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Article Artículo

Ruth Marcus Is Outraged by Overly Generous Social Security Checks

Well, who can blame her? After all, we have tens of millions of seniors living high on Social Security checks averaging a bit over $1,200 a month at a time when folks like the CEOs in the Campaign to Fix the Debt are supposed to subsist on paychecks that typically come to $10 million to $20 million a year.

Anyhow, her main trick for cutting benefits is to adopt the chained consumer price index as the basis for the annual cost of living adjustment. This would have the effect of reducing benefits by 0.3 percentage points for each year of retirement. This means a beneficiary would see a 3 percent cut in benefits after 10 years, a 6 percent cut after 20 years and a 9 percent cut after 30 years. This is real money. Since Social Security is more than half the income for almost 70 percent of retirees and more than 90 percent of the income for 40 percent of retirees, the hit to the affected population would be considerably larger than the hit to the top 2 percent from ending the Bush era tax cuts.

But Marcus insists this cut must be done first and foremost in the name of accuracy, since the chained CPI is supposed to provide a better measure of the cost of living. She notes but quickly dismisses the evidence from the Bureau of Labor Statistics (BLS) consumer price index for the elderly (CPI-E), which shows that the rate of inflation seen by the elderly is somewhat higher than the overall rate of inflation.

"The problem with that is twofold. That measure is imperfect — the “E” stands for experimental. And, as the liberal Center on Budget and Policy Priorities notes, the burden of higher health costs falls unevenly among the elderly. Average costs are skewed upward by a minority who face very high out-of-pocket expenses, a problem better addressed by fixing Medicare to deal with catastrophic costs."

Actually, the "E" stands for elderly, but let's get to the substance. First, if we are interested in accuracy then the answer would seem to be to have the BLS construct a full elderly index that tracked the actual consumption patterns of the elderly. This would cost some additional money, but we will be indexing $10 trillion in Social Security benefits over the next decade so if we want to ensure accuracy, it would seem reasonable to spend $70-$80 million to put together a full elderly index that actually tracked the consumption patterns of the elderly, looking at the specific outlets where they shopped and the items that they purchased.

It is difficult to know exactly what this would show, but it is possible that even apart from the issue of health care it would show that the elderly experience a higher rate of inflation than the population as a whole. The current index already assumes substantial amounts of substitution in response to price changes at lower levels of aggregation (e.g. different types of cell phones). If the elderly are less flexible in their shopping patterns and a less mobile population then this substitution may have the effect of understating the increase in their cost of living.

Dean Baker / December 26, 2012

Article Artículo

The OECD Economic Outlook: Just How Broke Will the United States Be In 2042?

On December 31, 2011 the Net International Investment Position (NIIP) of the United States was a little worse than negative 4 trillion dollars. This means that total holdings of U.S. assets such as stocks, bonds (private and government) and real estate, by foreigners exceeded total holdings of foreign assets by people in the United States by more than $4 trillion. This is more than one quarter of the annual GDP of the United States. Despite this negative position, in 2011 American-owned assets had still generated $235 billion—1.6 percent of GDP-- more income than was lost in corresponding payments to foreigners.

This unusual set of circumstances is not likely to continue.  Earlier this month, the OECD released a report “Looking to 2060: Long-term global growth prospects” based on the baseline projections of its June Economic Outlook.  The report projects that real per-capita GDP in the United States will rise 1.58 percent per year from 2010 to 2060.  That is, output per person will be 119 percent higher in 2060 than in 2010.  On the other hand, the OECD also projects that an increasing amount of that production will represent income to foreigners.

Apart from a brief surplus in 1991, the last 30 years have seen negative U.S. net national savings in the form of the current account deficit—essentially a large trade deficit offset in part by a small net income from assets.  The OECD projects that the current account deficit will grow to a record 6.4 percent of output by 2030 (over $1 trillion annually in today’s economy) before steadily recovering over the next three decades as net foreign investment in the United States declines.  This projected pattern of current account deficits implies large sales of U.S. assets to foreigner and therefore further deterioration of the U.S. NIIP.  By 2038, net foreign ownership of U.S. assets will rise from 26.7 percent of GDP to something closer to 54.5 percent.[1]  If these assets generate a return akin to government bonds, then in 2040 this will represent a flow of cash out of the United States equal to about 4 percent of GDP or $640 billion a year in today’s economy.[2]

CEPR / December 25, 2012