The Housing Crash and the End of Granny Bashing
Today, David Walker, the former Comptroller General of the Government Accountability Office, is testifying before Congress about the need to clamp down on entitlements (i.e. Social Security, Medicare, and Medicaid). As everyone should know by now, the focus on "entitlements" is part of a dishonest effort to transform the country's health care crisis into a demographic problem.
Health care costs in the United States are out of control. We already pay more than twice as much per person as people in other wealthy controls and get worse outcomes. This gap is projected to expand in the decades ahead as our costs are projected to keep rising relative to those of other countries. Because we pay for close to half of health care through the public sector (primarily Medicare and Medicaid), the health care crisis, if not addressed, will create a budget crisis. We then lump Medicare and Medicaid in with Social Security, and voila!!! We have an entitlement crisis.
Today, we also received new data on house prices, with the Case-Shiller index (the best available house price index) showing that real house prices have been falling at 26 percent annual rate over the last quarter and are now down by 19 percent over the last year.
While David Walker's testimony on entitlements and plunging house prices may seem unrelated, the latter will soon make the former completely irrelevant.
The basic story is actually very straightforward. The granny-bashers are arguing that the country is paying more than it can afford to support retirees. Therefore they want to cut Social Security and Medicare, the main benefits that these retirees receive.
However, the implicit assumption behind these cuts is that retirees will have enough money to support themselves, even if these programs are cut. While this would not have been especially true even before the collapse of the housing bubble (Social Security already provided more than half of the income for two-thirds of the people over age 62), it is certainly not true in the wake of the housing crash.
The crash of the housing bubble has already destroyed almost $5 trillion in housing bubble wealth, more than $60,000 per homeowner. As a result, the generation of workers who are approaching retirement will have almost nothing to support themselves in retirement other than their Social Security.
Working from the Federal Reserve Board's Survey of Consumer Finance, we found that if real house prices drop 10 percent from their March 2008 level, then the a typical family in the age group from 45 to 54, will have just $98,400 in wealth in 2009, counting the equity in their home. This is a falloff of 34.6 percent from 2004. (This number does not include wealth in defined benefit pensions.) Since the median income for this group is over $62,000, this will not go far toward maintaining living standards in retirement.
The basic problem is twofold. When these families saw their houses exploding in value, they didn't think they had to save. They assumed that house prices would just keep rising.
The other problem of course is that house prices not only didn't rise, they collapsed. This collapse was entirely predictably, and those who were concerned about the country's long-term financial situation should have been out in the forefront warning of the dangers posed by an $8 trillion housing bubble.
Unfortunately, these folks were too busy trying to cut benefits for the elderly to pay attention to such trivial developments. Well, now the collapse of this housing bubble should put cutting Social Security and Medicare off the table altogether.
We do face a long-term problem in soaring health care costs. Maybe we can now put the well-founded entitlement cutting crusade behind us, and get serious about addressing the real problem: health care.
Comments (16)
Actually, I'd rewrite this to be fairer to the average American home owner. They did not think that they didn't have to save because home values were going up -- they equating paying down mortgages with saving after being told for decades that the largest investment they'd ever make would be in their home.
When I put money into my 401(k) while the market is going up nobody accuses me of "not saving." That investment is an act of saving. It's just a volatile act. Home owners were misled about volatility in the hosuing market. But they were not, for the most part, acting irrationally. That's why we have to keep them from being unduly punished by this.
June 24, 2008 12:56 PM | Reply | Permalink
I love the way you put this. A glaring observation of that which should be obvious.
June 24, 2008 1:29 PM | Reply | Permalink
Not to worry if these "granny bashers" you are referring to, whoever they are, plan to agitate for this before the election. With interest rates at rock bottom and food and gas and heating prices rising, you have a boatload of scared current retirees (who until recently were enjoying interest income to supplement SS and fixed pensions) and the AARP to cut their heads off. No congressperson up for election who is not suicidal will go along with any such talk, they'll run from it, and many will be promising to get large cost-of-living increases. You've got a "third rail" situation, perhaps like never before, and it's not just the retirees that are worried, their kids are worried for them.
It might be different if you had high interest rates along with inflation. The way I remember the late 70's, there were a lot of retirees who really enjoyed the moving CD's game.
June 24, 2008 2:26 PM | Reply | Permalink
Well, Dean, I agree with you that the people in charge for the last 8 years have done nothing to solve the coming problem, and that their "granny bashing" arguments (as you call them) are disingenuous at best.
However, there is a real demographic crisis looming.
Sure, the problem with Social Security pales in comparison to the problem with Medicare and Medicaid (which are exacerbated by the rising costs of medical care). But there are problems in all three programs, including Social Security.
I do not advocate cutting benefits. I agree with you that more seniors will rely on SS for a larger portion of their incomes. We can't cut benefits. But we do face a problem in funding them.
The housing bubble is bursting now. The stock market may take a nose dive, too. Demographic arguments suggest we'll be in a rolling recession (some would say depression) for the next 17 years. That's not a typo -- seventeen years.
We should be about a decade behind Japan. But we've managed to delay the inevitable for an extra six or eight or ten years by inflating various bubbles and by starting various wars. This will make the ultimate crash even worse, of course.
I believe the scale of the coming problem is much greater than most people realize. The usual "politics" of these arguments will be overcome by the severity of the crisis.
When I have my tinfoil hat on, I even think sometimes that the Republicans are purposely throwing the next election so that they can be the minority party, in all respects, when the inevitable economic shit hits the fan. Then they hope to spend the next 50 years blaming it on the Democrats.
-- ARG
June 24, 2008 3:38 PM | Reply | Permalink
If economist of all folks would admit that the payroll tax is a regressive surcharge to the income tax (which it is) rather than a retirement fund (which it is not), particularly pointing out the mismatch between revenue and expenditures for the last 30 years, which was used to fund tax reductions for the wealthy, then perhaps we could get to the point of removing the income cap on the payroll tax, which would not eliminate its regressivity, but would massively alleviate it and would deal with the upcoming revenue crunch.
June 24, 2008 6:17 PM | Reply | Permalink
By the way, when folks like Walker run around talking about the sky falling, they try to frighten people by collapsing 75 years of expenditures into one period and they don't seem to remember simple present value math.
June 24, 2008 6:19 PM | Reply | Permalink
Hear, hear!
The whole idea of a Social Security "trust fund" is unrealistic.
The SS tax is just a regressive portion of the income tax. It all goes into the same pot, and it all gets spent (and then some).
-- ARG
June 25, 2008 10:36 AM | Reply | Permalink
Re: That's not a typo -- seventeen years.
It may not be a typo, but it is ridiculous, as is using the term "depression". Comparing the current sour economy to the Great Depression is like comparing a headcold to pneumonia. There just is no comparison. And no, I don't expect boom times in housing to return for quite awhile, but that hardly dooms the whole economy. Nor do I think we can compare the US to Japan: for a whole lot of reasons the US is very different from Japan, politically, socially and economically. My own prediction: housing will be flat as Kansas for at least five years, but in 2-3 years the economy will be humming again, based on alternative energy, infrastructure, and biotech. This assumes that either the Democrats are running the show, or, if McCain is in the White House, he doesn't (or can't) do anything spectacularly stupid.
June 24, 2008 9:47 PM | Reply | Permalink
Well, JonF311, "ridiculous" is a pretty strong word. I certainly accept the fact that you disagree with my pessimism. And, frnakly, I hope you're right and I'm wrong. But I don't think my pessimism is "ridiculous".
There are strong demographic arguments supporting the notion of a very long period of gradual economic decline, which is only just beginning now.
I haven't seen strong arguments to counter that notion (yours included). It seems more like hope or faith, or just whistling past the graveyard.
-- ARG
June 25, 2008 10:41 AM | Reply | Permalink
Marquis de SeaToShiningSea is on the right track. We must start taxing the top 10% of the wealth in this country, or soon they will have it all.
June 25, 2008 7:27 AM | Reply | Permalink
June 25, 2008 1:58 PM | Reply | Permalink
A lot of future retirees are still going to owe house payments when they hit retirement age. Of course Social Security isn't going to be enough to live on!
Trust me, there will soon enough commence a new round of Granny bashing from the Right. Granny was pretty dumb to refinance her mortgage at age 55. She should've added 30 to her age, and realized she would be 85 years old and still owe a house payment.
June 25, 2008 7:57 PM | Reply | Permalink
May I ask what these demographic arguments are? The fact that our population is aging? But that's true almost everywhere-- and more so in Europe and Eastern Asia than here. I don't see why older people make for a bad economy. What matters is the ratio of producers to non-producers. Indeed, I suspect an economy with too many children (see: some very desperately poor countries) may have more trouble, since many retirees can work at need, while young children really can't.
Or is this an immigrant bashing thesis? Our economy is going to hell because we have too many of foreigners who no speaka da English and may not have graduated from high school?
Sorry, but short of some mass mortality on the scale of the old Black Death I don't see any demographic threat to the US. Europe and Japan are in bigger trouble in that territory-- and even so I also find the "Eurodoom" thesis of Mark Steyn et al equally ridiculous.
June 25, 2008 9:46 PM | Reply | Permalink
Yes, you may. I know this thread is probably dead now, and I'm sorry I couldn't reply sooner. Hopefully you'll check back and read this.
You are exactly right on two important points. It's the ratio of producers to non-producers that matters, and it's definitely going to be worse in Europe and Asia. Furthermore, immigration is definitely good for the economy -- the more, the better -- but it cannot narrow the gap enough.
To answer your question, I would refer you to some good books I've read on this topic. The best of these is "The Coming Generational Storm, What You Need to Know about America's Economic Future" by Laurence J. Kotlikoff and Scott Burns.
In Chapter 1 ("From Strollers to Walkers") they sketch out the case they make in the rest of the book. The last paragraph of that chapter says, "...the raw numbers tell us two important things. The first is that human demography, driven by simple changes in life expectancy and childbearing, is about to trump the power of economic growth. The second is that the shift in the United States may be major, but it's minor compared to what the rest of the developed world will experience. If we get into trouble, there will be no rescue. We're on our own."
In the rest of the book they go on to build a pretty persuasive case, with lots of data. The bottom line is that the problem is very bad (much worse than most people have been led to believe), and that the longer we wait to fix it, the worse it will be.
They illustrate the way official government numbers tend to hide the real extent of the problem. They refer to a study commissioned by treasury secretary Paul O'Neill, which calculated the the "fiscal gap" at "$45 trillion, ...eleven times larger than the current official debt". "We are thus technically bankrupt," they state. The book outlines a "menu of pain" for different policy choices that could narrow this fiscal gap. "Taking any one or any combination of these medicines will be brutal," they say, but "delay has a significant cost." This study, by the way, was initially included in the president's FY2004 budget, but "the study was yanked from the budget a few days after Secretary O'Neill was unceremoniously fired..."
I could go on, but this post is already getting too long. I highly recommend this book, and I found it very persuasive.
It's not just gloom and doom, either. They offer constructive policy changes, and they offer advise to indiduals to cope with the coming troubles.
I'd be happy to read something that makes a credible counter-argument, but I haven't seen any such book yet. ("Dow 36,000" isn't it.)
A couple of other books are worth mentioning. One is "Financial Reckoning Day, Surviving the Soft Depression of the 21st Century", by William Bonner with Addison Wiggin. This book is a little more snarky, but has interesting historical examples of previous booms and busts, and good detail and data. Their Chapter 7 ("The Hard Math of Demography") begins with a quote from Auguste Compte: "Demography is destiny."
I also read a small book (almost a pamphlet) by a guy named Daniel A. Arnold, called "The Great Bu$t Ahead". This book was a fairly simple study showing that the Dow (as a proxy for the economy) corellates well with the highest producing demographic, people aged 45 to 54. The main point being that the change in this demographic is largely determined in advance, and if you look ahead the next 20 years or so, it predicts a huge, long slump.
So those are the arguments to which I refered. I wish I could do a better job briefly summarizing these -- sorry again for the long post.
-- ARG
June 27, 2008 10:18 AM | Reply | Permalink
"Granny bashing". Oh I love it. To even suggest that Social Security is not financially sustainable is now "granny bashing" - of course, only when it comes from the right. When it comes from the left (e.g., Clinton's proposal in the 90's to invest SS money in the stock market), then it's bold and forward-thinking, and it's those scurrilous right-wingers who stand in the way of progress. Funny how it's the Republicans who are the bad guys either way. So perhaps there's a liberal around here who is intellectually honest enough to describe their desired suggestion to fix Social Security to make it financially sustainable. (Hint: Throwing more money at it does NOT meet this goal.) Republicans have made their suggestions and you all think that's unacceptable. Fine. What's your suggestion?
June 26, 2008 2:20 AM | Reply | Permalink
There's a problem with Social Security? I'm sorry I hadn't realized. Hmm, I wonder how a program that is fully funded to meet its obligations for the next forty years could be in trouble? In the hypothetical event that the fund should be "depleted" at the end of this period, won't most of the Boomers be dead?
So, where's the crisis?
A few last questions Chemjef. How did our society manage to support the Boomers from the age of 0-20 without the sky falling? If there was no "crisis" in caring for the Boomers from their diaper years through their teens, why will our fully funded Social Security system fail them in the last decade or so of their lives?
June 27, 2008 9:18 PM | Reply | Permalink