econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 16 July 2016

Social Security And Medicare - Pay As You Go: Yes Or No?

from the Atlanta Fed

-- this post authored by Karen Kopecky

Based on current projections from the Congressional Budget Office, the Social Security trust fund is forecast to run dry around 2030 (see the chart); the Medicare trust fund in 2025. Barring a change in legislation, once the trust funds are depleted, benefits will be cut so that outlays match revenues. In the case of Social Security, this reduction will mean a 31 percent decline in benefits.

To balance the Medicare budget, certain Medicare benefits will also face significant reduction.

MSocial Security Trust Fund Balance

As my coauthors and I explain in a recent Oxford University Press blog post,our research has found that pay-as-you-go programs for retirees such as Social Security and Medicare, on average, make people worse off, whereas means-tested social insurance programs for retirees, such as Medicaid and Supplemental Security Income (SSI), improve welfare.

These findings are based on comparing the welfare of individuals born into economies with different types of social insurance programs available. We find that, given the hypothetical choice between having or not having Social Security, the average individual would choose to be born into an economy without Social Security. However, when we ask if an average individual would prefer to be born into an economy with or without means-tested retiree programs, we find that he or she would strongly prefer the economy with these programs.

The preference for an economy without universal pay-as-you-go programs like Social Security is consistent with findings in the literature more generally. These programs are large (Social Security was 4.9 percent of U.S. gross domestic product [GDP] in 2013) and have distortionary effects. In standard economic models, the distortions lead to such large reductions in savings and labor supply that they tend to outweigh the programs' insurance benefits.

In contrast, means-tested social insurance programs for retirees, such as Medicaid and SSI, are much smaller. Together, outlays from these programs for the elderly were only 1 percent of GDP in 2013. These programs provide transfers only to individuals with limited income and assets or with impoverishing medical expenses. However, it is in these states of world, when one is poor and/or sick, that such transfers are most valuable, which is why we find that these programs improve welfare.

Researchers have found that means-tested transfer programs for working-age individuals are highly distortionary because they implicitly tax income and assets. However, we find that such distortions are less severe for means-tested transfer programs for retirees, since individuals cannot use these programs to finance working-age consumption and medical care.

Our findings suggest that one potential solution to the sustainability problems plaguing Social Security and Medicare may be to make these programs means-tested as well. Under such a system, the government would still provide protection against the risks of ending up old, sick, alone or poor, but with programs that are significantly less costly.

Of course, saying that individuals would prefer to be born into a hypothetical economy A instead of economy B is not the same thing as saying that current U.S. citizens want to make such a transition. Moving from the current system to one in which Social Security and Medicare benefits are means-tested would not be attractive to wealthier individuals who are already retired or on the verge of it. A compensation scheme would likely have to be devised and financed through taxes or government debt.

Once the cost of compensation is taken into account, we may find that such a transition is too costly to undertake. And as the population ages and the ratio of retirees to working-age individuals increases, the fraction of individuals in the economy who need to be compensated will increase further. This reality adds impetus to dealing with the Social Security sustainability issue sooner rather than later.

[Editor's Note: The Atlanta Fed's 2015 Annual Report focused on the graying of the U.S. economy. Part of the report and a follow-up webcast discussed how aging is driving the depletion of the U.S. Social Security and Medicare trust funds.]

Source

http://macroblog.typepad.com/macroblog/2016/06/pay-as-you-go-yes-or-no.html

About the Author

Photo of John RobertsonKaren Kopecky is a research economist and associate adviser in the Atlanta Fed's research department

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Contributors


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
The Problem With Obamacare Is That It Did Little To Reduce Overall Healthcare Spending
Joan Robinson’s Critique of Marginal Utility Theory
News Blog
Joe Sixpack's Situation in 3Q2016: The Average Joe Is Better Off
Why Are Some People More Delinquent On Loans Than Others? - Part 1
Gravity Returns To San Francisco Housing Market
Violent Bond Selloff: An Eye-Opening Perspective
Infographic Of The Day: Identity Theft: You Should Be Worried
Early Headlines: Russia Hacked GOP, Trump To Drain Energy 'Swamp'?, New Sec'y Of State Candidate, India IP Shrinks, India Has World's New Largest Solar Plant , China GDP Hides Volatility And More
Most Coup Attempts In Recent Years Have Failed
The Global Cost Of Diabetes
The Universities Churning Out The Most Billionaires
Five Amazing Ways Plants Have Created New Technologies
Where U.S. Weekly Wages Go The Furthest
What We Read Today 09 December 2016
How To Stop Using Filler Words Like Um And Uh
Investing Blog
The New Art Of Utility Investing
Investing,com Weekly Wrap-up 09 December 2016
Opinion Blog
Trickle-down Economics, Trump Edition
Looking At Everything: Trump's $1 Trillion Infrastructure Plan
Precious Metals Blog
Silver Prices Rebounded Today: Where They Are Headed
Live Markets
09Dec2016 Market Close: Wall Street Closes On A New High, Trump Sugar High, Crude Prices Testing Resistance, US Dollar Melts Higher
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government



Crowdfunding ....






























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved