Sunday, October 10, 2010

The Social Security Boondoggle

Three groups spend other people's money: children, thieves, politicians. All three need supervision.  Dick Armey

The American people have a false sense of security when it comes to believing that the government’s “cradle to the grave” entitlements will always be there and will guarantee them a secure and worry free retirement.   In truth the American perception of retirement security is indeed fatally flawed and even the Dallas Federal Reserve startled America when it declared that the SS and Medicare shortfall will be $100 trillion dollars.
Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon. Traditional Medicare composes about 69 percent, the new drug benefit roughly 17 percent and Social Security the remaining 14 percent.
I want to remind you that I am only talking about the unfunded portions of Social Security and Medicare. It is what the current payment scheme of Social Security payroll taxes, Medicare payroll taxes, membership fees for Medicare B, copays, deductibles and all other revenue currently channeled to our entitlement system will not cover under current rules. These existing revenue streams must remain in place in perpetuity to handle the “funded” entitlement liabilities. Reduce or eliminate this income and the unfunded liability grows. Increase benefits and the liability grows as well.

The government used to get away with operating the world’s biggest Ponzi scheme because an upwardly mobile middle class with rising wages paid the taxes to keep the scheme alive and growing.  But wages have been crashing for at least a decade and “real” wages are at 1970’s levels.  Besides promising outsized benefits that can never be paid, the government is broke and so is Social Security/Medicare. 
The so-called Social Security Trust Fund has been looted by Congress to the tune of well over $2 trillion.  The Congressional thieves merely raided the SS Trust Fund and left a big pile of IOU’s.   After all, Congress Critters love doling out the financial security of retirees, widows and orphans to their rich partners in crime.  Senator Jim DeMint introduced a bill to stop Congress from raiding the SS Trust Fund but it went nowhere.
It’s time for politicians to stop stealing from our seniors to secretly finance trillions in wasteful Washington spending,” said Senator DeMint. “Congress has been raiding the entire Social Security surplus every year to pay for bridges to nowhere, teapot museums, and bloated government agencies. Politicians in Congress are using Enron-styled accounting, but if this were done in the private sector they’d be sent to jail. It is time to stop spending the Social Security surplus on other government programs and begin saving it for this generation and the next.”
 Every year, Congress raids the entire Social Security surplus to pay for wasteful earmarks and other government programs. In the last 20 years, Congress has already raided two trillion dollars from Social Security, including interest. Without Senator DeMint’s “Stop the Raid” amendment, the Social Security Administration estimates that Congress will raid an additional $452 billion from Social Security between 2009 and 2013, which including interest would exceed $1 trillion.
 “There is nothing but stacks of IOU’s in the Social Security trust fund because Congress has spent all of the money and will continue to spend it if we don’t take immediate action. Because of this raid by politicians, Social Security will not be able to pay promised benefits to seniors in less than 10 years.”
Things are about to get a whole lot worse for SS as it is drying up faster than originally projected which was 6 years from now.  SS is now officially in the hole for 2010 and will need $41 billion from the government to fund the benefit.  With a severely ailing economy it isn’t likely that SS will be replenished anytime soon with SS taxes from a largely unemployed and underemployed population of financially struggling folks.
As bad as things are for Social Security, it’s quite minor when compared with the massive underfunding of Medicare and the prescription drug program.   It’s probably true that the current generation of folks receiving SS and Medicare will be the last generation of folks to receive promised benefits. 
But the simple truth is:  there is no money to fund what Americans consider a comfortable retirement entitlement and “free everything” as their birth right.  Politicians merely used these entitlement programs as a cover to steal and like Bernie Madoff who “made-off” with the money, what Congress does is even more criminally negligent.  Many Congress Critters are quite wealthy and have personal trust funds to protect their assets from public plunder.  How would they feel if “We the People” raided their personal trust funds, stole their money and left a big pile of worthless IOU’s?   Moreover, Congress Critters have a pension plan that has been dubbed the “Golden Fleece Retirement” because “Congressional pension benefits are 2-3 times more generous than what a similarly-salaried executive could expect to receive upon retiring from the private sector”, according to the National Taxpayers Union.  Congressional pensions are so generous that they can collect $5 million or more in benefits.
These same Congress Critters who generally average millions in public pension benefits and who are already rich or exceedingly financially comfortable to begin with have no moral qualms whatsoever when it comes to robbing ordinary working stiffs of their Social Security checks.
Many financial planners and organizations have calculated how much one would receive in pension benefits if the same amount of money a person is forced to dump into SS was invested in private retirement accounts. 
Social Security finances retirement benefits by taxing workers' wages. Holding the tax rate constant, total benefits can increase by no more than payroll increases. That has been about 1.6 percent per year. It's the rough equivalent of a portfolio of stocks and bonds that earns 1.6 percent. If one were to save $1,000 yearly for a 44-year working career and earn this rate of return, accumulated wealth would be about $63,000. Over the last 75 years the compounded annual real return from a balanced fund of 70 percent stocks and 30 percent bonds was 6.2 percent. Saving $1,000 per year for 44 years at this rate of return would result in about $211,000…
Since World War II there have been only two occasions during which the market fell for two consecutive years-1973 and 1974, and 2000 and 2001-culminating in losses of 41 and 21 percent, respectively. Yet for the full period 1973 through 2001 the average annual compounded return was 12 percent, about 6.5 percent after adjusting for inflation.

Private investing is the only true wealth builder that benefits every member of society but government systematically stripes folks of their ability to build wealth, have financial security and own the resources to fund their retirement and healthcare needs.  More to the point, the government doesn’t want the great unwashed masses to have economic power and financial security because then folks wouldn’t be begging politicians for a few crumbs when they vote. 
There are other problems that differentiate the SS nightmare of today from the days when real surpluses accrued in the system.  In 1950 there were 16 workers supporting every retiree on SS.  These days there are under 3 workers to support every SS collecting retiree.  Also, expensive and unfunded programs for Medicare and prescription drugs were added and expanded over the years (Medicare Part A, Part B and Part D).  The incredible burden on the young to support an aging population that is living longer and longer is mindboggling and will ultimately result in generational warfare.  Because there is no money to fund what was supposed to be a self-supporting financial system of entitlements and medical care, these benefits will either have to be drastically reduced or taxes will have to increase significantly. 
The Nation Center for Policy Analysis has reported on the level of taxation needed to fund the promised benefits.
Future Payroll Tax Burdens.  Currently, a 12.4 percent payroll tax on wages funds Social Se­curity and a 2.9 percent payroll tax funds Medicare Part A (Hospital Insurance).  But if payroll tax rates rise to meet unfunded obligations:
·         When today's college students reach retirement (about 2054), Social Security alone will require a 16.6 percent payroll tax, one-third greater than today's rate.
·         When Medicare Part A is included, the payroll tax burden will rise to 25.7 percent - more than one of every four dollars workers will earn that year.
·         If Medicare Part B (physician services) and Part D are included, the total Social Security/Medicare burden will climb to 37 percent of payroll by 2054 - one in three dollars of taxable payroll, and twice the size of today's payroll tax burden!

Can Higher Taxes Solve the Prob­lem?  The CBO also found that if federal income tax rates are adjusted to allow the government to continue its current level of activity and balance its budget:
  • The lowest marginal income tax rate of 10 percent would have to rise to 26 percent.
  • The 25 percent marginal tax rate would increase to 66 percent.
  • The current highest marginal tax rate (35 percent) would rise to 92 percent!

Additionally, the top corporate income tax rate of 35 percent would increase to 92 percent.
With unfunded entitlements eating up bigger and bigger chunks of the federal budget, the system has about as much shelf life as any Ponzi scheme.  
America is facing a horror wherein the young will be forced into acute impoverishment just to support the old.  The fact that our economy doesn’t offer much in the way of economic prospects for the young to earn and build wealth, America as a nation will collapse under the weight of such financial burdens. 
Seniors will frequently shout “I demand those benefits because I paid for them”.  However, this is not always true because many of them collect 2-3 times what they paid in, depending on how long they live and their health issues.  One of the worst tragedies for all Americans is that the SS and tax systems rob working folks blind because the system is designed to prohibit personal wealth building for the middle class.  Everybody is screwed.  It’s just that some folks are screwed worse than others.
Even if Congress had not looted the Social Security Trust Fund to the tune of trillions, the entire system of SS/Medicare is unsustainable in the short term or the long term.  Not only is it destined to crash and burn because that’s the only possible outcome for any Ponzi scheme, the human misery of it all will be agonizing beyond belief. 
The politicians are always busy concocting pie in the sky fixes for the messes they create.  In the case of SS/Medicare the politicos have seized on the idea to add another 100 or 200 million folks on top of our existing population.  There’s only one problem.  Most of the third world immigrants who are brought here to work and fund SS are entitlement dependent themselves and consume far more in benefits than they will ever pay in taxes.   These are folks who tend not to pay any federal taxes anyway and actually receive thousands of dollars annually from the Earned Income Tax Credit and other entitlements.
Because SS and Medicare have been institutionalized as something sacred and because seniors are a hugely reliable voting block of folks that the politicians romance, nobody wants to tackle the immense systemic problems of SS and Medicare or the fact that it’s the financial rape of the low net worth poor to fund lavish subsidies to much higher net worth seniors.  Thankfully, folks are beginning to chirp in.  Economist Walter Williams took on the issue in a piece titled “What Handouts to Cut” and said “According to the Census, around 80 percent of Americans 65 and older own their own homes compared to 43 percent under 35. Twenty-three million households, or 37 percent of all homeowners, own their homes free and clear, and most of these are seniors aged 65 and older. According to the Federal Reserve Board's 2007 "Survey of Consumer Finances," the median net worth of people 65 and over is $232,000, those under 35 years have a net worth of $12,000 and for those 35–44, it's $87,000.
For good reason, older people have accumulated more wealth than younger people; the primary reason is that they've had more time to do it. There is no logical case that can be made for using the tax system to force Americans with less wealth to subsidize those with more wealth. But it's not clear who is subsidizing whom. Consider an elderly widow, say 70-years-old, with a modest retirement income of $18,000 living in a $300,000 house that's fully paid for. She might receive local property tax forgiveness, medical and prescription drug subsidies and other federal, state and local subsidies based upon her age and income….. Only 50 percent of young people vote, but up to 70 percent of seniors vote.”
Williams raises perfectly valid issues and he also got a ton of hate mail over the piece he wrote that disclosed the truth.  Karl Denninger took the issue to new heights when he wrote in a piece titled “Here Come the Lies (Social Security)” that “a black male has a life expectancy (as of 2007, at birth) of 68.8 years.  A white woman has a life expectancy of 81 years.
So a black man could be expected to live 3.8 years post-retirement at 65.  A white woman, 16 years.  Put another way, if a white woman and a black man have exactly the same earnings history in their lifetime, the white woman will receive 4.21 times the Social Security "income" as will the black man.
(Incidentally, if you're a native-American man you're in worse shape than the black man - the only ethnic group that is.)
Those who want to talk about Social Security's purposes never want to discuss this little bit of rather intentional and institutionalized racism.”
Precisely because SS is substantially a poor man’s tax and the biggest tax paid by many, it is grossly inequitable.  SS is only paid on wages earned up to $106,800 but rich trust fund babies and those who have high levels of unearned income are exempt from paying any SS tax.  Financial guru John Hussman caught a lot of attention when he recommended “Drop the rate substantially, but include all income – wage and non-wage. Three-quarters of Americans pay more in payroll taxes than in income taxes. By reducing the wedge between the hourly amount earned by employees and the hourly cost paid by employers, this strategy would create immediate incentives for employment. Moreover, it would raise more revenue because at present, even Warren Buffett only pays Social Security taxes on the first $106,800 of income.”
Hussman’s solution would work wonders for raising SS revenues, helping the economy recover and putting more disposable income into the hands of ordinary Americans.  However, so long as the thieving and grubby fingers of Congress Critters insist on pilfering SS, there are no reforms that will ever work to render it financially sound and/or solvent.

No comments:

Post a Comment