The Four Horsemen of the Apocadebt

October 19, 2009 at 11:47 pm (By Rodjean)

I devoted today to seminars connected with the annual meeting of the National Conference of Bankruptcy Judges, a group designed to bring the bankruptcy bar and judges together. The first panel discussion of the morning was entitled “Obamanomics.” Guest Panelist , former Oregon Senator Gordon Smith, discussed America’s current financial dilemma (including the coming Medicare/Social Security crises) with two bankruptcy professors, a judge, and an economics professor. What struck me were Smith’s remarks. From our current debt situation, he suggested there were four possible responses: (1) continue to solve troubled industries with GM and Chrysler-like infusions of cash, tilting the potential bailouts away from secured creditors, towards favored constituencies; (2) continue bailouts without raising taxes, thereby debasing the currency; (3) raise taxes sharply to cover the cost of entitlements; or (4) renege on the generational social compact which formed the underpinnings of Social Security and Medicare.

Smith made the point that option 1 will quickly erode foreign confidence in US investments. Note, as a matter of policy, the traditional legal expectations of secured investors are thwarted for the benefit of a favored political constituency. Foreign investors favor the US because the rule of law operates here. If political considerations trump the expectations of secured investors, the US will become just another banana republic in the eyes of foreign investors, and our current economic difficulties will be a fond memory.

Option 2 reaches the same result through inflation. The investor gets his money back, but he is paid in devalued dollars because of our profligacy, so foreign investment shuts down.

Option 3 is politically challenging. Moreover, seriously raising taxes would dampen economic activity in an already compromised market.

Option 4 is probably politically impossible, but some measure of repositioning benefits might occur.


  1. Maxwell said,

    I’m getting pretty tired of the term “politically impossible, especially when it’s used as a substitute for “necessary.”

  2. wj said,

    Any real solution, when it finally comes, will have to be a combination of these. Most likely, Options 3 and 4 . . . plus a likely, but possible gradual, reduction in the exchange rate due to an unwillingness to completely abandon the favored constituencies.

    Of course, the longer we wait, the more painful Options 3 and 4 will have to be. But for the moment, the political calculation is still “by the time we are absolutely forced to deal with this, I may no longer be in office — so stall, and let someone else deal with it.”

  3. Icepick said,

    Options 1 and 2 both mean the eventual decline of the nation. Options 3 and 4 will probably need to be done in tandem. We can’t end SS and MC overnight: People have been planning their futures around them and for many the future is now. We can’t change the game midstream. But benefit reduction will need to be introduced for those that are younger, and the best solution would see the elimination of those programs in the future. (I’m 41, and since my early 20s I’ve assumed I will never see a dime in SS, and I’ve never even thought about MC. Now I think I may see a dime, but that the dime will be worth much less than a penny.)

    In the meantime, people who aren’t going to get the full (or eventually any) benefit are going to have to pay more. It’s a great generational swindle, but I don’t see any long-term chance for the country otherwise. The demographics just won’t support this.

    Of course, we’re not going to get anything like option 3, in fact we will likely get the opposite. (See Obama’s $250 check to seniors next year as an example of that.) We will get more of 4 as a matter of course – the young don’t vote and when they do they almost never vote their own interests. (No one under age 25 should be allowed to vote.) And we will get 1 and 2 in abundance unless some third party magically emerges on the scene that both preaches and practices fiscal responsibility.

  4. Donna B. said,

    Getting 1 and 2 in abundance will bring about 3 and 4 in a very harsh way.

  5. Rod said,

    Speaking as one who has reached the maximum SS deduction for about the last 30 years, I fully expect the big push for SS will be to remove the cap (thereby increasing the taxes on every dollar over $100,000 by about 6%), while simultaneously means testing benefits (so the people making the largest contribution get no benefit whatsoever. Sounds perfectly fair to some folks.

    So we get a little bit of option 3 and a little bit of option 4.

  6. michael reynolds said,

    SS should be means-tested. So should medicare. Both are welfare programs — the benefits are vital to the poor and working class and utterly irrelevant to the rich. Continuing to write SS checks to millionaires — checks written by working people — is idiotic. We only do it so we can maintain the pretense that SS is a pension plan and Medicare is health insurance. Let’s cut the BS: they’re both welfare, and I support both for people who need them.

    Means test, raise the retirement age, and eliminate or at least raise the cap on contributions. I know that’s politically difficult, but not really a big deal for the economy.

  7. pathmv said,

    Good lord, I actually agree with Michael on a major political issue. SS stopped being an actual pension plan many decades ago, once the government started “borrowing” the contents of the “trust funds” to pay for other government expenses, rather than actually investing them to generate a return. If any company “borrowed” from its pension fund to pay on-going expenses of the business, no matter how many promissory notes they wrote in return, the government would send its executives to jail.

    Now, the means testing for SS should be different from the means testing for other government programs, since we have essentially decreed for so long that SS should be a significant portion of one’s retirement revenue for ordinary working-class folks. A sliding scale would be the best bet, so that there are fewer perverse disincentives to discourage folks from saving on their own. Except for the truly wealthy, everybody should get at least some benefit from the program they are forced to contribute to. And frankly, I suspect that if you means test it only to stop it from going to real millionaires, then that wouldn’t save us that much money. In order to save any significant amount of funds, you’d have to substantially reduce the payments being made to the upper middle class, not just the “rich.”

    Alternatively, we should drastically reduce the amount of taxes imposed for SS and Medicare, while also drastically reducing the benefits through means-testing. Let the middle class buy their own nursing home insurance; let the market develop long-term health insurance policies, such that as long as you pay the premiums starting at a young enough age, they guarantee you care throughout the rest of your life.

  8. Icepick said,

    While I support the basic idea of means testing, I want to see particulars before deciding on imposing such tests. What will you be testing, someone’s net worth or someone’s net income? If it’s income people can hide wealth in investments. If net worth is the standard then a lot of people that will NEED SS will get denied. And then there are fluctuations in market values that impact net worth.

    For example, in 2006 my mother’s net worth would have probably topped $250,000. If she could get a return of 6% on that she would have been making $15,000 a year, about the same amount she was getting in SS. But most of that wealth was tied up in her house so it wasn’t generating income. And now that RE has collapsed in Florida her home is worth considerably less – she’s probably worth less than $100,000 today.

    So how should she be means tested? Her non-SS income remains unchanged – about 5K per year. Her net worth was once much higher. But her actual living conditions have improved over that time. For one thing she has one less dependent. (My brother had been living with her and he’s dead now. And in the meantime her house, which has lost somewhere between 67% to 80% of its value, has had the electrical system replaced, has had a alarm system installed, and recently got a brand new roof (with a few minor but important changes when the new roof was installed). NOTE: Mom actually owns her house, as she paid off the mortgage and never refinanced.

    Concerning my Mom someone would probably decide she’s okay under any means testing, as any such scheme may well exclude primary residence. (But maybe not. Congress is getting greedier and dumber. They may well make a grab for more.) But what if Mom living in a house worth, say $750,000 instead? Anything I think of off-hand will either have big loopholes or be potentially punitive. For example, one basically has to give away all of one’s assets to get government assistance to move into a nursing home.

    So the theory of means testing sounds good, but I’m not convinced our government can implement it without ruining people they are allegedly supposed to help.

  9. Icepick said,

    A note on housing values in my mother’s neighborhood. One of the houses next to hers was fore-closed upon recently. (And the poor guy that got thrown out of the house was screwed two ways, as he was a renter. He had been paying on time, but his landlord had been pocketing the money instead of paying the mortgage.)

    Anyway the house has gone back on market. They want $31,000 for it. By brother-in-law is offering them $20,000 in cash IF they remove the oak tree in the front yard. (Estimates on that run to about $6,000.) I think my b-i-l has about a %50 chance of owning the house. The house sold for ~$75,000 in 2002 and wouyld have easily gone for $150,000+ in 2006.

    And if you don’t believe the house would have gone up in value that much in four years, I offer the house three lots up the street as an example. On July 6 2005 it sold for $130,200. On August 8 2005 the same house sold for $160,000. So my $150,000 estimate is actually on the way conservative side.

  10. wj said,

    It shouldn’t be that difficult (mathematically, at least) to means test separately for the primary residence. And I don’t even think it would be impossible to devise a means test which looked at both net worth (other than the primary residence, if any) and income. I would hope (without much optimism) that the formula, even including a sliding scale, could be kept relatively simple. But we don’t need to be too simplistic about it.

  11. Icepick said,

    But we don’t need to be too simplistic about it.

    Yes you do, if you expect seniors to abide by it. ANd feel free to devise such a formula. Personally I don’t think it will be that easy.

  12. wj said,

    Well, I’m just making up numbers here, and admittedly it isn’t exactly a “formula.” But conceptually:

    H = what your primary residence is worth
    W = your net worth, exclusive of your primary residence
    In = your monthly income (from pensions, investments, a job if you have one, etc., etc.)

    Construct boxes based on those three.
    H < $250,000 and
    W < $100,000 and
    In $1,500,000 or
    W > $1,000,000 or
    In > $10,000 per month
    SSI = 0

    The numbers are obviously in serious need of adjustment. And there would need to be several other boxes. But in general, that sort of thing seems do-able. And it shouldn’t take more than a dozen boxes or so to provide a reasonably progressive arrangement.

  13. wj said,

    Oops, the software just trashed part of my formulas.

    The first box is suppose to include an income of < $2,000 per month, giving SSI of $1,200 minus half of the income. And the the next box starts with a House worth more than $1,500,000.

    No idea what I said that got the software confused. Sorry

  14. Donna B. said,

    One of the simplest changes that could take effect immediately is to allow anyone who is eligible for SS to refuse it. For the present, since it would be mostly impossible for them to buy health insurance, they should be able to sign up for that alone.

    Maybe that’s already changed… it’s been a while since I’ve known anyone who didn’t sign up as soon as they were eligible … but the checks used to start coming at age 72 whether you wanted them or not.

  15. Rod said,

    As I read the discussion of means testing, I wondered what you will say to people who make $107,000 a year and have maxed out on Social Security deductions for a working lifetime. The rest of us have decided that you make too much money? The $25,000 per year you paid in income taxes and the $6,600 you paid in Social Security taxes bought you less from your government than someone who has made minimum contributions?

    It is a recipe for class warfare.

  16. wj said,

    Rod, I can only really speak for one person who has maxed out on Social Security deductions over several decades: me. (Even back when you could max out at a whole lot lower dollar amount, due to inflation since. Computer jobs have been like that for a long time.)

    When I first started getting SSI deductions was in the early 1960s. I was in my mid-teens, and had never even heard the terms “pyramid scheme” or “Ponzi scheme” — which are the technical descriptions for what Social Security, as implemented, is. But even in my ignorance, I managed to figure out that this was not really a pension plan that I would see a return on, just another tax. I did not then, and have never since, entertained the expectation that I would ever see anything back from it.

    Granted, I was expecting something more like bankruptcy than the imposition of means testing. But the expectation would be the same: I’m never going to see a dime back from it.

    Others, perhaps with less of a feel for math or demographics, may not have had the same realization. At least, not as early. But nobody who has been paying attention in the last quarter century, and is bright enough to have been making the kind of money that gets you maxed out, has any real excuse for surprise if they don’t get the full amount “promised” by the politicians.

    Overall, I think “class warfare” is a bit of an overstatement. Not to mention that the only likely kind of class warfare you would see from means testing being implemented would be some of the rich (and perhaps more of the moderately well off) working politically to try to defeat the plan.

  17. Rod said,

    wj: My first SSI deduction came in the mid 60’s. By the late 70s population demographics made it clear Social Security was headed for a rendezvous with bankruptcy at some point in the 21st Century. The combined end of the baby boom in the 60s and continued increases in life expectancy made that outcome increasingly likely. By the 80s it became commonplace for people to say they did not expect to ever receive a dime from Social Security. I figured SS would continue to exist in a less robust form, pruned by un-indexed inflation or by benefit cuts to a threadbare safety net that could not keep anyone out of poverty.

    The issue with means testing is not simply that America will renege on the social compact which promised some degree of cushion at life’s end to everyone who paid in, it is that the compact will only be broken for some of us – those who were compelled to contribute the most. Put another way, most of us knew Social Security was on a trajectory to crash, we just didn’t know we were the ones who would be thrown off to lighten the load.

    Remember, all of this will occur amidst higher taxes to pay for the huge national debt. I don’t expect people with incomes in the top 5% to take up arms. They are still among the more comfortable in our society. They are also the people who frequently continue to work past retirement age, anyway. So, they will pay more and more, while receiving less and less from their government. I expect an increased sense of disillusionment among many of them. It could result in those people successfully stopping means testing politically, moving to more tax friendly countries, rationalizing cheating a system they feel has cheated them, or resenting and showing less compassion for those who milk the system.

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