Robbing Piggy Banks

Credit: William Waitzman for Barron's

Credit: William Waitzman for Barron’s

This is excerpted from an article in this week’s Barron’s Magazine:

President Obama Thinks Your IRA Is Too Big

By AMY FELDMAN

The White House budget proposes limiting contributions to tax-deferred retirement accounts for the wealthy. The complexities are head-spinning.

When President Barack Obama released his fiscal 2014 budget in April, it included a proposal to set a cap on tax-advantaged retirement savings for wealthy individuals. In the scheme of the larger budget, let alone the partisan rancor sure to engulf any negotiations, it was small potatoes. But consternation — then uproar and outrage — followed. The failure of Americans generally to save enough for retirement is well documented, and needs no repeating. But even those people lucky enough to have built up seven-figure nest eggs are feeling squeezed by the trifecta of low interest rates, volatile markets, and increased life expectancies, which have put a big dent in how much they can withdraw each year without risking running out of cash. They felt like they were being targeted for having saved diligently and been financially successful.

————

It appears Mr. Obama believes this is a good way to mitigate the winner-take-all nature of success in a free society. Yes, we must do something to spread the benefits of economic success, but one can only marvel at how wrong-minded this suggested tax policy is. Retirement saving is a private good, which means you and I can choose to save just as much as we wish and there is a well-developed market of choices that meet our individual needs. People have company pensions, savings accounts, annuities, 401ks, and many other investment vehicles with which to accomplish this. On the public side we have the entitlement program of Social Security. When originated in 1935, the Social Security Act was meant to be a complementary public pension system to insure that people with inadequate savings or unfortunate financial circumstances did not suffer abject poverty. It was NEVER meant to be the sole source of retirement support for the entire population.

Private retirement savings help mitigate dependence on the Social Security trust fund and there is probably a reasonable argument to be made over raising the retirement age and means-testing. But our tax policies have deliberately tried to encourage private savings to increase national savings. This proposal endeavors to go backwards, presumably under some misguided notion of “fairness.” One must also assume that this president believes the government is the best or only vehicle to tax and redistribute the benefits of economic success. But it makes far more sense to extend the tax benefits of saving to the lower and middle income classes rather than seek to restrain the savings of the successful. For example, why limit contributions? The only reason not to do so must be some misplaced desire to increase tax revenues to grow the public sector. But the private economy has proven far more efficient in the provision of goods and services and the desire of some in Washington to increase our dependence on inefficient public goods is counter-productive to our material well-being as well as our personal freedoms. Private savings are a source of capital and one feels the need to constantly remind our political class of the meaning of “capital-ism” with pointed references to the etymology of the word.  One wonders if the thinking in Washington ever gets that far.

The Unforeseen Entitlement Crisis

The alternative is not a pretty future. It’s a future in which older people receive Social Security checks but still go hungry, in which Medicare is a paper entitlement because doctors and hospitals can’t be found to provide services for what Medicare is willing to pay.

We’ve explained before on these pages how the crucial issue in healthcare is not only making it affordable, it’s making it available. In economic terms it means we have not only the effective demand issue of paying for it, but a supply challenge of producing the goods and services demanded. Thus, healthcare can only be provided where supply intersects demand at the right price. Accurate price signals are the only way to coordinate this market process – there is no other proven method in the history of civilization. Unfortunately, the ACA disregards this simple truth. So, are you voting for solutions, or for more of the same failed promises?

From the WSJ:

Robots to the Rescue?

The flip side of an entitlements crisis is a labor shortage.

By HOLMAN W. JENKINS, JR.

In 1999, a golfer named Payne Stewart and crew were rendered unconscious by a loss of cabin pressure and their private jet crashed when it ran out of fuel. What does this have to do with the fiscal cliff? Read on.

Even in 1999, one could puzzle over why controllers on the ground couldn’t take command of a plane and bring it down safely. Technology certainly existed to make such a thing possible. Yet today we’re skipping right past pilotless airliners in anticipation of self-driving cars.

Why? Because we’re old. Technological innovation is less miraculous than it seems: It responds to need, and we’re an aging country with more people who need help and fewer people to do the helping, including driving us around.

All this was once foreseen by Alan Greenspan, the Federal Reserve chairman in the 1990s, who pointed out a corollary to the giant unfunded long-term liabilities of Social Security and Medicare. Not only does an aging population mean fewer workers to pay for the oldsters’ benefits. It means fewer workers to actually produce the goods and services that idle oldsters will want to consume. The corollary to an entitlement-spending crisis is, by definition, a labor shortage.

Robots are coming because robots are needed. In 2013, we can already see the appetite in the transportation sector. Aviation analyst Kit Darby figures the industry will need 65,000 new pilots in the next eight years to cover expected retirements. One reason for the millions Google has been spending to develop a driverless car is to meet anticipated market demand from America’s growing elderly population.

Or take another example, arising in Baltimore, where a local entrepreneur, following the logic of need, invested seven years and $30 million developing a robotic system for packaging prescription drugs for long-term patients in nursing homes and hospitals.

In a conversation last year, inventor Michael Bronfein told me if he’d known what it would cost him in time and money, he might never have started. How many entrepreneurs say the same? Probably all of them. But Mr. Bronfein saw a need and the power of technology to meet it, and the result was the Paxit automated medication dispensing system.

He saw workers spending hours under the old system sticking pills in monthly blister packs known as “bingo cards,” a process expensive and error-prone. He saw nurses on the receiving end then spending time to pluck the pills out of blister packs and into paper cups, to create the proper daily drug regimen for each patient. (By one study, the 40 million Americans over 65 take an average of eight drugs a day.)

He saw that the bingo-card system was not just wasteful of labor. When a patient died or was moved to a new facility or had his prescription changed, a month’s worth of drugs might have to be thrown out too.

He followed the economic logic that indicated that all the people involved in the old system were becoming too valuable to have their time wasted by the old system. Backed by his company, Remedi SeniorCare, Paxit—in which a robot packages, labels and dispatches a daily round of medicines for each patient—is spreading across the mid-Atlantic and Midwest and winning plaudits from medical-care providers.

Writ small here is an answer to our entitlement morass, when more of us will be living off our savings (or transfers) and fewer of us will be contributing our labor to society. Robots aren’t the only solution. We will still need better incentives for younger baby boomers to save for their own retirement and depend less on Uncle Sam. We still need better incentives for Americans of all ages to supply labor rather than leaving it to someone else to be productive (which means revisiting our massive expansion of unemployment and disability subsidies over the past four years).

We need to preserve the incentive for investors to bring us the robots that will make the future bearable, rather than burying entrepreneurs in taxes in a vain attempt to seize the returns of investments before those investments are made.

None of these matters, of course, has been allowed to intrude in the empty theatrics that President Obama, primarily responsible, has ordained should be the substance of the fiscal-cliff war. But even from the perspective of the fiscal cliff, let’s welcome the new year by envisioning a future that won’t be so bad, where modest entitlement reform and proper incentives for robot builders will save us from the Soylent Green solution to an aging society.

Make no mistake: The alternative is not a pretty future. It’s a future in which older people receive Social Security checks but still go hungry, in which Medicare is a paper entitlement because doctors and hospitals can’t be found to provide services for what Medicare is willing to pay. If we weren’t still in a New Year’s mood, we’d say the latter future is the more likely one.

Reality Check

We could accomplish entitlement reform by design, but, because of our political dysfunction, we’ll get it by default. Unfortunately, the last election showed that it’s probably still too early for a reality check.

From the WSJ:

None Dare Call It Default

A nicer term for what’s about to sock the middle class is ‘entitlement reform.’

By HOLMAN W. JENKINS, JR.

To call Greece First World may be a stretch, but Greece has defaulted once already, and it is only a matter of time until Greece defaults again. Welcome to default-o-rama, the next chapter in the First World’s struggle for fiscal sustainability.

Japan is piling up debt in the manner of a nation beyond hope. France, Belgium, Spain and Italy are defaults waiting to happen unless Europe can somehow generate the kind of growth that has eluded it for decades.

America’s fiscal cliff is an artificial crisis. We have no trouble borrowing in the short term. But at some point the market will demand evidence that long-term balance is being restored. President Obama said in his first post-election press conference that he doesn’t want any proposals that “sock it to the middle class.” He knows better. A long-term socking is exactly what’s coming to the middle class, which must pay for the benefits it consumes.

A few years ago, when the economy was humming, a common estimate held that federal taxes would have to rise 50% immediately to fully fund entitlement programs. Today, a 50% tax increase would be needed just to meet the government’s current spending, never mind its future obligations.

One way or another, then, entitlements will be cut. Don’t call it default. The correct term is entitlement reform.

You saw this day coming and saved for your own retirement. Don’t call it default when Washington inevitably confiscates some of your savings, say, by raising taxes on dividends and capital gains. Taxpayers accept the risk of future tax hikes that may make the decision to save seem foolish in retrospect.

According to economists Robert Novy-Marx and Josh Rauh, state and local taxes would have to increase by $1,385 per household immediately to make good the pension promises to state and local workers, including firefighters and cops. That’s not going to happen given all the other demands on taxpayers. Default, in this case, is the proper word for cities and states using bankruptcy to repudiate their pension obligations.

Prominent voices ask why the Treasury shouldn’t just cancel the government bonds the Federal Reserve has been buying. It’s money one part of the government owes the other. Dispensed with, of course, would be the idea that the Fed, in buying these bonds in the first place, was engaged in monetary policy. The Fed was printing money so Washington could spend it.

Now let it be said that inflation isn’t fundamentally a solution to the entitlement problem, but the Federal Reserve is being led by increments to accommodate inflationary financing of future deficits. Don’t call it default. Inflation is a risk savers are deemed to have accepted by putting their faith in the U.S. dollar.

Here’s what you weren’t told about Medicare during the presidential debates. Under the Paul Ryan plan, the affluent would pay more. Under the Obama plan, the affluent would flee Medicare to escape the waiting lists, shortages and deteriorating quality as Washington economizes by ratcheting down reimbursements to doctors and hospitals. Don’t call either default. You don’t have a legally enforceable right to the free care you imagined you were promised.

“Don’t worry” was President Obama’s implicit message during the campaign: If cutting subsidies for Big Bird is unthinkable, a joke, how much more so cutting benefits for middle-class voters?

Don’t go running to a judge when this doesn’t pan out. The courts do not overrule changes in government policy just because citizens find their promised free lunch isn’t forthcoming. Nor will it be fruitful to appeal to politicians’ sense of “fairness.” Politicians can be relied on to do what will get them re-elected. And, believe it or not, that is the good news.

If politicians weren’t eager to be re-elected, the trust necessary to be an investor would vanish altogether. While there is no escaping our challenges, there is a path in which the economy grows strongly and we don’t savage each other, and there is the other path. For years the trustees of Social Security and Medicare were accused of exaggerating the programs’ deficits by envisioning that America’s long-run growth would become more like Europe’s. Now who doesn’t fret that America’s growth is becoming permanently slower like Europe’s?

Which brings us to President Obama. He knows cuts are necessary but seeks to position Democrats politically as the defender of all spending. Notice that, with ObamaCare, he is deliberately creating a constituency of the young to set against the old in future fights over the allocation of federal health care dollars.

Meanwhile, saving the dynamism of the U.S. economy, while still affording an entitlement state, naturally falls to the other party in a two-party system.