Whether through inability or unwillingness, they have failed to resolve the issues of illegal immigration, a lost war on drugs, skyrocketing national debt, escalating health care costs, etc. It is time for another approach such as the United States Of Purple to try something different.
Today we will fix the failing Social Security system, the ultimate Ponzi scheme. If anyone in this country, outside of the Federal government, implemented such a program they would be brought up on fraud charges and likely put in jail for a very long time. Social Security takes money from today's new contributors/investors and gives it to today's beneficiaries/old investors, hoping that the pool of new contributors/investors will grow faster than the amount of money that was promised to the oldest beneficiaries/retirees.
However, that equation is no longer working. As the number of workers (new contributors) shrinks relative to the growing number of beneficiaries (retiring baby boomers), there is less and less money available to maintain the promises the political class has put forth on Social Security.
In fact, in 2011, Social Security's cash flow went negative, i.e. the amount of Social Security taxes being received by the Federal government was less than the amount of money being paid out to retirees. This required the Federal government to incur more debt to cover the cash shortfall, increasing the national debt by tens of billions of dollars just in 2011. This gap will only grow going forward.
And in 2011, we also found out that at least one major Federal politician, Harry Reid will not be capable of solving this problem. Mr. Reid insisted that Social Security was not in dire economic shape since there was over $2 TRILLION in its trust fund. However, this shows an incredible lack of understanding of the financial situation. Over the decades, when Social Security had excess cash coming in, it sent the excess to the Treasury Department where it was commingled with all other Federal revenue.
Unfortunately, once that happened, it allowed the Federal political class to spend the increased windfall from Social Security in ways that were most likely useless and wasteful. In exchange for real wealth, the excess Social Security funds that were collected, the Treasury Department sent a worthless set of IOUs over to the Social Security Administration, saying that the Treasury Department owed the Social Security Administration over $2 TRILLION. But Treasury does not have $2 TRILLION in gold bars, Apple stock, cold cash, etc. laying around, That wealth was spent long ago.
That was why President Obama said that if the Federal government shut down this past August, he could not guarantee Social Security checks would still be issued since the Federal government would be running short of cash. If a valid trust fund existed, it could have been tapped in the event of a government shut down. But it does not exist, despite what Mr. Reid believes. When you are so ignorant of a situation that you do not believe a problem exists, your chances of fixing that problem are nil.
So, we have a negative cash flow, we have a leading politician that does not even know a growing financial crisis exists, and we have a large generation of Baby Boomers who are entering retirement. Not a good combination of factors. How do we fix this problem in the fairest, most humane, and financial viable manner, both short term and long term?
The short term fix starts with three steps that were put forth in "Love My Country, Loathe My Government:"
- Step 10 - this step originally wanted to exempt the first $50,000 from Social Security tax and then reduce the Social Security tax to 1% (down from the current 6.2%) but apply it to all forms of income, not just wages. The reasoning behind this step was the fact that a taxpayer earning about $100,000 in wages pays the same amount of Social Security taxes as another taxpayer that makes ten times as much who pays the same taxes as a third taxpayer that pays ten times as much as the second taxpayer. The reason is that at the time the book was written, all wage earnings over $102,000 was exempt from Social Security taxes.
Thus, a millionaire paid about the same amount as someone earning $102,000, ten times their earnings, but the percentage paid would be about ten times smaller. If someone earned their $102,000 from non-wage sources, no Social Security taxes were due. This step attempted top levelize the taxation rate across all income earners and all income types.
However, when I wrote the book and this step, I was not aware that detailed IRS tax returns information was available online. If we look at the online tax return data from 2009, the latest year available to the public, this step needs to be modified.
First of all, the number of millionaire earners in this country would never be able to overcome the shortfall caused by exempting the first $50,000 in wage earnings of all Americans. According to the 2009 tax data at the Adjusted Gross Income level, there were only about 237,000 among the 140,000,000 (.17%) 2009 personal income tax returns filed. Such a small number could never be taxed enough to overcome the proposed $50,000 reduction.
Therefore, we have to drop this facet of this step that exempts some portion of earnings from Social Security taxes, there are just not enough wealthy people to pick up the slack. The lack of millionaire earners, just .17% of all tax filers, also provides little flexibility in substantially dropping the Social Security tax rate.
First of all, there is no way it can drop down to 1%, the original proposal. By playing with the data, there is a way to drop the current rate of 6.2% down to 5%, increase the amount of Social Security taxes paid by those Americans earning over $100,000 a year (remember, all of these people only pay about $6,200 a year since the taxation stops at a certain wage level), apply the tax to all forms of income using the AGI data form the tax returns of 2009, and still keep the system whole as of today.
In this scenario, a few things happen:
* Those Americans earning over $100,000 would go from covering about 30% of Social Security costs to about 43% of Social Security costs.
* The amount of Social Security taxes for those Americans would increase by almost 50% over what they pay now.
* The current discrepancy in effective tax rates, i.e. the wealthier earners pay a far smaller tax rate percentage on Social Security taxes, is levelized (double click on the graph for a larger, clearer view):
This appears to be a fairer approach. The effective tax rates are levelized to a larger degree without gouging the wealthier earners in this country.The vast majority of American tax filers get more than a 20% decrease in their Social Security tax rate. This should help our ailing economy by putting more money back into the pockets of millions and millions of taxpayers.
However, this approach only keeps us whole for the current year. Every year going forward, the Social Security Administration will need more and more revenue to keep up with the Baby Boomers who are retiring. Thus, a few more steps are required to stay ahead of this retirement tsunami:
- Step 11 from "Love My Country, Loathe My Government"would not allow any American whose net worth was over $3 million to draw a Social Security check. This would give people like Warren Buffet a great opportunity to back up their claims and opinions that they do not pay enough in taxes. People like Buffet, Trump, Gates, etc. do not need Social Security money to survive in their retirement years.
The underlying philosophy of Step 11 was to try and protect limited Social Security resources for those that truly need their Social Security checks to survive retirement. If you have $3 million of net wealth, you are nowhere close to being in need of that $1,200 or so monthly check from Social Security.
If you conservatively get a 5% return on your $3 million of wealth, that resulting $150,000 (more if you are worth more than $3 million) of income a year would put you into the top five percent of earners in the country before adding in Social Security, without touching your principle. This step means that it is "fairer" for you to struggle through each year on $150,000 than to reduce the Social Security benefits to someone who is worth far less and earning far less on their assets.
This step would buy Social Security some time and breathing room by focusing on need rather than just historical contributions.
- Step 12 would raise the retirement age to 70 years of age, with a hardship exemption. When Social Security was created over 70 years ago, many Americans did not live long enough to start collecting their Social Security check at age 65. This lower average age across the country helped keep the program fiscally solvent.
However, according to a March 20, 1995 Time magazine article, in 1940, 54% of U.S. men and 61% of U.S. women could expect to reach their sixty fifth birthday. By 1990, 72% of men and 84% of women could expect to reach their sixty fifth birthday.
Over time, the average age in America continued to grow, allowing more and more Americans to live long enough to collect Social Security payments. Longer lives means more revenue outflows which comes from fewer workers per retiree. This is an equation for disaster also.
This step would address this imbalance issue by finally raising the retirement age for anyone whose net assets exceeded $500,000 at age 65. Anyone whose net worth was less than $500,000 could start drawing a check at age 65 and the amount of the check would be linked to the value of their assets relative to $500,000. At age 70, anyone could retire with full Social Security payments (except for those that fall under Step 11).
These last two steps are further justified by an article by Alexandra Petri of the Washington Post, whose article was summarized in the November 18, 2011 issue of The Week magazine. Ms. Petri asserts that U.S. households headed by people who are 65 or older have 47 times the net worth of those households headed by people under the age of 35.
Thus, on average, older Americans can withstand a little financial pain/inconvenience in retirement, with hardship exceptions, relative to the size and timing of their Social Security benefits in order to ensure that the most needy of the elderly can still get full benefits from a system under financial strain.
- The fourth action item needed to fix Social Security is to shut down the massive fraud and criminal attacks the system is under which conservatively results in $70 billion worth of Social Security assets being lost every year. Since there are currently about 40 million Americans over the age of 65, if we somehow cleaned up the $70 billion of waste very year, we could pay for almost two months worth of Social Security payments for each of those 40 million retirees, every year. That would take a lot of pressure off of the financials.
Four simple steps to fixing an important problem in the short term: changing the tax structure to levelize the effective tax rate, forbid anyone with personal worth over $3 million to get a Social Security check until their net worth falls below $3 million, raise the retirement age to 70 with a hardship exception for anyone with a personal worth over $500,00, and clean up the chronic and unacceptable fraud within the program.
These steps are fair and compassionate in light of the fiscal problems the system has, regardless of Harry Reid's ignorance. It prolongs the life of the program and focuses resources on those that really need the help. It gives people like Warren Buffet the chance to put their wallets where their mouths are relative to not paying enough in taxes in this country.
However, the real long term solution is not to fix the current system but to terminate it. It is an inefficient and basically illegal Ponzi scheme that has to fail eventually or significantly reduce benefits to survive. It gives the political class control over a significant portion of our lives. It gives the political class a political football that they can use and abuse when it comes to reelection time, all the time never resolving the underlying causes of the crisis.
And the most basic reason, it is not a good investment vehicle:
- In 2011, the Urban Institute released a study that showed, on average, Americans pay more into the Social Security System via taxes during their lifetimes than they get out of it in retirement.
- In 1998, the Heritage Foundation did an in-depth study that found the average American married couple should expect to receive $450,000 from the Social Security Administration in their lifetimes. If they had been able to keep the money given to the Social Security Administration in their names via taxes and had invested those funds half in T-Bills and half in stock equity funds, they would have amassed almost $1,000,000 for retirement, more than twice what they might get from Social Security
- When I did similar analyses on my own Social Security history, I found that rather than getting $1,357 from Social Security every month at age 62, I could have gotten $4,200 every month with some rather conservative investment approaches until I was over 100 years old.
A long term approach is needed that weans the country off of Social Security and into private investment accounts. We need the four short term steps outlined above to be integrated into a long term plan that slowly diverts more and more people's Social Security funds into more profitable private tax deferred investment accounts while simultaneously reducing their future Social Security benefits until we get to a point where there is no Social Security any more.
Long term is not five or six years. We need a forty or fifty year plan that gets the country out of this abyss. We need some trained actuaries involved to figure out how to get to this termination point. People who are currently closer to age 65 would see more of their retirement income from Social Security than from these new investment accounts.
Those that are not real close to retirement but are not real young might see half of their retirement funds come from Social Security and half from the investment accounts. Those that are thirty years from retirement might expect only 10% of their retirement funds to come from Social Security and 90% from their investment account.
Smarter people than me with more experience and more detailed data to work with can figure this all out so that it is fair, compassionate, and actuarially sound. All these short term and long term solutions need is a little leadership, courage, and communications skills, in addition to putting the welfare of Americans' retirement ahead of personal political careers and enrichment. The United States Of Purple can do just that, the current political class cannot.
“We cannot solve our problems with the same thinking we used when we created them.” Albert Einstein
We invite all readers of this blog to visit our new website, "The United States Of Purple," at:
http://www.unitedstatesofpurple.com/
The United States of Purple is a new grass roots approach to filling the office of President of The United States by focusing on the restoration of freedom in the United States, focusing on problem solving skills and results vs. personal political enrichment, and imposing term limits on all future Federal politicians. No more red states, no more blue states, just one United States Of America under the banner of Purple.
The United States Of Purple's website also provides you the formal opportunity to sign a petition to begin the process of implementing a Constitutional amendment to impose fixed term limits on all Federally elected politicians. Only by turning out the existing political class can we have a chance of addressing and finally resolving the major issues of or times.
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 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.
Please visit the following sites for freedom:
http://www.cato.org/
http://www.robertringer.com/
http://realpolichick.blogspot.com/
http://www.flipcongress2010.com/
http://www.reason.com/
http://www.repealamendment/
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