Minor Thoughts from me to you

David Autor of MIT talks with EconTalk host Russ Roberts about the Social Security Disability Insurance (SSDI) program. SSDI has grown dramatically in recent years and now costs about $200 billion a year. Autor explains how the program works, why the growth has been so dramatic, and the consequences for the stability of the program in the future. This is an illuminated look at the interaction between politics and economics and reveals an activity of government that is relatively ignored today but will not be able to be ignored in the future.

Some interesting facts.

• Disability insurance includes both a monthly cash payment as well as access to Medicare.
• The disability rolls have more than doubled in in the last 13 years, from 1.2 million people to 2.9 million people.
• Divided by the number of U.S. households, we're spending more than $1500 per U.S. household, on disability insurance.
• By law, the program is biased on favor of people making disability claims. It's comparatively easy to get disability and very, very hard to prove that someone either no longer needs disability or that they made a fraudulent claim in the first place.
• Law firms helping people get disability are entitled to 25% of the disability back benefits. Each year, the Social Security Administration pays out more than $1 billion to these law firms.
• In 1984, SSDI consumed 5% of all Social Security revenues. In 2004, SSDI consumed 10% of all Social Security revenues. It now consumes all of the dedicated SSDI revenue and is cutting into the general Social Security revenue. At the current rate of expenditure, the SSDI trust fund will be exhausted within 5 years.

It looks like SSDI is something that we need to start thinking about reforming as well, as it grows increasingly more expensive to maintain.

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An oldie from August, that I've been hanging on to, for some reason. Veronique de Rugy breaks down S&P;'s memo about why they downgraded US debt to an AA+ rating.

The bottom line:

In other words, to avoid a downgrade, it would have been key in S&P’s opinion to show signs of willingness to cut (contain) Medicare and other entitlement spending. That didn’t happen, since many lawmakers in Congress (Democrats mainly, though not exclusively) refuse to talk about how much we can really afford to spend on Social Security, Medicare, Medicaid, and other social programs.

As a result, it is difficult to claim that the Republicans’ unwillingness to raise revenue is the only reason for this downgrade. It seems to me that there is enough blame to go around.

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When you get Medicare and Social Security benefits, you're not really getting "your" money back. In many cases, you're getting back far more than you paid in and the whole system isn't designed to make that kind of math work.

Our recent analyses of lifetime contributions and expected benefits in Medicare show that, over a wide range of scenarios, beneficiaries retiring at age 65 in 2011 can expect to receive dramatically more in total benefits than they have paid in dedicated taxes. For example, single beneficiaries and dual-earner couples who had earned the average wage throughout their working careers can expect to receive about $3 in Medicare benefits for every $1 paid in Medicare payroll taxes. If only one member of the couple had worked, we calculate a six-fold difference between contributions and benefits since both spouses are eligible for Medicare yet only one has paid taxes. Higher earning workers will have paid somewhat higher Medicare taxes, but their expected lifetime benefits still far outpace their lifetime contributions.

Social Security benefits and contributions come closer to balancing out over the lifetime for many beneficiaries (middle panel), but the one-earner couple again comes out far ahead due to a Social Security system that was designed decades ago around the stereotypical family of the past, with a working father and a stay-at-home mother. While a single woman who worked a full career at the average wage can expect to receive Social Security benefits roughly in line with her payroll contributions, a married woman who never worked but whose husband paid the same taxes as the single woman can expect to receive about $180,000 in spousal and survivor benefits. Unlike private pensions, these additional benefits are essentially free but only to those who are married, regardless of need, contributions or any child rearing. They are financed by all Social Security taxpayers, including single mothers who get no spousal or survivor benefits at all.

Examining both programs together (bottom panel) highlights the large dollar value of benefits being paid out and the fact that total lifetime benefits consistently outweigh lifetime contributions across a range of scenarios. It is no wonder these programs now account for one-third of all federal spending each year. Furthermore, our projections for people retiring in 2030 (data not shown) reveal a continuation of the difference between benefits and contributions under the current unsustainable structure of these programs.

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You may have seen charts floating around that supposedly show that we could pay for the Social Security shortfall by simply rolling back the Bush tax cuts “for the rich”. Megan McCardle has seen those charts too and she explains why they’re misleading and wrong.

The CBPP gets its figure by taking present values of the Bush upper income tax cuts extended over 75 years, and comparing them to the present value of the Social Security shortfall. For those who haven't taken finance classes, present values are sort of like compound interest, in reverse. Instead of adding up the future gains from interest rates, you discount future cash flows by a discount rate.

… Because it discounts future dollars, often quite heavily, cash flows which happen beyond 10-20 years out virtually disappear.

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