The Day of Reckoning has finally arrived! The inevitable, predictable point whereby no new victims can be added to the Ponzi schemes is here – NOW! US government retiree compensation and public social insurance obligations have overwhelmed the tax base and there’s little left to tax to support prior political promises. Social Security is about to
cease playing its decades-old role as a political cash cow and subsidizer of the rest of the Federal Government.
Since raising taxes and/or cutting spending are politically risky and may exacerbate economic recovery; speeding up the currency printing presses may become the only temporarily acceptable alternative.
The two political parties, will as always, blame each other for (decades old) systemic policy failures which they will proclaim to be unintended (but predictable) consequences of recession, aging population, etc. They will express surprise by each succeeding crisis they have brainlessly engineered while prospects for future national prosperity continues to decline. Concurrently, income and wealth spreads between the Chiefs and the Indians continues to widen, unabated.
The huge cost increases of paying Social Security, Medicare, and Medicaid benefits to an expanding retirement population poses the greatest economic challenge in US history. Health care cost inflation and automatic cost of living allowances (COLA) further exacerbate the formidable funding problems. Hopefully President Obama’s bi-partisan, National Commission on Fiscal Responsibility and Reform will find workable solutions to the impending fiscal disaster that threatens US prosperity. I hope the commission focuses on defects in US tax and welfare laws that are a patchwork of so-called “Unintended Consequences”.
Under current law, it is impossible to fix the Social Security Retirement and Disability funding problems. The “Law” is the problem.
The Social Security Act of 1935, as amended, establishes Old Age, Survivors and Disability Insurance *(OASDI) Trust Fund accounts. The law dictates that all surplus tax revenues and all earnings shall be invested only in interest-bearing obligations of the United States or in obligations guaranteed as to both principal and interest by the United States.
Many Americans believe that the Social Security retirement and disability trust funds contains pots of money that is sitting somewhere earning interest to pay their benefits when they retire or become disabled. They naively believe this because decades of widely disseminated misinformation and disinformation by media and political propagandists have told them so.
As of July 31, 2010 the OASDI combined trust funds held $2.6 trillion 100% invested in special issue, non-marketable IOU’s from the US Treasury. Correspondingly, the $2.6 trillion is a liability of the US Treasury; therefore, the trust fund does not have any actual resources with which to pay Social Security benefits. It’s like writing an IOU to yourself; no matter how many or how large the IOUs, it doesn’t change your net worth one cent. Current unfunded liabilities of the two retirement and disability trust funds currently exceed $5 TRILLION. It is hardly comforting to note that the increased FICA taxes extracted from Baby Boomer paychecks for the past quarter century to fund their own retirement (while paying for their parents and grandparents) have been squandered by politicians from both parties who place a
higher priority on incumbency than on the best interest of those they are elected to serve.
Regardless of how politicians, economists and others may describe OASDI trust funds, the bottom line is the law grants the federal government legal permission to collect dedicated revenues such as the Federal Insurance and Contributions Act (FICA) income taxes exclusively on wages. The law further authorizes the politicians to spend cash surpluses for other purposes. The surplus FICA cash is replaced by US Treasury IOUs and put in the Trust Funds. Interest on the Treasury debt held by the Trust is paid with more IOUs. Like a Ponzi scheme the scam continues until benefit expenses exceed cash income and the accounts need to redeem the securities to meet beneficiary payroll.
This year, payments to Social Security’s retirement and disability beneficiaries exceed FICA income tax revenues on wages and the income tax on SS retiree benefits. To pay back the Debt to the Trust Funds, the US Treasury is financing the cash-flow deficit by increased borrowing from the public. Borrowing from the public will continue unless or until cash-flows are brought back into balance. According to Congressional Budget Office (CBO) estimates (just a year
or two ago) withdrawals from the trust funds wouldn’t occur until 2016/2017.
The Obama fiscal responsibility commission will undoubtedly propose a mixture of tired proposals to raise FICA tax rates and eliminate the cap on Social Security (taxable) wage base (currently $106,800), raise the retirement age, cut benefits and/or tamper with automatic COLAs that protect benefits from inflationary erosion. Except for the latter, all these remedies were incorporated in previous Social Security reforms and they have produced surpluses
but the politicians SPENT the CASH and put IOUs in the non-marketable IOU debt in phony trust funds that are disallowed by law to invest in anything but US government debt, which can only be redeemed with real assets such as cash or marketable assets.
The 1983 Greenspan commission on Social Security reforms resulted in Ronald Reagan raising: FICA OASDI tax rates, taxable wage base, and retirement age; and, reduced benefits by taxing them for the first time; thus renouncing all previous political promises not to do so. Not surprisingly the combination of increased FICA income taxes on workers and the new Income tax on benefits caused reported OASDI Trust Fund tax income to outpace expenses over the past quarter century. These real surpluses were planned to offset the increased costs of funding “Baby Boomer” retirement. The only thing wrong with the plan is the surpluses were not invested, they were squandered. So now, the politicians are back to the drawing board trying to find devious new ways to pass-the-buck while hiding the truth about their fiscal irresponsibility’s and irregularities.
Note: the taxable threshold (Single $25k, Married $34k) on benefits was purposely not indexed to inflation so a growing population of middle-class beneficiaries would pay income taxes on the benefit, thus reducing its real
value. Prior to 1993, 50% of SS benefits were subject to the Federal Income Tax (FIT). In 1993, new thresholds of benefit taxation (Single $34k, Married $44k) were introduced to help finance Medicare funding shortages. The
current maximum mount of SS benefits subject to Federal Income tax is 85%.
The OASDI Trust Funds would be in excellent condition today if the surpluses had been placed in real Trusts and invested by fiduciary Trustees in various asset alternatives instead of exclusively buying special US Treasury debt. Instead, Congress and the Executive branch spent the surplus cash on other budget priorities and placed IOUs in the Trust Funds. Now that cash flow between tax revenues and OASDI expenses has turned negative, Treasury must now
sell notes and bonds to the public and pay real interest on the public debt to redeem special issue (internal government) debt or PRINT cash so all beneficiaries can be paid.
By setting up real Trust Funds with legally enforceable fiduciary responsibilities, government politicians can be held to the same accounting standards imposed on the public. During the transition from Ponzi to responsible government and to avoid falling into a national economic abyss; I propose the following:
1. Under the auspices of independent fiduciary Trustees gradually replace the special issue US government Notes and Bonds with marketable issues and other high grade investment alternatives.
2. Print cash instead of IOU’s to temporarily fill the cash flow gap. This will spur the economy with little prospects for inflation.
3. Pay interest (currently over $110 billion, annually) to the new Trust Funds in cash and/or marketable securities so real assets can grow and gradually replace the special issue debt.
4. Consider providing governors of the 50 States with authority to both establish and oversee the new federal government Trust Funds. Past Presidents and Congresses have already demonstrated they cannot be trusted to police themselves.
5. Transition into a discontinuation of business wage expense deductions of individual income taxes and FICA taxes. This will increase US government revenues by $100s of billions and perhaps muffle the noise that US corporations are over taxed. The 35% Us corporate tax rate doesn’t mean squat when the taxable amount is reduced by massive deductions, credits, etc. Note: More than ONE THIRD of the individual FICA and FIT taxes removed from paychecks stays in the pockets of employers.
Government trust funds bear no meaningful comparison to those in the private sector. Whereas the beneficiary of a private trust fund legally owns the income from it, the same is not true of a government trust fund, which is really nothing but an accounting device. Federal trust funds represent one accounting mechanism used to link earmarked receipts with the expenditures of those receipts. The Office of Management and Budget (OMB) and the Department of the Treasury determine budgetary designation as a trust fund when a law both earmarks receipts to a program and identifies the account as a “trust fund” account.
There is no valid, rational reason that the Social Security retirement program cannot be converted to an equity-based entitlement program whereby participants are insured to get a safe return on their investment, an asset that may be passed on to heirs. To do that, the phony Old Age & Survivors Insurance (OASI) Trust Fund, loaded with non-marketable, special IOU’s would need to be replaced with a real Trust Fund, with real assets one that comprises sound economic principles of compounding asset value instead of compounding government debt.
Social Security participants need legally binding contracts to enforce their rights. To rely on political promises to finance retirement is naiveté’ to the nth degree. Tell your Congressmen and Senators to change the law and DO IT NOW! Or, start looking for a real job!
Personal Note: I can still recall when the politicians placed a FICA tax on military pay back in 1957. At the time, the tax was modest and was concealed within a long overdue military pay raise. The new tax revenue from the military was needed to help solve an immediate Social Security cash flow problem. Even then, politicians would not acknowledge or could not grasp the notion that at some point in the distant future, the government would have to
pay benefits to the increased retirement population and to satisfy future liabilities, Trust Funds would require real investments in marketable assets that could grow to meet predictable demands. Failure, one half century ago, to change laws with regard to government administered trust funds has led to the massive debt and unfunded social insurance obligations that exist today. It is not complicated!
CHANGE THE FRIGGIN LAWS OR GO BANKRUPT! HOLD THE POLITICIANS ACCOUNTABLE! THOSE ARE THE ONLY CHOICES!
Since the US government is broke, it is my two sons who are being over taxed to pay for my retirement. Aware that Social Security as currently constructed is unsustainable; they are trying to plan for their own retirement, but uncertainties hinder savings and investment. By conserving some of the funds Uncle Sam is extracting from their pockets and transferring to mine hopefully a just balance (within the family) can be eventually achieved.
John T Koraska, MSgt, USAF, Retired, father, husband, patriot
In the late afternoon of October 15, 2010, my golden retriever and my best friend “Buddy” was hit and killed by a car driven by an unknown person. Buddy was born April 6, 2009. Sharing his loss seems to lighten the burden of grief. I wrote an obituary, with pictures of Buddy and posted it here:
href=" http://uspublicpolicy.com/buddyobituary.html" target="_blank">http://uspublicpolicy.com/buddyobituary.html