The temptation lies in the fact that any premium revenue is spent immediately not for the intended purpose but, more often than not, for totally unrelated purposes. Then, when claims are made, government must borrow the money to pay them; and pay interest on both the debt and the misappropriated premium monies.
This is quite obviously a bad thing but then I thought, this problem is much more extensive than FICA.
FICA is an acronym for the Federal Insurance Contributions Act tax and this got me thinking about government-funded (taxpayer-funded) insurance in general. There are lots of taxpayer-funded insurance plans beyond FICA.
- Welfare/Medicaid/Obamacare
- Unemployment Insurance
- Flood Insurance
- Bank Deposit Insurance (FDIC)
- Crop Insurance
- Worker's Compensation Insurance
- Life Insurance (for government employees)
- Federal Pensions
- Military Pensions
- State Pensions
One third of the national debt, about $5 trillion, is from raids on the premium trust funds.
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| Distribution of $5 Trillion US Owes Itself |
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| State Debt |
Raise your hand if you think this is bad practice.
Of course, bankrupt is the wrong word since the federal government is forbidden by law to borrow money to pay FICA benefits (claims). We must have really good lawyers since the government borrows money to pay FICA benefits every week.
With the Boomers retiring, fewer taxpayers will have to support more retirees and benefits will decrease; I think that's why we still make pennies.
Since this is nothing to be pleased about, it's difficult to explain the congratulatory demeanor of our liberal leaders; all handshakes and smiles about mismanagement that makes Detroit look good.
So, how do we fix it?
FICA (Social Security and Medicare)
By the time most of us retire at 65, we have about 15 years left. With an average working life of about 45 years, we need to put away about one third of our earnings to make sure we don't go broke.
In my plan, I suggest continuing FICA as-is for those aged 45 and older. The idea is to keep the promise of these programs for those 45 and up since it's too late to play catch-up. Those folks will continue to pay FICA as will their employers (7.65% each to fund Social Security and Medicare...aka Payroll Tax); these are the maximum earning years for most of us.
For those below 45, they will no longer pay FICA although their employers will. Thus, the net program loss of revenue will be small since these are the lesser earning years. The average 44-year old earner (salary average in US is $62,000) can save well over $300,000 in 20 years starting with 7.65% of pay (the amount no longer paid in FICA) in a safe 3% government bond along with another 10% of wages. These monies can be directly deposited in individual trust accounts.
The point is that this will pay the same as the current Social Security payout ($1,250/month including $50/month for a catastrophic health insurance policy) over 20 years and still have $119,000 left. This is living
on $15,000/year but it doesn't count what that person may have already saved.
Since the government spends 40% of our earnings, we must save about 20% and live on 40%. For the average income of $62,000, this means living on $24,800/year. So hopefully, there is additional savings because this will only last 12 years withdrawing at $24,800/year.
A 22-year old has much more potential; starting at minimum wage and working up to a $62,000 salary (or more with college degree) will net more than a half-million dollars toward retirement.
Any money left after death can be passed to heirs, unlike Social Security.
With Social Security, if you live beyond expectations, the rest of us pay. Of course, when Social Security began, there was no life expectancy after age 62.
Welfare/Medicaid/Obamacare
Welfare and Medicaid aren't really insurance since no premiums are paid. This is really taxpayer-funded charity.
Medicaid is so inefficient it makes me ill; no pun intended.
Obamacare makes Medicaid appear reasonable because it currently expected to be just as bad and everyone except the liberals (and some of them too) know it will get worse.
Do as I suggest and get the government out and the costs will drop.
Here's what a Nobel Peace Prize winner thought about entitlements like this:
We all know of course that we cannot abolish all the evils in this world by statute or by the enforcement of statutes, nor can we prevent the inexorable law of nature which decrees that suffering shall follow vice, and all the evil passions and folly of mankind. Law cannot give to depravity the rewards of virtue, to indolence the rewards of industry, to indifference the rewards of ambition, or to ignorance the rewards of learning.
Root, Elihu (2003-12-01). Experiments in Government and the Essentials of the Constitution
Unemployment Insurance
This stuff is great when you need it but it can be a drag on a state's economic growth since the premiums are paid by employers; new companies will likely look elsewhere if rates are too high.
There is also tax trickery here; new employers get preferential treatment. This generally means that long-term employers pick up the tab when the new guys leave town for greener pastures.
Personally, I'd rather have the Connecticut employer pay me directly. If not, I'd rather attract more industry with lower taxes, er, premiums so I'd have more options after a layoff.
Extending it with the funds provided by good employers or worse, taxpayers, after the financiers loot the market is the wrong way to go; I say we should jail the wrongdoers, confiscate their ill-gotten gains and fund the unemployed with the proceeds for as long as possible.
Flood Insurance
Bank Deposit Insurance (FDIC)
Crop Insurance
Between 1980 and 2005, the Federal Crop Insurance Corporation (FCIC) recorded $43.6 billion in total claims, averaging approximately $1.7 billion in losses per year. Three-quarters of FCIC claims result from three weather-related disasters –drought, excess moisture, and hail – with the remaining claims divided among 27 different causes, including crop-damaging frost and tornadoes.
Taxpayers pay about 62 percent of the insurance premiums which are set to cost more than $94 billion over the next 10 years, according to the Congressional Budget Office. The policies are sold by 15 private insurance companies, which receive about $1.3 billion annually in total from the government. The government also backs the companies against losses.
These subsidies drive up the cost of the program, with farmers buying higher levels of coverage than they otherwise would. Without the subsidies, crop insurance payouts during last year’s drought for the two largest crops, corn and soybeans, would have been just over $6 billion, about half of the $12 billion that the government actually paid.
This is a leftover from the dust-bowl days of the depression. Farmers’ net income for 2012 is expected to be $114 billion, down 3 percent from 2011 but still the second highest in 30 years. Let them pay for their own insurance.
Government Employee Unions
Before talking about the other taxpayer-funded insurance plans, this needs to be addressed.
I am opposed to unionization of government workers; in the private sector they make sense as protection against evil capitalists but in the public sector, they are the protectors. I think it's a conflict of interest; imagine if the armed forces were unionized and you'll see my point.
The full-time pay of all Connecticut state employees is $4.2 billion and they're unionized; this, without counting the teachers who are also unionized and receive $2.8 billion in salary. They also provide heavy financial support to politicians affiliated with the democrat party; spendthrift liberals who love big government. My point should be coming clearer.
In the private sector, workers represented by a third party are called contractors, not employees. Contractors are paid under IRS Form 1099 and they receive wages only; no benefits.
Being provided wages and benefits as a contractor is like having your cake and eating it too.
I was a contract engineer for many years. I bought my own insurance, paid both sides of FICA (15.3%), had unpaid vacation and no holidays to speak of.
Nearly 36 percent of public-sector employees are union members, while only 6.6 percent of private-sector employees are part of a collective-bargaining group. Local government workers unionize at a higher rate than federal employees, with rates of around 42 percent and 27 percent, respectively.
Worker's Compensation Insurance
This is essentially disability insurance except that its primary purpose is to shield employers from litigation.
Be that as it may, I'm a big fan of disability insurance; everyone should have it. The difference here is that the insurance premiums do not all get paid to the government; it's mostly private and the employers pay the premiums.
The exception, as usual, is for government workers and it's expensive with outlays in 2004 in Connecticut of $18 million/year and the state is self-insured.
Since there are unions, the unions are essentially the employers so the union should pay the tab (0.4% of all wages), not the taxpayers.
To make matters worse, the state Worker's Compensation commission costs $3 million/year. The unions should pay for this function too.
There were constitutional challenges with respect to the 14th amendment (due process) but, in the end, it was determined not to deny due process. If the unions have skin in thee game, they'll find the right balance of process!
The rates are risk-based with forestry and contact sports being the most costly followed by police and firefighters.
Life Insurance for Government Employees
In fiscal year 2010, the total amount of Federal Employees Group Life Insurance (FEGLI) coverage in force was $824 billion, and the balance in the plan’s financial fund totaled approximately $38 billion. In addition, throughout 2010, FEGLI paid out approximately $2.6 billion in insurance claims to beneficiaries of federal employees. The program also involves substantial premium costs to enrolled federal employees, who pay two-thirds of the premium for an initial amount of Basic life insurance.
Of course, the FEGLI fund contains nothing but IOUs.
The rate paid by all 4 million covered employees, regardless of age, for each $1,000 of Basic insurance is $0.150 bi-weekly or $0.325 monthly; so, for the average federal salary of $66,667, the premium is $260/year. This amounts to about $1 billion leaving taxpayers on the hook for $1.6 billion/year. Raise the premium to $0.845 and stop the subsidy.
States have similar programs and their unions should be paying for this too.
Federal Pensions
Military Pensions
See entry above for federal pensions.
You know what, I'm OK with that for the military or anyone routinely in harm's way and not a union member. The whole idea of government pensions goes back to the Revolutionary War and the gratitude the new nation felt toward it's liberators. They deserved it then and they still do.
State Pensions
In my plan, I suggest continuing FICA as-is for those aged 45 and older. The idea is to keep the promise of these programs for those 45 and up since it's too late to play catch-up. Those folks will continue to pay FICA as will their employers (7.65% each to fund Social Security and Medicare...aka Payroll Tax); these are the maximum earning years for most of us.
For those below 45, they will no longer pay FICA although their employers will. Thus, the net program loss of revenue will be small since these are the lesser earning years. The average 44-year old earner (salary average in US is $62,000) can save well over $300,000 in 20 years starting with 7.65% of pay (the amount no longer paid in FICA) in a safe 3% government bond along with another 10% of wages. These monies can be directly deposited in individual trust accounts.
 |
| Saving 17.65% of $62,000 in a 3% Bond for 20 Years |
on $15,000/year but it doesn't count what that person may have already saved.
Since the government spends 40% of our earnings, we must save about 20% and live on 40%. For the average income of $62,000, this means living on $24,800/year. So hopefully, there is additional savings because this will only last 12 years withdrawing at $24,800/year.
 |
| Withdrawal @ $24,800/Year |
Any money left after death can be passed to heirs, unlike Social Security.
With Social Security, if you live beyond expectations, the rest of us pay. Of course, when Social Security began, there was no life expectancy after age 62.
Welfare/Medicaid/Obamacare
Welfare and Medicaid aren't really insurance since no premiums are paid. This is really taxpayer-funded charity.
Medicaid is so inefficient it makes me ill; no pun intended.
Obamacare makes Medicaid appear reasonable because it currently expected to be just as bad and everyone except the liberals (and some of them too) know it will get worse.
Do as I suggest and get the government out and the costs will drop.
Here's what a Nobel Peace Prize winner thought about entitlements like this:
We all know of course that we cannot abolish all the evils in this world by statute or by the enforcement of statutes, nor can we prevent the inexorable law of nature which decrees that suffering shall follow vice, and all the evil passions and folly of mankind. Law cannot give to depravity the rewards of virtue, to indolence the rewards of industry, to indifference the rewards of ambition, or to ignorance the rewards of learning.
Root, Elihu (2003-12-01). Experiments in Government and the Essentials of the Constitution
Unemployment Insurance
This stuff is great when you need it but it can be a drag on a state's economic growth since the premiums are paid by employers; new companies will likely look elsewhere if rates are too high.
There is also tax trickery here; new employers get preferential treatment. This generally means that long-term employers pick up the tab when the new guys leave town for greener pastures.
Personally, I'd rather have the Connecticut employer pay me directly. If not, I'd rather attract more industry with lower taxes, er, premiums so I'd have more options after a layoff.
Extending it with the funds provided by good employers or worse, taxpayers, after the financiers loot the market is the wrong way to go; I say we should jail the wrongdoers, confiscate their ill-gotten gains and fund the unemployed with the proceeds for as long as possible.
Flood Insurance
I wrote to the local paper to express my outrage over the federal government's need to borrow the money to pay flood insurance claims. We charge about $3.4 billion a year in premiums, but just Katrina and Sandy cost over $140 billion in eight years.
Worse, if the predictions made by the global warming crowd are right, it will only get worse. I think they're right, regardless of the causes.
Having grown up on the water, I can appreciate the desire to live on the water despite the risks. But insurance premiums need to go up by a factor of 10 or more to cover the damage. Taxpayers should not subsidize questionable decision making by homeowners, businesses and utilities.
Bank Deposit Insurance (FDIC)
In light of apparent systemic risks facing the banking system, the adequacy of FDIC's financial backing has come into question. Beyond the funds in the Deposit Insurance Fund (DIF, a single-digit percentage of deposits paid as premiums by the banks) and the FDIC's power to charge insurance premiums, FDIC insurance is additionally assured by the Federal government.
I don't like this one bit.
According to the FDIC.gov website (as of March 2013), "FDIC deposit insurance is backed by the full faith and credit of the United States government". This means that the resources of the United States government stand behind FDIC-insured depositors." The statutory basis for this claim is less than clear.
I like that the banks pay for the DIF but given that the Federal Reserve Bank was required to pay commercial banks 6% interest on their reserves as a part of the 2008 Emergency Economic Stabilization Act, this seems wrong; I think the depositors are insuring themselves against risky bank behavior.
I don't like this one bit.
According to the FDIC.gov website (as of March 2013), "FDIC deposit insurance is backed by the full faith and credit of the United States government". This means that the resources of the United States government stand behind FDIC-insured depositors." The statutory basis for this claim is less than clear.
I like that the banks pay for the DIF but given that the Federal Reserve Bank was required to pay commercial banks 6% interest on their reserves as a part of the 2008 Emergency Economic Stabilization Act, this seems wrong; I think the depositors are insuring themselves against risky bank behavior.
The Federal reserve has to stop paying the banks anything and the DIF has to get funded by the banks to an amount at least sufficient to cover a failure of the largest megabank.
Between 1980 and 2005, the Federal Crop Insurance Corporation (FCIC) recorded $43.6 billion in total claims, averaging approximately $1.7 billion in losses per year. Three-quarters of FCIC claims result from three weather-related disasters –drought, excess moisture, and hail – with the remaining claims divided among 27 different causes, including crop-damaging frost and tornadoes.
Taxpayers pay about 62 percent of the insurance premiums which are set to cost more than $94 billion over the next 10 years, according to the Congressional Budget Office. The policies are sold by 15 private insurance companies, which receive about $1.3 billion annually in total from the government. The government also backs the companies against losses.
These subsidies drive up the cost of the program, with farmers buying higher levels of coverage than they otherwise would. Without the subsidies, crop insurance payouts during last year’s drought for the two largest crops, corn and soybeans, would have been just over $6 billion, about half of the $12 billion that the government actually paid.
This is a leftover from the dust-bowl days of the depression. Farmers’ net income for 2012 is expected to be $114 billion, down 3 percent from 2011 but still the second highest in 30 years. Let them pay for their own insurance.
Government Employee Unions
Before talking about the other taxpayer-funded insurance plans, this needs to be addressed.
I am opposed to unionization of government workers; in the private sector they make sense as protection against evil capitalists but in the public sector, they are the protectors. I think it's a conflict of interest; imagine if the armed forces were unionized and you'll see my point.
The full-time pay of all Connecticut state employees is $4.2 billion and they're unionized; this, without counting the teachers who are also unionized and receive $2.8 billion in salary. They also provide heavy financial support to politicians affiliated with the democrat party; spendthrift liberals who love big government. My point should be coming clearer.
In the private sector, workers represented by a third party are called contractors, not employees. Contractors are paid under IRS Form 1099 and they receive wages only; no benefits.
Being provided wages and benefits as a contractor is like having your cake and eating it too.
I was a contract engineer for many years. I bought my own insurance, paid both sides of FICA (15.3%), had unpaid vacation and no holidays to speak of.
Nearly 36 percent of public-sector employees are union members, while only 6.6 percent of private-sector employees are part of a collective-bargaining group. Local government workers unionize at a higher rate than federal employees, with rates of around 42 percent and 27 percent, respectively.
Worker's Compensation Insurance
This is essentially disability insurance except that its primary purpose is to shield employers from litigation.
Be that as it may, I'm a big fan of disability insurance; everyone should have it. The difference here is that the insurance premiums do not all get paid to the government; it's mostly private and the employers pay the premiums.
The exception, as usual, is for government workers and it's expensive with outlays in 2004 in Connecticut of $18 million/year and the state is self-insured.
Since there are unions, the unions are essentially the employers so the union should pay the tab (0.4% of all wages), not the taxpayers.
To make matters worse, the state Worker's Compensation commission costs $3 million/year. The unions should pay for this function too.
There were constitutional challenges with respect to the 14th amendment (due process) but, in the end, it was determined not to deny due process. If the unions have skin in thee game, they'll find the right balance of process!
The rates are risk-based with forestry and contact sports being the most costly followed by police and firefighters.
Life Insurance for Government Employees
In fiscal year 2010, the total amount of Federal Employees Group Life Insurance (FEGLI) coverage in force was $824 billion, and the balance in the plan’s financial fund totaled approximately $38 billion. In addition, throughout 2010, FEGLI paid out approximately $2.6 billion in insurance claims to beneficiaries of federal employees. The program also involves substantial premium costs to enrolled federal employees, who pay two-thirds of the premium for an initial amount of Basic life insurance.
Of course, the FEGLI fund contains nothing but IOUs.
The rate paid by all 4 million covered employees, regardless of age, for each $1,000 of Basic insurance is $0.150 bi-weekly or $0.325 monthly; so, for the average federal salary of $66,667, the premium is $260/year. This amounts to about $1 billion leaving taxpayers on the hook for $1.6 billion/year. Raise the premium to $0.845 and stop the subsidy.
States have similar programs and their unions should be paying for this too.
Federal Pensions
I've already covered this in another post. I'm concerned that the payout is one third of the Social Security for one sixth of the number of beneficiaries: it pays out nearly 100% more per person. What a racket!
Use my plan.
Military Pensions
See entry above for federal pensions.
You know what, I'm OK with that for the military or anyone routinely in harm's way and not a union member. The whole idea of government pensions goes back to the Revolutionary War and the gratitude the new nation felt toward it's liberators. They deserved it then and they still do.
State Pensions
I'm not OK with the state and local pensioners taking an average of $26,860 in yearly retirement benefits; Social Security pays an average of $15,000.
State and local governments employ 14.4 million people full-time and 4.8 million people part time for wages of $840 billion ($768 billion for full-time). This gives an average full-time wage of $53,334 so pensioners are pulling down a bit over 50% in retirement.
In addition this represents nearly 14% of the entire workforce. Government is essentially management so why is it 14% when, in the private sector, it's 4.28%? Think about it.
In addition this represents nearly 14% of the entire workforce. Government is essentially management so why is it 14% when, in the private sector, it's 4.28%? Think about it.
While I'll admit the average wage here is 14% lower than the average wage in America, I don't think it justifies the higher retirement benefits. See Fact #2 here.
Some local governments are allowing themselves to be bankrupted by these ridiculous retirement benefits; this is childish behavior since everyone suffers for the benefit of a few. Some state and local governments are changing their laws to deal with the reality of the fact that these benefits are simply not sustainable without increasing government spending beyond the existing 40% outlined in the preface of this blog.
Thank you for the warning. I have to start collecting mayonnaise jars for my pennies.
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