Social Security's Deficit Is Just the Start

A pessimistic take from the economist Laurence Kotlikoff

Source: Laurence Kotlikoff

You probably saw the news about the Social Security trust fund. According to the new trustees report, the Old-Age and Survivors trust fund is expected to run out of money at the end of 2032, one quarter earlier than was projected a year ago. There are bottles of shampoo that will last longer than that.

If the trust fund runs dry and nothing is done, Social Security will have to live entirely off payroll taxes as they’re paid in, which would only be enough to pay 78 percent of benefits.

I think the reason people have been fairly calm about this calamitous possibility is that they’re pretty sure it won’t happen, and I think they’re right: No one in Congress or the White House would allow it. There will be a fix.

That doesn’t reassure Kotlikoff. He says that the fix is likely to be the problem. It will be too little, too late, because Social Security’s problems are bigger than the government has the gumption to deal with.

I recommend that you watch the video to get his entire message, but here are some of his key points:

He argues that if you really want to know what condition Social Security is in, you should ignore the numbers presented up front and go way back to page 218 in the appendices to Table VI.F1., which presents the “infinite horizon” picture of the system. By that measure, the unfunded obligation of the system is $71.9 trillion (stated in present value). That’s far more than the $29.3 trillion unfunded obligation looking ahead only 75 years, which is the window that Social Security typically uses.

The forever fix would come to 5.7 percent of taxable payrolls, vs. 4.2 percent for the 75-year fix.

“We have twice, more than twice, the amount of debt hidden in Social Security that we do have on the books, and then there’s other obligations to Medicare and defense spending into the future, so the whole, you know, if you put everything together, you see that the entire fiscal enterprise of the U.S. is underwater to an enormous degree,” he told me.

Kotlikoff calls Social Security a “Ponzi scheme” that takes from the young to benefit the old. “We’ve been expropriating our children … grabbing their wages and giving it to old people for different transfer programs, as opposed to getting the old people to pay for themselves collectively,” he told me.

“We’ve been telling the young people, don’t worry, when you’re old, you’ll have your chance to expropriate your children,” he said. “The problem is, there are fewer children projected to be coming along.”

In 1960, consumption by age was a hump shape—highest around age 40, lower for the young and old. Now it’s a steady upward line by age. Older people consume more than younger people. We are taking from working people “what they would otherwise be saving for their own retirement,” he said. “You give it to old people who are close to the end of their lives, who are only interested in taking cruises and going out to dinner and enjoying the rest of their days, they’re not really interested in leaving money for their kids or making gifts.”

Because the United States saves less than it invests, it needs to import savings from abroad, which means that foreign investors are acquiring ownership of more and more U.S. assets. He said the United States is becoming like Jamaica, a country in which many assets such as hotels are owned by foreigners, and the Jamaicans work for them. “Our economy is turning into a servant economy, because most of us are working as servants for upper, you know, rich people, and for foreigners to some extent,” he said.

Kotlikoff said that the United States could improve its financial system immensely by making common-sense fixes to health care, such as expanding and improving Medicare Advantage, in which private companies provide insurance while being reimbursed by the government.

I tried to end on that happy note, but Kotlikoff wasn’t ready to finish with a smiley face. He said that even with the influx of foreign savings, the United States is underinvesting. Instead of Jamaica, he compared the United States to Argentina, which in 1900 was one of the world’s richest nations, but is no longer. “They pursued exactly the policies that we’ve been pursuing for the last 70 years under each administration,” he said.

TRANSCRIPT

Peter Coy 0:52

Hi, I’m Peter Coy. This is Economics for Everyone. Today’s topic is Social Security, which has been much in the news lately, and we’re lucky enough to have a special guest, Laurence Kotlikoff, Professor of Economics at Boston University, Fellow of the American Academy of Arts and Sciences, Fellow of the Econometric Society, Research Associate of the National Bureau of Economic Research, and President of Economic Security Planning, a company that produces software called Maxifi Planner, which helps people plan their finances, of course, and we’ll be talking about that, as well as other things, in the course of our discussion of Social Security. So, first of all, Larry, welcome to the show.

Laurence Kotlikoff 1:39

Great to be back with you, Peter. My best credential is that I’m a longtime buddy of yours.

Peter Coy 1:48

Thank you so much. Yeah, we’ve been a long time, and I’ve quoted you many times on different topics, because you’re a font of wisdom on so many different subjects. And today is social security so the trustees report, which comes out every year, just came out. That’s in the news, and it said that the year that the trust funds go empty is the time is three months earlier than predicted last year. Financial security worsening, and people are worried that if the something isn’t done there won’t be enough money in coming in through paychecks, payroll receipts to cover all the benefits that are going out, and so please tell me, what’s the situation with Social Security. Let’s start with that. Then we can go on through other topics from there.

Laurence Kotlikoff 2:48

So the situation is far worse than they’re portraying, because governments lie, and our government is very good at lying. This particular version of our government, but, but this problem has been going on for decades, so it’s not a Republican cause problem, it’s as much a Democrat cause problem as a Republican, but you know, you go back to Eisenhower in the 50s, he jacked up the social security system by a factor of three. I’m going to say some things that are concerning about the trust, about the finance finances of Social Security, and about the way we’ve been coming up with, you know, we’ve been running it financially, but I don’t want this to be interpreted as I’m against Social Security, I think it’s vital that we have a compulsory social insurance program that we force people to save, we force people to take their benefits in the form of income that never runs out, so we force their annuitization that we have a a a collective old age health care, Medicare, some form of universal health insurance. I would prefer to have one system for the entire country. So I’m all for social insurance. I’m just not for leaving the bills to our kids and our future kids, because that’s what we’re doing, and we’re lying about that, even in this most recent trustees report, but we’ve been doing this for four years, misleading the public about how bad the problem is. So, let’s just talk about the financial situation for Social Security, so the headline statement, and the statement that the trustees, and I put a quote, quotations around the word trustees, because Scott Bensett Bessent, who’s our Treasury Secretary, is the chief trustee for Social Security, but you know, if you’re a trustee, you want to. Tell the truth about the system, and you don’t want to spend your, let’s say, preface about the the 266 page report, and not talk about the true situation, which is hidden on page 206 in a table 6f Roman 6f that shows that the system is 46% under find it underfunded, and it was 42% underfunded the year before last year. So, what does it mean to be underfunded 46% It means that we need to raise the payroll tax, and it says this right in the table, but it says it in very cryptic language, so it’s hard for the regular person to understand, plus it’s hidden way in the back of this book and not mentioned at all at the front. Okay, and it’s, it shows right, right there we have a 71 point, I think it’s 970 1.6 something trillion dollar unfunded liability, actually it’s 71.2 in the system. Now, what that means is that we have obligations to pay benefits that ex to current and future beneficiaries, which in present value exceed the projected receipts and what’s left of the trust fund, which is very little by 71 point. I’ll just get the exact number here, so we don’t have to be guessing, yeah, it’s $71.9 trillion so that’s more than two years of GDP. Our GDP this year is about 28 trillion, so we’re talking about red ink in Social Security, that’s more than twice GDP, which is, and since US federal debt is about official debt, is about one year’s GDP. We’re talking about debt in the Social Security system that’s twice as big as the official debt, so, and this is net of any taxes that are coming in now. Why is that off the books?

Laurence Kotlikoff 7:26

Well, the government is perfectly free to take money from somebody like you, Peter, and promise to pay it back in the future, and it can come to you and say, and then we could, it can decide whether to call the money that it’s taking from you a borrowing that it’s and hand you back an IOU, a piece of paper called an orange piece of paper called a US Treasury bond, and call the payment in the future return of principal plus interest, that’s putting the obligation on the books, that becomes a formal official obligation, or it can say what I’m taking from you, Peter, is taxes, and in the future I’m going to make a transfer payment to you. You don’t care what words I use, the I’m Uncle Sam to describe what I’m doing here, but if I use the second set of words, the obligation is off the books. It’s not part of official debt, so it’s not included in the, you know, the debt clock in Times Square, which I believe for a second there.

Peter Coy 8:35

I mean, that somebody who favors the current system would say, well, there is a difference, because the future social security benefits are not legal promises. The government could choose to cut benefits, and the recipients would have no legal recourse.

Laurence Kotlikoff 8:56

A lawyer would make that statement, and it would be economically meaningless. Okay, because they would think that the law mattered, but when it comes down to it, we’ve seen countries going back to the 1400s and certainly Spain has been, you know, the default, and in 1575 of the Spanish debt was like the biggest thing for, in terms of the debt default, I think Argentina has defaulted on its debt seven times in its history. Russia’s defaulted on its debt, so you can legally default, you have legal debt, and then you default on it, and that’s many, many countries have done that, they’ve also effectively defaulted on their currency by hyper inflating, so they give you

Peter Coy 9:48

point is that there’s no strict, there’s no bright line between debt and sort of

Laurence Kotlikoff 9:55

no, it’s really the promise economically speaking, we would think that any. Promise has a probability of being paid, and also a probability of not being paid, and that’s the economics, and how we describe whether we say the obligation is official or unofficial, that’s just whether we’re talking about the problem in French or English or German, it has nothing to do with economics. The economics is the amount that’s being promised and the probability that it will get paid, that’s what would show up in a mathematical model. And the math doesn’t tell us what words you just used to describe the math. So, so here’s the thing about what just came out, the trustees report. What’s in that table? Six f1 First of all, we’ve got a number, 71 point 9 trillion more than two years of GDP. So I don’t think anybody in the country understands that we have more debt. We have twice more than twice the amount of debt hidden in Social Security that we do have on the books, and then there’s other obligations to Medicare and defense spending into the future, so the whole, you know, if you put everything together, you see that the entire fiscal enterprise of the US is underwater to an enormous degree extent, we would need to, well, let’s just talk about social security. Then I’ll talk about the bigger country wide picture.

Peter Coy 11:30

Before you jump into that, I just have a question for you. In the front of the report, there are numbers about what would be required to set social security right in terms of raising a payroll tax or reducing benefits. Are you content that those numbers are accurate?

Laurence Kotlikoff 11:50

Well, if I am recalling correctly, and I don’t know exactly what what they’re saying there, but the, they have two calculations, the unfunded liability out 75 years, so they make projections out 75 years, and then they have this other projection, which is the right one, which is out through time, beyond, you know, for the entire future, and so the unfunded liability for 75 years, which has no economic basis, because it’s assuming that your grandchildren will not get any benefit.

Peter Coy 12:36

Three grandchildren, that this

Laurence Kotlikoff 12:38

is, I mean, after 74 your grandchildren of which is ridiculous, and they certainly will. So, that number is.. I’ll tell you exactly, it’s not 71 point 9 trillion, it’s 29.3 So, we’re talking about, you know, understating by about 60% the problem. So, let me put it in these terms, the payroll tax hike that’s needed to deal with the 70 point $71.9 trillion problem, so the immediate and permanent payroll tax hike is 46% That’s why I said the system is 46% underfunded. That translates into taking the 12.4% FICA payroll tax rate for Social Security 12.4% and raising it to 18.1 raising it by 5.7 percentage points, so imagine if you’re listening to this or watching this that every week starting this week, your paycheck was reduced by essentially 6% That’s what’s needed, and for the rest of your life, and your kids’ life, and your grandkids’ life, everybody would have to pay 6% more every week out of their.. it’s

Peter Coy 13:59

actually, it’s actually the math is a little different if you raise the payroll tax by 6% your pay, the remaining pay six percentage

Laurence Kotlikoff 14:07

points

Peter Coy 14:08

per point, right? Yeah,

Laurence Kotlikoff 14:09

yeah, six percentage points,

Peter Coy 14:11

yeah.

Laurence Kotlikoff 14:12

So, and then, yes, there are macroeconomic implications we can get to, but so the story is even worse than this when you take into account the impact on the economy through time, we can discuss that, but for so that’s a 46% tax hike. Now, if you just look out to 2100 which is about 75 years now, which is their other calculation. The increase is not 5.7 percentage points, but 4.2 percentage points. So that’s one way to, so, so you can see that there, if you’re focused on the. You just the next 75 years, you’re looking at only a part of the cancer, and depending on what numbers,

Peter Coy 15:10

that’s pretty still pretty bad, even, even people say,

Laurence Kotlikoff 15:14

well, that’s pretty bad, and 75 years from now we’ll let the people around 75 years from now deal with the problem, but if you go back to 1983 when we had the Greenspan Commission supposedly fix Social Security, the problem with the issue was raising the payroll tax to get to a permanent solution by two percentage points. Now we’re in a situation where we have to raise it by 5.7 percentage points, so by doing too little back then we are in a situation where this, it’s like we operated on a half on a third of the cancer back then, and now the cancer, we say come back in 33 years, and we’ll look at it again, and now the cancer is 3343 years, I guess. Now the cancer is is three times as big,

Peter Coy 16:17

yeah.

Laurence Kotlikoff 16:17

And now we’re, what if we take the same approach, which is exactly what you’re reading in the beginning of the trustee’s report, because they’re talking about the 75 year problem, not the infinite horizon problem, the full, you know, the full future problem, if they take that same approach, which they surely will. Then they’re going to do again, too little, too late. They’ll say to the cancer, “Well, I mean, to the patient, we’re going to do what we did last time, which is operate on a third of your cancer, and you’ll come back in, in whatever, 1030, 1020, 30 years, and we’ll see how you’re doing, and you know what, the patient will not come back because the patient will be dead.

Peter Coy 17:11

Larry, if I could bring a new point up, you’re an expert in intergenerational accounting, and the idea of that is that if you think about one generation after another, which generation is paying which generation are today’s young people basically subsidizing today’s old people, and what will happen when today’s young people become old, where do we stand with that? People talk about a war among the generations. Sometimes people will say that old people are getting too good of a deal relative to young people. What’s your position on all that?

Laurence Kotlikoff 17:54

My position is, it’s exactly the case. We’ve been expropriating our children, and then telling our young people, and then telling them into, in grabbing their wages and giving it to old people for different transfer programs, as opposed to getting the old people to pay for themselves collectively, which is what we, that’s a fully funded system, but the, and we’ve been telling the young people, don’t worry, when you’re old, you’ll have your chance to expropriate your children. The problem is, there are fewer children projected to be coming along, so this Ponzi scheme that we’re running, and not just through Social Security, through official debt, through Medicare, Medicaid, because most of Medicaid payments go to older people in nursing homes, and by changing the tax structure, shifting more of the taxation onto wages, away from asset income, all these different mechanisms we’re using to expropriate our kids at the benefit to ourselves and and then we’re going to be able to consume at a higher level because of that, and then pass away. That’s the reality of what’s going on here. We get to have a higher living standard, they get to have a lower living standard, because they’re they’re left with this enormous obligation, I’ll describe how big that is in a second. When we talk about overall fiscal gap and generational accounting, which the government is not doing, we’re hiding the bacon all the time, and every year this trustee’s report comes out. It ignores Table Six f1 and that’s that’s been in that document since John O’Neill, Secretary, a good Secretary of Treasury, back around 2001 put it in there, and he was, he insisted it be put in there, and nobody’s taken it out, but they just keep pushing it. Further into the back of the book, and keep ignoring it, so let me tell you what else it implies. That table, it implies that if you look at the footnotes and you do a little calculation, an alternative to raising the payroll tax rate by 46% by 5.7 percentage points, starting this week. Okay, immediately and permanently, that’s what we’re talking about. 5.7 percentage point hike in payroll in that payroll tax rate, which is a 46% tax increase. What we’re talking about, if we cut benefits, is not cutting the benefits by 22% which is what the shortfall in cash flow in 2032 will mean. An immediate that year benefits will be cut by 22% but because the problem gets worse through time, what’s really needed is an immediate and permanent 30, as not, not in 2032 but today a 31% cut in benefits for everybody, every type of social security benefit, and there are about 12 different social security benefits, disability benefits, divorcee benefits, spousal benefits, widows benefits, child benefits and retirement benefits, all these different benefits would have to be cut immediately and permanently by 31% immediately says right now. So the 22% cut is far short of what’s needed, which is 31% That’s another way of saying that they’re lying. Okay, and now they’re also lying about the overall problem, which is.. but let me take a breath and see if you have any questions.

Peter Coy 21:54

Yeah, I do have a kind of a conceptual question, which is that if you stripped money out of this entirely, and just looked at real things like hospital beds, medicines, caretakers, and so on, what you really need, again, stripping money out of it, is that today’s old people are taken care of physically, and tomorrow’s old people are taken care of physically, which means there need to be the society needs to be able to generate the resources to provide those goods and services to old people at food, whatever it is, whatever they might need and so some people will say, and I want to know if you’re in this camp, that the real goal of all this stuff is to generate the savings, which will produce investment, which will produce the wealth that is required to sustain old people in the future, and that stripping everything else away, that’s what we’re really trying to achieve here. Is that fair to say?

Laurence Kotlikoff 23:11

Well, yes, we have to have the, I mean, there’s the issue of what’s our productive capacity? How does that? How does our policy impact that through time? Our productive capacity depends on how much capital we accumulate, how much we save and invest, and therefore add to our capital stock, and that makes workers more productive, and their wages would then rise, but the reality is that this policy of taking take as you go policy of taking from young people, not to pay, not just for social security, to pay off interest on the debt, to pay for defense, to pay for the president’s lunch and his beautiful palace that he wants to build his ballroom and his big arc to Trump that he’s building and all that stuff is is coming, it well, the way we’ve been financing it is increasingly by going after younger people and telling them they get their chance, and here’s what’s happened as a result of that. The, the, if you plot on a, on a graph, age, and then you vertical axis is average consumption, so average consumption by age. If you look at that chart. Back in 1960 it was a hump shape, so that a 70 year old, on average, an average on average, 70 year olds were consuming 60% of what 40 years year olds were consuming back in 1960 Today, that hump shape has become a straight line, so a 70. Old is consuming on average 40% more than a 40 year old, so the entire picture of the age consumption profile has changed, and this is exactly in accordance with what would happen if you just simulated in a mathematical model, taking from young people and giving to old people, you get the old people, the young people are saving for retirement. So you take from them what they would otherwise be saving for their own retirement. You give it to old people who are close to the end of their lives, who are only interested in taking cruises and going out to dinner and enjoying the rest of their days, they’re not really interested in leaving money for their kids or making gifts. That’s not the way we roll in our country. We’re generationally very selfish. They consume more, the young people reduce their consumption, but not by as much as the old people raise their consumption. This is standard life cycle economics going back to the Modigliani and Miller back, who got the Franco Modigliani, who you know and I know, got the Nobel Prize for this, and what happens is the national saving rate goes down, and so since 1950 the national saving rate in the 50s and 60s was 15% Today last year it was 1.5% 15% down to 1.5% And foreigners are looking at this and they’re saying, well, this country has got an incredibly low - they’re not thinking about it this way, but they’re looking at the investment opportunities that we’re not taking advantage of as a country, because we’re not saving at any, you know, we’re basically not saving, so they’re saying, well, this looks like a good place to invest, let us invest, and their investment rate last year was about 4.5% not one point, so they’re for every dollar that we’re investing in our country, they are investing $3

Peter Coy 27:08

You’re saying out of the investor,

Peter Coy 27:09

actually

Peter Coy 27:10

coming from abroad to fund about four,

Laurence Kotlikoff 27:13

$4 Let me put it that way. Yeah, so we’re running an enormous current account deficit, and so this is looking increasingly in our country, like Jamaica, and if you look at Jamaica, the average per capita income is like $6,000 a year. If all these poor Jamaicans who are effectively servants for the big hotel complexes, resort complexes that are that are investment, there’s all this investment in Jamaica by foreigners, and they’re getting the return, and they’re hiring the Jamaicans as service workers, but they’re really servant workers. So, our their economy is a servant economy. Our economy is turning into a servant economy, because most of us are working as servants for upper, you know, rich people, and for foreigners to some extent, to a large extent, increasing extent, and 85% of our workers are in this called service workers, I call them servant workers, their real wage, the median real wage of, in the according to the BLS, Bureau of Labor Statistic. If you go back to 1976 and you go fast forward 50 years, the median real wage to today is no higher than it was back 50 years ago. Median weekly real earnings, real, which is adjusted for inflation, no higher, that means that media means that half are above and half are below, so half of the people have seen absolutely no are at the same place that they were 50 years ago. Meanwhile, per capita GDP in our country has gone quite high now, so we’ve had a decent per capita growth, but we’ve had increasing wage inequality, increasing asset income inequality. We’ve got Elon Musk now with a trillion dollars in his pocket as of yesterday, because of his IPO. That wealth inequality has gotten much greater, and so we have to turn this whole situation around dramatically. Fortunately, we’re doing so many inefficient things with our health care system and the way we’re running our fiscal system that there’s a lot of scope to right the boat, if so to speak, and but let me just say this last thing. I don’t want to just drone on, but we did a study of of the unfunded liability for the entire system for the entire fiscal enterprise. So put everything on the books, the official debt, the unofficial debt. Look at it all together and ask, what kind of a tax hike would you need, immediate and permanent, to pay for everything through time, all the outlays for Social Security, Medicare, Medicaid, defense, President’s lunch, Air Force One gas, all that path of outlays, forget the words, you know, deficits or taxes,

Peter Coy 30:27

yeah,

Laurence Kotlikoff 30:28

just outlays and receipts, and I did this study in parallel with the, with in joint jointly with the Bank of Italy, because we did a side by side comparison of the US finances versus the US, and we call the paper Measuring What Matters. it@kotlikoff.net’s which is my website, kotlikoff.net You’ll see it right there under articles, and it shows that the US needs to have a 25% immediate and permanent increase in every single federal and state tax, so it’s not 46% in social security, social security is in somewhat worse shape, but overall it’s 25% so the social security payroll tax would have to go up 25% federal income taxes, federal excise taxes, corporate taxes, state income taxes, state sales taxes - they’d all have to go up 25% or we could cut all outlays on everything except interest on official debt by 23% starting today, and we would be okay. We would have no fiscal gap; there’d be no, we’d be able to balance our government’s books, so this is standard economic inter-temporal accounting that any economist is every economist grad student has taught, and nobody in government talks about this, because they want to talk in words that it says an emperor’s new closed situation, they don’t want to convey the fact that our country is entirely, completely fiscally broken. I’m going to explain this in one other way, and then I’ll stop. If you ask, could we leave future generations to pay these bills? Could we just take the fiscal gap, the money that current generations, people that now are alive, aren’t going to cover in terms of, you know, how much is is not going to be covered by current and future generations if we leave things the way they are, and we just raise taxes on younger people, sorry, not on people that are born this year and in the future, so on future generations. How much does that come out to be? How much of a burden will it be for them to cover everything that that they would otherwise be paying, plus cover the shortfall, the fiscal gap. It turns out we’d have to set a tax rate on them of 104% of their wages, so it that’s impossible. You can’t get blood out of the stone, you can’t tax anybody that amount, they’re going to leave the country. That shows you that it’s completely infeasible to leave this kind of burden on future kids. We can’t have future kids pay us out. This is just impossible. They don’t have the resources, and nobody seems to know that, because you know, I wrote this paper. It was a National Bureau of Economic Research paper, and the press ignored it. The other economists in the country ignored it. Nobody mentions it, but it’s a joint. Just came out last, I guess, fall, and it’s joint with the Bank of Italy, in effect. Nobody’s talking about it. I don’t get it, but that’s the way it is. We want it. We’re in Nepal’s new close situation, and by the way, Italy is in much better fiscal fiscal shape than we are, even though their debt to GDP ratio, their official debt to GDP ratio is higher, they’re off the books debt to their pension system and to their healthcare system much lower, so they have much less red ink, unofficial red ink, and much more red ink that’s official.

Peter Coy 34:26

Yeah,

Laurence Kotlikoff 34:27

and overall they have much less red ink overall.

Peter Coy 34:34

Larry, can I ask you one last question about artificial intelligence?

Peter Coy 34:41

Okay,

Peter Coy 34:42

now if a AI does what a lot of people think it’ll do, it’ll replace jobs, which would mean fewer payroll taxes, less revenue coming in, which would seem to hurt social security’s finances. Then I have a piece in the New York Times on my. This morning about taxation of artificial intelligence, so I got into some of these issues. If you tax general revenue, if AI produces so much wealth that it people’s consumption is able to rise a lot. You could tax some portion of that consumption to fund the elderly, basically to meet obligations. Social Security, the idea would be all problems go away because AI is generating so much wealth. What about that?

Laurence Kotlikoff 35:45

I think that’s fantasy. Tell you the truth, I know that members of Congress are saying we don’t have to deal with social security problems or anything, any other problems, because AI is going to save the day. So, what would happen if AI were to raise everybody’s productivity by 10% Suppose, I mean, we know it’s raised the wealth of Sam Altman and, you know, Elon Musk, and they’re going to, you know, they could, given our fiscal system, our tax structure, they’re not going to pay much more of anything in taxes the way things are set up. So, let’s suppose we raise your everybody’s pay by 10% Well, that means everybody’s social security benefit will also go up, because the benefits in the future will pay more payroll taxes, but then there’s going to be more benefits that we’re going to be claiming based on those higher payroll tax contributions, so and the system is actually quite progressive, so if this raises the wages of poor people, the benefits that they’re going to be getting down the road could actually, in present value, exceed what their extra taxes are because of the progressivity of the system, so there’s not a

Peter Coy 37:07

quick second that’s given the current mechanism of social security that could be changed if we saw a system that was generating ridiculous amounts of projected benefits for people, you just say, well, that formula is clearly wrong. Why don’t we come up with a formula that provides adequate resources to the elderly, whether that’s drawing from general tax revenue or what? That’s why I’m going towards a consumption tax rather than a payroll tax. Is the way

Laurence Kotlikoff 37:37

I’m with you, I’m just saying that, you know, people are making more money. Let’s hope, as opposed to losing their jobs, which is much more likely, and being replaced by robots powered by AI. The, we would, we’d see them having higher benefits, and they wouldn’t think that they’re, you know, they get used to this living standard, and then their benefit, you know, they’d have this commensurate social security, and they wouldn’t view that they’re being overcompensated and be happy to hand over more money, but if you think about it, how we’re going to get out from under this this whole fiscal gap problem that we’re facing, which is roughly about 7.6% of GDP, is what we’re short every year. We need 7.6% more receipts or less outlays for the end of time. That’s the size of our fiscal gap in Italy. It’s four percentage points of GDP, so that’s showing you that we’re about twice as worse off on a fiscal gap basis as Italy. So, what can we do? Well, one thing we can do is to have, as you said, a value added tax, a tax on consumption, and to make that work for everybody, in a sense, to make it work for for Elon Musk, so that he pays more taxes if he wants to hang out in the US as a US citizen and do business here, we would have to tax him not just on his restaurant meals but on all on the consumption value of his homes, of his private jets, of his yachts, of his, and also tax him on his consumption abroad. If he goes abroad to our private island, that he might buy any, but he’s a US citizen, and we tax, we would tax people on their worldwide consumption, and we would impute rent on their mansions, and somebody like Taylor Swift. I live in Rhode Island right now, I’m going to be you to teach and be a full professor there, but she’s got this enormous mansion down the road, 40 minutes, and it’s one of, I think, 10 homes, and we. Have to say, look, the consumption value, if you could rent that out, how much would it rent for? Well, maybe it’s 10 million a year that you, or maybe it’s 50 million if it’s Taylor Swift’s house, or but just looking at it, it looks like it’s about, would have to rent out for about 10 million a year, and it’s a beautiful place, and well, that’s, you know, what you’re ready, you’re you are in effect by not renting it out, you are consuming 10 million bucks of rental services from your house, that’s consumption, you have to pay 15% pay tax, value added tax on that, that would certainly bring in more revenue, but here’s another thing that we could do that wouldn’t necessarily involve raising taxes, which is to rationalize our health care system, that’s spending 18% of GDP on health care, delivering, I think, 20-first best results if you rank advanced countries. What if we just adopted the Dutch or the Danish healthcare system, the Danish healthcare system, or the Swedish healthcare system. Sweden is spending 11% of GDP, and they have fourth best results. So, if we just figured out what you know, and we have proposals that we could just take our Medicare Part C program, modify it in some pretty major ways, make it Medicare for all, but it’s not Bernie Care for All. It would be the Republican version of Medicare, but under strict regulation we could end up with the Dutch, the Danish, the Swedish healthcare systems, which are all, and that’s 7% of GDP. We could go from 18% to 11% pretty much overnight. That saves us the 7% of GDP that we need to have a fit, you know, have a system that is sustainable fiscal system that has no fiscal gap.

Peter Coy 41:58

Well, I love that. You know, what it’s nice to end on a positive note. I up until now I was getting pretty, it was pretty grim, but you, you found a way to show that there is a path out of this. Very glad to hear. I’m sure the people watching this video were glad to hear that as well. You’re not an ultra pessimist. There are steps that could be done to fix social security and make sure that the US is in fiscal health.

Laurence Kotlikoff 42:26

Let me just one add, I don’t want to end on an optimistic note too much.

Peter Coy 42:30

Come on, come on, just

Laurence Kotlikoff 42:32

mold scientists, but let me just add one other thing, which we left out, or I left out, which is that the national saving rate I said has gone from 15% down to now one and a half percent, the domestic investment rate, how much is being invested in the US, has also gone down dramatically from about 13 14% down to about 4% Foreigners are making up the difference, but the, but the over, not, not entirely, we’re not still investing 15% you know, debt basis, net domestic investment as a share of net national income down to 4% So, this means that we’re, you know, we all think that AI is going to be this huge productivity boost. I doubt that, because I see all the, I see what AI can’t do, not what it can do, at least in the area of personal finance, it just can’t get anything right whatsoever. It’s miles wrong on how much life insurance you need. You ask one AI, you’ll get an entirely different question and answer. They’re all wrong dramatically, and so we were leaving our workers with less capital and less equipment, less new technology, if you like, less new AI to use, because there’s no wherewithal to for companies to to invest, they’re not in there’s not enough investment happening, it’s happening in other places, so this means that their wages are not going to, or are not going to grow as rapidly, or they will just continue to stagnate if we’re talking about the middle class, and that’s the big concern that that we’re going to be left behind as a nation, that we’re heading the way of Argentina, and Argentina went from the last thing I’ll say, from 85% of our per capita GDP, their living standard was back 100 years ago was exactly 85% of our living standard. Today it’s 14% And what did they do? They pursued exactly the policies that we’ve been pursuing for the last 70 years under each administration, and lying about it to the public about what they’re really doing, and when you have a social security report that ignores table 6f you know they’re lying.

Peter Coy 44:49

Yeah,

Laurence Kotlikoff 44:50

so I just want to make sure we end on a pessimistic note. On a realistic note, you

Peter Coy 44:55

succeeded. Okay. Thank you. Okay.

Peter Coy 44:58

Well. With that caveat, I want to thank Laurence Kotlikoff, renowned economist at Boston University and expert on social security, for walking us through what’s going on in social security. Larry, always great to be with you. Thanks for being on the show.

Laurence Kotlikoff 45:18

Thank you, Peter.

Transcribed by https://otter.ai