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Our problem isn’t the taxes, but the spending

December 10, 2012 by Leave a Comment

“Spending car” by Mike Lester

Is it time for Republicans trying to avert the fiscal cliff to give up on protecting the Bush tax cuts for the wealthy in exchange for entitlement reform?

Maybe, says former Senator Bob Bennett in an opinion piece in the Deseret News.

President Barack Obama wants to raise revenue by increasing taxes on households earning more than $250,000. The financial arguments for his position are weak — there aren’t enough such households to have a big impact on the debt — but he will prevail because all he has to do to get his way is nothing.

No deal, and taxes go up automatically on Jan. 1, giving him what he wants for the rich. Then on Jan. 2, he can propose that Congress immediately pass a law putting rates back down for the non-rich. If Republicans don’t pass it and there is a new recession, he will claim that it was their fault.

Maybe a better question would be: do Republicans still have a choice?

In many respects, the debate over taxes–raise them on the rich! Lower on the poor! Middle class! Get rid of deductions! Close loopholes! Reform the tax code!–is important, but really misses the point of what is behind the fiscal problems our country is facing. At the root of it all, the problem isn’t the tax code–though I’m all for reforming it, simplifying it, and making it more flat–the problem is that we are spending more than we are paying in taxes.

Let me repeat that with some emphasis: we are spending more than we are paying in taxes.  It’s a national problem carried and caused by each and every American. It isn’t about the rich–who are paying more and more–or the poor–who aren’t paying at all, but are more reliant on the government than ever before: it’s about all of us.

  • The Democrats: “Raise taxes on the wealthy!” comes the hue and cry from the Left, regardless of the fact that taxes cannot be raised high enough to avert future fiscal crises. In fact, they may aggravate them. No matter how many times the left side of the political spectrum tries to attack the wealthy, to say that they are not paying their fair share, the fact is that the wealthy are paying an increasingly large percentage of all taxes received by the federal government.  As I’ve noted in an earlier post, the 1950s, which saw record high tax rates on the very wealthy, also saw the wealthy supporting only 27% of the government’s budget. Today, the wealthy support 51% of the federal budget.
  • The Republicans: “No tax hikes!” is a great slogan, and indeed, Republicans are right that taxes slow the economy and hurt entrepreneurs, employers, and families. But they can’t fight tax growth with one hand, and spend more with the other.  One of the major mistakes of Republicans during the George W. Bush Administration was the passage of Medicare Part D, a massive expansion of government spending without corresponding revenues (also known as “taxes”). It didn’t help that we decided to invade and occupy Iraq and Afghanistan at the same time. My point is that you can’t fight taxes and create spending at the same time and expect the books to balance at the end of the day.
  • And the rest of us Americans: Like it or not, whether you are political or not, whether you voted  or not, you too are part of the problem. Our culture’s changing priorities is a part of the problem. Think about your own spending and lifestyle habits:  do you go to the emergency room instead of the physician? Do your lifestyle choices keep you healthy and physically fit? Did you take a job–any job–during the recession, and then, when it wasn’t enough to pay the rent or put food on the table, seek help from family, church, or charity first, before seeking government aid?  Are you saving for your retirement or are you expecting that Social Security and Medicare will provide for you in your “golden” years? And to the wealthy: do you give to a lobbying group that assures your industry gets sweet-heart deals, tax carve-outs and deductions, or protection from competition? For all of us: do you make an effort to be aware of the effect local elected officials actions will have on your home, neighborhood, city, or state?

In large part, I believe that the growth of the mountain of debt our country faces in the coming decades is not merely the fault of politicians in Washington, D.C., but also the result of changes in American culture where we demand more, and more, and give less, less not to our country, but to our neighbors and to our communities. As we fail to prepare and practice self-reliance and interdependence with our neighbors, we hand government bureaucrats more responsibility for things that would have, just a generation ago, been handled by neighbors helping one another.

The costs of Medicare, Medicaid and Social Security are among the heaviest that our country will need to burden in the coming decades, but reforming them is the work of politicians, and work that they can feasibly accomplish. The long-term future of American prosperity depends on it.

On the other hand, the effects that are created by an American culture that creates people that ask “what can my country do for me?” is an effect that can be deterred only by asking “what you can do for your country.” And that question can only be answer by some serious introspection–and personal change.

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Hitting the Limit: A Financial Argument for Limiting Government [Contributor]

August 9, 2012 by Leave a Comment

Tyler Lees is a conservative engineer and train nerd from Midvale, Utah.You can follow him on Twitter as @ThePacificSlope. After he and I discussed on Twitter the necessity of establishing priorities for government in order to cut spending, I invited Tyler to share his view on the topic in a format longer than Twitter’s 140 characters. The following are his thoughts.

_____________________

taxes

taxes (Photo credit: 401(K) 2012)

I believe that there is a practical limit to how big government can get, irrespective of ideological points of view. Let me explain.

There is a real limit on how much a government can permanently spend. Taxes can only be raised so much and only so much debt can be incurred before the amount of revenue a government can raise tapers off. Where those points are can often be determined only after they have been reached. Just because we want something more, does not mean we can have it.

Taxes can only be raised to a certain point before the increases cease to yield significant gains in revenue. (This is the much-debated, much maligned, but holding firm concept known as the Laffer curve.) The reason for this is that taxes pull money out of private hands and place that money in the public till. The money will not go to expansion of business, repayment of debt, investment in new equipment or research and development,or, on the personal level, to where you—the individual taxpayer–want to spend it. The more taxes rise, the less cash businesses and individuals have to spend on their priorities, and with the effect that economic growth is reduced.

Debt is the second way governments can raise cash for their needs, but the amount of debt a government can accrue is also limited – in much the same you and I are. You can only borrow as much money as someone is willing to lend you. And that debt has to be paid back, eventually. The financial problems we are seeing in Europe is due to the loss of creditors confidence (and in the case of Greece, confirmation) that the Euro zone nations can honor their debts.

How about an example to demonstrate – what if a nation finds itself in an emergency (such as a war or natural disaster), and has to spend more than it can bring in? Looking at the United States in World War Two, the national debt rose  to the equivalent of over 110% of GDP by 1945 as the nation mobilized for war and put ten percent of the population in uniform. This,despite rates of taxation that might have seen communists up in arms. However, there was little, if any, protest because, and this is the key,the emergency ended, along with the high levels of borrowing. The need for budget-busting expenditures ended with the war, and taxes remained at high levels only long enough to pay down the national debt. A gross oversimplification, perhaps, but not inaccurate

In 2011, the United States national debt again exceeded 100% of GDP. The difference is that only a small portion of the debt over-run can be classed as temporary – most are a permanent part of the budget, items that will not end with an emergency or a cease-fire.

When our future obligations to Medicare, Social Security, and national health insurance (aka “Obamacare”) are factored in, expenditures will continue to grow.  As the baby boomers retire those expenses will grow faster than our ability to tax and borrow.

The budget will have to be cut, and we will have to make major changes to Social Security, Medicare, and the national health insurance plan to stay viable. This will happen – we can either do so voluntarily, now, or have it forced upon us when no one will let us borrow any more. “Austerity” will seem kind compared to the choices that will be forced upon us when the money runs out.

Our beliefs and principles can only guide what our priorities should be going forward.

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Retirement Plans? Private Investment is still Smarter than Social Security

February 22, 2012 by 1 Comment

Well, maybe ‘smarter’ isn’t the best word (see headline). Perhaps ‘a better investment’ would be more accurate.

[...]private capital investment remains remarkably safe over the long term. Despite recent declines in the stock market, a worker who had invested privately over the past 40 years would have still earned an average yearly return of 6.85 percent investing in the S&P 500, 3.46 percent from corporate bonds, and 2.44 percent from government bonds.

In contrast, Social Security,

  • Once the safety net for the poor, is the safety net for most retired Americans. Nine out of ten people age 65 and older receive Social Security benefits.
  • As of 2009, 55,905,731 Americans–rich or poor–received Social Security benefits. In 2011, it cost us $727 billion.
  • Once funded by 159 workers per beneficiary, there are so many Social Security beneficiaries that there are only 1.75 workers in the labor force  per Social Security recipient to fund it. That’s down from 2.9 in 2010 and the most dramatic drop since 1955.
  • Today, it is completely unfunded. The Social Security trust fund has been raided so many times by politicians, that there’s no longer any money in it…just IOUs.

So, which system do you want to be covered by when you retire? One that has paid out an annual return of 6.85 percent or one that’s completely bankrupt and funded from current tax dollars? Apparently, America is split on that question:

  • 50% of the workforce has no private pension coverage.
  • 31% of the workforce has no savings set aside specifically for retirement.

I have only one question if you are part of that 50% or 31%: are you crazy?

APROPOS: See also my review of Congressman Jason Chaffetz‘s notable effort to reform, fix, and revitalize Social Security to make it solvent again here.

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Could Congressman Chaffetz save Social Security? [Charts]

December 16, 2011 by 3 Comments

Would you believe that Social Security is now running in a deficit? Shocker, right?

According to the 2011 Annual Report  (the “Report”) to Social Security and Medicare Boards of Trustees, “Social Security expenditures exceeded the program’s non-interest income in 2010 for the first time since 1983.” Or, in other words, Social Security sent out to retirees and disabled recipients more than working America contributed into the trust fund.

Ostensibly, the Report attributes this to a slow economy and excess contributions from the previous year. After a slight resurgence until 2014, that deficit is set to grow as more Social Security beneficiaries draw on the Social Security trust fund. Then, in 2036, when I’m hitting my sixties, the trust fund reserves will be “exhausted.”

Meanwhile, the amount of my taxable wages that will go to Social Security is steadily rising, from 11.5% in 2007 to about 17% in 2035. In other words, not only is the trust fund reserves disappearing, but I’ll have less income to live on over that time.

After 2035, “tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2085.” By the way, the trust fund isn’t even real. It’s numbers on a paper. It’s been emptied out by Washington for other projects, and we’re living on borrowed money, anyway.

Thankfully, I don’t plan on living until 2085…but my daughters will, and they’ll be dealing with that load of junk then.

Unless someone fixes it. Fat chance at that, right? It’s the proverbial “third rail,” in Washington parlance.

I’d probably do better to make a small fortune than rely on Social Security for when I retire.

Enter Rep. Chaffetz’s ‘‘Social Security Reform Act of 2011’’

In November, Utah’s Rep. Jason Chaffetz proposed a bill to reform Social Security to return the program to solvency.  Among others, the reform would accomplish some substantive results:

  • Slow the growth in Social Security spending.
  • Achieve annual balance 2051 and actuarial balance over 75 years
  • A larger check for most retirees than they would receive without any reform
  • No tax increases
  • —No private accounts

How will the plan work?

First, it’ll raise the retirement age. The retirement age will rise a rate of 2 months per year until it reaches 69 in 2041 (if you were born in 1972)

    • After 2041, the retirement age is indexed to changes in life expectancy, which is expected to be one month increase every two years.
    • Early retirement age will be unchanged and it will maintain delayed retirement credit (8%/year, maximum 4 years)
    • Since so many people retire early (two-thirds), there will be a reduction in benefits during early retirement.

Second, change the way cost of living is calculated. Rather than a CPI-W, use a chained CPI.

Wait. Wha–? “Chained CPI.” According to Robert Greensteinof the Center on Budget and Policy, “chained CPI” is a measure of what it costs to live in America:

The regular CPI measures the costs each month of a market basket of items that average Americans may purchase each month and so it tells us how much prices are rising, what the inflation rate is. The chained CPI is identical, really, to the regular CPI in all respects except one. It includes an adjustment so that if, for example, beef prices rise much faster than chicken prices, and consumers, as a result, buy less beef and more chicken, it picks up the switching from the beef to the chicken, which makes their total costs for the month rise a little less quickly than if you assumed they continued to buy the same amount of beef and the same amount of chicken as before.

Get it? A more accurate measure of how much it costs to live in America.

Back to the plan:

Third, change the way that insurance for beneficiaries is calculated by increasing the index for people who make above the 50% during their working career.

Fourth, gradually increase the number of years used to calculate the average monthly earnings from thirty-five to forty years.

Fifth, tie special minimum benefits to wages instead of CPI.

Sixth, increase benefits for 85 and older by 5%.

Last, and I like this part a lot, use a means test  to reduce the benefit for people who made $360,000 in the previous year. In other words, if you don’t need social security, why are you getting it?

A little more complicated than some of the simplistic rhetoric you often hear, perhaps, but the devil is in the details and the value is in the results…which are what? How about a path towards Social Security solvency?

Check out this chart of projected changes in Social Security under the current law without changes and under the Chaffetz proposal:

Those are percentages. But how much money does this amount to? Look at this chart below on how much the deficit between revenues and expenditures will be over just the next nine years:

Under the Chaffetz proposal, each year (every ten years on this chart) will see a gradual increase in the percentage of taxable payroll as a percentage of the federal budget. Assuming that Congressional

lawmakers don’t raid that money or increase the benefits without corresponding increases in revenues, this plan would put Social Security on a path towards the black.

Lauding Rep. Chaffetz for making a substantive effort at reforming Social Security, the Provo Daily Herald supports his effort and his plan. Comparing him to Rep. Paul Ryan, who earlier this year was pilloried by Democrats for his budget plan, the Herald observed that the plan could work.

In other words, Chaffetz’s plan would keep the system from going broke. The letter isn’t meant to be an endorsement of the idea; and we all know how slippery Washington numbers can be. But this proposal at least seems to be grounded in reality.

Politically — which is just as important — the scheme seems viable. The idea is not to slash benefits for everyone, but to slowly reduce

increases. With savings compounding, that would enable the system to regain financial stability with few if any retirees noticing the changes.

More important than the Daily Herald, though, was the endorsement by the Social Security Administration itself. In a November 9, 2011 letter to the Congressman, the SSA said that

“We estimate that enactment of the basic provisions in this proposal would maintain solvency of the OASDI [Old Age, Survivors, and Disability Insurance] program throughout the long-range (75-year) projection period and would fulfill the requirements for sustainable solvency[.]“

Emphasis mine.

Even the Salt Lake Tribune, while taking issue with the Chaffetz’s plan on grounds that it does not include an increase in revenues, likes that the plan recognizes the intergenerational wealth transfer that is Social Security and that it acknowledges that need to retain Social Security’s solvency.

The wealthier among us might never benefit from Social Security in proportion to what they would pay in higher taxes. But they still have an interest in preserving the soundness of the system, and not only for the benefit of fellow citizens. Rich people who pay in enough to save Social Security now may well, like many of the rest of us, benefit greatly in the future if their huge incomes ever dry up. It happens.

Might the plan work?

In an age of entitlement expansion, Utah’s Rep. Jason Chaffetz is swimming against the flow. His proposed bill would help return solvency to the Social Security program without denying the promises that have been made to generations of Americans  paying into the system. It’s a real plan, it grapples with one of the toughest topic in national politics, and it makes great strides towards cutting through the Gordian knot that is Social Security.

Find the text of the bill here.

[Social Security Administration][NPR][Daily Herald][The Hill][Salt Lake Tribune]

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Fiscal IQ: Got it?

December 8, 2011 by 4 Comments

I found an interesting little quiz online today, put out by the Comeback America Foundation. It tests “Fiscal IQ” and fiscal knowledge. Click here to take the test.  It only takes about five minutes, and I think you should take it.


After completing the five minute and 30-question quiz, participants are provided two scores (Fiscal Knowledge and Fiscal Wisdom) as well as an overall IQ score, which is the average of the Knowledge and Wisdom scores. For any questions they answer incorrectly, the test taker will receive information explaining why they were wrong. The Fiscal IQ Quiz can be found here.

The test is based on David Walker‘s  book on dealing with America’s fiscal crisis–”Comeback America” which I read earlier this year. It looks at how government policy should shift to deal with the massive and growing deficits caused by the 55% (and growing) of our federal budget that is on cruise-control to pay for entitlements like Social Security, Medicare, and Medicaid. As I wrote in May–

It is almost cliché for my generation to joke that  Social Security will be gone before we retire.  It may be a stretch, but it really is no joking matter. Social Security is in a bad way, and it is getting worse.

The number of Social Security recipients is  growing faster than the number of people paying into it. It is a likely scenario that the Social Security trust fund (which doesn’t really exist, anyway) will be gone by the time I stop paying in and start asking for it back.

Social Security is just one piece of the puzzle, though, and perhaps even the easiest piece. Nevertheless, it’s taken a maverick like Utah  Representative Jason Chaffetz to start talking about how to reform the bankrupt entitlement to make it sustainable for future generations. (ICYMI, the Social Security Administration is calling it a plan that will make Social Security solvent.)

Things haven’t changed much in the intervening seven months since I read Walker’s book, at least not for the better. Washington is still stalled, President Obama has not proposed a budget palatable to Republicans or Democrats on the Hill, and America’s debt has been downgraded (and while that makes debt cheaper, it doesn’t exactly endear us to creditors).  We’re still on cruise control, the “Super-Committee” demonstrated that they weren’t so super, and the most action we’ve seen is the occupation, and subsequent forced evacuation, of Wall Street.

Is anyone really surprised that Americans are angry?

Take the test. Education is the best remedy to ignorance, so send it to your Congressman or Congresswoman, as well.

Please share your results in the comments. I scored 80% on the Fiscal IQ part and 100% on the Fiscal Knowledge…go figure.

[Comeback America Initiative]

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Debt too high saps economic growth.

August 31, 2011 by 1 Comment

Debt. You don’t like it. I don’t like it. No one likes it.

And yet, without it, much of the prosperity and technological progress we rely upon would not be possible. Finance and the power of compound interest has thrust our economy forward faster than any in history. Yet, compound interest is not a tool you want to be used against you. As New York Times columnist Carl Richards notes, “It’s always been one of the most powerful forces in the financial universe.”

Don’t think it matters? Just consider the result of the downgrade of American credit:

Think about that for a minute. If those worst-case-scenario interest rates came to pass and persisted, we’d be approaching a trillion dollars in interest payments per year. That’s what compound interest looks like when it’s working against you.

If that trillion dollar number doesn’t do it for you (that’s 1,000,000,000,000), consider it on a more personal scale.

On a personal scale, you get a taste of it every month if you get careless with credit cards. Take a look at a bill. For every month you carry a balance, there’s a minimum payment required.

Use carefully, it’s a great tool for growth.

Without financing, countries–and businesses and families–are poor and stay poor. Whether it’s a student loan to get through college and get a job that pays better, a business loan to cover the cash flow gap between invoice and payment, or money to build infrastructure and fund the armed forces, finance is a necessary part of growth and getting out of poverty.

Yes, taking on debt creates vulnerabilities for any of these parties; however,  debt managed and controlled brings prosperity.

On the other hand, debt out of control creates financial crises. It stops = growth and harms economies.

When the ratio of debt to income rises to a certain level, a new study shows, financial crises–be it household debt, corporate debt, or a national government’s debt–”become both more likely and more severe.” In other words, too much debt is not a good thing.

Well, duh.

The study, entitled blandly but descriptively “The real effects of debt,” was reported by Stephen G. Cecchetti, M.S. Mohanty, and Fabrizio Zampolli, economists at the Bank for International Settlements, at the “Achieving Maximum Long-Run Growth” Symposium in Jackson Hole last week.

I can only imagine that the report’s findings threw a lot of cold water on the “more stimulus/raise the debt ceiling” crowd (aka “New Keynesian orthodoxy” believers, according to the economists), including Fed Chairman Ben Bernanke, fresh back from scolding Republicans for their reticence to raise the debt ceiling.

Why? Because, at least in part, the finding vindicates Republican fears about the malignant effect debt can have, and is having, on the national economy.

From the Introduction:

Our result for public debt has the immediate implication that highly indebted governments should aim not only at stabilising their debt but also at reducing it to sufficiently low levels that do not retard growth. Prudence dictates that governments should also aim to keep their debt well below the estimated thresholds so that even extraordinary events are unlikely to push their debt to levels that become damaging to growth.

Emphasis my own.

Which leads to the question: at what levels does begin to hurt and retard growth? The empirical results of the study, based on review of debt levels in 18 OECD countries from 1980 to 2010, show that:

  • Households can handle a threshold of about 85% of debt to income.
  • For corporations (non-financial), the number is about 90%.
  • Governments can borrow between 80 and 100% of GDP.

But that’s just in the short-term. Looking at advanced economies–in other words, Western Europe and the United States, Japan, and Australia– the problem is

compounded by unfavorable demographics. The ageing of populations and the rise in dependency ratios have also the potential to slow growth, making it more difficult to escape the negative debt dynamics that are now looming.

In other words, in our economy more of our population is getting old and few children are being born, which means that Social Security, Medicare, and Medicaid all have fewer  people paying for them and more and more people drawing on them.

If I’ve learned nothing from leaving the bachelor world for the role of a family man, buying too many Happy Meals for the kids may make me feel good, but it’s more expensive than a BBQ at home, and its less healthy, too. And when costs are going up faster than my income, that’s not the time to go out and get more debt.

What is our current federal debt ratio to GDP, then? Check out the chart below, and how it compares over our history. Note that, prior to recent history, the level of debt is only comparable to times when we have been at war.

World wide war.

In the meantime, we’ve become addicted to the Happy Meals as a national economy. While Social Security, Medicaid, and Medicare were all begun with the laudable, and often successful, goal of caring for the poor, sick, and elderly, they have expanded to bloat our national budget to a place where our ability to help those needy groups will someday become questionable.

And I do emphasis will. It is inevitable that if we continue on our current track we will be unable to aid those in need. The time for reform was last year, and the longer we delay, the more difficult it will be. We’re not getting any younger as a nation, and we’re not getting any richer either.

The debt is just too damn high.

[via CNBC, New York Times, and BIS]

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Entitlement Reform: Start with Social Security

May 10, 2011 by 1 Comment
INFOGRAPHIC - Why Social Security Needs To Be ...

Image by Third Way via Flickr

It is almost cliché for my generation to joke that  Social Security will be gone before we retire.  It may be a stretch, but it really is no joking matter. Social Security is in a bad way, and it is getting worse.

The number of Social Security recipients is  growing faster than the number of people paying into it. It is a likely scenario that the Social Security trust fund (which doesn’t really exist, anyway) will be gone by the time I stop paying in and start asking for it back.

[Read more...]

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