October 7, 2012

Charles Lawton: These figures should increase your sense of doom

Somewhere between listening to presidential debates about tax cuts and tax increases (phantom and otherwise) and watching Greeks rioting in the streets and Iranians desperately trying to save their life savings from the collapse of their currency, we need to find time to address one simple question: How are we going to keep the promises we've made?

Between 2007 and 2011, the total earnings of all 175 million workers in the United States increased by $514 billion. Over the same period, the total increase in transfer payments from government programs to individuals -- Social Security, Medicare, Medicaid and other medical programs, income assistance programs, unemployment benefits, veterans benefits and education benefits -- totaled $580 billion.

In other words, if we had taken every raise, every first check for a new worker, all the increased earnings our economy produced over those four years, we wouldn't have enough to pay for the increase in benefits we've promised to those who qualify for the programs we've created.

Over those four years, our total earnings increased by 6 percent, and our total transfer payments increased by 35 percent. And in Maine the pattern is similar -- lower, but similar. Our total earnings increased by 4 percent and our total transfer payments increased by 35 percent.

In Maine, our use of government programs varies somewhat from the national average. Somewhat higher shares of our transfer receipts come from Social Security, medical benefits and veterans benefits, and somewhat lower shares come from income assistance, unemployment benefits and education and training benefits. These divergences generally reflect our older population and our above-average participation in the military.

But whatever the demographic reasons and individual motivations, the overriding conclusion is clear: We can't keep growing earnings at 1 to 2 percent per year and paying benefits that increase at 7 to 10 percent per year. It simply isn't sustainable. The only way we've succeeded so far is by borrowing from the Chinese.

None of this is to say that government transfer programs are bad, or that those who receive them lack motivation. It is to say -- or perhaps shout -- "Wake up!" This is not about lazy poor people or selfish rich people. Both rich and poor Greeks, rich and poor Iranians are being humbled by the failed economic policies of their leaders. If we are to avoid a similar fate -- and such good fortune is not inevitable -- we must assemble the facts, sit down at our kitchen tables and think about what to do.

And the solutions aren't unknown. Adjust retirement ages to current demographic realities, encourage full participation in voluntary retirement savings programs, increase the link between being healthy and paying for health care, make information about health care providers as readily available as information about restaurants. Establish a national sales tax with no exemptions or deductions to finance a health insurance program of last resort for those unable to obtain (not "afford" but "obtain") basic health insurance. Avoid unwinnable wars.

If we do this, the enormous sense of risk that currently discourages the hiring of one or two new employees will be reduced, and we will soon see the growth of earnings gaining on the growth of transfer payments.

Charles Lawton is Chief Economist for Planning Decisions, Inc. He can be reached at:

clawton@planningdecisions.com

 

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