Founding Fathers on the Social Security Trust Fund

Filed Under (Retirement Policy, U.S. Fiscal Policy, Uncategorized) by Jeffrey Brown on May 1, 2011

We found some amazing old footage of President George Washington and President Thomas Jefferson discussing the Social Security Trust Funds.  Enjoy!

Who Speaks for the Hamsters?

Filed Under (Uncategorized) by Larry DeBrock on Apr 26, 2011

In my Econ class we discussed the growing importance of “third party voices” in economic decision making.  For example, the existence of a rancher willing to sell a remote piece of land to an individual wanting to buy and build on exactly such a remote piece of land would look like a match made in heaven; both parties see gains from the trade.  However, if the transaction actually hurt a third party, that party might be able to successfully intervene.  But, if that third party was, for example, a grizzly bear forced to move locations because of the human presence, such an intervention would only happen if concerned interest groups entered the arena as representatives of the unrepresented.

A March 24, 2011 story in the Wall Street Journal is yet another example of this type of intervention.  The hamster thrives in fields of wheat and alfalfa. French farmers have switched from those crops to the more lucrative crops of wine and corn (remember how recognition of opportunity costs directs smart companies to allocate resources to high return uses).  Now the government is recommending forcing farmers back to the crops that protect hamsters.  The full details of the story are fascinating and I would urge you to read the WSJ article.

Synopsis of Our Coverage of the Illinois Pension System

Filed Under (Uncategorized) by CBPP Staff on Apr 9, 2011

[Note: this post is from 2011.  To see our more recent coverage, enter 'Illinois pension' (without the quotes) into the search box on the upper right]

On Monday, April 11th, Fred Giertz, Ph.D  will participate in a panel discussion on the State of Illinois pension policy system and it’s condition.  The health of the Illinois pension system has been frequently discussed on our blog.  Below are the titles of recent articles that examine the issue in-depth.
The Pension Non-Impairment Clause of the Illinois 1970 Constitution (3/23/11)  Nolan Miller

Why Taxpayers, and Not Just Public Workers, Likely Contribute to Public Worker Pensions (3/15/11)  Jeff Brown

A Modest Proposal to Reform Illinois Pensions (1/24/11)  Jeff Brown

The Illinois Tax Increase: Stop Me Before I Spend Again
(1/21/11)  Fred Giertz

The Long-Term Consequences of the University Early Retirement Program
(8/30/10)  Jeff Brown

Why that Illinois Pension Check will (Most Likely) Be in the Mail After All
(8/16/10)  Jeff Brown

Using Pension Obligation Bonds to Feed our Spending Addiction (7/20/10)  Jeff Brown

Wanna Read Something Scary? (7/9/10)  Nolan Miller

A “Hidden” Pension Subsidy in SURS (6/23/10)  Jeff Brown

Can States Use ‘Police Powers’ to Cut Pensions? (6/9/10)  Jeff Brown

Au Natural

Filed Under (Uncategorized) by Kathy Baylis on Mar 18, 2011

As many universities head into March break and spring beckons, I thought it might be interesting to reflect on the human relationship with nature.  (I realize nature is not the first thing that comes to everyone’s mind when thinking of spring break – but I’m sitting here in the Pacific Northwest – so instead of beaches and tequila, I’m thinking about giant cedar trees).  While travelling in Canada last week, I heard an interview with one of my ACES colleagues, Frances Kuo talking about her work about how natural landscapes affect human behavior.  One study that I found particularly interesting looked at crime rates in public housing.  The study followed households who had been randomly assigned to different public housing apartment buildings in south Chicago, some surrounded by greenspace, others without.  They find that both property and violent crime is significantly lower in those buildings with more greenspace than those without.  They also find that girls in these units with a better view of greenery do better in school.

OK, I’m enough of a skeptical stats geek that this short description had me wondering about various details of these studies – whether the buildings are truly otherwise the same, spurious spatial correlation, issues of crime reporting, and so on.  All of that aside, this study is evocative, as is the other work done out of this lab.  With more than half of the world’s population now living in urban areas, I find it interesting to think about these unanticipated benefits of preserving nature.  Parks and park budgets are usually an easy target in a recession.  For example, state parks have seen dramatic funding cuts (12.3%  from 2009 to 2010).  The good news is that attendance is actually up slightly.

So many of us have increasing connection with each other these days through ubiquitous internet/e-mail/text messaging that I wonder whether we give enough recognition to our connection with the natural world.

“One of These Things is Not Like the Others: So We Should Fix it First”

Filed Under (Uncategorized) by Jeffrey Brown on Feb 21, 2011

Last week, my colleague Nolan Miller wrote a blog entitled “Social Security, Medicare, Medicaid: One of these things is not like the others” in which he quite accurately describes the fact that the long-term fiscal burden of Medicare and Medicaid is substantially larger than that of Social Security.  As one who has toiled away on Social Security reform for more than a decade, I thought I needed to provide my perspective on what this means.

First, Nolan is absolutely right that Social Security’s projected growth, both in absolute terms and relative to GDP, is substantially smaller than that of Medicare and Medicaid.  The way I usually explain it to people is quite simple – Medicare has all the problems that Social Security has (e.g., a pay-as-you-go system faced with a rising ratio of retirees-to-workers) and then has layered on top of that the additional problem that per capita health care expenditures have been rising far faster than inflation.  As a result, the “M & M” part of our entitlement problem is definitely far larger than that of Social Security.  Nobody really disputes that.

Second, Nolan is also right that we know how to fix Social Security.  There have been countless commissions and expert panels that have examined the issue and made recommendations.  From a technical standpoint, the fix is, in fact, relatively easy.  There are many ways to raise revenue, reduce benefits, encourage people to work longer, and so forth.  But the problem is not a technical one.  It is a political one.  And the debates on Social Security during the Bush Administration show how hard it will be to get anything done.  Both sides are to blame – most Congressional Democrats stuck their heads in the sand during the 2005 debate and acted as if everything was fine and nothing needed changing.  Many Congressional Republicans spent their time promoting personal accounts as a free-lunch solution without acknowledging the need for substantial reductions in benefits.  When President Bush backed “progressive price indexing” in the spring of 2005, he was accused by Democrats and the AARP of slashing benefits for seniors (even though everyone over age 55 would have been untouched).

Nolan is also correct in saying that “if nothing is done, Social Security will be able to pay at least 75% of benefits through 2084.”  One thing he did not say, but which is also true, is that 75% of scheduled benefits in 2084 corresponds to an inflation-indexed benefit that is actually higher than what today’s retirees receive.  Put in that light, it does not seem like such a big deal.  Indeed, if we were to phase-in those reductions gradually (such as by moving from wage indexing to price indexing of initial benefits), then most people could easily adapt to such a change.  For example, if today’s 20 and 30 year olds knew that they would get only 75% of scheduled benefits by the time they retire, they could adjust their savings and labor supply plans accordingly.  (In fact, many of them would be pleasantly surprised to learn they will get that much!) Cutting benefits of people who are already retired by 25%, on the other hand, seems blatantly cruel, given that many of them retired based on knowing what their benefit would be, and the fact that an 80 year old does not have very many options for adjusting to such a cut.

So phasing in cuts makes sense.  But the problem is that political forces almost always stand in the way of making such a sensible reform – and as a result, we march along towards insolvency, making it less and less likely that we could phase-in such cuts gradually.  And, if we fail to take action soon, the politics of benefit cuts only get more difficult.  Indeed, I have had very influential Democratic policy advisers tell me that part of the reason they opposed reform in 2005 is because they believed that the longer this problem festers, the more likely it is that it will be dealt with by raising taxes rather than by cutting benefits!

If true, then we also need to look at the tax side of the equation.  The alternative to a 25% benefit cut is a 33% increase in payroll taxes (or some combination of the two).  Imagine taking the OASDI payroll tax from 12.4% today to 17% just to deal with Social Security.  As Nolan points out, solving the Medicare and Medicaid problem is much more difficult, and there will be calls to do some of that on the tax side as well.  Now think about the deadweight loss to the economy that is generated by rising marginal tax rates on labor.  To me, this is a serious economic issue that threatens the long-term vibrancy of the U.S. economy.

In fairness, Nolan’s blog is clear that Social Security’s fiscal state is “bad.”  His point is simply that as bad as Social Security may be, the “M & M” problem is even worse.  True.  But in my mind, that is all the more reason we ought to reform Social Security now.  We know how to do it, and we have bigger problems coming down the road.  So let’s start with the one we know how to fix.

Unfortunately, there are many defenders of the entitlement system who turn Nolan’s argument on its head and try to argue that because Social Security’s problems are small, there is no urgency.  No cause for alarm.  But as I often say in the way of a personal finance analogy, “just because you have not saved any money for retirement does not mean that you should not worry about the fact that you have not saved money for your kids’ college education either.”  Both are problems – both need to be fixed.  Because we know how to fix Social Security, it seems like a terrific place to start.

Out of the mouths of babes

Filed Under (Finance, Other Topics, Uncategorized) by Kathy Baylis on Feb 20, 2011

Ok – I admit totally stealing that line from Paul Krugman.

The UN has recently raised the alarm about increasing global food prices; which have helped fuel the popular uprisings in the Middle East.  A FAO price index reached its highest recorded levels in January of this year.

In the United States, food prices are expected to increase 2 to 3 percent this year as a result.  While some argue this rise is the result of a lax monetary policy, most others see this as a natural result of rising food demand from developing countries, biofuels and increasingly-frequent weather shocks.

Increasing food prices is of concern because of its effect on the poor.  Already over 47 million, or 15 percent of Americans live in poverty, a number that the great recession increased by 1.7 million in 2008.  It could have been much worse.  A New York Times editorial noted recently that the effect of the great recession was substantially lessened by government intervention.  In particular, the frequently-maligned stimulus package increased safety net expenditure, including increased funding to the Supplemental Nutrition Assistance Program (SNAP), previously known as food stamps.  A recent study by the Center for Budget and Policy Priorities found that the increased safety net funding was found to have kept more than 4.5 million people out of poverty in 2009.  In fact, a surprising outcome of the great recession, despite the clear hardship it caused for many long-term unemployed, is the small effect it had on the number of people in poverty in 2009.

Another measure of poverty is food insecurity.  Sometimes one can observe changes in food security that are masked by poverty figures.  But even food insecurity numbers did not rise as much as expected in 2009.  That doesn’t mean things are hunky-dory.  In particular, almost 15 percent of US households are food insecure, essentially the same number as in 2008.  Food insecurity in this context means that at times during the year, these households did not have sufficient resources to be certain they could meet their food needs.  In 2009, more than one in three families headed by single mothers were food insecure, and more than one in five families with kids under the age of 5 is food insecure.  One can also observe substantial regional variation, with 17.7% of families in Arkansas being insecure, compared to 6.7 percent in North Dakota.

Which all brings me to WIC.  One of the current Republican proposals being debated in the House is to cut over a billion dollars from the $6.5 billion budget for a nutrition and health program directed to Women, Infants and Children, or WIC.  From a recent USDA Economic Research Service report, in 2009, WIC helped over 9.1 million participants per month, including almost half of all infants and about a quarter of all children ages 1-4 in the United States. WIC targets poor and lower-middle income pregnant women and children under the age of 5.  Specifically, to qualify, a household has to earn no more than 185 percent of the Federal poverty guidelines, which translates to an annual income of $39,220 for a family of four, and applicants must found to be at nutritional risk, which includes e.g. having anemia, being underweight, or being overweight.  After 6 months, recipients must be recertified.  WIC provides food, nutrition education, and health care.  Unlike food stamps (now called SNAP), WIC is fully federally funded – handy in these times of draconian state budget cuts.  In particular, I think of a state like Texas which is facing a massive budget shortfall and where 17.4% of households are already food insecure.

WIC is generally seen as being highly successful.  Most of the studies have found that WIC lowers both the incidence and severity of low birthweight among children, resulting in substantial health savings down the road.  For example, a 1992 GAO study concluded that “each Federal dollar invested in WIC benefits returns an estimated $3.50 over 18 years in discounted present value.”  Other studies have found positive effects of WIC on reducing anemia.  So WIC is seen to be helping a large, vulnerable portion of the population, and to deliver long-run economic benefits.  And WIC will already see its budget stretched by increasing food prices, implying it will not be able to reach as many people even at its current level of funding.  So why does it make sense to cut its funding by more than 15%?

It’s not as if we don’t need to worry about these issues anymore.  Nutrition concerns are likely to get worse as food prices rise, and we still have a lot of catching up to do on infant health. As recently noted in an op-ed, “the United States ranks 30th in the world in infant mortality rates — between Poland and Slovakia, and 28,000 children born in the U.S. each year die before their first birthday… Many more face disabilities and serious life-long health problems, often because they are born prematurely or at low birth weights.”

But you might well be thinking “yes, but what about the deficit?” I know that one can make compelling arguments for each of the programs currently facing the budget axe (such as the 40% cut being faced by the EPA), so I don’t mean to argue that WIC is the worst of these proposed draconian cuts.  What I find most frustrating is that these proposed cuts, all with the potential for substantial harm, are a drop in the bucket compared to the deficit, the drivers of which are increasing health care costs, defense expenditure and lost revenues from unjustifiable tax breaks.  Somehow using the deficit as an excuse to cut those programs that actually lower health care costs in the long run doesn’t strike me as a good idea.

Around the Web in Public Policy

Filed Under (Uncategorized) by CBPP Staff on Feb 3, 2011

U.S. Projected to Hit Debt Ceiling by April or May

Reuters is reporting that the United States will reach the 14.3 trillion dollar cap on the budget by mid-late spring.  There has not been a specific number proposed as to what the new limit ought to be.  Republicans are expected to call for any raising of the debt ceiling to be tied to spending cuts.  As usual, some political brinkmanship will play itself out but there is a general consensus that doing nothing would be harmful.  The Huffington Post notes that, “If Congress does not raise the limit in a timely way, the government could be forced to scale back operations. A failure to lift the limit could raise the specter of a first-ever U.S. debt default and push up interest rates sharply.”  There are emergency steps that the Treasury Department can take to avoid defaulting such as borrowing against funds for pensions and cutting aide to states and municipalities.  However, doing so, comes with it’s own costs.

Food Price Index Rises

Recent instances of severe weather around the world are playing a part in raising the cost of food according the United Nations Food Price Index.  It is at the highest point since the UN began keeping track in 1990.  According the Reuters, the increase in cost is largely attributed to a lack of supply.  From the article, “The FAO’s Abbassian pinpointed crop conditions. ‘It is the supply situation. It is not the time when we get additional supplies from anywhere… Supply is not going to look any better than it is now until we know what is happening (with crops in major producing countries) later on in the year.’”

President Obama to Announce ‘Green Tax’ Incentives

Barack Obama is expected to announce incentives for companies to go green to be paid for by the elimination of gas and oil subsidies.  The new measures are expected to aide job growth by sparking the construction industry by setting a goal to “make commercial buildings 20 per cent more energy efficient by 2020.”  This change in policy will essentially provide a credit for companies that actively seek out ways to improve their facilities.  According to a senior White House official, the costs will be paid in a way to be seen directly in the budget.  According to the Financial Times, “Republicans have criticised the White House for choosing “winners and losers” in their tax proposals, and could be critical of the initiative if it is seen as favouring a handful of “green energy” companies that are close to the administration.”

The Illinois Tax Increase: Back of the Envelope Edition

Filed Under (Uncategorized) by Nolan Miller on Jan 17, 2011

OK.  So we all know that Illinois is in a huge fiscal mess and that something has to be done about it.  Last week, Governor Quinn and state Democrats passed a package of tax increases that are expected to increase tax revenue by $6.8 Billion a year along with some limits on spending growth.  If you’re wondering what that means for your personal taxes, the personal income tax rate is going from 3% to 5%.  So, increase what you pay by about 2/3 and that will get you a rough answer.  Deductions and other provisions mean that taxes probably won’t go up by the full 2/3, but that will give you a rough answer.

Other states are very happy to hear of the tax increase in Illinois for two reasons.  First, Illinois’ path-breaking tax increase may make it easier for other states to follow suit.  Second, our friendly neighbors see our tax rate increase as an opportunity to poach our best and brightest businesses.  According to Indiana governor Mitch Daniels, “It’s like living next door to ‘The Simpsons’ — you know, the dysfunctional family down the block.”  Up in Wisconsin, politicians are reviving the “Escape to Wisconsin” tourism slogan as a way of attracting new businesses.  Of course, they don’t mention that Wisconsin’s top personal income tax rate is 7.75 percent and their state corporate tax rate is 7.9 percent, which is no free lunch.  (Frankly, anyone who even considers defection to Wisconsin this week is beyond redemption and we don’t want you anyway.  Go Bears!)  States from as far away as New Jersey are getting into the act, with Gov. Chris Christie saying he would go to Illinois to try and lure businesses away. 

All of this left me wondering what the effect of the tax increase will be on Illinois’ competitiveness in terms of the overall state and local tax burden.  According to the Tribune:  ”Corporations [in Illinois] also pay a 2.5 percent tax on income, called the personal property replacement tax, which is collected by the state and flows to local governments. The two rates taken together come to 9.5 percent, the third-highest rate in the U.S., according to the Tax Foundation, a non-partisan Washington-based research group.” So, the tax increase will push us into the upper ranks of states in terms of corporate taxes.  But, it seems like the real question is about the overall state and local tax burden, which includes things such as sales taxes, income taxes, property taxes, gas taxes, etc.  Before the tax increase, Illinois had the lowest income tax of states had an income tax.  On the other hand, our gas tax is in the top four, property taxes are in the top eight, and our sales tax is in the top 15.  So, until now, Illinois has been low in income tax and high in these other taxes.  The overall tax burden has fallen in the middle of states (ranked #30).

So, how will Illinois rank after the new taxes are imposed?  Surprisingly, I couldn’t find anything written on this.  The best piece, here, points out that it will be hard to really figure this out for a few years.  Of course, the nice thing about being a blogger and not a newspaper is that I can speculate.  So, I pulled out an envelope, flipped it over to the back, and started calculating.  According to the Tax Foundation, in 2008, Illinois was ranked 30th highest in terms of total state and local tax burden with a rate (total taxes paid divided by total income earned) of 9.3 percent.  This was the most recent figure I could find.  To figure out what the new taxes would do to this, I used Illinois’ estimated 2008 population of 12.9 million people, per capita income of $46,493 and per capita state and local tax burden of $4,346 to back out the total state income and total taxes paid by state residents.  I then added in the $6.8 billion in new taxes and recomputed the state and local tax rate at 10.4 percent of income.  (I know, I’m cramming together 2011 numbers and 2008 numbers, but that’s the best I could do.)  Comparing it to the Tax Foundation’s figures for the rest of the states, Illinois would have ranked 7th highest in terms of state and local tax burden, falling well below the highest-tax states of New Jersey, New York, Connecticut and Maryland and in a group with states like Hawaii, California, Ohio, Vermont, DC.  Wisconsin ranked 14th with a slightly lower total tax burden of 10.2 percent and Indiana and Michigan were well lower, each with a total state and local tax burden of 9.4 percent (which is basically in line with Illinois before the tax increase) and ranking around 27th.

So, back of the envelope calculations are just that, and I wouldn’t go betting the farm on these numbers.  In particular, the estimates above do not take into account behavioral changes by actors both within Illinois and in other states.  But, they’re a good starting point, and based on these numbers it doesn’t seem like the new tax rates make Illinois a total outlier.  Our taxes will be high, but we’ll be in the ballpark of other large states.  Sure, increasing our taxes will lead firms and individuals, on the margin, to move to other states.  But, the reactions both inside and outside of the state may be somewhat out of proportion.  One thing is certain, and that is that Illinois has to do something to right its fiscal ship.  (And, incidentally, that is going to involve meaningful spending reductions in addition to tax increases.  There are real questions about whether the 2 percent limit on spending growth is really going to be followed and, even if it were, if it would be enough to make significant progress on balancing the budget.)  The alternative is financial collapse, in which case individuals and firms will leave the state in droves.  So, maybe the right way to think of the current tax increases is not relative to today, but relative to what would have happened in the state in another few years if nothing were done.  Relative to that doomsday scenario, these tax increases might actually be job savers.

Interestingly, our state’s finances made the New York Times again today.  This time, instead of focusing on our financial woes, the editorial praises us – faintly to be sure – for taking the first steps toward righting our financial house. 

Note: if somebody knows of better projections of how the tax increase will impact Illinois’ rank in terms of total state and local tax burden, please send it along.

Some of the numbers and their sources:

Illinois population in 2008:  12.9 Million

Illinois per capita income in 2008:  $46,693

Illinois per capital state and local taxes 2008:  $4,346 

State and Local Tax Burden as a Percent of Income: 9.31%

Rank among states: 30 (1 is highest)

Total Income in 2008 = 46,693*12,901,000 = 602,386,393,000

Total Taxes Paid in 2008 = 4,346*12,901,000 = 56,067,746,000

Now, add in the $6.8 Billion that the new taxes are expected to generate:

New Total Taxes = 62,867,746,000

New Taxes Per Capita = $4,873

New Taxes as a fraction of income (*holding income constant!)= 10.4%

New Rank = 7th (1 is highest)

Around the Web in Public Policy

Filed Under (Uncategorized) by CBPP Staff on Jan 12, 2011

China to Trade Yuan in the United States

China announced plans to trade the Yuan in the United States.  The value of the Yuan is controlled by the Chinese government, a policy that has caused tensions between the two two nations.  China hopes that the Yuan will become of global value similar to the dollar, euro and yen.  Currently, those who want to engage in the trading need to have an account with the Bank of China which has branches in New York and Los Angeles.

Illinois Raises Income Tax

Early Wednesday morning the state legislature approved a measure to raise the income tax on both individuals and corporations.  The rate on an individual, currently at 3%, will rise to 5% for the next four years, at which point it will lower to 4%.  The measure is being billed by some as a temporary means to help close the $15bn budget short fall that the state is facing.  Republicans say that to call this temporary is to sell the people lies.  No Republican voted in support of the legislation which is the last action taken by the lame duck congress and senate as the new members will be sworn in at noon today.

U.S Chamber of Commerce and White House Ease Tensions

After a rough midterm election and Obama’s naming of business leader William Daley as his Chief of Staff, the Chamber of Commerce has struck a new tone in it’s dealings with the White House.  In a speech on Tuesday, Tom Donohue the President of the Chamber said that past actions were “not personal” against Obama and that there was a noted change from the Administration.

Around the Web in Public Policy

Filed Under (Uncategorized) by CBPP Staff on Nov 4, 2010

Click on the link to get the full story:

Measure to Legalize Pot Fails

One of the more interesting attempts to add revenue to state budgets was California’s Proposition 19 attempting to legalize marijuana.  Advocates argued that taxes could be collected from the sale of the drug and could help with California’s budget woes as well as save money on the enforcement of drug laws and court prosecutions among others.  Many voters were comfortable with the broad idea but ended up voting no based on the details.  A common perception was that the specifics were either to over-reaching.  Leading advocates of the Proposition say they are already gearing up for a vote on a similar measure in 2012.

White House Open to Extending Tax Cuts to Wealthy

On the heels of a sweeping victory by Republicans on Tuesday night, White House Press Secretary Robert Gibbs said that President Obama will be open to extending President Bush’s tax cuts for the wealthy.  Previously this option has not been on the table but in keeping with his olive branch extended Wednesday, it appears all options are now up for discussion.  The cuts are scheduled to end December 31st and if no action is taken, rates will rise on the middle class.  How exactly this will play out when the new congress takes it’s place January 3rd, 2011 will be an important sign of times to come.

Fed Moves Spur Wall Street Rally

The Feds recent announcement to spend $600 billion dollars in bonds led to the Dow reaching it’s highest level since 2008.  The interest rate on long term government bonds, treasuries and fixed rate mortgages all fell.  This action by the Fed is expected to boost economic activity.  Also worth noting is that markets around the world also saw a boost in activity.  Critics of this action say that it is another instance of the government focusing on the wants and needs of major players and ignoring the needs of small business on main street.

E.U. to Overhaul Web Privacy Rules

With recent breeches of privacy admitted by companies such as Facebook and Google, the European Union announced that it will revise and update their internet privacy rules.  Tech companies say this is a welcomed move considering that the rules tend to differ across the 27 member nations which can make data transmission across borders quite difficult.  Some of the laws that will be updated date back to 1995 and are clearly out of date for today’s networked society.