Kinsley: Entitlement Myths

[question everything]

Thursday, Jan. 29, 2009
Entitlement Myths
By Michael Kinsley
TIME

(snip)

American families may have borrowed irresponsibly, and may have elected politicians who borrow even more irresponsibly on their behalf, but the typical American family is not bankrupt. The average couple age 65-74 has accumulated a net worth (not counting entitlement promises as either assets or liabilities) of $691,000, according to the Federal Reserve in 2004. Shortly thereafter, of course, they start to die in large numbers. And what happens to the $691,000? Generally it goes to the children and grandchildren.

It's often said, on the subject of underfunded entitlements, that we are "robbing future generations." This is not completely true. You can't literally steal, say, a vacation home from the year 2050 and plant it next to a beautiful lake in 2009. Nor can you beg, borrow or steal money in 2050 and spend it in 2009. But you can reduce your savings rate in 2009, spend the money instead and leave a less prosperous country in 2050. And if you borrow money from foreigners in 2009, as we have been doing more and more, they can indeed come knocking in 2050 and demand their money back. With interest.

Meanwhile, though, families--middle-class families, not just rich ones--are passing hundreds of thousands of dollars on to the next generation in their wills. Fair enough, if they worked for the money and saved it. In fact, wonderful. But much of this generosity, it turns out, is made possible by Social Security and Medicare. How much? Hard to say. What is easier to say with certainty is that most people today and in the future will get more back from these entitlement programs in retirement than they put in during their working lives.

Medicare and Social Security are supposed to be insurance against the perils of old age: poverty and illness. They are not supposed to be gifts or subsidies to the children of retirees. Yet that is what, in large part, they have become. The reason for insurance is that you can't predict the future. If an elderly woman has diabetes and her husband needs heart surgery, then dies anyway, leaving her impoverished, Medicare and Social Security should be there for her. And if it all costs far more than she ever put into the system, that's O.K. too.

But if our elderly woman dies with $691,000 in the bank, it's evident that she didn't need the government money to pay for her health care or to avoid plunging into poverty. She wasn't lying or cheating--she might have been legitimately worried--but her worries turned out to be unnecessary. And society, having kept its promise to her, should get at least part of that money back. Oh, yes, designing a system to achieve this would be a nightmare--maybe impossible. The incentive for old folks to squander their savings would be enormous. Maybe it can't work. But the point is worth keeping in mind as we enter President Obama's "new age" of "hard choices."

And the children? Let them rob their own children, just as their parents did.


http://www.time.com/time/magazine/article/0,9171,1874858,00.html

[w4rma]

1. I do not care about the average, When Mr. Kinsley starts writing about the median I'll listen. (nt)

[ProfessorGAC]

8. Actually That Is The Median

Look in the Statistical Abstract of The United States. Kinsley just doesn't know the difference so he said average. But, that actually is the median. I know the number seems high, but remember it counts the house.
GAC

[w4rma]

16. fasttense's post #9 below has different median numbers. Much lower. (nt)

[ProfessorGAC]

18. I'm Looking Right In The SAUS

As as a statistician, i honestly know the difference. I've got the latest Statistical Abstract on the couch next to me. I don't know what else to say.
GAC

[w4rma]

19. Pew Research Center says much differently. Maybe the SAUS is inflation adjusting the money? (nt)

[ProfessorGAC]

20. I Know People At Pew

I'll call them sometime today and see where they got their numbers.
GAC

[w4rma]

21. Honestly, the SAUS numbers seem like the wrong ones. That's a lot of net worth even including

homes. Especially when home prices have fallen and people owe the banks more than the houses are worth. No, something is way off with the SAUS numbers, or at least in how they are being interpreted.

[ProfessorGAC]

22. The Home Thing Is Valid

This book would have been published before the end of 3Q08. So, that probably does inflate it a bit. Remember the age group involved here. We're talking about people who worked their whole lives during a time of high employment and strong real income for middle class earners.

My dad was just a truck driver and he's been dead for 8 years, but my mom is still collecting more than $2500 per month from his pension. So, his pension had to be worth at least a quarter million when he was 65 and that was 12 years ago. Add the value of their house (a nice, but not huge ranch home) and they would have been at $450k back in the mid-90's.

They were just ordinary middle class folks, too.
GAC

[w4rma]

23. Still feels too high. Only thing to do is to research it more. :) (nt)

[ProfessorGAC]

24. Agreed

Just keep in mind that before the 401k days, pensions for union folks were generally VERY good. This age group includes LOTS of those union folks.
GAC

[question everything]

28. And... it is for 2004

No doubt, numbers today would be a lower.

[Greyhound]

25. Wouldn't the mode be more appropriate to your point?

The mean is simply the average, and we all know about everybody in a room is a millionaire when Bill Gates walks in.

[MajorChode]

2. Kinsley makes some excellent points

Social Security and Medicare are excellent programs and arguably the most successful programs in US history, however today we are light years away from the intent of SS and Medicare.

Every working person in the US contributes over 7% of their income below about $100K into the program and employers contribute similar amounts. The effect on the working classes is staggering, and to a large degree the money goes to people who don't need any of it. All of this is so people can pretend the programs aren't "welfare" and avoid the social connotations that come with that word.

[question everything]

3. I have wondered on these pages whether Social Security and Medicare

should not be separate lines in tax collections and disbursements. Rather, they should be incorporated into the income system - thus becoming progressive and go into the general funds. Then, payout should go on as need basis.

But I was told that this would make them "welfare." So what? We pay taxes according to our income and our taxes are used to fund deserved programs and help the ones who need them.

[terisan]

4. I don't think Kinsley is making sense here.

If I wer the elderly lady I would be offended by his characterization. Sounds like scapegoating to me.

Is his stat from 2004 of the average net worth of a couple age 65-74 of almost S700,000 accurate or is it misleading. Is it an average that includes Warren Buffett and spouse, as well as every other multimillionaire and billionaire . Would not using a median be more instructive ?

Also odd to use a 2004 statistic-even a couple who might have had that kind of net worth probably does not have it today.

The term entitlement is also misleading in regards to social security.

We live in a country with tremendous national resources for the size of our population. We are actually not faced with hard choices merely the opportunity to make better choices, reallocate some of our defense spending, and maybe give a lot of bankers and politicians their day in court.

[MajorChode]

5. It depends

Is his stat from 2004 of the average net worth of a couple age 65-74 of almost S700,000 accurate or is it misleading. Is it an average that includes Warren Buffett and spouse, as well as every other multimillionaire and billionaire . Would not using a median be more instructive ?

If you're trying to demonstrate how much total wealth is available without noting how that wealth is distributed, then it's a pretty useful figure. I think that's the point Kinsley was trying to make. There is enormous wealth in the US and it is contained within a small minority, and a good portion of that minority is elderly. Furthermore those people are mostly exempt from funding SS while the poor and middle class are bearing all the burden.

[Greyhound]

6. More from the corporate presstitute himself. As previously pointed out

using the average after three decades of Raygun's economic theory of reverse Robin Hood, the lie of false premise is easy to spot.

This also raises the fly in the SS ointment, on the one hand we are not supposed to "means test" SS because we all paid into it and it is an entitlement analogous to an insurance policy, yet we are also supposed to accept that the wealthiest of us should not have to pay a proportional amount of our income into it because we could never get that much out of it.

Also bear in mind that Michael Kinsley, like just almost everyone that you will read or hear or see, is himself a multi-millionaire with a vested interest in keeping this gravy train rolling as long as possible.

We know that they think we are incredibly stupid, the question is, are they right?

[exboyfil]

7. Social Security already has a huge means test component

On average under $10K of income 90% participation
$10K-$50K 38% participation
$50K-$100K 15% participation

In effect the folks making $50K-$100K are subsidizing the system. For someone making $10K the program pays out about 6 times the value of the contributions (consider it buying a inflation adjusted annuity with survivorship rights at 65/67). You have to get to around $40K before you can do better investing yourself in TIPS and buying an annuity than in S.S.

In addition Social Security can be taxed above a a certain income which is also a form of means testing.

I would agree with the proposition that the income level be increased to infinity as long as those high earners get to participate at the 15% level. Right now thank goodness for all those two earner income households in which each member makes $50-$100K, they are really carrying the system.

Does Kinsley propose means testing on assets? That is a real incentive to savings?? Someone sitting on $500,000 at retirement is not really that much money unless they also have a company pension (which is usually not inflation indexed unlike most government pensions). A 65/65 year old couple buying an inflation indexed annuity would receive $30,000/yr from this amount ($20,000 for the survivor after the first one dies). Someone who made $10,000/yr for 35 years who is married with a spouse gets $13,500/$9,000 at retirement (they would have paid $45,500 into the system but their annuity is worth $225,000 so they get about 6x on their money). To get the $30,000/$20,000 equivalent benefit a single earner couple would have to have paid about $500,000 into the S.S. as well (works out to making about $92,500/yr).

All these numbers ignore inflation (which is indexed in the S.S. calculation) or investments (which tends to understate the actual value of the S.S. contribution). Assuming a 3% real rate of return for money, then the actual value of the 35 years of contributions would be $91K/$839K. The 15% also buys you a form of health and life insurance as well though.

I have actually played with the idea of retiring at 57 (when I have my 35 years in) and beginning to draw down my 401(k) at that time. If I had access to relatively cheap high deductible health insurance, then I would probably pull the trigger. If you plan to further penalize my saving ways, then I will definitely pull the trigger.

For the S.S. system as a whole, you want to keep low earners out of the system as much as possible. I can't begin to imagine what the impact of low earning immigrants will have on the overall system. The 15% participation rate keeps the high earners somewhat honest (they still get something for their money).

Everyone says well Bill Gates should not be drawing S.S. This loses sight of the fact that their are very few Bill Gates. Most people are like me who are conflicted by two imperatives. One that S.S., which I contributed to all my life is pretty close to meeting my needs in retirement. The other is, I can't trust the government and I prefer to have control of my own life. I do not want to be penalized for my willingness to save.

[MajorChode]

10. If you are already penalizing the high income contributors

The question then becomes, why aren't we demanding that investment income and income from the super rich also subsidize the program?

If all income in the US went towards the SS program, we could drop the employee and the employer contribution in half. Imagine giving a family that makes $50K a $1,500 bonus each year while at the same time providing a huge tax benefit to businesses.

[trof]

14. Yep, I had to pay tax on half my S/S income. My other 'income'?

What we had to take out of my IRS to make ends meet.

[fasttense]

9. Just another con game, the real numbers are way different from what Kinsley reports.

"The median net worth of families (all assets minus all debt) has risen by 50% over the past two decades, from $69,902 in 1983 to $104,645 in 2004 (all figures inflation-adjusted to 2008 dollars). But this growth has been spread unevenly through the income tiers. For the top income group, median family wealth has more than doubled during this time period, rising by 123% to $439,390 in 2004. For the middle income group, median wealth increased by only 29%, rising to $98,286 in 2004. For the lower income group, median wealth increased by just 24%, rising to $16,000 in 2004."

http://pewsocialtrends.org/pubs/706/middle-class-poll

Even the wealthy's median net worth in inflation adjusted dollars is only $439,390. That's a far cry from the $691,000 he is quoting. He must have really had to dig to find his rosy picture. I love it that Republicons are always in the con game trying to scam their marks.

[MajorChode]

11. Kinsley is a "Republicon"?????

Hardly.

Kinsley was quoting the mean income of the 65-74 age group only, not the median of the entire subset which includes all ages which is what you're quoting.

[Greyhound]

26. Lies, damn lies, and statistics, It's all in what you want to show.

The impression this gives is not the truth for the overwhelming majority. All this stat really shows is what we already know, that the US is a very wealthy nation, it does not follow that most Americans are wealthy.

[MajorChode]

29. Here is the point Kinsley is making which has escaped some here

The 65-74 age group are the wealthiest of all Americans. This is true regardless if you look at it by mean or median.
http://www.census.gov/dusd/MAB/wp233.pdf

[closeupready]

12. Kinsley was the liberal foil to Novak on Crossfire.

That was years ago, of course, and he may have sold out since then, but if so, it's news to me.

[Vinca]

13. This is what I have inherited from previous generations:

a level (woodworking tool) owned by my grandfather. Approximate value: $100. Who are these $691,000 heirs that are so common? I'll need Social Security and I'll need assistance with healthcare.

[Mari333]

15. yep. I inherited an antique oak desk and a small chest made by my grandfather

and my kids will get the same thing. plus, the equity in my home is half of what it used to be. I know of NO one whose net worth is 600,000.00 now with homes that arent worth anything anymore, and 401 Ks and retirement savings going down the proverbial toilet.
This guy must live in another world then the one I am in.

[MajorChode]

30. If you need it, you should get it

That's what Kinsley had to say about the subject.

[Orsino]

17. Cue the Republican press conference...

...at which they prop up the body of the deceased woman who died with 700G to prove that Social Security isn't even needed.

We Americans aren't just whiners--we're lying about having no money. :eyes:

[leftchick]

27. oh really?

coincidentally I just found out today that Medicare will not pay squat for my 90 year old Alzheimer's patient father's needs, either at home or in a nursing care facility, until all of his assets are used up. And he has no where near 600,000.00. I don't know any elderly people right now with their hands on that kind of money. It must be a rich median he is talking about.