WHAT KOTLIKOFF (REALLY) SAID
by Dale Coberly
WHAT KOTLIKOFF (REALLY) SAID
Larry Kotlikoff responded to my post in comments (Social Security: It’s Just Math). by saying that I (coberly) “wrote quite a lot about something I [Kotlikoff] didn’t really say.” He has a point. I based my speculations about where he obtained his misleading numbers on an NPR summary of their interview with him. Kotlikoff says my speculations were wrong. He actually got his misleading numbers by including “Medicare plus Medicaid plus Social Security expenditures per adult.”
I still don’t know exactly how he derived his numbers, but I remain quite certain that talking about SocialSecurityMedicareandMedicaid in one mouthful is grossly misleading. Social Security has nothing to do with any deficits as it is paid for by the people who will get the benefits. IF those people are going to want higher benefits in the future to keep up with their longer life expectancy and higher standard of living, they would have to raise their own payroll tax about one half of one tenth of one percent, about 40 cents per week in today’s terms, each year while their incomes are projected to be rising over one full percent per year, or eight dollars per week per year in today’s terms. These numbers are derived directly from the SSA Trustees Report, and CBO options numbers two and three.
Medicare and Medicaid, by contrast, depend on the cost of medical care. Costs which we are going to have to pay, if we want the medical care, even if we cut Medicare and Medicaid to zero. We would just end up paying through private insurance, which would tend to mean that the old and poor would not get medical care… not because “we” were not paying for “their” care, but because we were not allowed to pay in advance for our own care using a system that protects our money from loss due to inflation, including “medical inflation.”
Medicare is NOT the young paying for the old. It is the young paying for their own expected costs in old age while they are young and healthy and are making money. As for Medicaid, costs depend on both the costs of medical care and the number of people in poverty in this country. Kotlikoff appears to be suggesting that “the young” could save themselves a lot of money if they just didn’t worry about their own needs when they get old, and didn’t think there was any reason to care for the poor and sick. Neither compassion nor an enlightened self interest would be allowed to suggest to the young that they might become old or sick or poor themselves, or that they would ever profit from living in a nation in which the poor and the sick can expect to be helped to return to being strong and good employees, good customers, or even good soldiers.
Here is a transcript of what Kotlikoff really said on NPR. I offer a few comments interlinear.
August 6, 2011 –
DAVID GREENE, host: Now, S&P says this downgrade might not even be the last one if the nation’s debt keeps ballooning. So how to turn this around? Listen to the prescription from Boston University economist Laurence Kotlikoff.
LAURENCE KOTLIKOFF: What you have to do is either immediately and permanently raise taxes by about two-thirds, or immediately and permanently cut every dollar of spending by 40 percent forever. So I’m talking about cutting Medicare benefits, Medicaid, Social Security, defense spending, you name it, by 40 percent forever, starting today. That’s what the CBO’s numbers say we have an absolutely enormous problem facing us.
Again, Kotlikoff prefers the big hammer approach. We are not allowed any subtlety in deciding what programs to cut, or what taxes to raise. If taxes are currently about 18% of GDP a two thirds raise would raise them to 30%. This looks a bit scary, but if we look hard at what we are getting for the money, and what we can get with the money we have left after paying taxes, we COULD decide that it is just the price we have to pay to provide the infrastructure that protects our ability to make money in the first place. I don’t know if we would feel safe in a country with a 40% smaller defense budget. And I am sure that not allowing the people to pay more than 60% of what it would cost them to provide an adequate retirement would not be really smart financial planning.
GREENE: Big tax increases, huge cuts to military spending and entitlement programs – good luck getting that through Congress – and the problem Kotlikoff says is a whole lot bigger than this $14 debt we’ve been talking about.
KOTLIKOFF: If you add up all the promises that have been made for spending obligations, including defense expenditures, and you subtract off all the taxes that we expect to collect, the difference is 211 trillion. That’s the fiscal gap. That’s our true indebtedness.
GREENE: It’s a big number. Why aren’t we hearing more about that as these big debates and all the drama go on in Washington?
It is indeed a big number. Kotlikoff needs to explain where he got it from. Then we can look at it and see if it makes any sense.
KOTLIKOFF: Well, the politicians have chosen their language carefully to keep most of the problem off the books, and they’ve done this for decades. So this is Enron accounting to the 10th power, I mean, millionth power, actually
. I see. It’s a secret. Been going on for decades. And we never knew. I don’t know if Kotlikoff has any idea what the “millionth power” means, but given his other numbers, I think he just likes the scary sound of it.
GREENE: Quite a strong accusation.
KOTLIKOFF: Well, it’s, you know, it’s true. Why are these guys thinking about balancing the budget? They should try and think about our long-term fiscal problems. We’ve got 78 million baby boomers who are poised to collect, in about 15 to 20 years, about $40,000 per person. Multiply 78 million by 40,000, you’re talking about more than $3 trillion a year in today’s dollars just to give to a portion of the population. That’s an enormous bill that’s overhanging our heads, and Congress isn’t focused on it.
This is the quote I addressed in my earlier post. Kotlikoff needs to explain in detail where he gets his numbers.
But more than that we need to understand that Social Security is not something “we” “give” to “a portion of the population.” Social Security is “us” paying for our own costs in advance of the time we will BE that “portion of the population. This is also true about Medicare, though it’s not so obvious in the way Medicare is financed.
As for Medicaid, well, as long as “we” know that we will never be in that “portion of the population” or derive any benefit from anybody who is,or was, then I guess there is no reason on earth why “we” should set a “portion” of our money aside to take care of those problems. But if we know it is OUR money for our own potential needs, it would be sensible to look at ways to control costs. Kotlikoff appears to think the best way to control the future cost of living is to cut off our own heads now.
GREENE: So Americans just watch this drama play out in Washington. I mean, is your message to them that this was all just a useless process?
KOTLIKOFF: This is a sideshow. The Democrats and Republicans have been having a food fight for decades. Underneath that facade of conflict, what’s really going on is that older generations are taking from young generations on a ongoing basis. And we’ve consistently done too little, too late, looked too short-term. Well, guess what? You can’t keep putting off these problems. And we’ve used language to disguise what’s really going on here, which is this mess of Ponzi scheme.
I would be the last to claim that the Congress is more than a sideshow. But I hope I have made clear to you why it is national suicide to divide ourselves into “the younger” versus “the older” generations. We will all become “older” in time. Meanwhile, even if enlightened self interest does not teach us to pay in advance for at least enough of our old age to meed basic needs, in a program that can guarantee our money will not disappear due to inflation or a bad day on the stock market, we might at least remember that the older generation had something to do with feeding and clothing and housing and educating us, and defending the country and building the infrastructure that makes it possible for us to make more money, with less work, than the now old could when they were young. Teaching us to think of our elders as “the enemy” is teaching us a kind of mental disease that will return us to the law of the jungle and a life that is “solitary, poor, nasty, brutal, and short. It is the devil’s agenda.
GREENE: We’ve been speaking to Laurence Kotlikoff, professor of economics at Boston University. He joined us from member station WBUR in Boston. Thank you so much, professor.
KOTLIKOFF: My pleasure.
coberly, Just remember that Kotlikoff has made his money off of “Generational Storm”. He has a stake in dividing generations. He is practically the main guy in modern versions of promoting hate between young and old based on entitlements. It is the theme of his public persona. If he can’t make it keep going using only SS, he will add other things but it is his claim to 15 minutes and he is unlikely to ask other questions.
The following is a reply I made “off the air” to a commenter who was concerned about exactly who said what to whom. I should say the numbers in it are entirely made up. I am not concerned with the official estimates, just wanted to indicate a way of thinking about the “problem.”
i am not sure ‘oo said what to ‘oo in all this. to be perfectly honest i did not write my post carefully enough, i did not say, but left the impression, that Kotlikofff got his numbers the way i suggested. since he wrote and i looked at what he actually said in the interview i have conceded that he got his misleading numbers in another way.
i believe he could make a case that MEDICAL expenses are going to be a real problem for us… but if he was honest, he would make a distinction between SS and medical expenses, and he would admit that it’s not “government” paying for those medical expenses that is the problem, but the expenses themselves are the problem
i was looking at a paper from the New England Journal of Medicine the other day which said ” that counting all of medicare and medicare related expenses, the most expensive ten percent of recipients account for fifty percent of expenses. that means that on average they are nine times more expensive than the other ninety percent….. say it costs each of nine people one thousand dollars apiece, and it costs the tenth person nine thousand dollars… then that tenth person’s costs are fifty percent of the whole cost.
if you know you are going to be one of the lucky nine, you don’t want to be paying for the unlucky tenth… unless you are one of the few honest people in the country who knows that at any time it could be you who gets unlucky… and if the medical costs are not 9,000, but 900,000… you can see where it begins to take a big bite out of your life savings.
you might be willing to pay a 100k over a lifetime to take care of old-age illnesses, but to pay 200k begins to look like a burden. the first might be about 2500 per year paid while working, the second would be 5000 per year. and while 5000 would be 10% of “average wage” it would be 20% of “low wage”, and if you want to help the low wage earner with a 2500 subsidy, then your “high earner” is going to be looking at a 7500 dollar per year “insurance premium” and he won’t like it.
don’t know if all this helps. i am trying to suggest that Kotlikoff may have a point. but his way of expressing it is unhelpful. i can’t know what Kotlikoff’s motives are, but his hysterical numbers do not help people arrive at any rational way of dealing with the problem.
and formulating it as the old preying upon the young is dishonest and a really, really dangerous way of thinking.
those old guys with their “honor your father and your mother” stuff knew what they were doing.
it’s not only “moral” to take care of the old folks. it is the way human society came down from the trees and out of the jungle.
As far as I can tell from reading the transcript of the NPR interview Kotlikoff’s comments are no less misleading than what you, Coberly, first suggested. Yes, medical costs need to be brought under control or better funded. Of course we can always disallow medical care for the elderly and the indegent. There are too many old and poor people as it is, especially in the Tea Party crowd.
The fact remains that Social Security isn’t a party to the deficit condition of the general budget. Social Security is one of many creditors of the Treasury Dept. and that creditor status was earned by actually lending the money to the government. The money was deducted as FICA contributions and it was spent on other government activities and accounted for by the issuance of Treasury notes. China lends the Treasury money iin the same manner, as does JP Morgan Chase Bank and Japan, etc.
Even Medicare is not a full participant in the deificit binge as much of the cost of Medicare is covered by a dedicated tax revenue stream. These fine points of accounting seem to be lost on Kotlikoff and the deficit hawks in general. They are bull shitters of the first order. They are dissemblers of fact. They seek to distort the facts of government funding.
Only the military and the administrative costs of the government are fully supported by the general budget. Those administrative costs include the cost of funding the Congress, a total waste of money. The deficiency of the bud get is also due in large measure to the continuing saga of inadequate taxation. The only point that Kotlikoff made that has any basis in fact is that the government has three programs named Medicare, Medicaid and Social Security. They all cost money. What he has lost sight of is that they are each funded differently and seperately from the other. He has also ignored the fact that Social Security is fully funded at least 25 years into the future with no modifications and a continuing economic recession. If he and his cohorts ever figure out how to genuinely improve the economy for all of its participants then the Social Security program will be balanced past the retirement period of our grand children.
actually, Social Security is fully funded forever. The great “actuarial insolvency,” the Death of the Trust Fund!, that we hear about simply means that once the Trust Fund is paid pack and paid down and has served the purpose for which it was intended, Social Security can continue on a pay as you basis as far as the eye can see. With no changes whatsoever, Social Security can pay a benefit that is “enough” by today’s standards, but if future beneficiaries are going to want a benefit that keeps up with their rising standard of living and allows them to retire at today’s retirement age, they would have to raise their own tax one half of one tenth of one percent per year.
There is no “insolvency” in any of that. Just a need to make a decision about what level of benefits is worth what level of taxes. Personally i think people would be foolish not to raise their tax in order to be able to retire young enough to enjoy it, with enough money to buy more or less the things their neighbors will think are necessary in a future we can only guess at.
But there seems to be some sort of conspiracy to keep the people from knowing they have that choice.
All I can say is a) I don’t follow much of what you folks are writing, b) I don’t make a living from trying to divide people, c) the country is broke, d) how you slice this in terms of Social Security’s fault or not is up for grabs, and e) if you want to see a serious way to fix our problems and preserve the important features of Social Security please take a look at http://www.thepurpleplans.org. You think your kids will be just fine based on current policy. I think they are in very grave jepardy. I think in 30 years your kids will say I’m right. Or maybe you don’t have any kids or any grandkids or any nieces or nephews? Is it all about you. Is that all you care about? I doubt it. I’m not who you seem to think I am. I’m not a Republican. I’m not a Democrat. I’m an economist who sees your kids being endangered by our generational policy. And I’m speaking up. You should respect that. best, Larry
thanks for stopping by. it you don’t see this, i’ll write directly.
i am not a R or a D either. I think your rhetoric is harmful. i would be glad to see you make your case.
making distinctions between things is what babies do on the way to growing up.
i do not think kids will be just fine based on current policy. i do think SS is not any danger to them.
i do have kids and grandkids.
if you are going to speak up, you should try to make sense.
Larry “d) how you slice this in terms of Social Security’s fault or not is up for grabs,”
That one line is reason enough note to respect the rest of what you have to say on the matter, Larry. There is no slice to be cut that can demonstrate that the Social Security program is in any way responsible for, “ c) the country is broke,”.
No more so than any other holder of U.S. Treasury debt. The creditor is not responsible for the borrower’s deficiencies. “The country is broke” can be laid at the feet of the banks, the militarism of the Congress and the last several Administrations, and the refusal of the political class to demand a balanced system of taxation. Take 20% from the One Percenters and there will be no deficit. Balance the income and outflow any way you want, but don’t continue to see the workers and their retirement plan as the culprits in this mess. The working class is the only sector of the population that has been giving up anything during the past several decades. it is time for the One Percenters to give it up and contribute to the the financial support of a government that has done its best to assure them their golden place at the to of our economic system.
i glanced at the purple plans. kotlikoff agrees with me that SS can be “fixed” with a 3.6% raise in the payroll tax. what he does not seem to understand is that this fix can be phased in over 75 years, while wages are rising about twenty times as fast… both as a percent of wages (SS rises at one half of one tenth of one percent per year, and wages rise at over one full percent per year). no one would even feel the tax raise. especially as the money is not so much a “tax” as a way to save “enough” for a basic retirement, protected from inflation and market losses, as well as death, disability, failure to thrive, and lack of prudence.
If you wish to have an impact on future generations, then by all means find a way to increase job creation and productivity goings going to Labor rather than being skewed to Capital. Get people back to work rather than allow Particpation Rate drop further thereby creating a lager proportion of the Civilian NonInstitutional Population being set adrift in Not In Labor. It is that simple Laurence. That Medicaid grows and more people are taking Medicare early is a result of fewer jobs being available as evidenced by Participation Rate being at 66.7% (a low point) at the end of the 2001 recession and at 64.2% today EOM September. Your solution only cuts more people loose to fend for themselves and is a race to the bottom.
A lack of job creation wiith meaningful pay is a far greater threat to the younger generations than SS, Medicare, or Medicaid which are reflective of a failed service for fees medical cost model as caused by the healthcare industry and is not even impacted by the SGR which impacts rising doctors fees.
I will disagree with this statement and perhaps it needs better explanation?
“As for Medicaid, costs depend on both the costs of medical care and the number of people in poverty in this country.”
You are missing the point I made earlier. While many people in poverty depend upon Medicaid, there are many middle income bracket people who can not afford Nursing Home care and must resort to Medicaid to pay for it. Figure $60,000 per year Coberly and who has that type of money and the provate insurance is expensive.
“abandonment of what Obama saw as an ultimately unworkable program leaves open the question of just how the nation will pay for the long-term care needs of some 20 million Americans. As Sen. Tom Harkin (D-IA) testified at a March hearing, only 8 to 10% of Americans have private long-term care insurance coverage. Most people assume it’s not something they will need until they are elderly—even though some 40% of the 10 million Americans who now need long-term care are under 65. Also, commercial policies are often expensive, end up providing inadequate coverage and with few consumer protections in place, have a long history of fraud and abuse.
By default, Medicaid now foots the bill for more than 40% of all long-term care. As Harkin testified; the over-stressed joint state-federal program “now pays more than $110 billion—$110 billion—annually for long-term care for both the elderly and the disabled.” The Congressional Budget Office, meanwhile, estimated that the Class Program might have saved more than $3 billion in Medicaid costs (primarily by keeping people out of nursing homes) in its first 10 years.” http://www.healthbeatblog.com/2011/10/a-class-act-failure.html
The military industrial complex will waste much of 7800 Billion bucks in the next 10 or so years.
not much of a misunderstanding… substitute “middle class” for “poor” and we are saying the same thing. if middle class people are too poor to pay for long term care then they are poor in the sense i was talking about.
but here’s the problem:
who is going to pay for all this long term care?
i can’t think of any reasonable answer except the people themselves. that may mean they need to make more money, or it may mean they need to save up for the cost, or buy insurance to cover the cost.
just to take your figure of 60,000 per year (too high, i think it should not cost that much). guess that your chances of needing long term care are,10%, and that you will need it for an avergae of ten years.
then you would need to pay 60,00 for the insurance.
over a 40 year working lifetime, that would be 1500 a year, or if your average pay over that time was 50k, it would mean an “insurance rate” of 3%.
if this is indeed your expected costs, and we don’t want you to do without that care because you can’t afford it, or didn’t buy the insurance, then we may decide,as a community,to tax you to pay for it. but because we are good guys, we make the tax pay as you go, so if your income is low, you get a break on the premium, and in any case you pay the going rate today, and rely on pay as you go taxes on the following generation to take care of “inflation.”
i am not proposing this, just thinking out loud.
but if we are paying for it, we ought to look for ways to make it cost less.
it’s a way of fooling ourselves to say “government” pays for it,or should pay for it. of course that is the best way to pay for it, but “government” is us.
Coberly–Where can I find the purple plans? I take it that these are Kotlikoff’s suggested ways to address SS and entitlement costs, and I hope other costs (ya know, tax cuts and wars). Also, where do I see evidence that the US govt is broke? Broke how? Unable to make debt service payments? Only when the House of Reps fools around playing default games.
Doomsday hasn’t come yet. Never will, really, because by the time this planet becomes a cold, dark rock on the edge of this galaxy, we will be long gone as a species. Give me another theme to think about, Mr. K. NancyO
$60,000 is what it is today for long term healthcare in a nursing home or assisted care unless you opt or substandard. My wife and I have a policy at < than $20 per month from AARP. It costs more today. The payout is ~$80.00/ day for 4 years when you are expected to die according to the data. That coupled with SS and you have a place in a better than avergae place. 4 years is what you are expected to live once you succumb.