The term makes Seniors crazy and makes politicians run the other way. The Democrats media have successfully demonized the word so that no rational discussion can be had. That has to change. The Presidential commissions answer to this part of the problem is to raise the age and tax people more. This only puts the program at odds with the demographics of the country. If there is an inescapable truth, it is that you can’t beat demographics. The answer lies in 6th grade arithmetic.
First some facts:
1. The Social Security Trust fund is not real and has not been for 40 years. President Lyndon (Great Society) Johnson decided, and all the Democrats went along, that FICA tax receipts should get added to all the other tax receipts and get spent. The SS trust fund contains IOUs from the government promising to pay itself the Social Security contributions of the population. Suppose you put $100 a week in an envelope for your retirement; you take it out immediately, replace it with an IOU to yourself for $100 and spend the money. After working for 40 years, how much money is in the envelope? Right, and that is where we are.
2. The return on the Social Security Trust fund is 0%.
3. All your Social Security contributions, the ones that the government has already spent, are not yours.
4. Social Security Contributions that come out of your paycheck each week are matched (100%) by your employer.
5. There is no plan for privatizing Social Security that calls for making any specific investment that “helps” Wall Street. These plans have limitations on what investments can be made to limit speculation (same as IRAs). You can’t buy baseball cards, stock options, Picassos, etc.
6. Back to the arithmetic. Put $1,000 a year into a CD/Municipal Bond that pays 5% (hard to do now but certainly not historically great return). Do that for 40 years. At the end of 40 years, your total contribution has been $40,000. However, thanks to the effect of compound interest, you have an account with about $120,000. Three times what you put in.
The people who object to any privatization plan first make an effort to scare people who are currently on or close to receiving Social Security. No privatization plan changes their benefits. The only issue remotely impacting these people (I am one of them.) is funding to.
Another objection is that it gives money to the Wall Street guys. Wrong. Under any of these plans, Social Security contributions are your property, all plans call for it to be a voluntary program and under your basic control. What you do with the money is your business, again, within safety and soundness restrictions. There is absolutely nothing in any of the proposals that says it must be in the stock market. As with IRAs, precious metals, CDs and municipal/corporate bonds are all valid investments.
Look at the arithmetic again. Money triples over 40 years at 5%. Current FICA levels are about 13.5% counting employee and employer. Someone making $50,000 contributes a total of $6,750 a year. Doing that for 40 years at 5% gets you just over $800,000. It is yours. The interest that throws off would be more than your get from Social Security, even without touching the principal. You can do what you want with it. Give some to your kids. And you would not contribute one more penny that you are contributing now. By the way, the guy who makes $25,000 winds up with about $400,000. If you actually get a raise someday, the return is even better.
Now why does this happen. The comparison between the current plan and privatization is easy. One gets a 0% return and one gets the marvelous impact of compound interest.
The only real issue to doing this is funding the current system until it is replaced. The flippant answer to that is that we can’t fund the current system now. Not helpful but it shows what are options are. We have to do something besides continually raising retirement age and contribution levels. The effort needs to be put toward figuring out how to do the transition, not continually bandaging a system that was fraud when Bernie Madoff did it.
Friday, November 12, 2010
Wednesday, November 10, 2010
Starting Somewhere
A big news story about Federal, State and Local governments giving $17,000 in tax credit to people who by a certain ($32,000)electric car. The rationale is that “you have to start somewhere”. The issue is where to start. The premise here is that tax incentives for individual people to buy a product that you want them to buy is a good thing. (This is otherwise known as income redistribution. You take tax money from everyone and give it only to people who buy the product you - the Government - wants you to buy. This incentive means raising taxes.
Another form of incentive is not getting in the way of people who develop stuff that can be turned into a profitable enterprise - like the Model T – how much government help did old Henry get?
The argument is in which process is better:
This one gives the makers of this car the ability to sell their product at prices where the company cannot make a profit. Why? Because the government says this is the product we want to push. Not A FUNCTION OF GOVERNMENT. What happens when the tax breaks are withdrawn? Sales fall. Is the government supposed to bail out the business? The logic will be that we have to bail out the business to save the jobs that we created that were unsustainable. Who gets to pay for that bail out?
The other plan is to leave these companies alone. Good ideas are good ideas and will rise to popularity is they are allowed to. So it costs more now - so what. What did the first PCs and cell phones and the Model T cost in today’s dollars. There were ridiculously expensive but people bought them and they became less expensive. Businesses build new stuff because they see a market need and try to fill it and make a profit. A risk /reward issue. There is a risk, and as the potential gain becomes less and less it becomes less worth it to take the risk. The larger the chunk that the government will take the less likely that people will take the risk.
The primary argument against cutting taxes to is that it will create greater deficits. (The problem with all the government (CBO) calculations about tax cuts is that they are by law required to calculate tax projections based upon people not changing their behavior. For example, if the raise the taxes on a pack of cigarettes by $2, the figure that they will get another $2 for every pack of cigarettes currently sold. But people will buy fewer packs so their calcs are always wrong and wrong in ways that show tax increase lower deficits.) Behavior changes; risk takers take greater risks and tax receipts increase, look up what happened under Kennedy and Reagan. Receipts increased after the tax cuts. The problem was that Congress just spent that money and more.
So let people build whatever kind of cars they want and let people buy them. Without the government.
Another form of incentive is not getting in the way of people who develop stuff that can be turned into a profitable enterprise - like the Model T – how much government help did old Henry get?
The argument is in which process is better:
This one gives the makers of this car the ability to sell their product at prices where the company cannot make a profit. Why? Because the government says this is the product we want to push. Not A FUNCTION OF GOVERNMENT. What happens when the tax breaks are withdrawn? Sales fall. Is the government supposed to bail out the business? The logic will be that we have to bail out the business to save the jobs that we created that were unsustainable. Who gets to pay for that bail out?
The other plan is to leave these companies alone. Good ideas are good ideas and will rise to popularity is they are allowed to. So it costs more now - so what. What did the first PCs and cell phones and the Model T cost in today’s dollars. There were ridiculously expensive but people bought them and they became less expensive. Businesses build new stuff because they see a market need and try to fill it and make a profit. A risk /reward issue. There is a risk, and as the potential gain becomes less and less it becomes less worth it to take the risk. The larger the chunk that the government will take the less likely that people will take the risk.
The primary argument against cutting taxes to is that it will create greater deficits. (The problem with all the government (CBO) calculations about tax cuts is that they are by law required to calculate tax projections based upon people not changing their behavior. For example, if the raise the taxes on a pack of cigarettes by $2, the figure that they will get another $2 for every pack of cigarettes currently sold. But people will buy fewer packs so their calcs are always wrong and wrong in ways that show tax increase lower deficits.) Behavior changes; risk takers take greater risks and tax receipts increase, look up what happened under Kennedy and Reagan. Receipts increased after the tax cuts. The problem was that Congress just spent that money and more.
So let people build whatever kind of cars they want and let people buy them. Without the government.
Tuesday, November 9, 2010
Already?
Meanwhile, with the help of the media, the race for the 2012 Republican Presidential nomination is already in full swing. Primaries are the way it is supposed to happen. The key will be to do two things: have a primary season with a minimum of bloodshed and wind up with a candidate that does not start out with built in negatives that have to be overcome. Elections are won and lost buy the Party that can attract the 20% of the people in the middle of the spectrum. Most of these people are not political junkies - sound bites, 30 second interviews, campaign slogans and headlines are their news. Getting negatively branded in the minds of this group is an irrevocable injury. It is not hard to determine who fits into this group. Doesn’t mean that these people need to disappear, just means they would not make good candidates. Fund raising, cheer leading and endorsements are valid mission for whoever can do it well. It also does not mean that the chosen Republican candidate has to move compromise anything from a policy stand point. It does mean that two people can run on exactly the same policies and make the same and one can get elected and the other would have no chance.
Keeping the ol' boys around
Newsday has an article showing the depth of their typical analysis. The issue was the Republican promise to stop earmark spending and how much money will be “lost” to LI as when this practice stops. They listed about $18 million of $65 million in earmarks that the local Democratic will admit to obtaining. To say that this was a somewhat shortsighted analysis is an understatement. Some things to consider:
These 6 people got this money but there were another 529 people in Congress trying to feed at the same trough - a trough that is 41% filled with borrowed money – mostly from China.
The rest comes from taxes. Of all the tax money that goes to Washington, a higher percentage of that money comes from LI than the percentage of the earmark money LI gets back. Seems like a bad deal to me.
It can be debated as to whether all of the recipients of this largesse are properly objects of the federal government.
Finally, this is the tip of the iceberg. The use of earmarks is well established as a means for obtaining votes in Congress that are not otherwise available. The game is You-vote- for-my-money-wasting-bill-that-you-don’t-like-but-contains-your-earmark-and-I-will-vote-for-your-bill-that-I-don’t-like-but-contians-my-earmark. No one sponsors a bill with their own earmarks and the tradeoff protects everyone. The amount of money that is spent on bills that only pass because of this is incalculable. It is not just the earmarked money.
These 6 people got this money but there were another 529 people in Congress trying to feed at the same trough - a trough that is 41% filled with borrowed money – mostly from China.
The rest comes from taxes. Of all the tax money that goes to Washington, a higher percentage of that money comes from LI than the percentage of the earmark money LI gets back. Seems like a bad deal to me.
It can be debated as to whether all of the recipients of this largesse are properly objects of the federal government.
Finally, this is the tip of the iceberg. The use of earmarks is well established as a means for obtaining votes in Congress that are not otherwise available. The game is You-vote- for-my-money-wasting-bill-that-you-don’t-like-but-contains-your-earmark-and-I-will-vote-for-your-bill-that-I-don’t-like-but-contians-my-earmark. No one sponsors a bill with their own earmarks and the tradeoff protects everyone. The amount of money that is spent on bills that only pass because of this is incalculable. It is not just the earmarked money.
Creation Myth
There is a movie coming out that claims to be about why the mortgage industry collapsed. They managed “explain” the securitization process and leaves out Fannie Mae, Freddie Mac and the other government agencies responsible for 90% of the mortgage securitization market. The government invented subprime mortgages and pushed them on the banks. Where do they think the banks were laying off most of these crappy loans? On the government! Banks knew the loans were subprime and that is why none of the banks kept them in their portfolios - the government was buying and guaranteeing them (through the agencies which have the full faith and credit of the US treasury.) There was a no risk to Banks BECAUSE OF THE GOVERNMENT. That made them prime loans to the banks.
And have these agencies stopped this ridiculous practice. Nope. They are still offering balloon teaser rate loans and subprime documentation. Without acknowledging the reason for it, the situation will never get fixed.
And have these agencies stopped this ridiculous practice. Nope. They are still offering balloon teaser rate loans and subprime documentation. Without acknowledging the reason for it, the situation will never get fixed.
Don't Stop Now, It worked so well
The current economic situation is the direct result of Freddie Mac and Fannie Mae pushing subprime mortgages as a social policy. People borrowed more than they could repay and created the bubble. When the teaser rates these agencies offered went up, the bubble popped and things went to hell. As long as people insist on blaming Bush, Republicans and Banks, the situation will not be resolved. Obama’s vaunted Financial Reform doesn’t even mention Freddie Mac and Fannie Mae - no solutions there.
The Art of Compromise
This election has taught us that losers want to compromise. The Democratic leadership from the First Dope on down wants to compromise (a little); the media - after supporting every one sided thing that the Democrats wanted to do – thinks it is only right to compromise. After all its suggestions were ignored, after being accused of being “enemies”, being told to “sit in the back of the bus saying”, being branded as the “ Party of NO” and overwhelming winning the election, what are the Republicans to do? It remains to be seen what the definition of “compromise” is. If the Democrats waste $1,000,000,000,000 on a stimulus package that doesn’t work, is it a compromise to waste only $500,000,000,000? That meets them half way. The media will see things like this as a viable effort at a compromise. It’s not.
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