In my last post, I was examining what the ability to pass unused Social Security savings from generation to generation would really have over the population; particularly, whether the program is self-sustaining or not and, if not, by how much.
What I found was that everyone leaves money on the table, a lot of money. I also found that the fund should have at least $52 trillion in it (IOUs or federal securities or cash) but has considerably less.
I'm not talking about unfunded liabilities (like the Wall Street Journal) since they are technically impossible for Social Security; at the point where the reserves are used up, continuing taxes are expected to be enough to pay 76 percent of scheduled benefits. Thus, the Congress will need to make changes to the scheduled benefits and revenue sources for the program in the future.
I'm talking about real withholding (and, most importantly, interest) over the last 60 years.
I've been writing furiously to the Social Security Administration, my congressman, my two senators and even the White House. I want an explanation regarding the fact that there is only $2.7 trillion worth of IOUs in the trust fund when there should be at least $52 trillion worth of them.
Even my old pal Leo wrote to his representatives.
Leo's congressman, John Kline (R-MN) has replied by saying "he will keep the information in mind for any upcoming or pending legislation". Not encouraging but, at least, a response. Nothing from my Connecticut all-democrat leaders; as you may recall, it was their idea.
The White House replied today but said absolutely nothing about the Social Security Trust Fund. The letter sounded familiar and so I looked back over my previous replies and found it to be an updated copy of a previous reply. I think this shows arrogance, disdain and antipathy. I will write back and say as much.
It's been said that Social Security is the 'third rail' of American politics and the flaccid response thus far is testament to that dictum.
Disagreement with My Math
There was some disagreement about my math.
My brother-in-law Jeff suggested that I may have overestimated the savings of the 1947 control group by counting the entire population of 2,858,000. This seemed a valid observation since the average participation rate in 1967 was only 57% (close to the lowest ever) and since I'm reluctant to argue with conservatives.
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| Workforce Participation Rates (%) |
- I did not count those under 20 or over 65 in the overall calculation (4% of workforce).
- I think I have another few percent hiding in my conservative curve fit.
- I did not count the top 9% of earners in the calculation for the control group of 1947.
- The straight percentage of payroll tax paid by this group is 17/50.9 or 33%.
- The ratio is found by the top 9-10%'s red to all of the red in the figure below; some groups pay more than 7.65% because small business owners pay both sides of FICA.
- Even this is overly conservative because 1% of a top 10 percent earner's income is a lot more than 1% of lower quartile earner's income.
- Using annual instead of continuous compounding, my savings estimates are 10% low.
- The net result (47% on the low side) more than compensates for the labor participation rate.
I hope my defense is sufficient for Jeff. To him I say thanks for reading and for trying to keep me honest. If more of us treated government with the same critical eye, we'd all be a lot better off.
On Wealth
My supposition in my post on the Wealth Gap was that, rather than trying to address the wealth gap by inefficiently (263% overhead) spraying cash on those with limited earning power, it might be more effective to help them keep more of what they do earn, thus increasing their wealth. This is like wealth un-distribution.
My proposals included the elimination of regressive taxation that hurts low wage earners disproportionately; sales taxes, fuel taxes sin taxes and property taxes.
The national average sales tax is about 6%. Given that low wage earners spend everything they don't save, this amounts to at least $500/year.
To a low wage earner struggling to save (after the government takes $1,860 from him and his employer for Social Security), $1,000 in yearly fuel tax is huge (fuel taxes average $1/gal).
A low-to-middle wage family with a car or home or both will pay perhaps hundreds of dollars in tax on the car and 1.4% of the home's market value (typically 2% of the 70% assessment value) in tax. In the bottom 20%, the home-ownership rate is 45%. The sum of these taxes has to be worth at least $2,000/year on average given that even a renter is paying some or all of the landlord's taxes.
By the way, where is the 'middle class' is this distribution?
If this money were saved directly instead of collected as tax and redistributed by inefficient means, it would have a huge impact on the wealth of low income households; this amounts to an average of at least $3,000/year in total. For the bottom 20% of earners (28 million workers), that adds up to $84 billion/year; roughly the cost of the food stamp program but worth a great deal more because of overhead and lack of opportunity for fraud.
For Social Security inheritance, the lifetime minimum wage earner retiring last year will leave an average $130,000 on the table at death. Given the 2.5 million deaths each year, this is another $65 billion/year for the bottom 20%. More than twice that much for the bottom 40%.
The total of $155 billion/year for the bottom 20% is worth $562 billion in government subsidies given the average 263% delivery overhead of government subsidies.
If you don't buy my overhead calculation (or similar findings by others), I can easily argue that the federal government borrowed virtually all of the money ever dispersed as welfare; $15 trillion total since 1964 minus $5.4 trillion in Medicaid leaves well over $10 trillion (when interest is added) in debt to other than ourselves. This means we can also tack on the federal debt payments of $395 billion/year to the $155 billion detailed above; by the way, at 4% interest, $395 billion isn't even enough to keep the debt from self-growth so add another $55 billion/year.
We spend $450 billion/year on non-health-related charity but these suggested moves are still worth over $550 billion/year. Sadly, we still have to pay the debt but I think I've made my point; we wouldn't have the debt and we'd have a lot less poverty were it not for government interference.
Regarding my overhead number and the $450 billion in Welfare we spend each year, excluding charitable donations ($516 billion) and all healthcare spending; think about it, does anyone really believe that the poor are getting $10,000/year for each of the 45 million? If so, please contact me at your earliest convenience; I've got this bridge for sale..
Regarding 'having to pay the debt', do we really? If our government will steal $50 trillion from us, what's to stop it from stealing $11 trillion from them? Maybe that's why House Republican's see the 'Obamacare versus default' as a win-win proposition? Perhaps it's time for payback for being the world's policeman for 70 years?
The savings to states is also huge but not calculated here due my laziness but it is probably close to half of the total. This is because of the insidious means by which such well-intentioned but foolish programs, started at the federal level, are eventually pushed off onto the states to make Congress look better while everything else gets worse.
The less-than-obvious problem is that if the government had not stolen the $50 trillion from the Social Security Trust Fund (taken without so much as an IOU), the interest of 4% would cost the federal government over $2 trillion/year. My brother and I came to this grim realization while discussing my last post.
This ridiculous yet factual result illustrates the futility of the program's design; $2 trillion in interest for $0.8 trillion in benefits is not a good deal and is an even worse plan! It also explains why our elected representatives are so reluctant to discuss it (I think I hear them running away screaming like little girls).
Solution
As I have been saying for several months now in my posts, the government has to get out of the retirement business (and healthcare and education) except for forcing us to save and making employers contribute to our retirements. Forcing us to save and then stealing the savings is just not right.
A lifelong minimum wage earner starting today would accumulate $242,000 over 45 years with today's minimum wage, 12.4% withholding and today's 4% interest rates (no 15% rates like the early 1980's).
The same math for those starting to earn in 1967 would yield $33,000 after 45 years ($1.60 minimum wage, 7.6% withholding and 4% interest) even though they ended up with $198,000 at age 65.
Interest rates will go back up. As government grows relative to GDP and more are forced to borrow to make ends meet; supply and demand. We'll go (further) into debt just like government does.
Put this forced savings into individual accounts holding low-risk securities; no US Treasury bonds since we all pay taxes to pay the interest on Treasuries; remember that government itself is not profitable and paying yourself interest (via taxation) really isn't profitable. Knowing what I now know, I would only buy Treasuries if I had my citizenship elsewhere; the US government almost makes Lehman Brothers and AIG look good!
By the way, all of this reasoning applies equally to federal and state employee pensions and we're beginning to see the impacts there.
Current Events
Regarding the budget battle, I sent this letter to my democrat senators:
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Senator,
I'm writing to ask you to vote for the house CR to fund government and defund the ACA.
The ACA is a $150 billion 'solution' to a $50 billion problem.
Poor people can't afford even cheap premiums but they can't be turned away from emergency care.
As more companies opt for a fine instead of providing employee's insurance, the whole wage basis of the middle class will come unhinged.
The MLR provision isn't working either; insurance companies still post 30% profits.
The only good thing is the pre-existing thing but that would be a good standalone law.
You rightly bucked the party on place something here, please do it again.
-Marty
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I encourage you all to send this to your senators. It's worth 10 minutes of your time and there's only a week left before chaos. I think I'm getting out of the market again as a precaution.
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