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This page contains a single entry from the blog posted on December 13, 2010 4:53 PM. The previous post in this blog was Countdown is on to Buck-a-Hit Day. The next post in this blog is Need a sponge bath?. Many more can be found on the main index page or by looking through the archives.

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Monday, December 13, 2010

The worst part of the tax sellout

It's hard to single out one aspect, but certainly some folks are particularly worried about what it means for the future of Social Security.

Comments (18)

By any objective measure, Social Security has been an extremely successful government program. One such measure is the poverty rate among retired individuals, which has dropped substantially. Another is the very low cost of operating the program.

Since Social Security has been successful, this contradicts the philosophy of the Radical Conservatives that no government programs can work. Radical Conservatives need to weaken and destroy the program, so they can then point to the program as one that does not work. It looks like this will be done by allowing the program to bankrupt itself.

Once the prgram is partially privatized and payroll taxes are diverted elsewhere, the program will not be able to meet its obligations, and we will all hear arguments about how government cannot run a retirement system. Of course, turning things over to Wall Street will mean billions in extra fees, and a portion of that money will be used to elect legislators partial to that cause. For those of you who want this outcome, one question. How's your IRA/401k Plan done in the last few years?

Just a preview of 2013 and beyond.

Passed by 85 - 13
Ouch.

Due in part to a lopsided demographic, social security has no future. The original intent was for the program to be a stop gap for the elderly to avoid abject poverty - not a retirement program. Obviously times have changed - my generation will never see social security money.

Passed by 85 - 13

The United States Senate is a big part of what's wrong with America.

As evidenced by this article. You know, they are not even embarassed enough to hide it anymore.

http://taxprof.typepad.com/

The "compromise" as proposed has no impact on the funding of Social Security, just as the federal budget deficit has no impact on the funding of Social Security. The temporary FICA reduction and the massive increase in the deficit will provide arguments, for those who want some, to pare back Social Security. Those arguments have little merit and would hardly stand up against the kind of political resistance that met Bush's efforts to privatize in 2005. The biggest threat to the funding of Social Security is the prospect of protracted unemployment and wage deflation.

It may indeed prove to be politically difficult to let go of the Social Security tax cut, but if it becomes permanent there surely will be increased pressure to lift the cap on high-end contributions to make up for it. This would be a politically popular move and a positive development overall. Workers at the lowest income levels have been paying too much into the system relative to the benefits they receive from it (owing to both lower benefit levels, a longer average working life and a shorter average lifespan after they do retire). Anything that helps those at the bottom is a net plus. I know there are risks involved in a payroll tax cut, but I'll take it. It's much better policy than the Bush tax cuts were.

Did you hear the latest? President Obama just called the cave-in of the stadium in Minnesota a "good deal for the American People."

He's coming out to Astoria, Oregon to cut the ribbon on the newest tourist attraction there.

"Social Security has been an extremely successful government program."

Especially if you have beeen getting benefits for a while. Why don't ou ask a 30-something who is giving up 7.5% of his paycheck to support his elders?

"no government programs can work."

Govt programs could work IF govt would just leave them alone. However, like PERS and the health plan when you start collecting premiums and realize you aren't paying out that much at the start, then the temptation is to expand who gets payouts. Pretty soon once the payouts catch up with income (3-2-1-now), then it gets to be ugly.

BTW - Cutting FICA tax by 2% is stupid. It'll drive it that much faster into the red.

Don't worry about it. We can just borrow more money from the Trust Fu...uh oh.

Ha ha, good one Bill. Want to hear an even better one? Paul Krugman calls it stimulus.

I'm an economic ignoramus but I've never understood how Social Security can continue indefinitely unless there are more young people paying into it than people drawing from it. This seems so because of two things: 1) Inflation which would seem to outpace any interest that might be accumulated (and seems unlikely because so much is paid out rather than invested) and 2) the number of retirees is growing AND people other than the folks who originally put money into the system through their paychecks have been - and are - drawing from that pool.

When you add on things like a cut in social security taxes and talk about other things like using social security money for things other than what it was intended (or doing away with it entirely and expecting everybody to look out for themselves) it's an even scarier picture.

We may have to look at ransoming Edgefield back from the Menamin brothers so that it can be rechristened as a new Poor Farm.

I am 53 and have been hearing since I was at least old enough to work that SS was "going broke" that it wasn't going to "be there" for me, that I was not going to get mine, etc etc. It is like the old lady who has been dying for the last 40 years. But is still kicking. It will last for political reasons. Try telling people who have been paying in their entire lives that they will not get theirs now that they are retiring and their 401-Ks are now 201-K. These people vote. Changes will be made but it is essentially a good program and it is all many people have. I do not see many deficit hawks volunteering to send their back to the government.

Seems like any big stimulus package is going to have a similar affect on SS funding - because it will increase the deficit. Since our contributions are not earmarked for benefits and there's no trust fund holding the contributions separate from the other money the government collects, the liability is just an unfunded obligation of the US Govt. There's no difference to SS system if they reduce our contributions or send us a check in the mail. It's all coming out of the same pot of money.

Let's look at what Social Security really is, and not the myths, spin and political posturing by politicians on both sides of the Aisle.

1. The program is a defined benefit pension plan. Benefits are based on lifetime earnings, adjusted for inflation.

2. The program is a separate Trust Fund. The Trust Fund is invested in US government bonds because they are the world's safest investment (really) and they are politically neutral. Those of you who claim this is the Fed robbing the SS Fund, take a look at the Balance Sheet of Private Pension Funds, Insurance Companies etc. They are heavily invested in Government Bonds. If you expect to cash in on your life insurance, it is because the insurance company will be able to cash in its government bonds.

3. By paying interest to the SS Fund, the Federal Government is directing some General Revenues to the Fund.

4. Under current law the SS Fund cannot go bankrupt. This would require zero people working. What can happen is that the SS Fund may exhaust its balance, and then be able to pay out only what it takes in each year. Estimates are that this could be 75% to 85% of statutory benefits. So under a worst case scenario the forecast is that everyone in the SS System would get at least 75% of promised benefits. Not great, but not zero either.

5. The truth of the matter is that no one can accurately predict if and when the SS System will exhaust its Fund Balance. It depends on economic growth, inflation, wage rate increases, immigration, and about every other economic variable, none of which can be forecast with any accuracy.

6. The Government will replace the lost 2011 contributions out of its general revenues (or borrowings). The long term health of the SS System will not be affected by the payroll tax reduction. The external debt of the U. S. will grow, however.

7. If the SS System does exhaust the SS Fund, then there will have to be more borrowing or lower benefits or higher taxes or increases in the eligible age. One or a combination of these events will happen. If nothing is done, there will be lower benefits (see points above)

8. The underlying problem is demographics. The U.S. population is aging, and retired people consume but do not produce. Unless long term there is substantial economic growth, and unless a large portion of this growth is allocated to retired people, over the long term economic income of the U. S. will decline. The current and future fight is over who will aborb this decline.

A normal trust fund wouldn't allow the trustee to tap into the fund for uses other than those to which the fund was dedicated. The US has been doing this for years. It's a trust fund in name only. I think it confuses the issue to even refer to a trust, once the fund can be raided for any purpose. What good is a trust if it's main asset is IOUs from the trustee?

Gary, you could describe the same facts the way Sid has above, saying that the Trust has been investing in US government obligations, which are generally regarded as investments having no risk of default. Calling them IOU's from the Trustee doesn't change that. Nor does your language about "tapping into the fund for other uses" change the investment aspect.

Social security won't fail us if we don't allow it to. It's really that simple.


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