Budget Cutting For Dummies... And Washington Politicians, Part 5 - Social Security

The last four days we have been looking at ways to reduce Federal government spending as quickly, as efficiently, and as painlessly as possible in order to avoid a complete financial and political meltdown of the United States government and the freedom that we derive from it. We have looked at government waste, obsolete programs, and redundancy as ways to reduce spending. Today we will take a stab at one of the biggest line items in the government budget, Social Security.

Before getting into the details of how to fix Social Security, lets review a few basic facts. First, several times in this blog we have proven that most Americans would have been better if money confiscated in their name and given to the Social Security Administration had instead been placed in a tax deferred retirement account, e.g. an IRA or 401k-type saving s option. Even if that money had been invested only in safe, low returning Treasury Bills, it would have been a better deal in retirement than trusting that Social Security would make good on their promises. However, that did not happen and we need to look at the reality of today.

As a result of that previous analysis, I do have detailed IRS results from 2008 income tax returns that give us the number of Americans who had adjusted gross income at various income bands, starting at $200,000 and up. We will use this official IRS data below. I also obtained Census data that showed how many U.S. households fall into different income bands from 2009. Finally, I have the latest Social Security Administration statistics from early 2011.

Thus, there is a small issue of timing since the three primary data sources are from recent, but different years. However, given that this is a rough estimate, the results should not vary much if we had the latest data from the same time period. I am sure it exists somewhere in the bowels of the Federal government but I could not find the information easily online. The methodology and logic are sound, the variations in the end results should be minimal.

In "Love My Country, Loathe My Government," three steps were proposed to fix the ailing Social Security financial mess:

1. Step 10 exempt the first $50,000 of income from any Social Security tax, uncap the maximum amount of income that is taxed for Social Security, and tax all forms of income at 1%.
2. Step 11 - prohibit any citizen with more than $3,000,000 in assets from collecting Social Security retirement checks.
3. Step 12 - raise the retirement age to 70 over time.

Let's look at each of these changes in detail.

Step 10

A very basic problem with the current tax set up for Social Security is that wages are taxed up to about $102,000. Any wages earned that exceed this cap is exempt from further Social Security taxing. Thus, if someone earns about $102,000 a year and another American earns $1,020,000, ten times as much, the amount each pays for Social Security taxes is the same. If a third person earns $10,200,000, he or she pays exactly the same amount as the first person. Thus, the more wages a person earns, the lower the tax is as a percentage of total wages once the cap is exceeded.

The second problem with the current taxing arrangement is that Social Security taxes are levied only on wages. If someone had no wages but earned $10,000,000 in interest, dividends and capital gains, they would pay nothing into Social Security. Thus, the burden for carrying the whole system is placed on lower and middle income families and wage earners have a real tax rate that is much higher than for higher earners.

This proposed approach attempts to begin changing the above inequalities. It is the most detailed step but gets us very close to solving the entire funding problem. The analysis and logic go as follows:

• The latest Social Security Administration (SSA) results indicate that there are 54,194,000 Americans currently receiving checks from the SSA every month with an average value of $1075.80. Thus, if you multiply these two numbers together along with the number twelve, twelve months in the year, you determine that the SSA pays out about $699,622,862,400 a year in benefits.
• I found a source on the Net that tracks Federal government spending and they had a table that showed the budget for Social Security to be about $730 billion but this number also included administration costs in addition to payouts. Thus, there does look like there is some consistency between the two sources so let's use $730 billion as a Federal government line item for SSA.
• Half of the SSA funding comes out of wage earners checks and the other half is a matching amount that the wage earner's employer must pay in. Step 10 assumes that the employer portion of the taxation scheme will not change. Thus, we need the American taxpayer to pick up half of the $730 billion or about $365 billion to cover SSA expenses.
• From the IRS tax tables I already had, I can estimate how much higher earning Americans contributed to the SSA in 2008. However, these tax tables and the spreadsheet they are already in allow me to adjust and model what these taxpayers would pay under various scenarios.
• I adjusted the spreadsheet to include the lower earning households that I got from the Census data.
• After several iterations of various Step 10 scenarios, I found if I exempt the first $35,000 in every household's income from any Social Security tax and then tax everyone else's total income by 6.1%,  I can generate just over $365 billion, enough to cover the needed revenue of half of the SSA's budget line.
• In this scenario, the amount of money paid by those U.S. households earning over $200,000 a year goes from about $26 billion to about $166 billion a year.

This approach, as laid out in Step 10, is a much fairer taxation method since every American is taxed at the same rate once you remove the cap. You no longer get the effect that someone making $10,000,000 pays the same dollar amount but a much lower percentage amount of someone making $100,000 a year.

This approach should also stimulate the economy by putting more disposable income into the hands of millions of more households.
The flexibility in this approach is that you could easily change factors over time. You could tweak the tax rate or the amount of money exempted from SSA taxes as needed. It is simple to understand.

However, there are two problems with this approach. 6.1% is a pretty hefty tax burden to place on a lot of U.S. households. It would probably result in some depression of economic growth since these households would have less disposable income. Second, while we have fixed the funding problem for the current time frame, this problem will get worse over time as more and more Baby Boomers retire. Thus, the $730 billion number will grow unless we do more.

Step 11

That beings us to the other two steps. Step 11 would not allow any American with more than $3 million in assets to collect a Social Security check. Consider an old joke to understand this step:

A young, good looking, and extremely rich gentleman walks into a bar, sits down and orders a drink. He notices a gorgeous young woman across the room and before you know it they are sitting together, enjoying each other's company as she learns that he is indeed, very rich. After a little while the following conversation occurs:

Man: Would you sleep with me for one might for a $1,000,000?
Woman: Quite possibly.
Man: Would sleep with me for one night for $10?
Woman (Outraged): What type of woman do you think I am????
Man: Oh, we know what type of woman you are, we are just negotiating price at this point.

Step 11 is all about price. Given the financial straits that the SSA finds itself in, should people like Bill Gates, Warren Buffet, Donald Trump, Derek Jeter, Oprah Winfrey, etc. receive Social Security checks in retirement? Wasn't Social Security designed as a safety net for elderly Americans in their retirement?  Wouldn't it be better to strengthen that retirement net by not allowing rich Americans to siphon money out of the system?

If you agree that these successful and quite affluent people should not get SSA benefits in retirement, then all we are negotiating about is the price, much like the man and woman above were talking about. At what level of assets should the cutoff be? Step 11 proposes that any American with over $3 million in assets not be eligible for SSA benefits. $3 million in assets conservatively invested would generate $150,000 income every year, placing that person in the upper 5% of all U.S. households. That should be enough for someone to live on, especially if it reduces the amount of financial strain on the SSA, allowing it to better serve less affluent retirees.

Step 12

Step 12 is based on the reality of the numbers, some on which were laid out in "Love My Country, Loathe My Government:"

• In 1940, 54% of men and 61% of women in the United States could expect to reach their 65th birthday.
• By 1990, 72% of men and 84% of women could expect to reach their 65th birthday.
• In 1950, there were sixteen people paying into the Social Security Trust Fund for every retired person drawing benefits.
• By 2030, there will be only two people paying into the Trust Fund for every retired person drawing benefits.

This is the reality of our world, it will not go away. More people will retire and fewer people will be able to support them. Thus, the third step needed to close the gap is to raise the retirement age over time from 65 to 70 with provisions for a less affluent Americans to draw payments before 70 under certain hardship conditions.

If you have $1,000,000 in assets and no hardship expenses, you should be able to live quite comfortably despite having to wait five more years to draw a Social Security check. This delay relieves the pressure on the real time collection of SSA taxes from the fewer workers that are supporting the whole system. This raising of the age would be phased in over a relatively short time but long enough to allow Americans to beef up their savings to overcome the five year increase in retirement age.

I could not find detailed enough data to show how much this step would save the system but it would be substantial. I will keep looking and present findings in the near future if I can get the detailed data I need to make an educated guess.

All three steps are needed. We need to balance and make fairer the inequities towards lower earning Americans via Step 10, we need to ask our more successful and richer Americans to make a sacrifice for their less fortunate citizens by foregoing their SSA benefits, and we need most everyone to suck it up for a few extra years before receiving their benefit in order to take pressure off of the system.

You cannot leave out a step. There are not enough rich Americans to only do Step 11. If you only do Step 10, that 6.1% today will grow so large that it will eventually stymie economic growth and place an unfair burden on current workers to support retired workers. If you only do Step 12, than most Americans will be dead before they are old enough to collect.

There, that wasn't so hard or painful. Everyone sacrifices a little to save the system. Just takes a little bit of math, a small amount problem solving skills, and a large dosage of leadership out of Washington and our political class.  Unfortunately this last point, leadership, is something we have not seen any trace of yet. The numbers and approach are pretty straightforward and laid out above, almost dummy-proof.  Will our political leadership step up? Doubtful.







Our book, "Love My Country, Loathe My Government - Fifty First Steps To Restoring Our Freedom And Destroying The American Political Class" is now available at http://www.loathemygovernment.com/. It is also available online at Amazon and Barnes and Noble. Please pass our message of freedom onward. Let your friends and family know about our websites and blogs, ask your library to carry the book, and respect freedom for both yourselves and others everyday.


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