Another Day Older & Deeper in Debt

Jose Pinera is given credit for having privatized the Chilean social security system. Chileans put money into accounts that are protected constitutionally from the politicians.

In the U.S., FICA taxes go into a trust fund which is then raided by politicians with pork to pay for. The result is truly scary as you will hear if you listen to the Pinera interview.

There simply is not enough money to pay for the Social Security, Medicare, and prescription drug program commitments that have been made. Eligibility ages will have to be raised and benefits cut. Turmoil will ensue.

The Soc. Sec. Ponzi Scheme

John Trever at the Albuquerque Journal had it spot on with this cartoon.

Here's how Investopedia defines a ponzi scheme:

A fraudulent investing scam that promises high rates of return at little risk to investors. The scheme generates returns for older investors by acquiring new investors. This scam actually yields the promised returns to earlier investors, as long as there are more new investors.

That seems to describe Social Security exactly. SS promises a return with little risk--it's "security" after all. The older investors are paid from the receipts of new investors. As long as the new investors keep paying, the older investors get their checks.

The prob. is that it can't go on forever when the number of contributors keeps shrinking and the older investors keep living longer. And when the Congress has no lock box, to use an Al Gorism, they put their grubby little hands on our money. All that goes in goes right back out.

The scary thing is that rather than making the terribly hard decisions to fix SS, our friends on Capitol Hill on both sides of the aisle are talking about reducing payroll taxes. Yep, that means Social Security. So instead of fixing it, they'll make it worse. Keep paying out what you're paying but reduce what's coming in.

Now don't get me wrong, I would never say never to a tax cut in any form. But, but, but, this is different. Payroll taxes--SS, unemployment, medicare--aren't the same as the income taxes. There's supposed to be some sort of relationship bet. what you put in and what you get back. If they go cutting what people put into SS, they're making a terrible problem worse.

And for what? So they can look like they're doing something to "fix the economy". It's lunacy.

Obama's Soc. Sec. "Coverage"

Hopped on Obama's issues website after hearing the rumor that he wants to eliminate the cap on Social Security wages. If you're not familiar, right now we all pay SS taxes on the first $97,500 we earn. That figure is matched by our employers so that we pay $6045 out of the first $97,500 and the employer pays $6045 more.

The theory behind the cap is that SS was originally intended to be a supplement to retirement. We would get back according to what we put in. It was not meant to be a welfare-type program where the folks who didn't pay much in (or any in) would get back as much as everyone else.

Senator O says this on his website:
"The first place to look for ways to strengthen Social Security is the payroll tax system. Currently, the Social Security payroll tax applies to only the first $97,500 a worker makes. Obama supports increasing the maximum amount of earnings covered by Social Security and he will work with Congress and the American people to choose a payroll tax reform package that will keep Social Security solvent for at least the next half century."

I love the use of the word "covered" here! That's not "covered", that's "taxed".

And then here in a op ed piece he wrote last fall:
"One possible option, for example, is to raise the cap on the amount of income subject to the Social Security tax. If we kept the payroll tax rate exactly the same but applied it to all earnings and not just the first $97,500, we could virtually eliminate the entire Social Security shortfall."

I take that to mean that all income would now be "covered"--the sky's the limit on this "coverage". I also take that to mean that this extra cash from the new "coverage" would be used to "virtually eliminate" the existing shortfall. I guess employers would have to match the "coverage" as well--call it double coverage, like in the NFL.

What might some unintended consequences be?

Let's take Dick and Jane. Dick teaches high school and coaches football in the 'burbs of New Jersey and makes $60,000 a year. Jane sells computer widgets, makes a base of $110,000, and had a great bonus/stock options reward last year of $40,000. I bet that's not uncommon for a good number of folks living in a metro area on either coast. What would Senator O's extra "coverage" mean to them?

An extra $6045 a year in taxes.

Now, how might that affect Dick and Jane's spending habits? Well, they're a little nervous these days bc. their house value is down over the last two years, their 404(k) is down over the last two months, and they're really worried about Jane's bonus this year bc. everyone's talking recession.

My guess is that they'll do two things. First, cut back on the doo-dads. They'll put off replacing the car, building a new deck, or buying that flat screen at Best Buy. They'll go to Six Flags instead of the Grand Canyon. This reduction in discretionary spending will only add to the "recessionary pressure", as it's called it on CNBC.

Second, they'll freeze or cut or, at the very least, give second thought to their charitable giving. They're already one of the decent givers at church with a $4,500 contribution to the annual fund. They were happy to do it. They're being asked to increase their pledge by ten percent. But with with an extra $500 a month going to SS, and house prices still falling, and the market in a tizzy. . . . .

And the YMCA that's doing a capital campaign for an addition? D & J will wait a year to commit just in case the the market hasn't found a bottom yet.

It's easy for Senator O to say he's just going to erase that cap. It might even be true that it's no big deal, Junior's SS in more important and D & J can "afford it".

It might not be so easy to deal with the opportunity costs and unintended consequences $6045 of extra "coverage" for Dick and Jane.

Just another way of looking at things. . . .