The Information Auditor

2009 OASI/DI Board of Trustee's annual report

Plan B 3.0

Lster Brown, more of a polemicist than scientist in this book, attempts to illustrate how climate change affects several areas of our life beyond that of just rising temperatures, melting glaciers, and elevated levels of CO2 in our atmosphere. The work here is a dense and impressive collection of data and predictions: if we let the present rate of climate change to go unabated, continuing on with business-as-usual, we will see rising ocean levels, harsher weather (hurricanes, droughts), more dramatic water shortages (jeopardizing agriculture), mass starvation, refugees, perhaps even making some parts of the planet unlivable. The effects of climate change will push some troubled countries into becoming failed states: ungovernable and dangerous. This should be a time for alarm and action as our country is very dependent on the global economy, and our economy is still very dependent on natural resources (of which we are quickly running out). He uses a technique of framing economic choices in terms of environmental opportunity costs that is very effective for illustrating the imbalances we create in our environment with our lifestyle.

Unfortunately, this work suffers from the it’s-as-plain-as-the-nose-on-my-face fallacy: that is, the obviousness of my facts makes my argument for me. He makes emotionally charged conclusions from fuzzy facts. Two examples illustrate this tendency: one was the claim that a one degree Celsius rise in temperature leads to a 10% drop in yields of “grain” (pages 38 and 52). Another was his claim of a 1:4000 ratio of “grain” yield to water inputs (pages 71 and 81). Both of these factoids are meaningless ratios. Grains can mean anything from corn to wheat but Brown does not specify. Many other variables accounting for crop yields he also ignores in order to keep the emotional impact high on the reader (and not challenging us to think for ourselves). But without including region, climate, fertilizers, cultivation practices and the variety of the grain he has in mind, and no reference to time intervals or dimension of the relationships (average, a median, etc.), he looses credibility as a trustworthy thinker.

Beyond the fire hose of apocalyptic factoids, he proposes few new policy solutions. He fails to frame the wicked problem aspect of our situation. We may have to make unsettling compromises to lead the world through this uncertain period for survival. We might expand GMO usage (developing higher yield crops requiring less irrigated water); increase industrial poultry farming (to meet protein needs); and keeping our military strong as it is the only institution capable of delivering emergency humanitarian services and order around the world. He also does not touch on the fact that global climate change is a strategic national security issue to the DoD. Even the US Army has led the DoD adding sustainability concepts in their operations since 2005. But books as this seem to preach more to the converted than to the audiences it needs to reach (the people who don’t think we have a massive, critical problem). Brown’s work here is in danger of being more of a distraction with its blizzard of , sometimes, tenuous data than a serious tool for public policy decision making (perhaps a case of Garbage In?).

A colleague of mine at work shared the following with me, "10 Steps to Workplace Serenity" (we work in the software business):

1) Learn to string together buzzwords in clever ways, especially words as "benchmark", "horizontal integration", "battle rythm", "Results-driven" and "synergy".

2) Never answer your desk phone.

3) Create an Outlook inbox assistant that moves all incoming mail from your team to a folder you can't easily see (bury it under 3 or more levels of indenture in the folder structure of your inbox).

4) Always eat big lunch that makes you really sleepy in the afternoon.

5) Avoid mean people (if you can).

6) Wear your telephone headpiece all the time and act like you're engaged in a teleconference.

7) For fun, once-in-a-while, choose a big powerpoint presentation by someone in your organization (must be at least 100 slides or more) and print it out on the plotter.
a) don't claim it or pick it up; just let it lie there.
b) a day or two later, print it out again on the plotter.

8) Eagerly volunteer to support meetings that require you to do nothing but "listen and take notes". Then leave your desk, go back to your car, and take a nap.

9) Get about 100 of those obnoxiously thick programming books on your desk shelves (Programming Perl, Programming Python, the C++ Cook book, Ruby, C++ Algorithms, etc.), raise your eyebrows a lot and tell people you are a skeptical empiricist.

10)Take massive doses of antidepressants.

The state of South Dakota has run a structural deficit for five of the last six years. It was going into December 2008 (the month the governor submits the budget to the legislature) with an unprecedented deficit projected due to the recession (83.8 million initially projected). Some of the state’s trust funds, which were being used to balance its budget (constitutionally mandated), were in danger of being exhausted. Fitting for a state from the old Wild West, the cavalry came to the rescue in the form of the American Recovery and Reinvestment Act of 2009. It made millions of non-matching Federal funds available to the state, which it used to make up for its deficit for the 2009-10 budget (foregoing many program cuts and further depletion of its trust fund reserves).

The characteristics of its budget reflect a governance style mandated closely by direct voter involvement through several initiatives. From 1990 to 2006 ballot measures relating to limits on taxation and spending appeared in eight different years, many of which succeeded --in some cases amending the state constitution. In 1996, Article XI, Section 14 of the state constitution was created by voter referendum to restrict tax increases only by ballot initiative or a 2/3rds majority of both houses of the legislature. In 2000 another initiative created Article XI, Section 16 prohibiting inheritance taxes. Meanwhile, voters rejected exemption of food from sales tax in 2004 and significantly increased cigarette taxes in 2006. Thus the state government is left with regressive tax revenue streams that are burdensome (to lower income households) and unstable (being highly vulnerable to economic fluctuations). Governance in this state is like a rowing shell manned by one rower (the government) and 12 captains (the voters), each of whom shouts at each other and to the single rower to row faster with the single oar they allow him to have.

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I will be eligible for Medicare Part A and B on March 1, 2026 and eligible for OASI benefits in 2028. Will Social Security be around when I retire? That depends. In casual conversation, and in some policy documents, Social Security is often meant to refer to a pension system and long-term medical care (Medicare). But these components should be separated in policy analysis as they have separate uses, trust funds, and challenges. So separate are these programs that as far as Medicare goes in my case it will be in the red by the time I am eligible (likely “not be there”); meanwhile, the Old-Age, Survivors, and Disability Insurance (OASDI), the monthly check to help pay my bills, may be in better shape.

But what seems more at play here is a struggle over cultural values and attitudes about aging, financial risk, the role of government, along with competing visions and predictions over the future. The debate about its future is rhetoric-laden and relies on predictions of the future (which rarely come true in just the way we think). For instance, in their article Rethinking Social Insurance, Stuart M. Butler and Maya MacGuineas masterfully created a sense of impending crisis by combining the costs of OASI/DI and Medicare. They included disturbing projections of the share of income each of us shall be burdened. Left to its own, Social Security will make up 30% of the share of Federal Spending: an entitlement crisis.

These authors dismiss increasing taxes because of its negative effect on the economy; borrowing would lead to unacceptable debt; changing spending priorities for defense and education and removing business tax cuts are also not acceptable. And since we no longer live in the 1930’s they call for a “complete modernization of our social programs” (see Butler, S, & MacGuineas, M (2008, February 19).Rethinking Social Insurance. Heritage Foundation. New America Foundation: Fiscal Policy Program., 1-14). Ironically, their solutions sound like they’re from the pre-depression era in which individuals should were supposed to have sole responsibility for their health care costs and pensions –and not burden society. The dire situation we are in is due to our “political process” and its penchant “to expand politically popular programs”. And the worse thing Social Security does is burden future generations (the young) with supporting the aged and selfish: we face a crisis that is financial and moral, an unfair entitlement program running on auto pilot that holds the future hostage.

In contrast, Henry J. Aaron’s A Vision for the U.S. Pension System at 100 frames Social Security as a political experiment, evolving and adapting since 1935. He would call Butler and MacGuineas’ position as an imagined entitlement crisis. He would contend the only real crisis in this debate is the costs of health care. Aaron believes we should be reforming health care first.

But according to the 2009 OASI/DI Board of Trustee's annual report, the future of the program’s funding appears bleak in the long term (50-75 years forward) due to the current recession, the assumptions made about mortality (longer lives), and the nation-wide fertility rate (lower than necessary). The tax burden on workers currently is 12.35% and this year’s predictions has it growing to 16.7% in 2030 and 17.7% by 2083. The cost of the program rises steeply from 2012 to 2030, due to the baby-boomer retirement, and the assumptions made about the concomitant moderate rise in labor force numbers. By 2031, the rate of cost is expected to slow and remain stable. The estimates of workers to beneficiaries is 3.2 (reasonably stable since 1974 from 3.2 to 3.4) but by 2030, when I retire, that ratio could be around 2.2. The trustees predict that OASI and DI have an adequate reserves in their trust fund until 2012-14, adequate in the short term. By 2016, costs outpace revenue and trust fund assets combined. It is then that the Treasury must step in and sell off trust fund assets, exhausting both OASI and DI funds by 2039.

The OASI/DI trustees recommended raising taxes and decrease benefits to some degree. They want to see payroll taxes immediately increased by 2.01% and a reduction of 13.3% ($5.3 trillion) in benefits. Payroll taxes should be increased every year to 16% by 2037 and leveling off thereafter. They also foresee even larger sacrifices necessary to maintain long term solvency (75 years and beyond). Immediately change to the DI fund is necessary as it will become insolvent by 2020. Another measure is to reduce benefits that can be payable with tax rates starting in 2037. By doing that, benefits go down by 24% in 2037, leveling to 26% by 2083. Both approaches are tough but should be effective in dealing with the shortfall for the long term.

Medicare is in far greater trouble. Part A (Hospital Insurance) fund Trustees declared it reaches the point of no return within 10 years and will be exhausted by 2017 (again, their forecast is affected by the current recession). Meanwhile, HI costs are to rise 8.5% from now to 2083 and alone will account for 5% of GDP. Part B costs rose 7.8% in each of the last 5 years and will continue growing from 4.5% to 5.5% in the next five. Trustees warn that things like congressional overrides of physician fee reductions and holding Part B premiums down contribute to Medicare’s inevitable insolvency.

What can be done? The greatest priority is to ensure all these programs have adequate reserves in their trust funds. In order to do that it is important to make plausible economic forecasts, which is far from easy as very few have ever been reliable or accurate. Even the CBO, in its latest testimony regarding the state of the economy, admits that their projections are clouded by great uncertainty. Recent stimulus policies have at best merely propped up consumer spending somewhat but have done little in reviving business activity, which reinforces a pessimistic outlook for social security programs since they rely upon wage taxes. So, if people are not finding jobs, higher increasing existing taxes streams and compensating for low fertility rates (replacement workers for retirees) are hardly effective mitigations.

Are our assumptions effective in helping us think through the problem? Trustee’s assumptions, for instance, focus on projected GDP growth and fertility rates. Thus, the low cost scenario for the next 25 years in OASI/DI consists of a net increase of 1.3 million immigrants; higher fertility rates; increases in productivity; lower and stable CPI; moderate rise in wages; low unemployment rates; at least a 3.6% rise in the trust fund interest rate; and, incredibly, a reduction in the decrease of the death rates (perhaps suicide is a good option for the aged?). In Medicare’s case, cutting benefits and raising taxes appear to be the only logical alternatives.

But other things could happen. Demographics are shifting and so are attitudes. Changing attitudes about aging may mean it becomes easier for people to find work later in life (SEE Perry, P, Butler, R. Spearheading the Longevity Revolution. 1 July 2008. Saturday Evening Post Vol. 280; issue 4). Many people are putting off retirement for several reasons that are not just economic: truly, in many cases, 50 IS the new 40 as people find themselves productive and able to work into their 70’s (excepting dramatic health problems). Boomers, who are a quarter of our population, also appear to be planning for later retirement due to the recent recession (Gillette, B. Economic downturn has many reconsidering retirement plans. 15 September 2008. Mississippi Business Journal 10 Volume 30; Issue 37). Along with the collapse of housing prices cutting into younger boomers’ and gen Xer's equity in their homes makes one of the “three legs” of persona pension planning very weak. So, perhaps delaying retirement can be supported by fiscal policy? In 2008, wage taxes accounted for 83% of OASI/DI trust funds; however, the tax rate for the self-employed is double that of employers and employees. Flipping that rate might make self-employment easier for workers who retire from one company and work as independent contractors (SEE “Table II.B2.—Tax Rates for 2008 and Later” in the OASI and DI Trust Fund annual report for 2009 [cited above]). We can also relax immigration, allowing more workers in, and we might consider freezing the minimum wage (which may increase availability of jobs, raising more wage taxes).

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