by Dale Coberly


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.