3 Economic Riddles Politics Won't Answer

03/28/2011 12:50 pm EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

This column is devoted to making sense out of money issues, but when governments get involved, the results can seem to defy economic logic.

1. No Cost-of-Living Increase for Social Security…but Medicare Premiums Rise 4.4%
The federal government can’t find any sign of inflation since the fall of 2008, so the Social Security Administration says there will be no cost-of-living increase in benefits for Social Security recipients in 2011:

As determined by the Bureau of Labor Statistics, there is no increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of 2008, the last year a Cost of Living Adjustment was determined, to the third quarter of 2010.

No inflation in the past two years? Where do they live?

Yet at the same time, Medicare premiums are set to rise 4.4% over the 2010 levels for anyone with income over $85,000.

The government’s reasoning for the increase in premiums, as written on Medicare.gov: “The Medicare Part B premium is increasing in 2011 due to possible increases in Part B costs.”

Oh, great. The government is actually getting ahead of anticipated cost increases by charging you higher premiums—in advance! But they don’t recognize any inflation for the past two years when it comes to Social Security. Does this make any sense to you?

By the way, your actual Medicare premium is based in your income two years ago—perhaps before you retired—and could be as high as $369.10 per month, a shocking fact for many recent retirees.

2. Home Values Are Falling but Property Taxes Are Rising
I don’t care how many county assessors and village clerks try to explain this to me, it can’t possibly make any sense. Even with lagging re-assessments, there’s no way that property taxes reflect anything like current market values.

For example, Lake County, Ill. (just north of Chicago), in 2009 collected an average of 7.25% of median household income—one of the highest collection percentages in the nation and the highest in Illinois.

In fact, the state of Illinois in 2009 ranked as the fifth-highest collector of property tax as a percentage of home value, and yet the state is on the brink of insolvency. (You can check these figures for individual states and counties using the property tax lookup tool at interactive.taxfoundation.org.)

Even more astounding is the fact that property taxes in Lake County haven’t fallen, despite a 6.3% decline in “equalized assessed value.”

State and local governments make up for falling home values by increasing assessments through a variety of accounting tricks, but the bottom line remains the same: You’re paying more property taxes.

While home prices have fallen as much as 30% from their peaks in many states, property-tax collections have climbed more than 10% nationally since 2008.

Only government could get away with this—and that might not last long. Just ask the mayor of Miami, who was ousted in a recall election last week after proposing a 14% property-tax increase.

3. Universities Increase Tuition, Yet Graduates Can’t Repay Loans
Everyone agrees that education is the basic requirement for a successful, growing economy—even though today’s college graduates can’t find jobs and are having huge problems repaying student loans.

Notably, the interest rates on many federal student loans are set far higher than even mortgage rates. And you can’t default on student loans through the bankruptcy process.

It’s clear that college is being priced out of reach for many struggling families, and that financing college is turning into a very risky deal. But instead of cutting costs and lowering prices to encourage more use of their product, colleges and universities across the nation are raising tuition rates.

Last week, the University of Illinois announced a 6.9% tuition increase. That’s just a reflection of what’s happening across the country.

Only one school seems to get it. In Terra Haute, Indiana, the new freshman class at St. Mary-of-the-Woods College will be promised that their first year’s tuition and fees, currently $25,000, cannot rise over their four-year course of study. Officials there said the policy is an attempt to increase enrollment and retention.

Finally, someone in a college administration is acknowledging the reality of the marketplace: Higher prices destroy demand—unless government subsidizes student loans.

If we want an educated citizenry, schools will have to make better use of their resources instead of passing on higher costs.

What do all three of these examples have in common? Those who price the “product” are insulated from the demands of the marketplace, where ordinary people have to make tradeoffs. Taxes and subsidies shift costs and incentives to benefit insiders at governments and educational institutions, while the rest of us pick up the tab.

Related Articles on MARKETS