The Latest Depressing Facts and Lingering Myths About Social Security

Many times we have discussed how bad Social Security is from a retirement investment perspective. We demonstrated how bad this program is in several different ways in past postings:

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1) From our November 11, 2011 post, we reported that an government analysis from the late 1990s proved how lousy a retirement program Social Security is. On November 12, 1999, the Federal Reserve Bank of San Francisco published an economic analysis of the system's financial rate of return. The highlights of their findings include:

•The average worker in the Social Security system attains a rate of return on their Social Security contributions that is less than 2% when adjusted for inflation.

•In 1999, an American could have gotten almost twice that rate of return by personally investing in Treasury bills that at that time were averaging about 3.5% on an inflation adjusted basis.

•Even with the low rate of return, the analysis concluded that this low rate of return should be viewed as "rosy" since the political class had not addressed the long term solvency issues facing the Social Security system and those issues would either result in higher Social Security taxes or lower Social Security pay outs in the future.

•The San Francisco Fed concluded in 1999 that failure to address the solvency issues would reduce the average rate of return on Social Security contributions to around 1%.

•Not mentioned in the study, but what is obvious, is that if the rate of return on Social Security is only between 1% and 2%, this pales in comparison to what an American could have gotten over a long term investment of their Social Security contributions in an average stock mutual fund.

•The study takes note that numerous ideas have been put forth but Congress, i.e. the political class, had not acted on any of them, and concluded with the warning that "continued delays in addressing Social Security's long-term financing problem will only lead to more painful adjustments in the future." Twelve years later this situation of inaction has not changed.

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2) From our January 4, 2011 post we went through the following analysis based on my own Social Security situation. Using my latest personal statistics from the Social Security Administration at that time, I put together a simple spreadsheet to do some what-if analysis. The main assumptions and calculations in this spreadsheet include the following:

1. I calculated all of the money, year-by-year, that my employers and myself had contributed into the Social Security pool.
2. I assumed that I would have been able to keep that money but had to invest it in a tax free IRA or 401k account immediately.
3. I then located the historical annual S&P stock market investment returns and assumed that I put all of the Social Security money into a low cost S&P stock fund.
4. I grew, or shrank, my pool of money every year based on the S&P rate of return.
5. Starting this year, I assumed that I would get more conservative with my investment strategy since I am approaching retirement (I am 57), a standard investment tactic. Thus, I assumed that I could get a 4% return with this more conservative investment approach and that I would stay at this 4% conservative approach for the rest of my life.
6. Social Security tells me that age 62 I can start receiving monthly Social Security payments of $1,592. This becomes my bench mark.

How much better or worse would this approach have been vs. what Social Security will pay me? Consider the following spreadsheet results:

•Under the above assumptions, starting when I was 62 years old, I could take out twice as much than what Social Security will pay me and not run out of money until I was 88 years old. At that point, if I was still alive, I could live off of other investments and savings.

•Under the above assumptions, starting when I was 62 years old, I could take out 75% more than what Social Security will pay me and not run out of money until I was 95 years old. At that point, if I was still alive, I could live off of other investments and savings.

•Under the above assumptions, if I wanted to be conservative, I could take out 50% more than what Social Security will pay me and not run out of money until I was 100 years old, at which point I would still have a $267,000 in my account.

Thus, a different approach from the Urban Institute but the same result: I am far better off investing my own money using standard investment knowledge than letting the political class dictate and control my retirement money and life style.

Another positive aspect of this theoretical approach is that I would have had the wealth and money under my control. I would not be subject to the whims and ignorance of the political class and subject to their control. Its called freedom and the con job of Social Security does rob us of some of our financial freedom.

- Don't believe the stock market is a sound way to save for retirement? I took a much more conservative approach to find out if and when Social Security ever becomes a better deal. Using the same model above, I changed my long term investment approach so that it was not invested in an S&P stock fund but it was invested in long term U.S. T-Bills. I went to a government website to locate the historical annual returns of long term T-Bills. This is theoretically a safer, more conservative investment approach. What did I find out:

•Under the above assumptions, I could take $1592 out of the account each month, the same amount as what Social Security will pay me, and at age 100, still have $50,000 in the account.

•Under the above assumptions, I could take out 20% more than the $1592, and enjoy a 20% better life style, and not run out of money until age 92, if I lived that long.

In either approach, I and probably tens of millions of other Baby Boomers would have been better off if the government had allowed us to take care of our own retirement. They did not and now we are in a quandary, with unwilling or unable leadership to solve a problem that might sink the nation. And unless major changes are made, this con job will continue for generations of Americans to come.

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3) Also from that January 4, 2011 post we reviewed the work of two economists who work for the Urban Institute. An Associated Press investigative report at that time highlighted the work of two economists, Eugene Steuerle and Stephanie Rennane from the Urban Institute. Their research examined just how well the Social Security program performs financially and whether it is a good investment vehicle for individual citizens.

In the AP article reporting their results, the two economists looked at an average-wage, two earner American couple earning $89,000 a year. Upon retiring in 2011, they would have paid $614,000 into the Social Security program.

But according to the payout schedule and the Urban Institute analyses, this couple can expect, on average, to receive only $555,000 in Social Security benefits. Thus, this analysis shows that as an investment and retirement vehicle, the Social Security program yields a negative 10% return rate on investment. In other words, you would have been better off taking the money you earned, but confiscated by the government to sustain Social Security benefits for retired Americans, and put it under your mattress. If you had a broker getting negative 10% returns on your investment, you would fire them.

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4) In our November 14, 2011 post we discussed similar work on Social Security's viability by the Heritage Foundation. In 1998, the Heritage Foundation published a similar analysis that showed an average married couple would have been rewarded with twice their Social Security payments if they had been allowed to keep the money that was contributed to the Social Security Administration in their name and been allowed to invest it tax free in a balanced bond stock mutual fund.

It is pretty clear that the Social Security program is now a very poor choice for a retirement vehicle. And it may even be getting worse, based on an updated Urban Institute analysis that was reviewed by an Associated Press (AP) article from August 5, 2012:

• Americans retiring today and going forward in time are the first generation of workers who have paid more in Social Security taxes during their careers than they will receive in benefits after they retire.
• The AP calls it "a historic shift that will only get worse for future retirees."
• The AP reviewed several historical scenarios to prove this last conclusion. If an American retired in 1960, they could expect to get back seven times more in benefits than they paid into Social Security taxes while working. That ratio would have improved beyond seven to one if that worker was a low-income worker, as long as long as he or she made it to age 78 for men and 81 for women.
• As recently as 1985, workers at every income level could retire and expect to get more in benefits than they paid in Social Security taxes, though they didn't do quite as well as their parents and grandparents.
• A married couple retiring last year after both spouses earned average lifetime wages paid about $598,000 in Social Security taxes during their careers. They can expect to collect about $556,000 in benefits, if the man lives to 82 and the woman lives to 85, according to an updated, 2011 study by the Urban Institute, a Washington think tank.
• Demographics are the driving force beyond the upcoming fiscal collapse of the Social Security system. In 1960, there were 4.9 workers paying Social Security taxes for each person getting benefits. Today, there are about 2.8 workers for each beneficiary, a ratio that will drop to 1.9 workers by 2035, according to projections by the Congressional Budget Office.
• About 56 million people now collect Social Security benefits, and that number is projected to grow to 91 million in 2035. Thus, today's problems and financing shortfalls are likely to get worse over time, further endangering the future payouts to retirees and making Social Security an even worse retirement option for most Americans: "Future generations are going to do worse because either they are going to get fewer benefits or they are going to pay higher taxes," said Eugene Steuerle, a former Treasury official who is now affiliated with the Urban Institute. 

As distressing as this news and these bad retirement financials are is the continuing ignorance of how bad this process is and how bad shape the process is in:

- Statement from the article:  "The trustees who oversee Social Security say its funds, which have been built up over the past 30 years with surplus payroll taxes, will run dry in 2033 unless Congress acts."

Why it is a myth: Just recently the Social Security process went into a negative cash flow situation, i.e. it is paying out more in benefits then it is collecting in taxes. This situation will not change any time in our lifetimes since there are more people retiring, and drawing Social Security benefits, than there are not enough new workers joining the work force to support a positive cash flow.

There is no wealth in the so-called "trust fund." Starting back in the late 1960s, President Johnson allowed general government tax revenues to be co-mingled with excess Social Security funds and spent, and likely wasted, by the political class. In exchange for giving real wealth to the politicians since then, the Treasury Department gave the Social Security Administration some accounting IOUs to cover the confiscation of real wealth from the Social Security process.

There are no gold bars, shares of Google stock, piles of cash, etc. sitting in the trust fund. The Social Security trustees are now dependent on the Treasury Department to go out and raise money via debt financing to fund today's Social Security checks, just one reason why our national debt is skyrocketing. The trust fund will not run dry in 2033, it is already dry of real wealth.

Statement from the article: "But returns alone don't fully explain the value of Social Security, which has features that aren't available in typical private-sector retirement plans, said David Certner, legislative policy director for AARP. Spouses can get benefits even if they never earned wages. Children can get benefits if they have a working parent who dies. People who are too disabled to work can get benefits for life. Because of spousal benefits, most married couples with only one wage earner will continue to get more in benefits than they pay in taxes for the foreseeable future."

Why it is (mostly) a myth: This is no different than what would happen under my personal scenario discussed above or some of the more logical privatizing solutions that some in Washington have proposed. If I had passed away under my scenario, my wife and my son would have still gotten my wealth via my retirement accounts without it first being inefficiently handled by the government. Thus, this concept is not unique to Social Security.

Mr. Certner really has to really contort a scenario to make Social Security look good. According to him, it is still a positive payout if one spouse did not work and the other did, then the payout is positive. However, given that over the past few decades most households have had to have two working spouses to survive, how many times will Mr. Certner's scenario of positive return payout vs. the probably much larger times it will not pay out?

Now while it is true that privatizing Social Security via my plan would not handle disabilities as well as Social Security, given how much better off I would have been if I had managed my Social Security payments, putting a small tax on those much larger earnings could be a way to handle the disability issue.

A bad retirement investment option, and getting worse, shrouded in myths and misconceptions. Hardly a good way to ensure the happy retirement of tens of millions of retired Americans. Hardly a good way to help younger Americans save for their own retirement.

But more than a decade after credible minds proved the disastrous course the Social Security system was on, almost every politician since then has not had the courage, fortitude, smarts, and will to make the necessary changes to fix the short term problems and the long term problems. Four steps from "Love My Country, Loathe My Government" would go a long way to fixing the whole mess:

1. The first step is to raise the retirement age to 70, with a hardship exemption for those that cannot afford to wait that long. Americans are living much longer than they did when the Social Security process was put in place but little has been done to address this issue.
2. If any American has a net worth of over $3 million, they would not be able to draw a Social Security check at any age until their net worth fell below $3 million. Better to save limited and shrinking funds for Americans who most need the support rather than continue to pay out checks to people like Buffet, Trump, Gates, etc. who do not need the Social Security checks for survival.
3. Reduce the tax rate of the Social Security tax process but uncap the max and apply the lowered rate to all forms of income, not just wages. The detailed math for this process is in the book.
4. And finally, implement term limits for all Federal politicians. Many of them have been in office for 10, 20, or more years. They have not solved this problem so far so we must now assume they have become part of the problem.

Long term, after we have fixed the short term financial status for current and near current retirees we need to get the political class and the Federal government out of the retirement management business. They have proven they do not know how to do it effectively and many others have proven that fact over and over.

For a view of how that might happen, please review the success story of the Chilean reformation of their equivalent Social Security system at the following link. It reviews a real life example how much wealthier Chilean retirees are now vs. how much poorer they would have been if their central government still ran the operation:

http://loathemygovernment.blogspot.com/2012/02/united-states-of-purple-presidency-some.html

Chile did the right thing decades ago and it worked. We need to find some leadership, which is current lacking, to do the same here today for the sake of both the retired and the working citizens of this country.

Please visit our Presidential 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 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.

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/
 

United States Of Purple - Saving Social Security By Terminating It

This is the next in a series of posts of how a United States Of Purple Presidency would address and resolve the major issues that our nation faces. We have waited far too long for the existing political class, both Democrats and Republicans, to address, never mind resolve, those issues.

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.

Social Security is not a good deal. It would be financially better for every American to divert their earnings into a private investment account (e.g., I have done similar scenarios for people earning only $20,000 a year, they would be far better off diverting their Social Security payments into a tax free investment account); this approach would put more capital to work in the market to grow the economy, and it would remove the ineffective and abusive political class totally out of the equation.

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/

Even The Government Thinks That Social Security Is A Bad Deal

Many times in this blog we have pointed out numerous studies which showed how bad of a financial and retirement deal Social security is, citing numerous sources:

1. In a December 30, 2010 Associated Press (AP) article, AP reported on a recently published Urban Institute Social Security analysis that showed, on average, the typical American pays more into the Social Security system during their lifetime than they receive back during their retirement years.
2. In 1998, the Heritage Foundation published a similar analysis. It showed an average married couple would have been rewarded with twice their Social Security payments if they had been allowed to keep the money that was contributed to the Social Security Administration in their name and been allowed to invest it tax free in a balanced bond stock mutual fund.
3. In a number of posts in this blog, I have shown how much better off I personally would have been if the government had allowed me to put all of the Social Security contributions that were made in my name over my lifetime into an IRA-type account decades ago

Reliable, non-partisan analyses that show how bad a deal Social Security is. However, these types of analyses are often largely ignored or ridiculed by the political class in favor of the myth that Social Security is a fantastic retirement vehicle that should be protected at all costs...and kept under their control.

By perpetuating this myth, the political class maintains control over a large part of our lives, our retirement standard of living. This control not only reduces our freedom and our standard of living but gives our politicians more power and a constant election issue to perpetuate their time in office.

However, it is not only non-government sources that debunk the Social Security myths. I recently came across a government analysis from the late 1990s that also proved how lousy a retirement program Social Security is. On November 12, 1999, the Federal Reserve Bank of San Francisco published an economic analysis of the system's financial rate of return. The highlights of their findings include:

• The average worker in the Social Security system attains a rate of return on their Social Security contributions that is less than 2% when adjusted for inflation.
• In 1999, an American could have gotten almost twice that rate of return by personally investing in Treasury bills that at that time were averaging about 3.5% on an inflation adjusted basis.
• Even with the low rate of return, the analysis concluded that this low rate of return should be viewed as "rosy" since the political class had not addressed the long term solvency issues facing the Social Security system and those issues would either result in higher Social Security taxes or lower Social Security pay outs in the future.
• The San Francisco Fed concluded in 1999 that failure to address the solvency issues would reduce the average rate of return on Social Security contributions to around 1%.
• Not mentioned in the study, but what is obvious, is that if the rate of return on Social Security is only between 1% and 2%, this pales in comparison to what an American could have gotten over a long term investment of their Social Security contributions in an average stock mutual fund.
• The study takes note that numerous ideas have been put forth but Congress, i.e. the political class, had not acted on any of them, and concluded with the warning that "continued delays in addressing Social Security's long-term financing problem will only lead to more painful adjustments in the future."

This analysis and these conclusions were not reached by a think tank or a blog writer, they were reached by the economists at the San Francisco Fed  TWELVE years ago. Thus, at least parts of the government knew what a lousy deal this program was, and is, long ago. And it correctly pointed out that the system would be put under increased financial strain if changes were not made when they did the analysis TWELVE years ago.

Sadly, they were correct and as a result of inaction, lack of leadership, and lack of courage from our politicians, the changes will be more painful. Recent news reports have stated that the Social Security system went cash negative this year. In other words, the system is now paying out more money than it collects in taxes, requiring the Treasury Department to incur more national debt to cover the current Social Security liabilities and negative cash flow.

Typical political class performance. Why address an issue in a coherent, strategic, and financially sound way ahead of time that might endanger a few votes? Better to protect their personal turf, protect a few votes, satisfy a few lobbyists, and enhance their re-election chances, regardless of the increased pain and increased cost it will cause down the road.

How typically shortsighted but totally consistent with their mode of operation:

• Decades after ignoring the oil shocks of the 1970s, the political class has still not come up with an effective energy strategy, a delay that has resulted in high energy costs, reliance on unreliable foreign sources of energy, and potential harm to the environment.
• Decades after implementing a weak and ineffective drug addiction strategy, the "war on drugs," we have allowed violent drug cartels to flourish and we have incarcerated millions of Americans at the cost of trillions of dollars with no discernible impact on drug usage or change in our approach since the Nixon era.
• Decades after identifying the threats from under educating our kids via an under performing public school system, the political class has still not come up with a coherent education strategy that would provide American kids with a world class education experience, despite spending trillions of dollars to get mediocre education results.

In all major facets and issues of our lives, the political class has failed us, making their personal gains and political careers higher priorities than service to America and its citizens. Fixing any of the the above problems should not be insurmountable, we just need leaders with a little focus.

For example, three steps from "Love My Country, Loathe my Government," would fix an ailing Social Security system in a fair, coherent manner:

• Step 10 - reduce the Social Security tax rate but uncap the maximum amount of income subject to the tax and include all forms of income in order to make the percentage taken out of a household's income consistent across all income levels.
• Step 11 - prohibit citizens with a net value of over $3 million (e.g. Bill Gates, Donald Trump, Warren Buffet) from drawing a Social Security retirement check in order preserve limited resources for the most needy.
• Step 12 - raise the retirement age to 70 years, with a hardship exception, in order to reflect the changed demographics in the country since the Social Security program was introduced.

There, that was not hard. That should not be not hard, assuming that we had politicians in office with a little backbone and vision. The government and the political class came up with this horrid retirement plan, we are unfortunately stuck with it. The least they can do is fix it, twelve years after the same government identified its pathetic returns and needed changes.

The actual conclusions from the San Francisco Federal Reserve's analysis are listed below:

****************************************
Social Security has evolved from humble beginnings in 1935 as a program of "forced saving" intended to ensure retirement income for the elderly into its present form: a complex, resource-intensive program that redistributes income across individuals and households based on a wide variety of characteristics. In general, Social Security favors low-wage earners over high-wage earners, older workers over younger workers, women over men, and immigrant workers over U.S.-born workers.

The "average" U.S. worker faces a rate of return on contributions that is quite low--less than 2% after adjusting for inflation. By comparison, the real yield on a 10-year inflation-indexed Treasury Bond is currently around 3.5%. In addition to being low, rates of return from Social Security must be viewed as risky because they are subject to change from future political actions that will be needed to ensure long-term solvency of the program.

Under intermediate demographic and economic assumptions, Gokhale (1998) reports that the OASI payroll tax rate must be increased by about 4 percentage points (from 10.7 to 14.6%) to pay for projected benefits on an ongoing basis, i.e., for 75 years and beyond. Alternatively, long-term solvency could be achieved by cutting benefits by 25%. Either action would reduce the real rate of return for the average U.S. worker to around 1%. A tax increase would be disproportionately borne by young workers (who are further from retirement) whereas a cut in benefits would penalize young and old workers in a more even-handed way.

While numerous ideas for reforming Social Security exist, none have yet to be formally proposed in the U.S. Congress. Continued delays in addressing Social Security's long-term financing problem will only lead to more painful adjustments in the future.



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 respectfreedom for both yourselves and others everyday.




Please visit the following sites for freedom:
http://www.loathemygovernment.com/
http://www.cato.org/
http://www.robertringer.com/
http://realpolichick.blogspot.com/
http://www.flipcongress2010.com/
http://www.reason.com/
http://www.repealamendment.com/

Taxes, Fairness, and Utopia

Hardly a day goes by lately without President Obama or some leader in the Democratic Party claiming that the Bush tax cuts for those Americans making more than $250,000 a year need to be restored in order to make our income tax system "fairer." They seem to think that they know best how to measure what "fair" is and that involves making the wealthier pay more than they have paid over the past eight years or so.


Now, you may think that those making more than $250,000 a year need to pay more in taxes and that's fine, it is your opinion. However, there is another aspect to "fair" that Obama and many politicians seem to overlook:

• According to the Tax Foundation, in 2006, before the recession hit, a whopping 41% of American Federal tax filers paid nothing in Federal income taxes or actually got a check from the Federal government in addition to paying nothing in income taxes.
• According to the Tax Policy Center of the Brookings Institute in cooperation with the Urban Institute, in 2009, after the recession, 45% of American tax filers paid no Federal income taxes.
• According to an April, 2010 Associated Press report, in 2009, 10% of American tax filers accounted for about 73% of all Federal income taxes.
• According to the National Taxpayer Union, in 2008, 1% of Americans paid for 38% of all Federal income taxes, 5% paid for 59% of all Federal income taxes, and 10% paid for 70%.
• During the Bush administration years, the number of American tax filers not paying anything in Federal income taxes rose dramatically from the long term average of about 25% to the current levels of about 45%, indicating that not only did the wealthier benefit from the Bush tax cuts but about 20% of the U.S. population went from paying income taxes to getting money for filing taxes.

Some people would say that although almost half of the households and tax filers did not pay Federal income taxes, they did have to pay a myriad of other taxes including Medicare, Social Security, sales taxes, and state and local income taxes. This is true, but so did those that actually paid Federal income taxes, they also had to pay all of these other taxes. 

If Obama and his crowd want to talk fairness, I find it a little hypocritical that almost half of the adults in this country can get a free ride on Federal tax expenditures on such things as education, defense, infrastructure, FEMA, government agencies such as the SEC, FAA, FCC, etc. and other Federal government services. They paid no taxes to fund these services yet get all of the advantages of using them. In most logical and fair thinking people's minds, that is not fair, it is called freeloading.

Again, if you think that the wealthier in this country need to pay more in income taxes, that is your right and your opinion. However, it is also my right to believe that if you are receiving something of value, you should be paying for that value. The bigger issue has to do with the suicidal path we are on as it applies to our fiscal solvency as a nation. If half of the country is not feeling the pain of deficit spending, why should they get excited about fixing the problem? Life is good the way it is from their perspective. This is not conducive to solving our national debt problem.

This is where the utopia reference comes in. In a a fair and just world, everyone pays their fair share. However, we do not live in utopia and fair is a very subjective measure. Republicans would look at the above numbers and say that those paying the load of Federal income taxes are already paying too much. The Democrats would say that the wealthy are not paying enough in spite of the above numbers. As a result, there is never any meaningful and fair tax reformation undertaken and the country hurdles towards a financial disaster.

In the absence of utopia, how about the following solution for the current income tax chaos:

- The Bush tax cuts are restored for those Americans making more than $250,000 a year as Obama desperately and irrationally fixates on. Remember, that doing this will increase income taxes received by the Federal government by about $70 billion and reduce a typical annual Obama budget deficit by only about 5%, not a big impact on our debt.

- However, as a condition for this tax increase, that extra $70 billion would never get into the hands of the political class. It would go directly to a Treasury Department virtual "lock box" which is untouchable by any politician. The Treasury Department would use the funds solely to pay down our nation's debt.

- For all Americans, both individuals and businesses, that receive money for filing their taxes and pay nothing in income taxes because of the current tax code, they would have to rebate back, via their tax forms, half of what they would have received from the Federal government. For example, if you were to net $1,000 from the Federal income tax code (i.e. you would be paying no Federal income taxes and getting $1,000 anyway due to tax breaks), you would have to pay back half of that $1,000 or $500. That $500 would go into the same Treasury account created above and the $500 used to pay down the debt.

How much would this generate? Finding the right numbers has proven impossible so let's try an estimate by a "what if" approach. What if we assume there are about 135 million tax returns filed every year (that number can be estimated by online sources), what if we assume that 45% pay no Federal income taxes and many receive money anyway from the Federal government, and if we assume that the average amount of money received is $1,000, then putting these assumptions together would generate about $30 billion a year. If the amount of money received is only $500, then this approach would generate about $15 billion a year. Not earth shattering relative to our national debt but it would certainly get the message across that everyone has to contribute to solving the debt problem.

- Both tax actions would self destruct once either a balanced budget amendment was passed  by the Federal political class or spending was reduced to such a level as generally viewed to be sustainable relative to GDP.

There are a number of advantages to such an approach. First, it would bypass all of the political posturing and inaction that we are cursed with from our politicians. Second, it would put every American's financial situation into the pot, no more of the rich paying under the lower Bush tax cut rates and no more of any American tax filer not feeling some pain of paying income taxes. Third, it would encourage taxpayers to put leveraged pressure on those in power to finally fix our out of control spending since until that happens, everyone in America would be paying more in taxes.

This approach would also apply to corporations and businesses.  A few weeks ago (source: The Week magazine, April 8, 2011), it became known that in collusion with the political class, General Electric had $14.2 billion in worldwide profits in 2010 but because of various tax breaks, it not only paid no Federal income tax but it received a $3.2 billion tax refund from the Federal government.

Under this proposed scenario, that $3.2 billion refund would immediately be reduced by $1.6 billion and that $1.6 billion would be used to pay down the debt. This approach would obviously encourage General Electric and other such businesses and companies to also pressure Washington to get its fiscal house in order quickly in order to eliminate this charge. $1.6 billion from just one company is more than 5% of the $30 billion discussed above. Thus, very quickly, once you add in those not paying any income taxes at all, personal and business, and those earning over $250,000 a year, you start to generate some significant revenue to pay down the debt.

A great plan. Politicians do not get more of our money to wastefully spend, there is an accounting fail safe process to actually pay down some debt, all Americans and all Americans businesses now have skin in the national debt game, and this skin in the game leverages everyone to pressure Washington to finally act to fix the budget process and address our debt problems. It is not utopia but at least it has a chance of working. Waiting for our political class to enact overarching fair tax reform is utopian thinking and thus, unlikely to ever happen.

[Full disclosure note: I am not anywhere close to earning over $250,000 a year in case you think I am only looking out for my own best interest. For our latest tax return we fell into the 15% bracket and paid money to the Federal government for Federal income taxes for year 2010.]




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.

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.com