Thursday, February 24, 2005

I'm currently taking a course on Monetary Policy taught by a former Governor of the Federal Reserve Board, Dewey Daane. He has brought several prominent speakers into the classroom, but none was more interesting than yesterday's speaker, Congressional Budget Office (CBO) director Douglas Holtz-Eakin. His job is strictly non-partisan and he did a superb job explaining the current situation with Social Security. Basically, SS will grow from 4% of current GDP to 6.5% in 2030, after which it steadies out until the SS trust fund runs out and benefits have to be cut (in 2052 or so). These cuts are mandated by currently existing policy (circa 1983), not by any Bush administration directive or policy change.

So, the director posed the question to the class: is Social Security currently in crisis? Most everyone, 25 students or so, acknowledged the problem; I was one of just a handful who say the system is in crisis. Here's why: if you acknowledge a problem exists and have the ability to enact a solution, you have a moral obligation to act immediately. Now, President Bush wants to make changes that will fundamentally change American retirement 10, 20, and 50 years hence. Pre-funding of Social Security - through partial privitization - will definitely change this. Still, things will have to happen in the meantime to fix the social insurance part of any new system, which will be accomplished through some combination of borrowing, higher taxes, or selling California.

The scarier part of the equation is Medicare/Medicaid. Whereas SS should grow no larger than 6.5% of GDP, it levels off. Medicare's growth function is exponential. It currently is 4% of GDP - based on growth rates in health care, that number rises to 20% and beyond very, very quickly. Social Security Reform will be a test case, because the numbers at least seem reasonable. Medicare is an entirely different animal that cannot continue to exist in its current form, and therefore the reform will be much more difficult.

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