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Public Pensions: Arithmetic Please Print
Saturday, 12 March 2011 09:38

It's so fashionable these days to beat up on public sector pensions that the rules of arithmetic no longer appear to pose a binding constraint. The New York Times concluded an article complaining about the cost of state pension with a quote from Sylvestor Scheiber, one of the pension analysts advocating cuts in public pensions:

"By the time the typical private-sector worker has retired, the teachers, the highway patrolmen and these folks have already gotten $200,000, $300,000, $400,000 in pensions.”

The comment refers to the fact that many state workers can receive full pension benefits while still in their 50s. The immediate point of reference is Wisconsin, where it tells us that police and firefighters can retire at age 53 if they have 25 years of service, while other workers can retire at age 57 if they have 30 years of service.

The article does not tell us what percent of state employees actually retire at these ages. It is likely that most state employees don't have 30 years of service by the time they reach age 57, so they would have to work longer to receive their full pension benefit. However, even if we do assume that an employee other than a police officer or a firefighter (i.e. the "teachers and these folks") retires at a relatively early age, they will not get the $200,000, $300,000, $400,000 in pension benefits that Mr. Scheiber touts.

According to the article, the average pension for public employees in Wisconsin is $26,000. (Many public employees do not get Social Security, so their pension is likely to be the vast majority of their retirement income.) Most workers start taking their Social Security benefits before they reach age 63, which creates a gap of less than 6 years between the lowest age at which most Wisconsin public employees can draw their benefits and the age at which most private sector workers have retired.

If we multiple 6 times the average annual pension of $26,000 we get $156,000, as the amount of benefits that public sector workers can receive before private sector workers typically retire. This is considerably less than the $200,000, $300,000,  $400,000 numbers tossed out by Mr. Scheiber. And this would only apply to a worker who had 30 years of employment with the state by the time they reached age 57. A worker that first started working for the government at age 30 would have to wait until age 60 to retire with a full pension in Wisconsin, giving them less than three years of additional benefits.

It is also important to note that public sector workers pay for these benefits with lower wages than their private sector counterparts. Including all benefits, public sector workers still receive slightly lower compensation than their private sector counterparts after controlling for education and experience. This picture would be little changed even if the calculations of public sector compensation were adjusted upward by increasing the pension contribution 20-25 percent to account for the current underfunding of pensions.

 
The Washington Post Claims that Multinational Drug Companies Tried to Use Their Market Power to Pressure India to Change Its Patent Policy Print
Saturday, 12 March 2011 08:37
According to the Washington Post, multinational drug companies retaliated against India for having weak patent protections by pulling out of the country in the 1970s. The Post seems to imply that this decision could have been motivated by economics. That is not true. If a drug company is engaged in reverse engineering it gains no particular advantage from having the manufacturing facilities located within India. If drug companies left India because of its patent policy, as the Post claims, then the motivation was political -- to pressure India to change the policy -- not economic. 
 
The Economist Wants to Scare You Into Supporting Cuts to Social Security Print
Friday, 11 March 2011 17:46

That's why they show a scary looking graph that shows "entitlement" spending (Medicare, Medicaid, and Social Security) going through the roof. They do this even though everyone who has looked at the issue knows that the real problem is health care spending. The U.S. spends more than twice as much per person as other wealthy countries.

The problem is our broken health care system. Here is the graph that honest people use.

 
FactCheck.org Does Not Have Access to the Internet Print
Friday, 11 March 2011 11:42

That is what this project of the Annenburg Public Policy School told readers today when  it backed up its earlier piece claiming that Social Security does contribute to the budget deficit. If did have access to the Internet, FactCheck.org could have easily discovered references to the "on-budget" budget in any budget document it chose to examine (e.g. here and here). The political figures who FactCheck.org criticized in its initial post were obviously referring to this measure of the budget deficit, as was pointed out in a previous note.

An organization engaged in fact checking statements by public figures should probably invest in an Internet subscription so that it can more accurately do its work.

 
Charles Krauthammer Doesn't Understand How Bonds Work Print
Friday, 11 March 2011 08:15

Charles Krauthammer is very upset that Jack Lew, President Obama's budget director, is saying true things about Social Security and the budget. Krauthammer is troubled by the fact that Lew said that Social Security does not add to the deficit.

Lew based his claim on the law governing Social Security's operations, it can only spend money that has in its trust fund. This money comes either from the designated Social Security tax or from the bonds and interest on the bonds that were bought using the surplus from prior years. No money can come from general revenue.

This seems pretty simple, but not to Krauthammer:

"When your FICA tax is taken out of your paycheck, it does not get squirreled away in some lockbox in West Virginia where it's kept until you and your contemporaries retire. Most goes out immediately to pay current retirees, and the rest (say, $100) goes to the U.S. Treasury - and is spent. On roads, bridges, national defense, public television, whatever - spent, gone.

In return for that $100, the Treasury sends the Social Security Administration a piece of paper that says: IOU $100. There are countless such pieces of paper in the lockbox. They are called "special issue" bonds.

Special they are: They are worthless."

It's nice that Mr. Krauthammer thinks that government bonds are worthless. (I have a standing request that he, or anyone else, pass along any government bonds that he considers worthless. We will use them to support CEPR.) While he is welcome to believe anything he wants, the bonds held by the Social Security trust fund are backed by the full faith and credit of the U.S. government. Krauthammer may want to default on bonds that belong to the nation's workers, but his desires are not the same as reality.

Selling these bonds to fund Social Security no more raises the deficit than the decision of a rich person to sell bonds to finance their consumption raises the deficit. The deficit was incurred when the money was lent to the Social Security trust fund in the first place. 

The size of the deficit, including the money borrowed from Social Security -- the on-budget deficit -- is reported in every budget document put out by the government (e.g. here and here). Krauthammer might try to learning a bit about how the budget works before he goes off ranting about Jack Lew and Social Security [Corrected -- thanks WTF].

He also might do a little homework about his proposed fixes for Social Security. Two of his fixes, changing the indexing formula and raising the retirement age would hit elderly people who are barely scraping by as it stands. However, his third idea -- taking away benefits for rich people like Warren Buffett -- would not even save the program any money.

While Krauthammer may know lots of rich people like Buffett, in reality they comprise a tiny portion of the population and the benefits they receive are a trivial share of what Social Security pays out each year. As a result, a means test that was designed to take away benefits from the country's Warren Buffetts would likely cost more to administer than it would save the program in benefit payments.

In reality, the projected shortfall in the program is relatively distant and minor. The country has far more urgent concerns, like putting 25 million unemployed or under-employed people back to work. This should be the focus of our political leaders right now.

 
Power Breakfast: Lose It! Print
Friday, 11 March 2011 05:37

Yes, this horrible segment on my local NPR affiliate WAMU repeated the same nonsense as yesterday. It told listeners that the key policy choice facing the country is whether we will just let the Martians take over the planet, as advocated by President Obama, or stand up and fight, as demanded by the Republicans.

Okay, that was not quite how the segment ran, but it is pretty damn close. The segment told us that the main energy choice facing the country is whether we focus on producing oil and gas in the United States or we focus on switching over to alternative energy.

This is not true. There is no option to make the country independent of foreign energy by increasing domestic production of oil and gas. Let me repeat that so that even a top reporter at  a major news outlet can understand it.

There is no option to make the country independent of foreign energy by increasing domestic production of oil and gas.

The reason is simple, the United States does not have enough oil and gas to replace the amount that it imports even if we drilled every last barrel out of every environmentally sensitive region in the country. Just as the city of Tokyo does not have enough oil to be energy self-sufficient, neither does the United States have this option.

There are zero, nada, no projections that show that oil and gas reserves in the United States are large enough to allow the country to replace the fossil fuels that it imports. It currently imports about 11.5 million barrels a day, down from its pre-recession level of 13 million. Its domestic production is about 5.6 million barrels a day, and dropping. (It had been around 10 million a day thirty years ago.)

Projections from the Energy Information Agency show that if we drill everything in sight, we may be able to increase domestic production by 1-2 million barrels a day (it would take a decade to get this gain). That would mean that we would be very lucky to reduce dependence of foreign oil by even 20 percent.

Given the reality, the correct response of a real reporter to a politician who wants us to have "red, white, and blue" energy by drilling everywhere is to ask him if he has any idea what he is talking about or whether he is deliberately saying things that are not true.

A real reporter does not pass along an untrue statement to listeners and compare it to a true statement and make it a "he said/she said" for listeners. Reporters have the time to evaluate the truth of statements by public officials -- that is their job -- listeners do not.

 
Credit Swipe Fees: A Tax on Cash Customers Print
Thursday, 10 March 2011 06:24

Michelle Singletary, the Post's generally adept personal finance reporter, missed one today. Regulations by the Fed limiting debit card swipe fees are definitely a positive step. Currently these fees are passed on to all consumers. The ones getting nailed worst are the cash customers who pay the higher price without even getting the convenience. This is like a sales tax.

The reduction in fees will not be passed on everywhere and always to consumers (firms do have market power), but to be an economist here, if firms thought they could mark up their prices by more, why aren't they doing it already? In other words, it is reasonable to assume that most of the savings will be passed on to consumers.

 
Europe Will Provide U.S. Consumers With Lower Cost Financial Services Print
Thursday, 10 March 2011 06:09

That is the implication of a NYT Dealbook post that reported JPMorgan's claim that parts of the Dodd-Frank bill will favor European banks. If JPMorgan's claim is correct, then it means that U.S. consumers need to worry less about any potential increase in the cost of financial services that could result from better prudential regulation. JPMorgan is claiming that European governments are willing to incur the cost of subsidizing risky practices of their banks (think Iceland).

Economists would argue that this is pure gain to U.S. consumers, just as they argue that being able to get low cost textiles and steel from China or India is a gain. If European subsidies make U.S. financial services uncompetitive, then the U.S. should simply focus on the areas in which it enjoys a comparative advantage.

 
Power Breakfast: Discussion of the Martian Invasion and the Price of Gas Print
Thursday, 10 March 2011 05:37

WAMU, one of the NPR affiliates in Washington, DC, has a segment during Morning Edition called "Power Breakfast" which discusses issues being debated in Congress. This segment is often embarrassing for the amount of misinformation that it can pass along in just a few minutes.

This morning was one such occasion. It began with a comment by Texas Senator Kay Baily Hutchison, complaining about the price of gas and the cost of filling up her pick-up truck. Ms. Hutchinson then said that part of the answer to high gas prices was increased drilling in the Gulf of Mexico and then talked about a bill that she is co-sponsoring with Louisiana Senator Mary Landrieu which would allow for some additional drilling.

While the segment did give a short sound bite to an opponent of drilling, Ohio Senator Sherrod Brown, it would have been appropriate to ridicule Ms. Hutchison's comment, since there is no plausible story in which her bill would have any visible impact on the price of filling up her pick-up.

The amount of additional oil that can be drilled from the Gulf is only around 0.2 percent of world supply. It would take roughly 10 years to get up to this level of production. Using normal elasticity assumptions, this would imply a reduction in the price of oil of around 0.5 percent. That would mean that if we completely opened the Gulf for drilling, it would save Ms. Hutchison about 30 cents off the cost of filling her pick-up in 2021. Of course the bill she has proposed would have considerably less effect. 

If politicians can say ridiculous things to advance their political agenda, and the media do not point out that their comments are ridiculous, then they will have incentive to say ridiculous things. This makes for an ill-informed nonsensical debate on public policy issues. The media bear much of the blame for this since it can be expected that politicians will do whatever advances their political career. It is the media's job to hold them accountable.

 
Republicans Push Proposal to Eliminate Jobs and Raise Unemployment in the Senate Print
Wednesday, 09 March 2011 06:20
Okay, I didn't expect this headline, but it would be worth reminding readers that this would be the effect of the Republican proposal for sharp budget cuts for the remainder of the 2011 fiscal year. Analyses by both Goldman Sachs and Moody's have shown that the spending cuts, if extended into 2012, would eliminate more than 500,000 jobs. It would have been appropriate to mention this point in the article.
 
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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