Matt Miller is Worried That Bill Gates' Kids Will Go Hungry

The most striking development in the United States over the last three decades is the massive upward redistribution of income. So, what do we hear about when we go to the Washington Post oped pages? Naturally, we get columns telling us that old people are going to condemn the country's youth to poverty.

The effort to divert class anger into generational resentment is a huge industry in Washington. Just by himself, Wall Street investment banker Peter Peterson has invested $1 billion in this drive and there are many other wealthy people who also consider it a good use of their funds.

This is the context for Matt Miller's column today in which he tells us "young Americans get the shaft." That is of course true, but it takes some really bad logic and/or arithmetic to think that the reason is the $1,100 monthly Social Security checks received by their parents or grandparents.

In fact, if Miller had access to data, like Survey of Consumer Finance released by the Fed this week, he would know that most seniors have little other than their Social Security to live on. The cohorts that are now on the edge of retirement have seen defined benefit pensions largely disappear. They saw weak wage growth during their lifetime and therefore had little to money save.

Insofar as they were able to put money aside, they lost much of their savings when an over-valued stock market corrected to more normal levels and the housing bubble burst. Most people would probably put more blame on the Wall Street crew who managed to get incredibly wealthy through this whole process (e.g. Robert Rubin at Citigroup or Richard Fuld at Lehman), but Miller wants us to focus our wrath on seniors getting their Social Security checks.

Miller does have a better case that Medicare is a costly burden, but the issue here is not that seniors are getting such great care. The issue is that we are paying too much for it. We pay more than twice as much per person for our health care as people in other wealthy countries. If we paid the same amount per capita as Germany, Canada, or anyone else, we would be looking at long-term budget surpluses, not deficits. Again, normal people would be upset at the drug companies, the hospitals, the highly-paid medical specialists, not retired workers who paid into Medicare their whole lives.

Just to mention one other point that Miller gets badly wrong, he complains that:

"For years, states have let public pension managers assume their investments would grow 7.5 or 8 percent a year, when 3 to 6 percent has been more realistic. This bipartisan ploy hides trillions more in pension shortfalls, funds that will have to be forked over one day by (you guessed it) younger Americans."

Miller is obviously very confused here. When the stock market had price to earnings ratios above 20 in the late 90s and eventually over 30 at the peak of the bubble in 2000, it was not possible for pension funds to have 7.5 or 8.0 percent returns, as some of us argued at the time. However, now that the price to earnings ratio is back near 15, the long-run average, it will be possible for pensions to yield their historic rate of return. In fact, it is almost impossible to construct scenarios where this will not be the case.

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written by tom michl, June 14, 2012 7:50

The Shiller price-earnings ratio (I think its 22), which uses a moving average of earnings, is not low by historical standards. The ratio you cite, 15, is often criticized by analysts. There has recently been a lot of discussion of this difference, especially after a Goldman Sachs report touting stocks. I'd be interested in your opinion of this debate.

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written by bmz, June 14, 2012 8:44

The CBO projected that the surpluses Clinton left for Bush were enough to pay off the entire US debt by the time that the Social Security/Medicare trust funds would have to be amortized for beneficiary payments, all without having to raise taxes to pay for the amortization of those trust funds. These “surpluses” were made up entirely of excess payroll taxes building up the trust funds. Bush took those excess payroll tax receipts and gave them “back” as income tax reductions, heavily weighted to the wealthy–who didn’t create those surpluses in the first place. By doing this, Bush guaranteed that taxes would have to be raised in order to amortize the trust funds. The failure to do so simply permits the Republicons to steal the money contributed by workers for their retirement. Everything Matt Miller is arguing is about stealing senior's money.

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written by skeptonomist, June 14, 2012 8:55

P/E ratios have come down a lot from their ridiculous values before the 2000 crash, but still are not as promising as Dean makes out. Corporate earnings are currently anomalously high considering the state of the economy - how long can this continue? At some point corporations will run out of workers to fire. The current historical average P/E level, however it is calculated, has been influenced by the very high values of the 90's bubble - the average before that is distinctly lower. Bond prices have been on a long upward trend since 1981, but this is obviously at an end now. The investment situation is very different now from what it was around 1981, when stock P/E and bond prices were both very low - no one should expect to get similar returns to those 1981-2000 or even 1981-present.

That said, the 3-6% estimates are almost certainly too low, at least for the long term. In fact, most economic projections are probably too pessimistic at the moment. There is obviously a mass-psychological effect that causes the outlook to be too optimistic when things are going well, and too pessimistic when they are going poorly. If this were not true the business cycle might not exist. Somehow economists as well as those in the real economy don't seem to be able to take account of this when making projections.

PE calculations
written by Dean, June 14, 2012 9:05

For my PE calculations I take the value of all corporate equity (from the Fed's Flow of Funds) and divide it by trend after-tax corporate profits. My definition of trend is the average profit share of income over the last decade.

I think is by far the cleanest and most comprehensive measure. Note that this may well differ from the S&P 500. This is appropriate for pensions because they invest in private equity, which are of course not going to be included in the S&P.

Stealing from our Children
written by jonny bakho, June 14, 2012 9:20

Our ruling elites and their mouthpieces always say that entitlements are "Stealing from our Children".

In their view, "Children" means "Legacies of the Wealthy Elites". For our ruling elites, the legacies of the wealthy are the only children who matter. The children of the poor and Middle Class are not part of the conversation.

Miller is simply stating the belief of our elites that the wealthy have no obligation to support the society that helps create and maintain their wealth.

young pay for the old?
written by coberly, June 14, 2012 9:28

actually its easier than that. today's young will be tomorrows elderly. they are paying for their own future costs. pay as you go is the same (in all important respects) as paying in advance. only better. it finesses the inflation problem, including medical inflation. and your money is not going to disappear one bad day on Wall Street.

and in terms of "cost to society" there is no difference between pay as you go "tax" and collecting dividends. the money represents production. and the money you collect from your stocks is "lost" to future production in exactly the same way that money paid to retired people through SS taxes is "not invested." oddly enough, this is exactly what societies have done for at least fifty thousand years under the idea of "honor your father and your mother." difference is, of course, they knew what they were doing. we like to fool ourselves with "ownership of assets."

i forgot to add
written by coberly, June 14, 2012 9:38

"the young" can pay for their own social security at today's retirement age and income replacement rate (both represent a huge increase in "benefits") by raising their own payroll tax an average of one half of one tenth of one percent per year... or about forty cents per week per year while their wages are going up eight dollars per week per year.

medicare is a bit trickier... the costs need to come down, but even if they don't, people can pay for their own future Medicare costs by raising the medicare tax an amount that is less than their expected increase in wages. so it becomes a choice between buying the medical care you hope will make you live longer and healthier or buying more "stuff."

dean says (elswhere) that people cannot afford the projected medical care costs. but even the people who make the projections say it's not going to happen that way... the costs will be controlled. how is mostly a political game. meanwhile the idea that we can pay for our own medical needs should not be left off the table.

of course a time may come when we can't... it just costs too much to live forever... but that is a different problem.

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written by ellis, June 14, 2012 10:12

Matt Miller's argument boils down to this: working class retirees have to give up most of their pensions, health care, Social Security. As a centrist Democrat, Miller is simply voicing the views of his party's leadership.

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written by BH in MA, June 14, 2012 2:37

So we cut taxes for the rich, remove pesky regulations and other financial controls for banks which leads to a huge real estate bubble that then collapses and takes the economy down with it. Unemployment and resulting costs for "automatic stabilizers" are up, tax receipts are down and the deficit is large as a result. But the problem is not banks, bankers, income inequality or the lack of strong financial regulation. No. The problem is we've got too many firefighters, police, school teachers, street lighting and paved roads. And our old people are bleeding us dry by taking $1100 per month out of a pension system they paid into.

It's true that we leave our debts to future generations - we always have and always will. But we also leave them our assets. If we run up our debts improving those assets it won't be a problem. But if we run up those debts by refusing to tax ourselves at appropriate levels during times of war and/or relative prosperity while at the same time refusing to maintain, repair or upgrade our roads, bridges, freight and cargo systems, power grid and telecommunications infrastructure while refusing to do anything about healthcare costs rising to 20% of GDP or rising education costs which result in a lot of wasted potential (50% of young people avoid college due to the cost), well, then they're screwed.

Shrewd observation BH
written by diesel, June 14, 2012 3:13

"It's true that we leave our debts to future generations.....But we also leave them our assets."

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written by PeonInChief, June 14, 2012 4:25

Never underestimate the willingness of the elite's pundits to construct arguments that allow the elite to thieve from the rest of us.

I do wonder, though, how they claim that pension funds will make only 3-6%, while 401k estimates require an assumption that growth will be in the neighborhood of 10% for most workers to have a decent retirement.

Matt Miller is Worried That Bill Gates' Kids Will Go Hungry

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