if the just stick their heads far enough in the sand for long enough, Democrats won’t attack them. The result is a choice between Democratic obstructionism and Republican cowardice.

And we wonder why so many young people are turned off to politics?

Many economists and lawmakers — especially conservatives — argue against tax hikes as solutions to entitlement shortfalls, saying the hikes would be counterproductive. According to this argument, higher taxes would retard growth, reduce federal revenues, and worsen entitlement shortfalls. 

For example, Stephen Moore in his June 12 Wall Street Journal column “Don’t Know Much About History…” alludes to a presumed beneficial impact of faster (wage) growth on the financial problems of entitlement programs. Unfortunately, that presumption is incorrect, especially as regards Social Security.

The claim that faster wage growth would reduce Social Security’s financial shortfall is an artifact of the standard (but flawed) 75-year-ahead Social Security financial projections that count payroll taxes through that period but ignore benefit obligations those taxes would create beyond the 75^th year. The projections make it look as though robust wage growth would shrink the gap between Social Security revenues and obligations. But the picture changes over a longer timeframe.

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In describing the contents of the Social Security Trustees’ latest annual report, most reporters have described the changes as “minor.” That impression rests, however, on a comparison of a large number with a gigantic number—the present value of Social Security’s financial shortfall over 75 years to the present value of total payrolls, also projected over the next 75 years.

Note that according to the report, an additional 2 percentage points must be added to payroll tax rates immediately and must be kept in place permanently. That’s unlikely, and precisely because we are describing the shortfall as “no big deal.”

Problem is, the cost escalates the longer we wait. How long would we wait? When it becomes as large as four percentage points? Six? No, if it becomes that large, chances are taxpayers would revolt and the system would have to face benefit cuts.

Benefit cuts? At a time when beneficiaries are more numerous and politically powerful? Unlikely. Then what? (more…)

Year after year, federal officials speak of the Social Security and Medicare trust funds as if they were real.  Yesterday, the government announced that the Social Security trust fund will be exhausted in 2040 and that the Medicare hospital insurance trust fund will be exhausted in 2018 — projections that the media dutifully reported. 

But those dates are meaningless, because there are no assets for these “trust funds” to exhaust.  The Bush administration wrote in its FY2007 budget proposal:

These balances are available to finance future benefit payments and other trust fund expenditures—but only in a bookkeeping sense. These funds…are not assets…that can be drawn down in the future to fund benefits…When trust fund holdings are redeemed to pay benefits, Treasury will have to finance the expenditure in the same way as any other Federal expenditure: out of current receipts, by borrowing from the public, or by reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, increase the Government’s ability to pay benefits.

This is similar to language in the Clinton administration’s FY2000 budget, which noted that the size of the trust fund “does not…have any impact on the Government’s ability to pay benefits” (emphasis added).

I offer the following proposition:

• If the government knows that there are no assets in the Social Security and Medicare “trust funds,” and yet projects the interest earned on those non-assets and the date on which those non-assets will be exhausted, then the government is lying. 

If that’s the case, then these annual trustees reports constitute an institutionalized, ritualistic lie.  Also ritualistic is the media’s uncritical repetition of the lie.