Relevant and even prescient commentary on news, politics and the economy.

Thank G-d for House Republicans

Dr. Black hits the latest good news from Capitol Hill:

The House has signaled that it isn’t going to play ball today

And I am no longer the only economist noting that the House–not for the first time–is forcing the Administration to do what it should have been ready to do all along. In fact, Brad DeLong cites Tim Noah,* Scott Lemieux and Jon Chait(!), Aging Ezra, and Paul Krugman and Noam Schreiber,** while Jared Bernstein, last seen being willing to further reduce Senior Purchasing Power for a pair of dirty socks, puts it directly:

The thing that worried me most in the endgame is that the [White House] would be so intent on a deal that they’d lock in too few revenues with no path back to the revenue well, and that they’d leave the debt ceiling hanging out there…. Those fears will be realized unless the President really and truly refuses to negotiate on the debt ceiling and is willing to blow past those who would stage a strategic default. If he is not, and if this cliff deal passes, then I fear the WH may have squandered its hard won leverage.

That last is apparently politico-speak for “look who just s*at the bed.” Thank G-d for House Republicans. Otherwise, this Administration would have killed itself long ago.

*Wherein I mix Hebrew and Yiddish in comments. This could become DeLong’s first entirely non-English comments thread… **Sadly, I take this as more evidence that Slouching Toward Prosperity will not be published in my lifetime.

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Fareed Zakaria on Social Security, Fareed Hearts Pete Peterson, Disses your mom

by Dale Coberly

Fareed Zakaria on Social Security

Fareed Hearts Pete Peterson

Disses your mom

Fareed Zakaria wrote an essay for Time, The Baby Boom and Financial Doom. Dean Baker responded to Zakaria with Fareed Zakaria is unhappy that the American left chooses arithmetic over Peter Peterson. Baker makes the point that the increase in the number of people over age sixty five has always been accompanied by an increase in productivity that makes everyone richer despite the costs of feeding the old.

Baker is far too kind to Zakaria. Zakaria’s article is a compendium of lies designed to fool people in order to lead them to their harm. The lies are not original with Zakaria but are the same lies we have been hearing from Peter Peterson sponsored think tank “non partisan expert” liars for years.

I hope that by taking a little harder look at those lies people will learn how not to be fooled by them and others like them. [Note: I have been told that I need to find another word for “liars.” I understand that people are put off by it, but they need to understand that is exactly what we are dealing with here: lies and liars: words designed to deceive you by people who mean you harm. It is almost possible to believe that Zakaria doesn’t know he is lying, but has merely been fooled by Peterson. But the selection of “facts” presented by Zakaria suggests he knows exactly what he is doing.]

Here is what Zakaria says:   (under the fold)

The facts are hard to dispute. In 1900, 1 in 25 Americans was over the age of 65. In 2030, just 18 years from now, 1 in 5 Americans will be over 65. We will be a nation that looks like Florida. Because we have a large array of programs that provide guaranteed benefits to the elderly, this has huge budgetary implications. In 1960 there were about five working Americans for every retiree. By 2025, there will be just over two workers per retiree. In 1975 Social Security, Medicare and Medicaid made up 25% of federal spending. Today they add up to a whopping 40%. And within a decade, these programs will take up over half of all federal outlays.

Well, the facts may be hard to dispute, but they don’t have anything to do with Social Security, and Social Security doesn’t have anything to do with the deficit.

The short answer to Zakaria’s Baby Boom and Financial doom scenario could be put something like this:
Social Security is paid for by the people who will get the benefits. It is their own money. It has nothing to do with the federal budget. The population numbers that Zakaria offers sound scary because they are meant to sound scary, but the fact remains that the workers can continue to pay for their own Social Security by simply raising their own payroll tax by what amounts to forty cents per week each year. This is an “undisputable fact” that can be clearly demonstrated. And it takes into account all the baby boomers, and the increasing life expectancy, and the poor growth in wages the Trustees project over the next 75 years. It also takes care of the “infinite horizon” which the Big Liars like to trot out when the numbers for the next seventy five years don’t sound scary enough.

In particular, the Baby Boomers have already paid for their retirement. That is the Trust Fund you hear about. It’s real money, paid by the Boomers. It needs to be paid back to them for their retirement. Paying back money that you owe does not increase your debt; it decreases it. The Trust Fund is not “going broke.” It is paying for the Boomer retirement, as it was created to do. After the Boomers have been paid, the Trust Fund will return to a normal reserve fund and Social Security will go back to “pay as you go” as it was designed.

An average worker today might be making, say 50,000 a year, and paying about 3,000 a year for his Social Security, leaving him 47,000 for other uses, including other taxes. His boss contributes another 3,000. And because there are today about three workers for each retiree, those three workers contribute a total of about 18,000 dollars per year, which is about what the average Social Security benefit is.

In another forty years or so, the average worker will be making twice what the average worker today is making… so, say 100,000 dollars (inflation adjusted). If nothing else changed, he would pay about 6000 a year in payroll tax, leaving him 94 thousand dollars for other uses, and his boss would contribute another six thousand, making 12000. By then there might be only two workers per retiree, so there would be 24000 available for that retiree’s Social Security benefit. But 24 thousand a year might feel like poverty in a world where the average wage is 100k. So those workers… who know they will soon become retirees themselves … might agree to pay 8000 each per year, leaving them 92,000 per year for other uses. Their bosses would contribute another 8000 (don’t worry about the poor boss: “most economists agree” that this is “really” the workers money). So 16 thousand, times the two workers per retiree, results in a SS benefit of 32000 per year. Enough to live on in reasonable comfort. (Please note that with a real income of 92 thousand a year, those workers would have plenty of money to “invest in the market” to try to raise their standard of living in retirement. But the SS would be there “in case all else fails.”)

And that’s it. Please note that the poor worker staggering under his load of one retiree for every two workers has 45000 dollars more in his pocket after paying his payroll tax than he has today, and he can look forward to a retirement with 14,000 more dollars per year than today’s retiree. That is, in spite of the staggering load of only two workers per retiree, the future worker will be about twice as rich after paying his payroll tax, and will be able to look forward to being twice as rich in retirement.

It is hard for me to see the gloom in this picture, much less the doom. You may note that the workers could have decided to not raise their payroll tax, keeping the extra two thousand a year for “now,” at the cost of 8000 a year when they are retired. I think this would be a foolish choice, but if it were made honestly, with everyone knowing what they were doing, I would not have an objection.

But Zakaria and Peterson try to keep the people from knowing what their honest choices are.
“The facts are hard hard to dispute…”

but the facts Zakaria chooses are meant to deceive. Please note “the facts are hard to dispute” adds nothing to the argument but does tend to set up in the unwary reader’s mind… “no point arguing with this… these are the facts.” And it is pretty much the standard of excellence among “non partisan expert” liars to use “facts” which are “strictly true” but nevertheless designed to mislead.

“ In 1900, 1 in 25 Americans was over the age of 65. In 2030, just 18 years from now, 1 in 5 Americans will be over 65.”

Does this sound like it means something? It’s meant to. Something like, “Gosh, the population of old people is soaring. It’s going to cost me five times as much to pay for “the old” if we don’t do something.”
Well, maybe not. In 1900 people had large families because a lot of their kids died. This by itself would tend to make the ratio of under sixty five to over sixty five larger than it is today. Add to that the fact that people over 65 also tended to die “young” because they couldn’t work and ran out of money for food and shelter. But perhaps Zakaria doesn’t really want to return us to the dear old days of high infant mortality and a short but miserable old age. Maybe he’s only pointing at the problem… “how are we going to support all these old people.” But in fact he is not. He is pointing away from how we are going to support these old people: We could continue to support them the way we have since 1936 when Social Security was invented: Allow them to save enough of their own money in a way that is safe from inflation and bad days on the market.
And the fact is that unless we decide to kill off the old, we are STILL going to have to “support” them, even if there is no Social Security at all. When they cash in their stocks and bonds, it will be “the young” who are providing the cash.

“Because we have a large array of programs that provide guaranteed benefits to the elderly, this has huge budgetary implications.”

Well, maybe not. Workers pay for their own Social Security “off budget.” So Social Security has no budgetary implications whatsoever. Medicare has some “budgetary implications” because it was made partially “on budget” in what I think was a misguided attempt to make the rich pay for more of it. Ordinary workers could pay for all of their own expected medical care in retirement through Medicare, but eventually a serious effort would need to be made to bring down the cost of medical care or no one but the very rich will be able to afford it. This is a problem Zakaria… and Peterson… carefully do not address. Because Peterson’s agenda is ENTIRELY the destruction of Social Security, despite what he says.
Medicaid is entirely on budget; it is welfare. But again, unless you want to go back to high infant mortality and people dying in the streets, this is a problem we are going to have to address. And the way to address it is not to begin by cutting the programs and throwing sick people into the streets. It would help if you knew that the budget deficit has not been caused by medicare and medicaid, but by unreasonably high defense spending, wars of dubious value to America, and the massive fraud of “bankers and private equity billionaires” that brought down the economy in 2008. America can still afford to take care of “the least of these.” And for those who think money is the measure of all things, a case can be made that taking care of the sick now ultimately makes the country richer.

“ In 1960 there were about five working Americans for every retiree. By 2025, there will be just over two workers per retiree. “

This does not mean what it seems to mean. You might ask, if you knew to ask, why Zakaria leaves out “the fact” that today the ratio is three working Americans for every retiree. Perhaps that makes the jump to “two working Americans” seem less scary. Perhaps that might make you ask “how can only three of us support each retiree? The answer turn out to be that “we” are not supporting those retirees. They paid for their Social Security themselves. But this ratio of retirees to workers scare “fact” is a perennial, and I want to take some time with it. It will be a little bit (not much) mathematical, made harder by the fact that I don’t know how to draw pictures on line: you will have to use your imagination and draw them for yourself.

First there is the original version: “there were 40 workers per retiree in 1940” or “16 workers per retiree in 1950”… or some such.

This is a meaningless artifact of how the Social Security system was phased in. Imagine if you will a country which has recently experience hard times which have wiped out the life savings of everyone.

The people get together and decide to create an insurance pool to keep this from happening again. Imagine there are forty million people in the pool, one million aged 25, one million aged 26, one million aged 27, and so forth to one million aged 63 and one million aged 64. So far no one has retired so the ratio of workers to retirees is 40 million to zero. The next year the one million aged 64 turn 65 and retire. The one million aged 25 turn 26 and “move up a year” as does everyone else, with one million new workers who turn 25 and enter the insurance pool. So the number of workers remains the same while the number of retired people increases by one million. Now the ratio of workers to retirees is 40 million to one million… or 40 to 1.
Next year another million people retire and another million young workers enter the pool, and the ratio becomes 40 to 2, or 20 to 1. And the next year another million… etc, and the ratio becomes 40 to 3 or about 13 to 1. And so on.

First note in passing that those first cohorts who retire “only” paid their insurance premium for a year or two… far less than they will collect in benefits. But the people knew this when they designed the insurance pool. They reasoned that the first retirees were people who had lost the most savings in the depression; the first retirees had worked their whole lives paying taxes, supporting their own elders, and supporting the children who would be directly paying their benefits, as well as building the infrastructure that made it easier for those children to make money than it had been for their elders. They also noted that none of the later retirees.. people who paid the premium “tax” for a full forty years … would lose anything by the deal. They would collect the benefits they paid for in their turn… benefits that would equal what they paid in, plus an interest that takes care of inflation and about two percent real interest on top of that. Plus any “insurance” benefit they would collect if they died with dependents, got disabled, or just never made enough money to have saved enough for retirement.

But note that people don’t live forever, so by, say, year ten, the number of retired people increases by another million but decreases by say half a million who die that year. This means that the ratio of workers to retirees will not continue to decline forever. It will stabilize at some level that reflects the death rate of retirees, or what is the same thing, the average life expectancy of retirees.

If, say, the average death rate was 10% of each cohort of retirees each year, then after 10 years (in our model… real life is a little more complicated) the number of people who die each year is the same as the number of new retirees. This would also mean that the life expectancy… you have a 50-50 chance of living to this age… of new retirees would be five years.

Draw a picture. Make a bar graph: write ages on the bottom axis, and population on the vertical axis. For every age from 25 to 64 the bar is “one million” high. For every age after 65 the bar is shorter by 10% or 100 thousand. So you have 40 million workers, and 900 thousand plus 800 thousand plus 700 thousand… and so on … retirees. The sum of those retirees is four and a half million (9 plus one, 8 plus 2, 7 plus 3, 6 plus 4, and 5). So the ratio of workers to retirees is about 40 to 4 1/2) or about 9 to one. And this is a ratio that will not change over time unless there are changes in death rates, or birth rates, or immigration. Note that the life expectancy is about four and a half years. This means that each worker works for forty years and can expect to collect 4 and a half years of benefits. So, oddly, the ratio of workers to retirees is the same as the ratio of working years to retirement years for EACH retiree.

If the death rate was 5% per year for each cohort of retirees, the bar graphs would decline at a slower rate.. taking 20 years to reach zero at age 85, with the life expectancy now ten years. One million retirees still die each year, but now there are ten million of them alive at any one time . This makes the ratio of workers to retirees 40 to ten or 4 to one. It also makes the ratio of working years to retirement years 4 to one.
Now, finally, let us give those retirees a life expectancy of twenty years… half of them will die by age 85, and (most of) the rest of them by age 105. This would result in a population of retirees of twenty million… or a ratio of workers to retirees of 2 to 1. It also means that workers will work two years for every year they expect to be retired.

But wait, if they are going to be retired, they are going to have to buy groceries for those twenty years. Where are they going to get the money?

Well, they could save it from their earnings if we could solve the inflation problem for them in a way that didn’t expose them to the risk of ending up with nothing at all from investing in stocks that fail. And this is what Social Security does.

Note that they don’t need to save enough in protected savings to have the same income in retirement as they have while working. They could decide, say, that since the kids are grown and the mortgage paid, if they had to they could get by on, say, one third of their working wage. Since they will be working 40 years and expect to live 20 years, they would need to set aside about 16% of their wages to have enough. (16% times 40 equals 32% times 20.)

And if they put that money into an insurance pool, they can expect to keep collecting that 32% even if they live longer than 20 years. This is made possible by the money paid in by the people who don’t live as long as the twenty years.

But Zakaria doesn’t know that and Peterson doesn’t want you to know that.
You are making well over twice as much money as your grandparents made… and they struggled to save 10% of what they made to eke out a retirement that would only last about ten years. But you, twice as rich as they were, are being told you can’t be expected to save 16% of your wages to pay for a retirement that will last twice as long or maybe a lot longer?

Or maybe you can. But the only way to do this is through Social Security, and Peterson doesn’t want you to, because even though its YOUR money, its a “government” program. And that drives Peterson crazy. Literally insane.

But wait, it’s better than that. While you are paying your 16% every year, wages will be going up so that by the time you retire real wages will have about doubled. That means that the 16% workers are paying in each year will be worth twice as much as the 16% you paid in (this is a simplification). That means that instead of living on about 33% of what you were making while working, you will have about 50% or more. Because Social Security is insurance, the effective interest on your premium (payroll tax) is a lot higher if you were a low wage earner than if you were a high wage earner. The high wage earner is not hurt by this. He still gets a reasonable “return on investment” plus the insurance value of Social Security “in case” things had not turned out so well for him. The interest on your Social Security “investment” is not high. It depends on the growth in the economy, but it is always higher than inflation. And whatever happens, you will get “enough.” And that’s priceless.

The “facts are not in dispute.” And the facts are that all the scary language about the looming booming number of old folks “we” have to support… turns out to mean that we can easily afford to support OURSELVES out of our own savings, protected by Social Security, but not “paid for” by the government.”
And if you are going to live longer.. become one of those looming booming old people… you are going to have to find a way to pay for those extra years. Social Security provides a very secure way to pay for at least “enough.”

That is if you don’t let the Big Liars scare you into letting them “save” it.

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After selling the election

In a previous post Fiscal cliff and the frenzy  I pointed to the rush of reporting the day after the election. Some of these articles should be in the op-ed section instead of reporting.

Lori Montgomery

“Avoiding hard decisions could have grave consequences, analysts say…”

        … 

Few expect Washington to replicate the scope of the Bowles-Simpson plan. Though it is widely praised, its $4 trillion in 10-year savings includes major changes to Social Security opposed by liberals and an aggressive new tax code that would generate far more revenue than most conservatives could stomach.

        … 

About half the new savings would come from reversing part of the massive tax cuts that, along with the collapse of tax collections during the recent recession, are a major cause of current budget problems. The rest would come from lower spending, including on Social Security and Medicare, forecast to be the biggest drivers of future borrowing.

Zachary Goldfarb

Much of the public dispute over the fiscal cliff has centered on the president’s demand that taxes rise for the wealthy. But entitlements are an essential element of the discussion because they are the main drivers of the nation’s borrowing problem over the years to come.

from The Root

After four years of sheer obstructionism — behavior that was called out during the presidential campaign season — most Americans are pointedly aware of who is willing to further wreck the nation’s economy and who would like to rescue it.

Fifty-three percent of the nation believes that if a fiscal agreement isn’t reached by New Year’s Eve, Republicans in Congress are the ones to blame, reports a new Washington Post-Pew Research Center poll. It also reports that only 38 percent believe that the president and the Republican Congress will reach a deal.

If those pessimists are right, then in an effort to assure a long-term deficit reduction, a series of mandatory and draconian spending cuts will jump off in less than seven weeks, coupled with the expiration of a slew of tax cuts.

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Barack Obama’s carefully crafted economic populism carries the day…and then the next three months?

Three writers point to the need to maintain energy and attention to the Obama Grand Bargain.

The media are a huge factor in most elections in the US, and outside of Fox News and the rightwing press, most of the major news outlets were more sympathetic to Obama than to Romney. They still helped Romney quite a bit, however, especially with swing voters, with poor reporting on key economic issues. Most Americans didn’t know that the federal stimulus had created an estimated 3m jobs; in fact, they didn’t even distinguish the stimulus from the unpopular federal bank bailout. They didn’t understand the benefits that people would derive from Obama’s healthcare legislation. They didn’t know that they’d had their taxes cut under Obama. And millions believed the hype that federal deficit spending and the US public debt were major problems. (For the record, the US currently pays less than 1% of GDP in net interest annually on the federal debt – less than it has paid during the past 60 years.)
The confusion on economic issues was probably the most important influence on swing voters, who supported Romney against their own economic interests, thinking that the economy might improve if he were elected. For this, and other misunderstandings, we can thank the major media, although we should also include the public relations blunders made by the Obama team. Perhaps the biggest strategic error wasPresident Obama’s refusal to go after Romney’s proposal to cut social security, thereby losing the majority of senior citizens’ votes (a big vote in swing states like Virginia and Florida), which he could potentially have won by defending America’s most popular anti-poverty program.

Obama’s silence on social security is a bad omen for the future of his second administration, when – facing almost immediately the “fiscal cliff” – political, media, and business leaders will be pressing for a “grand bargain” on budget issues that will screw the vast majority of Americans. It will take a lot of grassroots pressure to prevent the worst outcomes: likewise, to get us out of Afghanistan and to prevent another disastrous war, this time with Iran. Obama’s foreign policy has been mostly atrociousand the never-ending “war on terror” continues to expand, while most Americans’ living standards have been declining.

Bill Black interview

Bill BLACK: Yes. The president came into office talking about the possibility of this grand bargain—more than the possibility; this desire reach it. And then he tried to reach it in budget discussions with the Republicans. They refused.

He just a few days ago went and met with the editorial board of The Des Moines Register, the leading newspaper out in that portion of Iowa, and he had a discussion off the record, and emphasized that because it was off the record he could be more blunt, and said that his first course of business, and one that he believed he could get done very quickly should he be reelected, would be to strike a grand bargain. And he described the grand bargain, and there would be $2 in budget cuts for every dollar in increased taxes.
So this grand bargain is: we will weight this much more heavily towards killing social programs, or at least cutting them back significantly and raising taxes on the rich.

Now, that’s got most of the attention from progressives, but note two other things that he was saying. One, he’s talking about austerity. He’s talking about following exactly the kind of model that Europe has followed that put them gratuitously back into recession, and indeed into a Great Depression. And as we’re doing this interview, it has just come out that European unemployment reached a new high in September, which is the latest month that they had data for. So this has cost millions of Europeans their jobs, and it’s Great Depression levels of unemployment in Spain and Greece, and growing in many other nations. So this is insane to follow this strategy.

Glenn Greenwald at The Guardian  writes:

So the delirium of liberals this morning is understandable: the night could scarcely have gone better for them. By all rights, they should expect to be a more powerful force in Washington. But what are they going to get from it? Will they wield more political power? Will their political values and agenda command more respect? Unless the disempowering pattern into which they have voluntarily locked themselves changes, the answer to those questions is almost certainly “no”.
Consider the very first controversial issue Obama is likely to manage, even before the glow of his victory dims, literally within the next couple of weeks. It is widely expected – including by liberals – that Obama intends (again) to pursue a so-called “Grand Bargain” with the GOP: a deficit- and debt-cutting agreement whereby the GOP agrees to some very modest tax increases on the rich in exchange for substantial cuts to entitlement programs such as social security and Medicare, the crown legislative jewels of American liberalism.

Indeed, Obama already sought in his first term to implement sizable cuts to those programs, but liberals were saved only by GOP recalcitrance to compromise on taxes. In light of their drubbing last night, they are likely to be marginally if not substantially more flexible, which means that such a deal is more possible than ever.

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Biden…"I flat guarantee you"

Mark Thoma takes a poke at Joe Biden’s guarantees on SS  in  No Changes in Social Security:

I wish I could believe this.

Biden guarantees: ‘There will be no changes in Social Security’, by Michael O’Brien, NBC News: …”Hey, by the way, let’s talk about Social Security,” Biden said…”Number one, I guarantee you, flat guarantee you, there will be no changes in Social Security,” … “I flat guarantee you.” 

But the first time Republicans offer a trade (“tell you what, if you cut Social Security, we’ll stop cutting taxes”), will the administration take it? I’m afraid they will.

Here are several of Dale Coberly’s and Bruce Webb’s earlier posts on some of the matters and myths, somewhat at random from the dozens of informative posts on SS:

Social Security: Trust Funds, Actuarial Balance, Sustainable Solvency Posted by Bruce Webb 7/22/2012

Social Security: Simple story vs. myth busting Posted by Bruce Webb 2/18/2009

Reframing the Trust Fund  Posted by Bruce Webb  6/15/2008

Social Security For The Young  Posted by Dale Coberly  10/04/2011

DAMNED LIARS AND SOCIAL SECURITY Posted by Dale Coberly 4/11/2012

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SOCIAL SECURITY AIN’T BROKE

by Dale Coberly

SOCIAL SECURITY AIN’T BROKE

A Reply to Linda Beale

I want to take advantage of Linda Beale’s essay “Social Security: It Ain’t Broke Unless China is too” to make some points of my own. I want to be clear at the outset that I am grateful to Linda for her essay. She is essentially right. My comments are secondary. It’s not a case of my disagreeing with Linda, but of having something to say that I hope will help people understand the Social Security “question” a little better.

I am going to assume the reader has Linda’s essay in front of him.

First, I don’t agree with Krugman: you CANNOT think of Social Security as “part of the budget.” I don’t know how the government talks to itself about this, but they sure went to a lot of effort to segregate Social Security funds from the budget with a payroll tax and a Trust Fund. . You don’t have a “trust fund” if the money is fungible.

We once had a reader at Angry Bear point to a CBO “paper” that said because SS funds come into the Treasury like other taxes, they cannot be regarded as separate from those other taxes. The money is not “marked” so you can tell SS money from other money. This is a lie. The government is quite capable of keeping track of where the money comes from and where it is dedicated by law to go. So be warned, there are experts, even in the heart of CBO who are quite willing to lie to you if they think they can get away with it.

Second, i don’t like the usage “workers pay… to support [past workers, current retirees] who paid into it in the past.” While this is technically true, it is misleading. Those current retirees DID pay into SS in the past. They paid for their own benefits. Pay as you go is merely the very clever way the first cohort’s payments are protected from inflation, and earn interest, without being exposed to the risks of the market, so they can be returned to the taxpayer in time to help pay for his retirement. It is critical that people understand that the workers pay for their own benefits. It is NOT “the young paying for the old.” When they figure your benefits, they look at what YOU paid in, not what your son is paying in.

Like a lot of things in life, both ideas are true here. We are paying for the older generation, just as the next generation will pay for us. But at the same time we are paying directly for ourself. The money we pay is recorded against our name. Just like in a bank account.

Third , you’ll get some disagreement about when the Trust Fund was created and what for. Beale is essentially right about the present Trust Fund being created to allow the boomers to pay in advance for the part of their own retirement benefits that would be needed in excess of normal pay as you go. The trust fund was there at the beginning as a simple way to buffer income against outgo, both for normal monthly ebbs and flows, and for the occasional recession when taxes collected would fall short of benefits “promised.” But the ’83 Social Security Commission knew the boomer retirement was coming, and the tax rate they set at that time “just happened” to result in a Trust Fund large enough to bridge the boomer retirement. This is the point we have reached today. A long expected point, in spite of the liars screaming that SS has gone “cash flow negative.” SS has not gone “negative.” It’s cash flow includes interest, and eventually principle, from the savings it generated exactly for this purpose.

Fourth, I don’t agree with Beale that there is NO “problem.” The Trust Fund is not the problem. The problem is that as people live longer, they will need to devote a higher percent of their earnings to their retirement.. OR not retire as young, OR live on less when they do. I don’t think any sane person would choose options 2 and 3 when option 1 is so cheap. But it IS a “problem,” a very small one once it is understood, which is why the bad guys work so very hard to prevent your understanding it. You, the young, can insure your own future retirement with no increase in retirement age or cut in monthly benefits simply by raising your own tax… really your own savings rate… one half of one tenth of one percent per year, or about forty cents per week in today’s terms. This is an enormously better solution than not letting people retire when they are old, or cutting their benefits below survival levels, or taxing the rich and turning Social Security into welfare as we knew it.

Fifth.. the Trust Fund treasuries will indeed run out some time around 2030 or 40 or 50. It is a fatal argument to tell people don’t worry be happy. Even “the young” can see that they will be taking a benefit cut when they retire if nothing is done. Their problem is they don’t know they can avoid the benefit cut by raising their own “tax” by an amount so small they would not even notice it.

Default or not Default is not the question. Default would just move up the day when the tax needs to be raised, but would make no real difference in justice to anyone. And the lying bastards won’t default in a way you could bring them to court for. They will just cut benefits one way or another so the TF does not have to be paid back in a time inconvenient to themselves. They CAN do that. And that is the extent to which Uncle Sam borrowing from himself IS a problem. But it is not the problem that the liars say it is. Uncle Sam will have no problem finding the money. In fact, i don’t think the liars really care about the money. What they really want to do is destroy Social Security. They hate it because they hate the idea of “the help” being idle. They can’t imagine you might think you have something more important to do with your golden years than work for them.

Sixth.. The liars claim that the iou’s are meaningless is based on their idea that the government has to tax the people to find the money to pay the people. This is a confusion … we are not all the same person… but it is one they probably sincerely believe, and it isn’t helpful (to them) for us to miss the point. It needs to be explained. The money is owed to the people who paid their payroll tax on the understanding that it would be used to pay for their retirement. It will be paid by people who did not pay that payroll tax, and who presumably benefitted by borrowing the money. They will not be paying twice for their Social Security. They will be paying for the first time for what their government bought with the money they borrowed FROM Social Security. The rich know that it is THEY who will be taxed to pay back the money they borrowed from Social Security. And they are just short sighted enough to stop thinking right there, especially as they can rationalize that the money was borrowed not by them but by “the government” whoever that is. But since they hate the government, they can pretend they have no obligation to pay it’s bills just by pretending they got no benefit from spending the money.

Again, I want to think Linda for her essay, and I hope this helps.

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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.

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SOCIAL SECURITY: IT’S JUST MATH

Update: By Dale Coberly (was inadvertently omitted as author, although regulars know and the label names him)

SOCIAL SECURITY:

IT’S JUST MATH

or how to lie with numbers

“Math doesn’t lie” seems to be the new focus group tested mantra  about Social Security that Congressmen and their journalists are so proud to repeat.  What it really means is “we put a lot of money into finding ways to make the numbers sound big enough to scare the children.”

Here is a recent example, which I found in  http://www.slate.com/articles/news_and_politics/intelligence_squared/2011/09/stop_obsessing_over_entitlement_reform.single.html

“Slate:Of course, old people today are no longer poor because of Social Security. But recently, GOP presidential contender and Texas Gov. Rick Perry called it a “Ponzi scheme.” And last month, the economist Laurence Kotlikoff said this in an interview with NPR: “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 just to give to a portion of the population. That’s an enormous bill overhanging our heads, and Congress isn’t focused on it.” But you’ve written that Social Security will be only a small contributor to the future budget gap. Are Kotlikoff’s worries unfounded?

A look at the 2011 Trustees Report Table IV.B2  shows that, sure enough, in 2025 there will be about 78 million beneficiaries to OASDI.    To find the “$40,000 per person” is not so easy.  Look at Table VI.F7, Cost of OASDI (“Social Security”) in 2025 will be $1213 Billion, not 3 Trillion, for a per person cost of about $15,551 in “constant 2011 dollars” , not  $40,000.  Hmmm, maybe he means “current dollars, that is inflated dollars.  Well, table VI.F8 gives  $1626 Billion for 2025, still not $ 3 Trillion, or $40,000 per person. 

Wait, maybe he is talking about Social Security PLUS Medicare (HI).  Getting closer. Table VI.F9 gives the combined cost for OASDI AND HI, in current (inflated) dollars as $ 2237 Billion.  Not 3 Trillion. Not $40,000 per person.

So where does Kotlikoff get his scary numbers?  Perhaps from the (Table VI.F9) “High Cost” estimate for 2025, in current dollars,for Social Security plus Medicare, of $ 2737 Billion. Close enough, if you don’t mind rounding up by 10%.

It is not honest to start out by talking about Social Security, then skip to talking about (mumble) “socialsecurityplusmedicare” without bothering to mention that you have done so, or pointing out that Medicare is a very different kind of problem than Social Security. And it is not honest to use a “high cost” estimate which even the Trustees regard as “unlikely,” without even mentioning that that’s what you are doing.  Nor is it honest to talk about inflated dollars without telling people that’s what you are doing and giving them a basis for understanding what the numbers mean in terms of the money they have in their wallet today.

Table VI.F4 gives GDP in current dollars for 2025 as $ 30 Trillion dollars. And the combined “high cost estimate” for the combined costs of Social Security and Medicare as 8.96% of that.  Table VI.F4 gives the intermediate (most likely) estimate of the combined cost of Social Security and Medicare to be 7.66% of GDP.

But even staying with Kotlikoff’s misleading estimate, a “high cost” estimate of feeding and housing, and basic medical care, for 78 million people, over a quarter of the adult population, may reach 10% of GDP.

Kotlikoff is pretty sure this is an “enormous bill overhanging our heads”….”just to give to a portion of the population.”

But “we” are not giving it to them.  They will have paid for it. 

And every one of us will one day be in that “portion of the population.”  Kotlikoff appears to be suggesting we just ask old people to step out into the blizzard, so “we” don’t have to pay for “them.”

But “we” will be paying for ourselves…  just in case, you know, we don’t want to go into the blizzard. “We” are “them.”

With pay as you go financing “we” pay for our future benefits over a forty year period, an average of 30 years before we will need to collect. This is no different than “saving” the money.  Because of inflation people cannot afford to just put the money under the mattress.  Before Social Security they would take it to a bank and hope the bank would pay it back, with enough interest to stay ahead of inflation.  Or they would “invest” their money in hopes of getting back more than they paid in by taking advantage of the growth in the economy.  The  success of this would depend upon picking the right investment on the right day.

Social Security avoids both the risk of inflation, and the risks of investments that go bad at the worst possible time.  By using your money to pay back the people who paid for their Social Security before you, they are able to pay those people with money that is worth more than the money the older people paid in.  This is very simple:  Those older people paid a tax on an income that was a lot smaller than yours.  You pay the same tax on a larger income. This makes more money available to pay the benefits due to the older people.

This is effectively the same as “interest”, and because it comes from the growth of the whole economy it is not subject to the same risk as individual investments.  And because it is paid in “current” dollars, it always keeps up with inflation.

And when it’s your turn to retire, you will get the same advantage the older generation got.  And when your children retire, they will get the same advantage you got.  And so on, forever.

But please note, it is YOU paying for your own retirement.  It is NOT you paying for granny.  She already paid for her own retirement. 

Don’t be confused by the pay as you go feature.  It is really not different from what happens when you put your money in the bank or buy stocks and bonds.

Your money goes, the same day you deposited it, right out the door to pay for the current uses of some other person.  And when you are ready to cash out your savings, or stocks and bonds, the money would come in the door, that very day, from some other person, presumably someone looking for a safe place to save for his retirement.

To get a more honest picture than the one Kotlikoff is trying to scare you with,  look at Table VI.F7,  and see that the intermediate (best guess) cost of OASDI in 2025 is projected to be $ 1212.8 Billion in “constant 2011 dollars”… dollars worth as much as the dollars in your wallet today.   Divide $1212.8 Billion by 78 million and you get $15,549 per beneficiary. 

Table VI.F2 says this is 15.67% of “taxable income.  The same line gives the SS income rate  as 13.15%.  This is the amount of money available to pay the benefits. It comes from the current payroll tax rate of 12.4%  and additional income… mostly a part of the income tax that IRS collected on income from benefits and kicks back to SS. This means a tax increase of about 2.5% (15.7 – 13.2) would be needed to close the gap. 

The best way to increase the tax this much by the year 2025 would be to raise the payroll tax about one tenth of one percent per year for each the boss and the worker.

But it turns out the need for the raise has long been anticipated and the workers have been “saving up for it” by paying a tax rate higher than needed for the usual pay as you go.  This gives SS a savings account (the Trust Fund) to draw on to ease the transition to the higher tax rate. The Trust Fund will still have about  2.6 Trillion dollars in it by 2025, helping to pay the increased costs (Table VI.F7). 

We could just let the Trust Fund make up the difference between the tax rate and the cost rate, but this would not be prudent.  It turns out that a gradual increase in the tax rate of ONE FOURTH  of one tenth of one percent per year for each the boss and the worker will keep Social Security “solvent” forever. This is about 20 cents per week per year for each.

Actually no increase at all would be needed to  keep Social Security “solvent.”  The increase suggested here is what it would take to maintain the current “replacement rate”.. that is the percent of your pre-retirement earnings that you collect from Social Security on a monthly basis, AND retire at the same age as current retirees.   It’s pretty certain you would want to do both of those things, and as we have seen, the cost is not even high enough to notice.

While your tax is going up one quarter of one tenth of one percent per year, your income is projected to go up over one full percent per year.  That means, essentially, that each year your tax is twenty cents more per week (forty cents if you are your own boss) and your income is 8 dollars per week more than it was last year.  Leaving you with MORE money every week than you had before, PLUS having paid for a longer, richer, secure retirement.

So Kotlikoff’s 3 Trillion dollar “enormous bill hanging over our heads,” just to “give” to a “part” of the population (you) turns out to be a need to raise your own tax… really your own savings… less than a tenth of a percent per year over the time between now and then.

Remember this is your own money.  Not “the government’s.”  It’s not welfare.  You pay for your own retirement.  There is no deficit or debt.  Just a need to pay for what YOU will need. And it won’t cost enough to even notice.

It’s just math.

[note…

The numbers I give above are for OASDI, Social Security proper, not Medicare, because Medicare’s problems are best addressed by controlling medical costs (not by cutting benefits).

But even if costs can’t be controlled,  we may decide we want to pay for the medical care anyway.  The cost of this would be about a fourth of the cost of Social Security.  So the same logic applies. Instead of raising your tax 40 cents per week each year, you might have to raise it 50 cents per week each year.  You are still going to have more money after paying the tax than you have today.  And you will still be paying, in advance, for your own needs…  not some other “portion of the population.”]

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ARITHMETIC MATTERS

by Dale Coberly

ARITHMETIC MATTERS

I was thinking that someone could fault my essay the other day about the “Intelligence Squared” debate. I said that Howard Dean’s side did not really help anyone understand why, or what, or how to “save the program.” I hope I helped explain the why and what, but I probably wasn’t any more clear than Dean about how.

This will attempt to address that. Recall the original article about the debate

Arithmetic still matters,” Zuckerman began. “Medicaid now pays for both health and long term care for roughly 55 million Americans. It finances more than one third of all births in the United States, and pays the cost of almost two thirds of the people in nursing homes. The federal government underwrites 50 to 77 percent of the cost, depending on the income level of each state. Even so, Medicaid is the second biggest and fastest growing category of state spending. Costs are up more than 60 percent in the last five years and are expected to exceed $450 billion this year and to keep growing by about eight percent annually for the next decade. In the next — by the mid-2030s, the 65 and over population will nearly double, and health care costs, which have been rising far faster than worker productivity since the end of World War II, may be completely out of control, resulting in a tidal wave of federal spending.

Perhaps arithmetic still matters, but Zuckerman is careful to avoid giving us any. Instead he seduces us down a path that begins with apparent sober numerical facts and ends with pure demagoguery.

You need to learn to beware of words like “costs are up more than 60%”…

Sixty percent of what? If Medicare costs went up 60%, they would go from 3% of payroll to about 5%. This might be more than you want to pay. It might even be more than it should be. But it is not exactly an intolerable burden if that’s what it costs to live a longer and healthier life.

But, just as a matter of “arithmetic,” note how a 2% increase in costs becomes a scary “60% increase.” This is typical of the “it’s just math” school of liars.

Similarly, the rest of Zuckerman’s seduction presents numbers intended to scare you into thinking that Medicaid costs are high and growing alarmingly. It would be just as reasonable to think that health care costs are high and will get higher, and that government programs are the best way people have to pay for them. Or even that government needs to step in and find a way to control costs (which is not the same as cut benefits).

But finally we reach the payoff.: be afraid of costs “completely out of control” and “a tidal wave of Federal spending.”

None of the “arithmetic” Zuckerman gives us here actually supports that scary rhetoric. His theorem amounts to: “If costs are going up, we must cut our insurance.”

I don’t know how much costs are going to go up. Neither does Zuckerman. But I can suggest that you try to find out what costs are now in terms of your own personal budget, and what they are likely to be in terms of your personal budget at some reasonable time in the future. And what the estimate is based on. And whether it is a cost you are going to have to pay one way or another… either through taxes or private insurance or out of pocket. Don’t forget this is insurance. You may be healthy today, but with insurance you are paying a little bit now “just in case” you are faced with life or death huge costs…personal costs…in the future.

And what is the safest way to pay for them. Private insurance cannot guarantee that it will be able to pay for your care, even after you have paid premiums for your entire life. The government can.

There is also some reason to suppose that the government might be in a better position to control prices than private insurance. But only as long as we can remind the government that we are paying for our own insurance here, and not just some budget item they can cut “to balance income” with no consequences to the people who thought they were paying for insurance that would be there when they need it.

Pay as you go is the only way that I can think of to make this work. Under pay as you go the people just pay for current costs. Their own future costs will be higher, so they are not bearing an unfair burden. Their own future costs will be paid for (directly) by the workers of that time… who will have higher wages and will be more able to afford it. Those future workers own higher costs in turn will be paid for by the workers of that later time… who will have higher wages… and so on.

Perhaps the process can’t go on forever. But it can go on a lot longer than retired people can afford to pay each month for the “insurance” that would pay for their current level of risk. The ultimate answer to high costs is to find a way to control them, and to decide how much of your current income you are willing to set aside for what level of health care you may want in the future. Please note there is no “looming deficit” here. We just pay the costs as they come up. The magic of pay as you go will assure than none of us pay more than our own “expected” costs. The fact that we are paying in advance of our own need does not mean that we are paying for “someone else” or that we are not paying for ourself.

I don’t know what the whole health care arithmetic will turn out to be when it is done by someone honest, but I can point at something which may be important to keep in mind:

Table VI.F2 of the 2011 Trustees Report tells us that the cost of Medicare (HI) in 2030 will be about 4.4% of taxable payroll, compared to about 3.8% today. This looks to me like about a half of one percent increase in your payroll tax, and half of that will be paid by your boss. That is not a staggering burden. [It might be more reasonable to compare the future cost to the present tax rate.. 2.9%, half from the worker, half from the boss. This would suggest a need to raise the tax 1.5% over the next 20 years. That would be less than half of one tenth of one percent per year for each the boss and the employee….still not a staggering burden. And it goes to pay for your own eventual health care needs.]

Moreover, the real wage is expected to increase at least 1.2% per year between today and 2030. This would result in a real wage that is about 25% higher in 2030 than it is today.

Lets say that today you are making 1000 dollars per week. You are paying 1.45% for Medicare or about $14.50 per month. (your boss pays another $14.50, but if you want to say that is “really” your money, you need to add $14.50 to your income. ) This leaves you with about $986 a week after you have paid for your Medicare.

In 2030, your income would be 1,250 dollars per week (real). And if there were no increase in the Medicare tax rate, your tax would be $18.12, leaving you with $1232 per week after you have paid for Medicare.

If the cost of Medicare goes up to 4.4% of taxable payroll and the tax rate is raised to meet the cost, your share goes up to 2.2%, and you would pay $27.50 per week for Medicare, leaving you with about $1222 after paying for your Medicare.

So even with the increased cost of Medicare, you would have 236 dollars in real money more than you have today AFTER paying for your Medicare.

There are, of course, other taxes, but the arithmetic is the same. After calculating the increased costs, and your expected increase in wages, you are going to be richer in the future, not staggering under a load of “debt”.

All you have to do is pay for what YOU ARE GOING TO NEED. You are not “paying for granny.” Granny already paid for herself.

Note that even if costs for health care go up faster than your wages … in real terms… you are still paying for something you may want more than a new car when you get sick.

I suggest this is the real arithmetic you need to keep in mind.

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