This Just In: The Recession Ended
The latest U.S. recession is now "officially" declared to have ended in June 2009. These declarations are made, not by the government, but by an academic organization, the National Bureau for Economic Research, NBER. The group's Business Cycle Dating Committee consists of seven leading professors of macroeconomics; it met yesterday in a conference call and made this decision, announced just hours ago.

Gains during the second half of last year in gross domestic product and gross domestic income (personal income and business profits) were the main drivers of the call on the economy's turning point, according to the Committee's statement; these developments stood up to annual mid-year data revisions and recalibrations by the Commerce Department, which allowed the Committee to believe they are sustained and not some statistical fluke. At the same time, the Committee are not "Pollyannas", and their statement is very cautiously worded. The recession ended in June 2009 and a recovery began. But, they remind us, this does not necessarily imply that economic troubles are over. They point out that in the recession during 2001, employment did not turn up for 21 months after the nominal "trough" in economic activity. This time, jobs began to increase, at least to some extent, six months after the trough.

This report recognizes what numerous business economists have said for some time, that the economy stopped contracting in the middle of 2009. At that point forces toward renewed expansion began a process of economic healing. In this cycle, this is turning out to be a long convalescence, a necessary process in our view, as we explained in our own August 23 article. Still, the official designation of "recovery" may well help business, investor and consumer confidence and inspire heartier activity going forward. Surely this and other news already gave a boost to the stock market, which gained almost 1-1/2 percent in today's trading.

Gasoline Prices in Other Countries
In our article last month about the current state of the U.S. economy, we complained about the stubbornly high cost of gasoline as a burden on U.S. consumers' budgets. We heard back, seemingly within minutes, from two readers who have spent considerable time in Europe. "But, Carol, gasoline is cheap in the U.S.!" they exclaimed. "Americans are spoiled." Or words to that effect. There was even some suggestion that gasoline – or the oil companies – here might be subsidized.

So we consulted some websites to learn more about the pattern of gasoline prices around the world. These price figures are conveniently provided for a collection of countries by the International Energy Agency, a Paris-based center of information on all sorts of energy products and policies.

The following table gives prices in U.S. dollars for a gallon of gasoline in five countries during August. The answer about such significant price differentials is readily apparent.

Thus, the differential is almost all due to differing tax rates. The costs of the fuel itself, even including refining, transporting to the gas stations and marketing, are remarkably close for the U.S. and European countries. Japan, in relative geographic isolation, is somewhat higher, but not really a lot.

What of these taxes? Why should they be so different? We selected the U.K. to check out and we examined some reports on the government's budget. Writers for the Institute for Fiscal Studies explain that fuel taxes are indeed meant to discourage personal driving. The tax on gasoline was revamped in 1993 to include an automatic escalator clause, so the levy rate increases on a schedule. The increases have occasionally been delayed, but the latest one just took effect this past April. Further, the Value Added Tax, or VAT, in the U.K. is calculated, not on the actual cost of the fuel, but on the combined cost of the fuel and its excise tax, a double-taxation hit. A separate indicator of the policy intention is found in the licensing fee on vehicles, which is scaled by the size of the vehicle and its engine. So policy in the U.K. is environmentally oriented, besides, of course, trying to raise some revenue for the government.

In the U.S., by contrast, the federal gasoline tax is dedicated to highway construction. Its revenues go to the Federal Highway Trust Fund. So while the tax raises the cost of the gasoline to consumers, those revenues go to help make driving easier. There have even been recent efforts to raise the tax rate, not to discourage driving, but toward rebuilding some now deteriorating roadways. Otherwise, we do find some subsidies for oil companies, in such areas as investment in oil exploration, which can be expensed all at once on the oil companies' tax returns instead of depreciated through time, as for most business investment. These are not large, massive giveaways, but it can probably be said that tax policies are relatively supportive of the oil industry and that they help to hold down the underlying cost of gasoline production. Still, this seems to be limited and vague, not a clear priority.

So where does this leave U.S. consumers? Yes, we pay much less for gasoline – by a factor of more than two times – than people in many other countries. However, we're still paying prices that are quite elevated by our own standards. See the graph. After the through-the-roof performance in 2008, there was a great fall, but the lower levels in early 2009 were not sustained very long, and we seem to be stuck with $2.70 a gallon for regular, an amount that has thrown off the budgeting of our income and is clearly one of the restraints on our feeble economic recovery.

Fixing Social Security: A Big Deal -- or Overblown?

A couple of weeks ago, the Social Security program marked its 75th anniversary. This huge program is a mainstay for the finances of the growing "senior" population. In July, there were 53.4 million beneficiaries, more than one-sixth of the total U.S. population. However, we frequently hear questions and concerns in the media about Social Security's own financial condition. Indeed, a faithful reader writes and asks about the current partisan hype. Is it so bad off – the reader asks – as some bemoan? Or does it really only need tweaking, as others argue?

There is actually a pretty clear answer, one that mainly needs us to strip away the hype and the emotional outbursts from both political parties and just get down to work.

Benefit Payments Larger than Receipts; Deficit Will Eat Up the Fund
The story is basically that Social Security benefit payouts are growing faster than contributions. This year, with the recession hurting the payrolls from which contributions are made, benefit payments will actually be larger than contributions, so there will be an outright deficit. The Social Security program as a whole will therefore eat just a bit into its portfolio of Treasury securities in order to make all the scheduled payments. After a couple of years of renewed surpluses, benefit payments will again be larger than receipts in 2015 and will remain so, relentlessly eating through the Trust Fund assets. At present, Social Security officials project that the Fund will run completely dry by 2037.

After that time, under current law, benefit payments will be limited just to the amount of current receipts. So the payments would have to drop sharply. The Social Security Administration actuary's office estimates that they would have to come down by 25% or that the payroll tax would have to be raised by some 4 percentage points to roughly 16.5% from the current 12.4% – or some combination of these two changes – in order to restore balance.

Early Action Would Save Everyone Money
These are draconian amounts and seem pretty unfair to impose on retirees and workers in 27 years, especially when we know about the situation now. If, instead, we take some legislative action soon, the adjustments can be considerably smaller. The system would be "whole" for the next 75 years if Congress would take prompt action to lower benefits 13% or raise the tax rate to 14.4%, or some combination of changes to benefits and taxes that would only need to be about half the size of delayed changes. So, in brief, we can "tweak" now – albeit a pretty good-sized "tweak" – or we will have to chop later.

The last time there was an overhaul of Social Security was 1983. At that time, the system was allowed to run out of assets. Congress was finally moved to act when they had to vote temporary borrowing authority for the Social Security Administration in order to prevent benefit cuts. Now, we know what will happen, so we have no excuse for not fulfilling our obligations.

Problem Is Numerical, Doesn't Have To Be Political
Thus, everyone is wrong and everyone is right about the need to work on Social Security. It is wrong to say that the system is broken drastically and has to be completely redesigned. It is also wrong to downplay the need for action. The issue is serious and deserves close attention. An advantage is that since the problem has its origins in numbers, not politics, there should be room for dispassionate discussion of reforms that might be desirable. The looming shortfall is not the fault of some irresponsible policymaker or bureaucrat, and we don't have to spend time on the diagnostics and fact-finding. So maybe we could explore some design ideas.

In the current issue of the Social Security Bulletin, a quarterly journal of the Social Security Administration, Chief Actuary Stephen Goss gives us some helpful background that comes from the very fundamentals of how many people there are and how long they live. The prior episode of shortfalls came because the life expectancies of beneficiaries were becoming longer and longer. In 1935, 65-year-old men could look to 11.9 more years of life and women, 13.2 years. By 1983, men aged 65 were up to 14.3 more years of expected life and women to 18.6 years. So, then, one of the obvious ways to solve a deficit of benefits versus receipts was to raise the retirement age to absorb some of this longer benefit period. Younger workers are thus experiencing so-called "full retirement age" at 66 and eventually 67 compared to the original 65.

Probable lifespans are still increasing, but now there is an additional issue, Mr. Goss emphasizes, the decreasing number of workers per beneficiary. For the past 35 years, the ratio of workers to beneficiaries has hovered in a range of 3.2 to 3.4, or right at 30 beneficiaries per 100 workers. Now, this relationship has already started to change, because after the Baby Boom, the birth rate dropped sharply. As a result, there are fewer workers per beneficiary: the ratio went down through 3.0 workers per beneficiary during 2009 and it is likely be just 2.1 by 2035, translating to 48 beneficiaries for every 100 workers, a 60% increase. These are firm projections, because the people involved are nearly all alive today, and we know how many of them there are.

Remedies Can Simply Change Formulas or Alter Basic Structure
Thus, Goss argues, trying to fix the impending deficit problem by fiddling with the retirement age might not be enough or might be less effective in curbing the growth of benefits relative to contributions. In separate analysis, the Congressional Budget Office points out that there are numerous other items in the tax and benefit formulas that might be altered: the earnings ceiling where workers stop owing the payroll tax, the income scale used in calculating the initial benefit, and so on. All of these variables could be changed.

This is where some, mainly Republicans, have argued for "privatization", the outside investment of some portion of an individual's Social Security "account", in the expectation of raising more income through private sector assets. In the past, we've been an advocate of that approach as an adjunct to other efforts. But after the recent plunge in stock values, it no longer seems as prudent, regardless of one's political persuasion. Another approach we've heard talk about lately involves shifting the structure of the benefit calculation toward the "defined contribution" system that is used for 401(k) plans and a growing number of corporate plans. Then the benefit payment becomes a distribution that depends on the current value of the account, rather than on some pre-ordained formula. And the liability of the fund's managers or trustees becomes simply the current value of the fund, rather than an actuarial projection that forces repeated balancing adjustments.

This is the time for discussion of these notions. In the current hyper-partisan political environment, it's probably foolhardy to think the discussions could be "dispassionate", but it's much better to deal with all of it now when we can all be more thoughtful about it.

Finally, this is a huge issue, and we all have a stake in it. If you have comments or further questions, please write us; we'll see what we can find out.

Sources:
Stephen C. Goss. "The Future Financial Status of the Social Security Program," Social Security Bulletin, Vol. 30, No. 3, August 2010, pp. 111-125.

Data are from www.ssa.gov, "Actuarial Publications" [i.e. tables] and 2010 Trustees Annual Report, published August 5, 2010, and all accessed September 1, 2010.

Noah Meyerson, Charles Pineles-Mark, and Michael Simpson. Social Security Policy Options. Washington, D.C.: Congressional Budget Office, July 2010, especially pp. 1-16.