May Day: Two Directions for Latin America

Bolivian president Evo Morales has nationalized his country’s natural gas industry. He sent soldiers to occupy the gas fields on May 1, celebrated by socialists worldwide as May Day. This May Day was also the 25th anniversary of  Chile’s Social Security privatization. As Jose Pinera wrote in the New York Times:

Since the system started on May 1, 1981, the average real return on the personal accounts has been 10 percent a year. The pension funds have now accumulated resources equivalent to 70 percent of gross domestic product, a pool of savings that has helped finance economic growth and spurred the development of liquid long-term domestic capital market. By increasing savings and improving the functioning of both the capital and labor markets, the reform contributed to the doubling of the growth rate of the economy from 1985 to 1997 (from the historic 3 percent to 7.2 percent a year) until the slowdown caused by the government’s erroneous response to the Asian crisis.

Perhaps 50 years from now, we will know whether Chile’s privatization or Bolivia’s nationalization brought a higher standard of living to citizens.

It might also be noted that Pinera is sometimes criticized for having engineered the privatization as part of a military government (although such critics rarely acknowledge that successive Social Democratic governments have not abolished the pension reform). But  how free is a country in which a president, just back from a summit with Fidel Castro and Hugo Chavez, can unilaterally send soldiers to seize an industry from its legal owners? Morales is taking very little time to earn the attribution “increasingly authoritarian.”

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The High Cost of Obstructionism

Michael’s posts below looked at the Medicare Trustees Report. The 2006 Report issued by the Social Security Trustees isn’t any better. With another year of inaction, Social Security’s problems have grown worse. The program will begin running a deficit in just 11 years. In theory, the Social Security Trust Fund will pay benefits until 2040, a year earlier than predicted last year. That’s not much comfort to today’s 33-year-olds, who will face an automatic 26 percent cut in benefits unless the program is reformed before they retire.

But even that is misleading, because the Trust Fund doesn’t contain any actual assets. The government bonds it holds are simply a form of IOU, a measure of how much money the government owes the system. It says nothing about where the government will get the money to actually pay those IOUs.

Overall, the system’s unfunded liabilities—the amount it has promised more than it can actually pay—now totals $15.3 trillion.

That’s “trillion.” With a T.

Setting aside some technical changes in how future obligations are calculated, that’s also $550 billion worse than last year. In other words, because Congress failed to act last year, our children and grandchildren were handed a bill for another $550 billion.

How long will Congress continue to duck this issue?

Medicare’s Trustees Pull the Trigger

Fortunately, the trustees’ report (see below) does help lay the groundwork for future Medicare reform. One of the few helpful provisions of the 2003 Medicare Modernization Act is what is known as “the trigger.” As Medicare’s trustees explain:

If in two consecutive [trustees] reports, it is determined that the difference between Medicare outlays and dedicated financing sources will reach 45 percent within the first 7 years, then a “Medicare funding warning” will be triggered… This finding would require the President to submit to Congress, within 15 days after the date of the next budget submission, proposed legislation to respond to the warning. Congress is then required to consider this legislation on an expedited basis. This new requirement will help call attention to Medicare’s impact on the Federal Budget.

As they did in 2004 and 2005, this year the trustees reported that the difference between dedicated funding and outlays will first exceed 45 percent of Medicare outlays in 2012. Since that is just six years off, the trustees pulled the trigger.

Since it is likely that the trustees will pull the trigger again next year as well, reformers need to start gearing up for that fight today. Here’s one place to start.

Hey Buddy, Can You Spare $86 Trillion?

That’s how much Congress would have to put in an interest-bearing account today to cover the gap between the Social Security and Medicare benefits it has promised, and its ability to actually keep those promises.

The trustees of the Medicare and Social Security programs released their annual reports at 3pm today.

A brief rundown:

  • The unfunded liability of the Social Security program grew by 20 percent (from $12.8 trillion to $15.3 trillion) while Congress dithered over reform proposals.
  • But the Social Security gap is still smaller than the unfunded liability of just the Medicare prescription drug program, which weighs in at a robust $16.2 trillion.
  • The total unfunded liability of Medicare topped $70 trillion (It’s actually $70.8 trillion. Round up or down to suit your taste.)
  • The trustees’ estimate of the unfunded liability of the Medicare drug program actually shrank 11 percent from their 2005 estimate of $18.2 trillion. But that reduction was more than offset by a 2 percent increase in the unfunded liability of the physician insurance part of Medicare (from $25.8 trillion to $26.2 trillion) and a 16 percent surge in the unfunded liability of the hospital part of Medicare (from $24.4 trillion to $28.4 trillion).
  • All told, Medicare’s problems are over four times the size of Social Security’s.