Shell Games And Fiscal Policy

For the past several years, Democratic Governor Dan Malloy of Connecticut and Republican Governor Chris Christie of New Jersey have engaged in a public war of words over fiscal policy. Despite the economic similarity of their northeastern states, the two men have repeatedly clashed on television over their strategies for restoring fiscal discipline in government.

Malloy, following traditional Democratic doctrine, has chosen to maintain government spending in the face of economic malaise by raising taxes in order to eliminate budget shortfalls. Meanwhile, Christie, adhering to classic Republican policies, has slashed spending and reduced taxes in pursuit of the same goal.

So which strategy has proven itself to be the successful one? Regrettably, neither one has done so. During the past month, in fact, both Governors have acknowledged failure.

The first failure occurred in Connecticut, where Governor Malloy had been accused by his political foes of generating $500 million in excess cash by over-borrowing on debt. He had announced plans to spend the cash by mailing $55 checks to Connecticut households as election year tax refunds.

But then the anticipated $500 million budget surplus suddenly vanished with the collapse of overly optimistic economic assumptions. Because the excess cash was needed to finance normal government operations, the proposed tax refund vanished as well.

Meanwhile, in New Jersey, a similar collapse of overly optimistic economic assumptions forced Governor Christie to slash required payments to the state’s employee pension plans. To compensate for unexpectedly low tax revenues, the Governor decided to redirect the funds to finance normal government operations.

Ironically, Governor Christie himself initially agreed to authorize pension plan contributions at levels that would help the state “catch up” for many previous years of fully or partially cancelled payments. His predecessors had often balanced their budgets by redirecting pension funds to meet current needs.

But when Christie found himself in the same situation that had plagued his predecessors, he opted for the same choice that they had made: to shift budgeted pension funds into current year expenditures.

And so the “shell game” of government fiscal policy continues on both sides of the political aisle. Whenever debt generated funds or pension plan funds are shifted to finance current government operations, future budgets become more difficult to balance while the size and scope of government remains unaffected.

How would you modify the budgetary practices of our government officials to ensure the long term fiscal solvency of our states?

Federal Budget: What Deficit?

Do you remember the American government shutdown of October 2013? Just five months ago, the “deficit hawks” of the United States Congress refused to finance the continuing operations of most of the federal agencies and functions.

They claimed that they were deeply concerned about the unrestrained debt financed spending habits that were imperiling the financial futures of the American people. And they had a point; after all, the federal government deficit had exceeded $1 trillion in each of the four fiscal years 2009 through 2012.

Last week, however, the U.S. General Accountability Office (GAO) announced some stunning news. Apparently, the deficit had plummeted to $680 billion in fiscal 2013; it represented the fastest deficit decline in the United States since the end of World War II.

Before we get too excited by that “historic” decline, of course, it would be helpful to remember why any such decline was possible in the first place. After all, had the deficit not climbed to record levels during the previous four years, it would have been impossible for the GAO to announce such a dramatic decline this year!

Nevertheless, for individuals who remain concerned about American profligacy, the decline can be perceived as a return to a level of relative normality. The United States produces $17.1 trillion of Gross Domestic Product (GDP) per year, an amount that is roughly 25 times as large as the $680 billion debt.

A ratio of 25 to 1 may be worrisome, but it is certainly not catastrophic in scope. It is analogous, for instance, to a family that earns $100,000 per year and that needs to borrow an additional $4,000 to make ends meet during a financially challenging period.

The total accumulated debt of the United States now exceeds $17.3 trillion. That is roughly 1% higher than the $17.1 trillion of annual GDP, representing (again) a troubling but not terrifying difference. It is analogous to a family with annual income of $100,000 that decides to carry a $101,000 mortgage.

These analogies are not perfect, of course. The federal government’s debt must be refinanced at regular intervals, while a family can often “lock in” mortgage debt at low fixed rates for up to thirty years.

On the other hand, a family can lose 100% of its earnings when a head of household loses his (her) job. The federal government, though, can continue to receive significant tax revenues throughout the most dire depression periods.

These facts may explain why Congressional Republicans recently “caved” (in the words of their own supporters) during negotiations over the debt ceiling. Although long term budget projections do show federal deficits climbing back to unsustainable levels within a decade, politicians on both sides of the aisle appear to be content to permit current budget policies to remain in place for now.

If you were Comptroller General Gene L. Dodaro of the GAO, would you regard the 2013 budget deficit as a promising sign of fiscal health, or as a troubling sign of fiscal stress?

Budget Sequestration: Our Military Priorities

Do you remember the specter of the Great Sequestration of 2013?

It dominated the news headlines just a few weeks ago. The federal government of the United States was preparing to slash its short term discretionary spending budgets in an indiscriminate manner, an action that was necessitated by Washington’s inability to agree on a long term plan to reduce its budget deficit.

So … how did sequestration turn out? Well, at first glance, nobody seemed to have noticed it. Despite dire warnings of a steep slow-down of the national air traffic system, for instance, the industry appears to have adapted to the budget cuts in a “business as usual” manner.

But as time rolls along, the true costs of the sequestration process are becoming more apparent. For example, you’ll undoubtedly notice it if you decide to visit New York City next month.

Farewell, Fleet Week

Each spring, the Big Apple kicks off its warm weather tourist season with a celebration of the United States Navy. Fleet Week brings naval vessels up the Atlantic Coast, from bases like Norfolk, Virginia and Charleston, South Carolina, to spend several days in New York Harbor and on the Hudson and East Rivers. The sailors throw open their decks to the general public and join a series of festivals and special events.

Fleet Week was originally inspired by Operation Sail, a quasi-governmental organization founded by President John F. Kennedy to sponsor such events throughout the United States. Although the initial OpSail event in New York City was staged in connection with the 1964 World’s Fair, the most memorable one featured a Parade of Tall Ships that helped the metropolis celebrate the nation’s Bicentennial in 1976.

That was a year when America was still reeling from its defeat in the Vietnam conflict, the resignation of the disgraced President Richard Nixon, and the social, economic, and military challenges of the Cold War. The Big Apple itself was sliding into a severe financial and social crisis. Both the nation and the city desperately needed a shot of inspiration, and the OpSail event provided it with aplomb.

The recent Fleet Week versions of that historical OpSail event have attracted both military enthusiasts and casual tourists to the Big Apple from the four corners of the world. They’ve showcased America’s military forces in the best possible light, and have provided thousands of American sailors with the most enjoyable shore leave experiences imaginable.

Last week, though, the Navy announced that sequestration budget reductions will preclude it from joining the festival next month. Regrettably, that leaves the Big Apple with a Fleet Week in desperate need of a fleet.

Goodbye To The Blind

The recent Fleet Week announcement was a high profile one; it attracted the attention of commentators around the world. But the sequestration budget reductions are beginning to affect numerous low profile organizations as well.

How low profile? Consider, for the instance, the Cincinnati Association for the Blind and Visually Impaired and the Greensboro Industries for the Blind. The organizations employ a few dozen blind citizens — individuals who would find it difficult to remain employed in the mainstream work force — to manufacture supplies for federal governmental agencies.

Because of cutbacks in a Depression era government program that is now called AbilityOne, federal government officials have decided that they can no longer easily afford to purchase such supplies from local organizations that hire disabled workers. As a result, last week, the CABVI announced the prospective layoff of a few dozen employees who produce tape products for the federal government, following a similar announcement by the Greensboro organization about the loss of a military contract.

Shall we take a broad perspective to help us assess this situation? On the one hand, the United States Department of Defense is pouring resources into locales from Syria to South Korea to achieve its global priorities. Yet, on the other hand, it cannot afford to visit New York City in order to attend a party that is being staged in its honor. Likewise, it is unable to honor supply contracts with nonprofit associations that employ disabled American citizens.

American Priorities

Of course, there are many valid reasons for respecting such priorities at the Department of Defense. Our country undoubtedly continues to hold strategic interests in regions like the Middle East and the Pacific Rim; our military forces clearly help us protect these interests.

And our domestic organizations are proving to be managed by resilient and resourceful executives. Fleet Week organizers are already investigating the possibility of inviting local Coast Guard craft to help fill their naval void. And the president of the Greensboro organization is pursuing a T-Shirt supply contract with the military to replace the lost tape supply contract.

In other words, American citizens and organizations are continuing to devise creative ad hoc approaches to adapt to the Great Sequestration of 2013. Nevertheless, the outcomes of the sequestration process are revealing important truths about the priorities of the American people.

Introducing … The Trillion Dollar Coin!

The United States is a big country. With big homes. And big motor vehicles. And even big meals.

There is, however, one aspect of the American lifestyle that has remained small over the years. Namely, Americans have always insisted on utilizing small coins as currency.

Pennies, nickels, dimes, and quarters still pervade the American monetary system. So why should we expect Americans to accept the newly proposed trillion dollar coin?

Small Change to Large Coins

Because of the costs of producing small coins, and because of their limited purchasing power, many developed nations have ceased minting pennies and cents. Many have also converted their paper dollar, euro, pound, and yen “bills” to large coinage.

Japan was the first major western economy to do so, retiring all “sen” coins (i.e. coins worth less than a yen) sixty years ago. Australia and Canada have since ceased minting cent and penny coins as well. And the Netherlands and Finland only produce tiny numbers of one cent and two cent coins for collectors, while permitting retailers to round cash prices to the nearest five cents.

Meanwhile, Britain first introduced a large coin with its “round pound” in 1983; it then withdrew pound bills from circulation five years later. And Canada followed with its “loonie” dollar coin, named after the loon bird which appears on it, in 1987. Like Britain, it withdrew its dollar bill from circulation two years later.

Indeed, many nations have opted to replace small change and paper bills with far larger coinage. But how have such proposals fared in the United States?

Susan B. Anthony to Sacagawea

From time to time, various parties in the United States have proposed to retire the penny from circulation. No such proposal has ever become law, though a pair of noteworthy efforts have resulted in the issuance of dollar coins.

In 1979, for instance, the United States Treasury began minting a coin with an illustration of the suffragist leader Susan B. Anthony. And in 2000, it began to issue a similar coin with an illustration of Sacagawea, a female native American who led American explorers Lewis & Clark across the frontier. Neither coin, though, captured the imagination of the American public, and paper dollars were never retired from circulation.

Surprisingly, though, the New York City subway system earned the admiration of currency administrators around the world when it successfully weaned commuters from token coins during a period of several years. But it opted to replace its small tokens with devices that resemble prepaid debit cards, not larger coins.

So why, considering this track record, is any one discussing an American trillion dollar coin?

The Fiscal Cliff

The rationale for such a coin can be attributed to the ongoing debates in Congress and the White House about America’s federal government deficit. Just two weeks ago, for instance, the entire government worked through the New Year’s holiday to avoid a “fiscal cliff” of expiring tax benefits and proliferating spending cuts.

By no means, however, was this fiscal cliff an isolated incident. Two summers ago, the federal government almost shut down over a dispute about expanding its borrowing limit; Standard & Poor’s downgraded the credit rating of the United States government as a result of that debacle. And a similar borrowing limit debate is expected to recur next month.

So how would the issuance of a trillion dollar coin resolve this situation? Well, if the federal government could no longer borrow money to finance its operations, it could instead produce a single collectible platinum coin with a stated value of $1 trillion. It could sell the coin to the Federal Reserve Bank of the United States for $1 trillion. And it could then utilize the $1 trillion to finance its operations.

But how could “the Fed” secure $1 trillion to purchase the coin? Simply put, the Fed could borrow $1 trillion from the very same parties that have always loaned money to the federal government.

Three Shells And A Pea

Have you ever witnessed a game of “three shells and a pea”? Also known as “the shell game,” it involves the shifting of a pea (or a coin, for that matter) from one overturned shell to another. Participants wager on their own abilities to follow the location of the pea as it passes from shell to shell.

Is this trillion dollar coin scenario not a shell game? The coin itself is analogous to the pea. And the federal government and Federal Reserve Bank are analogous to the shells.

The fact that a Nobel Prize winning economist has acknowledged that this scenario could work may astonish us. The fact that others are actually advocating its implementation may astonish us as well.

Nevertheless, most astonishing of all may be the fact that American ingenuity is now focusing on the development of such games. Why not focus, instead, on eliminating the budget deficit through economic growth?

Catching The Ball: An Income Tax Nightmare

You don’t need to be a fan of the New York Yankees to congratulate their Captain, Derek Jeter, for becoming only the 28th player in the 135 year history of Major League Baseball to reach a career milestone of 3,000 hits. At a time when so many other professional sportsmen have chosen to inject their bodies with artificial steroids, Mr. Jeter’s performance decline in the twilight of his career is apparent testimony to his decision to rely solely on his natural skills.

Unfortunately, Mr. Jeter’s dramatic quest for his 3,000th hit led to another drama, one that is currently playing out in the offices of the Internal Revenue Service. The IRS, as always, is simply applying the tax law in the manner that it has been written by politicians. The details of this particular drama, though, may lead us to wonder whether those very politicians ever anticipated this particular situation.

During a week in which President Obama repeatedly called for the closure of tax loopholes for the very wealthy, a working class fan who caught a baseball found himself immersed in a debate about tax fairness. His gracious actions, and their resulting tax implications, reveal much about our government’s fiscal policies.

See the Ball, Catch the Ball

On July 9th, Derek Jeter began a baseball game against the Tampa Bay Rays with a career total of 2,998 hits. He would eventually hit successfully in all five batting appearances that day, ending the game with 3,003 in total.

His second appearance, though, led to the historic event that allowed him to ascend to the 3,000 hit level. And he met the challenge in a most dramatic fashion, socking a home run that soared into the stands instead of simply grounding a ball through the infield.

The nature of his hit set off a series of events that ultimately involved the Internal Revenue Service. A 23 year old cell phone salesman named Christian Lopez caught the ball and returned it to Mr. Jeter after the game as a keepsake. Jeter and the Yankees, grateful that he didn’t sell the ball at auction, rewarded him with game paraphernalia, autographs, and free tickets for future games.

How much could Lopez have earned by selling the ball at an auction? There’s no way to know for sure, but Bloomberg speculated that he might have received as much as $250,000. It may have sold for a far higher amount; Barry Bonds’ record breaking 756th career home run ball, for instance, actually sold for a whopping $752,467 in 2007.

Enter The Tax Man

Although Mr. Lopez did not pay or receive any money as a result of these events, he is now in need of expert tax advice. That’s because his brief catch represented a compensatory activity that resulted in his receipt of an item with resale value. In other words, to put it simply, he did some work and received compensation, thus making him liable for income taxes on his receipt.

Wait a minute … he gave the ball back to Mr. Jeter, didn’t he? Yes, but his generous gesture represents a personal gift, and donors of personal gifts must pay taxes on gifts of items with values exceeding $13,000 under American tax law. In other words, the loss that he incurred by “gifting” the ball back to Mr. Jeter cannot fully off-set the value that he received by catching the ball earlier that day.

Furthermore, the fan’s receipt of the merchandise and tickets may itself represent the collection of taxable compensation. Thus, he may need to pay income taxes on his receipt of those items, whether or not he ever actually resells them. And although a number of organizations have stepped forth and volunteered to pay some or all of his tax obligations on his behalf, such acts may themselves represent taxable gifts, leading to additional tax obligations for the firms or Mr. Lopez.

Back in Washington

Meanwhile, while these events were unfolding, President Obama continued his tussle with Republican Congressmen over the tax code. The Congressmen continued to insist that the federal government already overtaxes the American people and should not attempt to balance the federal budget through additional tax increases, while the President responded that many wealthy Americans are beneficiaries of tax loopholes that can be equitably closed.

One group of beneficiaries, the President notes, consists of wealthy managers of hedge funds. Such individuals generally pay a relatively low 15% capital gains tax on their “carried interest” earnings, an amount that is less than half of the current 35% top marginal tax rate that Mr. Lopez may end up paying on his earnings and gifts.

It may take months for Mr. Lopez to sort out all of the tax implications of his moment of glory. Hopefully, though, our representatives in Washington will not wait that long to reassess the practical implications of their taxation policies on fans who catch baseballs in the stands.

Wisconsin Budget Battle: A Familiar Tale?

Citizens of the state of Wisconsin may be growing a wee bit weary of the apocalyptic language with which supporters of Republican Governor Scott Walker and public sector union leaders are describing their epic battle. Nevertheless, Hollywood itself couldn’t have scripted a more action-packed array of events to match what is now occurring in and around America’s Dairyland.

Police troopers, for instance, have been dispatched to the homes of Democratic legislators to escort them to the state Capitol. To escape such ignominy, those very legislators have fled the state as fugitives, and have rented motel rooms in undisclosed locations. Meanwhile, thousands of raucous union demonstrators have seized control of the Capitol building and are refusing to go home, while a practical joker has lured the Governor into an embarrassing phone conversation and has released a recording of their comments to the public.

As political disputes go, it all seems horribly unprecedented in tone, scope, and content, doesn’t it? In many ways, though, the current Wisconsin battle is simply reflective of similar disputes that have (and currently are) being waged across our nation.

A Bizarre Plot

The Wisconsin saga began when a relatively young and charismatic gubernatorial candidate named Scott Walker swept into office, vowing to bring the state’s budget deficit under control by demanding concessions from public sector unions. However, the unions soon learned that he wasn’t simply focusing on demands for financial concessions; he introduced legislation that would deny the unions their fundamental right to bargain collectively as a unit as well.

Union leaders perceived this legislative proposal as an existential challenge to their authority, and sent thousands of protestors to swarm the Capitol building and bring the state’s political processes to a grinding halt. Meanwhile, fourteen Democratic legislators refused to report to work, gambling (apparently correctly) that they could prevent the Republican majority from passing anti-union legislation by failing to appear and thus denying the Legislature a working quorum. When the outraged Governor ordered the state police to track down the legislators and escort them to the Capitol, the legislators fled to neighboring Illinois.

The plot took an even more bizarre turn when a practical joker fooled Governor Walker into believing that he was a wealthy donor named David Koch; he pulled the Governor into an embarrassing telephone conversation that encompassed, among other topics, an admission that Walker was considering a plan to lure the Democratic legislators back to the Capitol to establish a quorum. The practical joker then released a recording of the conversation to the public, exacerbating the situation.

A Unique Situation? Think Again!

Is this truly a unique situation? It may indeed represent an unusually colorful confluence of political intrigue and conflict, but most of the core elements of the story are actually strikingly similar to various strategies and tactics that have been employed for many years, and that continue to be utilized today.

Legislators fleeing a state to prevent an opposition party from achieving a quorum, for instance, is a tactic that was employed by Texas state legislators in 2003, and that is also being utilized by Indiana legislators today. The tactic has been employed on a global level as well; the Soviet Union, for instance, boycotted meetings of the Security Council of the United Nations to protest Taiwan’s voting presence on the Council instead of Communist China’s. The Soviets may not have anticipated the Security Council’s willingness to declare war on Communist North Korea without it; the Soviets later returned to the Council but could not reverse the declaration.

Furthermore, a number of states and municipalities have already restricted the rights of public sector unions to organize into groups, to engage in collective bargaining, and to strike and take other aggressive actions. Democratic Mayor Ed Koch of New York City, for instance, used the Taylor Law in 1980 to restrict the right of transit union workers to launch a strike; Republican Governor Mitch Daniels of Indiana similarly signed restrictions against collective bargaining into law in 2005.

And phone call pranks have been part of the political landscape for many years. Luminaries from Sarah Palin to Tony Blair have been fooled into believing that they were speaking to famous individuals who proved to be pranksters; embarrassing revelations have sometimes resulted from such incidents.

Nothing New Under the Sun

The Korean War? The Ed Koch era? And Tony Blair’s administration? These time frames spanned the entire length of the latter half of the twentieth century; they all presaged the political shenanigans that are now occurring in Wisconsin.

Thus, although the politicians who are currently embroiled in these events tend to portray their situations as being unprecedented in nature, we might remind ourselves that there is, indeed, nothing new under the sun of political intrigue. Whatever the resolution of the current battles in Wisconsin, it is likely that unions – strengthened or diminished – will indeed survive to fight another day.

Government Activism: Goodbye Fannie Mae, Freddie Mac?

Have you noticed how certain Republicans and Tea Party activists have flung the appellation “socialist” at the Obama administration in the guise of an epithet? Justified or not by the President’s past decisions, these political conservatives are certainly not extending their criticism of the President to Treasury Secretary Tim Geithner’s recent proposal for financial reform. In fact, some free market oriented politicians are actually supporting Secretary Geithner’s ideological goals and policies.

Geithner has proposed an extreme down-sizing of Fannie Mae and Freddie Mac, entities that implement some of the federal government’s most intrusive activities in the affairs of the nation’s private sector economy. Their activities have been authorized by a bipartisan array of Democratic and Republican presidential administrations since the birth of Fannie Mae during the 1930s.

What exactly do these organizations do? Why have they been supported by the federal government for so long? And is Geithner’s proposal an isolated one, or is it a harbinger of an emerging trend?

An Ownership Society

Fannie Mae was created in the midst of the Great Depression during the Democratic administration of Franklin Roosevelt to support the residential housing market and to encourage home ownership. Freddie Mac was subsequently created to supplement Fannie Mae’s economic activities during the Republican administration of Richard Nixon.

What do these organizations do? On a fundamental level, they purchase mortgage loans from banks and then resell them. Or they buy such loans and simply hold onto them for a while. Or they issue guarantees that the loans will be repaid by their homeowners. Throughout the twentieth century, and for the first few years of the current century, the federal government created many such operating programs and activities to prop up the private mortgage markets through these two organizations.

Our political leaders in Washington D.C. have undertaken other activities to prop up the mortgage industry as well, of course. The income tax mortgage interest deduction, for example, effectively enables the federal government to make the mortgage payments of home owners more affordable by permitting borrowers to reduce their federal tax obligations. After all, the larger our mortgage payments, the lesser the income taxes we pay, and the more we can afford to splurge on larger homes!

Every President, prior to the Obama administration, heavily promoted Fannie Mae and Freddie Mac in an effort to support the goal of universal home ownership. Bill Clinton, for instance, focused on the extension of loans to minorities and low-income consumers. And in relatively lofty language, George W. Bush often expressed his vision of an “ownership society,” supported by the operations of Fannie Mae and Freddie Mac.

Geithner’s Proposal

Comparably speaking, how intrusive is the presence of Fannie and Freddie in our national home mortgage market? As compared to, say, the federal government’s presence in our national education system? Or our national health care system?

The U.S. Department of Education’s Race to the Top program, for instance, recently injected $4.35 billion into locally controlled school districts. And the most conservative critics of President Obama’s national health plan complain that its ultimate cost may exceed $2 trillion. At the height of the financial bubble in 2008, in comparison, Fannie Mae and Freddie Mac owned or guaranteed $5.3 trillion of home mortgages in the United States, over half of the total amount. In other words, its fiscal footprint on our national economy actually dwarfs the federal government’s positions in the education and health care sectors.

Geithner’s somewhat audacious proposal is, essentially, to remove Fannie Mae and Freddie Mac from our nation’s home mortgage system through a series of gradual reforms that shift their activities towards the private sector. Many worry that the economic effects of such reforms will lead to higher mortgage interest rates and thus less affordable homes for American citizens. On the other hand, many believe that the political and fiscal effects of such reforms will lead to a significant reduction in the risk probability that multi-trillion dollar government bailouts of this sector of the banking industry will be needed in the future.

Crossing the Aisle

Are you still feeling a bit nonplussed, though, at the sight of a Democratic president proposing a level of fiscal deregulation that his conservative Republican predecessors never seriously contemplated? Such crossings of the ideological aisle may have been unusual a short while ago, but they appear to be growing more common in an era when opposing party politicians are making conscious efforts to display their proclivity for cooperation, collaboration, and comity.

Interestingly, incidents of growing Republican support for government intrusions into the private sector are emerging as well, with staunch conservative Texas politicians vowing to investigate alleged market manipulation in the energy industry, and a bombastic free market oriented New Jersey governor proposing a government rescue of the Atlantic City casino industry and partial government ownership of the insolvent Xanadu retail and entertainment complex. Apparently, on both sides of the political aisle, pragmatic considerations are giving rise to political consensus.

Retire at 62? Sacre Bleu!

In Cameron Mackintosh’s theatrical version of Victor Hugo’s Les Miserables, the first act ends with the thrilling spectacle of Parisian citizens preparing to launch a dramatic revolution against a powerful government. Sadly, most of the revolutionaries end up dying on the ramparts during the second act, albeit in a glorious and inspiring manner.

The French people, of course, first won their freedom from tyrannical King Louis XVI during the Revolution of 1789, an event that began with a street protest that grew into the mob that stormed the Bastille. Throughout modern history as well, the French people have expressed their political views by taking to the streets to stage public marches.

Last week, in fact, the entire French economy ground to a halt as a labor strike paralyzed the nation. But what were the people protesting? An unpopular war, perhaps? Or a stifling new tax of some sort?

Protecting (Very) Early Retirement

Believe it or not, the strikers were protesting plans by the French government to eliminate early retirement. Or, more accurately, to eliminate very early retirement. To be sure, the government was not suggesting that the national retirement age be lifted to what Americans would consider a “normal” age of 65; instead, it was merely proposing that the age be increased from 60 to 62.

Had the French government suggested raising the retirement age all the way to 65, as the government of Greece did several months ago, Paris may have suffered through the same level of violent rioting that swept through Athens. At the time, street mobs of Greek protestors smashed office windows, overturned motor vehicles, and even committed several grisly murders by fire-bombing a downtown bank during business hours.

Lost in these controversies, though, was an interesting question regarding the comparative fiscal budget deficits of Europe and the United States. Namely, how can French (and Greek) government officials believe that they can restore fiscal solvency by establishing a retirement age in the low-to-mid-60s, while the United States faces a fiscal black hole even though its Social Security retirement age for its youngest baby boomers has already been lifted to 68?

Actuarial Science

The solution to that question is a complex actuarial matter, not one that can be defined easily on the basis of a single issue. On the one hand, it’s true that a later (i.e. older) retirement age tends to reduce a nation’s fiscal deficit, not worsen it. But there are many other factors that drive up the cost of providing income and services to retirees in the United States, factors that simply don’t impact European nations to the same extent.

One factor, of course, is the clinical cost of health care services. The United States’ health care expenditures per capita is far higher than France’s expenditures, greatly due to policy differences between the nations. For instance, America refuses to permit its own Medicare regulators to negotiate with pharmaceutical companies and other providers for lower fees. Thus, even though American senior citizens begin to receive government health benefits far later in life than French citizens, the annual cost of those services is far higher in the United States.

Another factor is the cost of administrative complexity. In the United States, Medicare is not the sole insurer of health services for seniors. Many citizens also rely on retiree health benefits provided by their former employers, or on the MediGap private insurance plans that are sold in the commercial sector, to pay for services that fall outside of Medicare’s coverage limits. Furthermore, each state in the United States establishes its own Medicaid coverage policies for long term care functions, which are terribly costly services that are provided near the end of one’s natural life.

Finally, there are cultural factors that impact American populations far more than French populations. Although the French citizenry does encompass various cultural groups, the American citizenry constitutes a mind-boggling diversity of languages, cultures, and ethnicities. Although many believe that this diversity represents a core strength of American society, it also complicates the government’s efforts to distribute a uniform set of benefits across its entire population.

What To Do?

So what is the United States to do? How can the nation manage the many factors that are driving the budgetary costs of retirement benefits far beyond the comparable costs of peer nations?

Although it may be very difficult for America to address the cultural factors, it can undoubtedly accomplish much by tackling the clinical and administrative costs of services. Program administrators, for instance, can address clinical costs by negotiating volume discounts with medical providers. The federal government can address administrative costs by encouraging or mandating the adoption of electronic health records in standardized formats. Such common-sense activities can go far towards supporting an American retirement age that would satisfy most citizens in the United States, even though it may enrage the populace elsewhere.