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Weekly Economic Commentary

 
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Poor People or Old People - Who Do We Want to Help?

July 20, 2011

Dowload PDF version 

Milton Friedman, may he rest in peace, used to talk about the "tyranny of the status quo." By that, he meant that it is difficult to change public policy because of entrenched interest groups allied with policies that have been in effect for decades. I would argue that opposition to changes in our current Social Security and Medicare programs is an example of tyranny of the status quo. The original intent of both programs was to provide an income support floor for our retired senior citizens. So, why do these programs supplement the income directly through Social Security and indirectly through Medicare to wealthy seniors? We do not have similar income support programs for wealthy juniors. If we care about poor people, regardless of whether they are 75 or 25, why don't we means test Social Security and Medicare? Higher income retirees would get smaller Social Security benefits and pay even higher Part B Medicare premiums than they already do.


One common objection to this is that seniors paid into these programs when they were working and are, thus, owed the benefits. Yes, when you work you pay Social Security and Medicare taxes. But, because these programs are largely, in effect, Ponzi schemes, your Social Security and Medicare taxes are being used to cover the benefits being paid out to your parents and grandparents. When you are eligible for these benefits, it will be your children and grandchildren making payments to fund your benefits if the basic structure of these programs is not changed. And, until recently, Social Security tax receipts exceeded benefit payments. This current surplus was folded into the Treasury's general fund, which was used to pay for everything from military activities to national parks. Social Security taxes are just another revenue source for the Treasury - an income-capped flat tax. The Social Security Trust Fund is just a bookkeeping gimmick. When the time comes to tap it, the Treasury will have to raise taxes, issue bonds and/or cut other spending to honor it. So, let's talk straight about this issue.
Now, means testing Social Security and Medicare benefits obviously will be unpopular with those higher income seniors who have "earned" the full benefits promised them. So, in order to mollify this group, let's flatten the federal income tax structure. But, so as not to lose too much in revenue, as the marginal rate structure is flattened, let's cap some popular deductions such as mortgage interest. The basis of supply-side economics is that economic decisions of work vs. play and saving/investment vs. pure consumption are made at the margin - the margin of the tax rate. So, by flattening the marginal income tax structure, the economy's potential growth rate would be enhanced.


I wish that this idea of means testing senior benefits and flattening marginal federal income tax rates were originally thought of by me. But, this is not the case. I got the idea from reading a commentary about a year ago written by Josh Barro, the Walter B. Wriston Fellow at the Manhattan Institute. The Manhattan Institute is a think tank devoted to arriving at market-oriented solutions to public policy challenges. Any errors in representing this view are, of course, mine and not those of Mr. Barro.


Sales of Existing Homes Declined in June, Partly Due to Cancellations 

by Asha Bangalore
Sales of existing homes declined 0.8% to an annual rate of 4.77 million units in June.  The cycle low for sales of existing homes, excluding the swings related to the first-time home buyer credit program, is 4.5 million units, recorded in November 2008.  Effectively, sales of existing homes have risen 6.0% from the cycle low mark (see Chart 1).  Sales of single-family homes held steady at 4.24 million in June, up 5.5% from the cycle low reading of 4.02 million in November 2008.  The peak for sales of single-family homes occurred in September 2005 (6.34 million units).  Sales of existing homes fell in the Northeast (-5.2%) and West (-1.7%) but rose in the Midwest (+1.0%) and South (+0.5%).  The National Association of Realtors has indicated that 16% of realtors reported sales cancellations in June vs. 4% in May.  The reasons for cancellations are unclear, with appraisals and tightness of credit being cited as possibilities. 

DGC 72011 1 
The median price of an existing single-family home stood at $184,600 in June up 8.7% from the month and 0.6% higher from a year ago.  The year-to-year increase is the first since November 2010 (see Chart 2).  This improvement in pricing of existing homes is encouraging and additional such gains would suggest that housing market conditions are stabilizing.  However, this optimism may have to be revised in light of the large number of unsold existing single-family homes and persistence of distressed properties in the market place. 
DGC 720112 
Inventories of unsold single-family existing homes have held at 8.9 months supply in each of the three months of the second quarter, up from 8.6-month mark in March.  DGC 720113 
In June, 30% of existing homes sold were distressed properties according to the National Association of Realtors, which is a nearly steady reading compared with 31% in May 2011 and 32% in June 2010.  Chart 4 indicates that distressed properties sold continue to hold at an elevated level, which plays an important role in pricing of existing homes.  The good news is that the share of distressed properties in sales of existing homes shows a small declining trend since February 2011 (see Chart 4) and the June reading (30%) is below the median (34%) for the period October 2008-June 2011.  DGC 72011 4 

 

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The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.
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