Our Income Taxes Are Not Progressive

Progressive?

The claim we have progressive income taxation has been accepted with no thought given to whether it is true.

It isn’t. Although the wealthy are paying a larger share of total income taxes than ever, they are also wealthier than ever, and Liberals are constantly whining about the growing wealth gap. Far from being progressive, income taxes discourage savings and the accumulation of wealth, and place obstacles in the path to closing the wealth gap. It’s easy to maintain wealth, hard to accumulate it.

To begin, what makes an income tax progressive? The probable answer is that the higher the income, the higher the tax rate. The intent of progressive taxation is to have the wealthy carry the tax load, because: “They should pay their fair share. They need to give back. They receive the greatest benefits. Yada, yada & Etc.”

Because of the “progressive” nature of our income tax system, the wealthy make a lot of tax lawyers and accountants wealthy too by paying them to devise ways to beat high taxes. Even government has leaped into the tax avoidance business, by promoting schemes like tax-free municipal bonds.

Since the top 5% in terms of adjusted gross income pay 60% of income taxes (the top 5% share of the total has increased steadily, up from 37% in 1980 when the top tax brackets were at 70%), and the bottom 50% pay only 3% of the total (less than half of the 7% they paid in 1980).

You can see by the trend, the wealthy need all the help they can buy to avoid fulfilling the Democrat’s dream of wealthy Republicans eventually paying all the income tax. As it is, almost half of our “taxpayers” no longer pay any taxes to the IRS.

Thanks to the Internet, you can also easily find entire nations that provide tax avoidance services, offering off-shore banking in British Virgin Islands, Belize, Dominica, Seychelles, Panama and Gibraltar, and in other less favored states.

As is usual, the unwealthy need not apply.

Can an income tax be regressive? Look no farther than FICA (Social Security) and Medicare payroll taxes for the answer, a resounding “Yes!” The FICA and Medicare rates are the same for all, and FICA is paid equally on the first dollar earned up to the 137,700th dollar, after which the marginal rate is zero. Therefore, the total FICA tax rate for someone earning $275,400 falls to 3.1 percent, exactly half the 6.2 percent rate for anyone earning $137,700 or less.

You do realize your "employer contribution" comes out of your wages too, don't you? It's a sneaky way politicians try to make you think you're only paying 6.2 percent into Social Security. If you were self-employed, you would know you pay 12.4 percent into Social Security, and 2.9 percent into Medicare.

The total FICA tax rate continues to fall once taxable wages pass $137,700  For example, for someone earning $413,100, the tax rate is only 2.07 percent. At $550,800, it falls to 1.55 percent, or approximately the 1.45 percent Medicare tax. Get the picture?

FICA is also regressive because it discourages savings and wealth accumulation. The 12.4 percent of income paid into Social Security earns at about a 2 percent rate, less than the rate of inflation. After a lifetime paying into FICA, mortality tables show that a black male born before 2000 will die just about the time he would collect his first check at about 66 years of age. He will probably be unmarried when he dies, so his Social Security benefits will cease with his last breath. The return on his working lifetime investment is worse than 0.00%, which would be the return if someone was paid what he put in. No, his return on investment is a negative 100 percent (-100%).

Opponents of privatized Social Security accounts don’t spend much time on this feature of the present system, or on the fact it went cash income negative in 2010 and goes bankrupt in 2035.

As added frosting on the wealthy’s tax avoidance cake, a person making a million dollars a year from investments only pays FICA at the 0.00% rate. If, following the example of Ross Perot, the million dollars was all income from tax-free municipal bonds, his federal income tax rate is also 0.00%. Therefore, the wealthy can legally pay FICA and income taxes at the same rate as the drug dealer, who pays none of either unless he is caught, arrested, and convicted, and then only if the government can then find where he stashed his loot (see British Virgin Islands, Belize, Dominica, Seychelles, Panama and Gibraltar), and then find someway to collect from it.

Lots of luck collecting, G-Men.

Not only FICA is regressive, but our “progressive” income tax system is too. It also discourages savings and wealth accumulation, by taking a portion of the income before it can be invested, and then taxing interest and profits which, during inflationary periods (i.e. most of the time), means the IRS is reducing your capital base.

Taxing both interest earned on investments and capital gains are particularly regressive and oppressive forms of taxation. In the first instance, interest usually doesn’t keep up with the rate of inflation, so taxing interest earned just adds to capital shrinkage.

On the other hand, capital investments usually increase with inflation, and often at a faster rate. However, that still means that most of the value of the asset is original cost plus inflation. If the value only goes up by the amount of inflation, and the asset is then sold, the investor has not made a profit, he has just gotten back the value of his original investment.

“Not so,” says the IRS. "You have made a profit, i.e. selling price – original cost = profit, and on that profit you will pay capital gains tax." In other words, your investment not only did not beat inflation, but after paying tax on the “capital gain,” you lost money. Such a deal! Courtesy of your IRS.

I am waiting for a Liberal to explain to me why a system of taxation that discourages savings and investment is considered “progressive.”

The most illogical and regressive part of income taxation is the double taxation of corporate profits. Corporations are taxed at a very high rate (basically 21%, formerly 35%, with possible add-ons) when profits are earned, and then those profits are taxed to individuals when distributed as dividends.

Liberals have justified this double taxation by once again clothing it in the mantel of “fairness,” declaring that corporations must pay their fair share. Either through deceit or ignorance, the Liberals don’t admit that corporations don’t actually pay any income, property, or any other form of taxes; we who buy their products pay their taxes.

That’s right, when you’re calling for corporations to take on more of the tax load, what you are really demanding is government to tax us more. To a corporation, corporate taxes are just another cost of business to be passed on to their customers along with the costs of labor, materials, and overhead.

When the government collects corporate taxes, it reduces the capital the corporation can use for investment. Therefore, instead of funding growth internally through increased retained earnings, the corporation has to replace the funds lost to corporate income taxes by borrowing.

I’ve heard many Liberals dispute this, but without demonstrating to me how corporations could pay their taxes unless they receive money from their customers when they sell them their products. Some have told me that corporations sell a lot to other corporations, and to government, as if that proved a human being was not the ultimate link in the tax paying chain.

For the accounting illiterate among you, I would like to explain that corporations who buy anything from anyone include those costs as material or overhead charges, and recover them through charges such as depreciation, amortization, professional services expenses (such as tax lawyers and accountants), & etc. The only time they “eat” the taxes instead of passing them on is when they are operating at a loss. However, at that point taxpayers subsidize their loss because tax law provides for corporations to carry losses back against prior period taxes paid, and then forward against subsequent year profits.

The bottom line is there is nothing progressive about “progressive” income taxation. It is an artifact created from class envy and taxpayer ignorance by legislators to fool taxpayers. While the taxpayers are gloating and celebrating how politicians have “socked it to” the wealthy and to the evil corporations, the politicians are gloating about how easy it is to fool ignorant and envious citizens and get their votes.

Meanwhile, instead of benefiting from the stronger and healthier economy that sensible taxation would promote, the taxpayer congratulates the politicians for distributing tax misery equitably.

Income taxation problems such as discouraging investment, wealth accumulation and savings, slowing economic growth, and placing American business at a competitive disadvantage in the world marketplace, would be solved by a national sales tax along the lines of the Fair Tax proposal.

Just as regressive income taxation has been called “progressive,” the progressive Fair Tax proposal has been labeled regressive.

Newspeak lives.

Please click on the label below to see all my articles on this topic.

Social Security Privatization Made Easy

Privatization of Social Security is still a hot topic in the Combs house. I started drawing Social Security at my normal full entitlement age, in my case 65 years and 10 months (I was born in 1942). However, Alice waited  until she was 68 before starting.

Both of us knew that Social Security wouldn’t pay me much, even though I earned above or near the maximum for FICA contributions for almost all of a working life now approaching fifty years.

Over the years Alice and I have heard Democrats putting down Social Security privatization, saying that it wouldn’t pay as much and was too risky. As a test, I thought it would be a good idea to use real income and contribution amounts to get an accurate estimate of how a person would have fared if Social Security had always been privatized. Fortunately for my project, Alice had “Your Social Security Statement” in one of her voluminous files (she never throws anything away) and I copied her Social Security income by year onto an Excel spreadsheet, beginning with the $40 she earned in 1959.

The next part, calculating how much Alice contributed to Social Security each year, took a little research. Happily, such research in the Age of Google is the essence of simplicity, and I immediately found a Social Security page on JustFacts.com that provided a table of Social Security tax rates:

Year Social Security Tax Rate
1950 3%
1960 6%
1970 8.4%
1980 10.2%1990 12.4%
2000 12.4%

By multiplying Alice’s Social Security earnings each year by the tax rate for that year I calculated how much Alice contributed each year. Since Alice earned more than the Social Security ceiling since 1977, I projected her income and contributions through the end of 2008 and found she had contributed a total of $220,254.56 from 1958 through 2008.

The next part was simple, but a bit tricky since it required me to select a table of values for stock market investments covering at least a half century. I selected a table of the Compound Annual Growth Rate (CAGR) of the S&P 500 for two reasons. The CAGR gives about a one percent lower rate of return than using simple averages, but avoids the valid criticism that a simple average method mechanically distorts the effects of year-to-year fluctuations. The other reason I chose it was that an index of the S&P 500 reflects a simple, inexpensive mutual fund investment option that has been available for a long time.

I used the date range calculator for each of the fifty years 1958 through 2007 (I valued 2008 FICA contributions at face value). It was laborious work, but now you don’t have to do it, because I’ve done it for you.

(For example, a dollar invested in the S&P 500 in 1958 is worth $32.57 today. Multiply your FICA contribution in 1958 by $32.57, and you would have its value now.)

Year Compound Annual Growth Rate
1958 $32.57
1959 $24.78
1960 $23.22
1961 $24.19
1962 $20.18
1963 $22.88
1964 $19.28
1965 $17.06
1966 $15.65
1967 $17.98
1968 $14.97
1969 $14.05
1970 $15.87
1971 $15.85
1972 $14.37
1973 $12.43
1974 $15.00
1975 $21.29
1976 $16.23
1977 $13.63
1978 $15.37
1979 $15.42
1980 $13.71
1981 $10.90
1982 $12.12
1983 $10.53
1984 $8.98
1985 $8.85
1986 $7.01
1987 $6.07
1988 $5.92
1989 $5.27
1990 $4.14
1991 $4.43
1992 $3.51
1993 $3.36
1994 $3.14
1995 $3.18
1996 $2.37
1997 $1.97
1998 $1.51
1999 $1.19
2000 $1.00
2001 $1.11
2002 $1.27
2003 $1.66
2004 $1.31
2005 $1.21
2006 $1.17
2007 $1.04
2008 $1.00

Now all you have to do is post this to your Excel spreadsheet, and multiply your contribution each year by the CAGR value for that year. When you’re finished, just sum the total and you will find how much your contributions would be worth through 2008 if they had been invested in an S&P 500 index fund. (This fund would be much larger if you assume that dividends are reinvested.)

Alice would have had a fund worth $765,722.90. If she drew on it now, at the rate of the $2,000 per month Social Security would pay if she started now, it would last her 32 years, or until she was 98 years old, even if she never re-invested a penny. That’s a good thing, since Alice, then at age 66, had a life expectancy of another 18 years to the age of 84. If she only made it to 84, by drawing out $2,000 a month she would still have about $333,000 left to pass on in her estate.

(Unfortunately, in our current government-run system, as soon as you die, your Social Security disappears unless you have the unlikely situation of a spouse who does not qualify in their own right, or unmarried minor children.)

Alice, being a very successful businesswoman, would of course re-invest her privatized Social Security funds, and would probably just leave it in an S&P 500 index fund.

The average rate of return for all holding periods beginning in 1926 (the year the S&P 500 was actually founded) is 11.0%. The average rate of return for all holding periods beginning in January 1945 is 11.6%, and since January 1980, the average rate of return for all full-year increment holding periods is 13.9%.

Let’s keep it simple and say that the market can only do 10.0% per year, so in each month of 2009 Alice leaves the principal alone and only takes out as income the average monthly increase of $6,380 ($76,560 per year), which is about 3.2 times larger than she would have been paid under Social Security.

Don’t forget, Alice can keep drawing on her funds at this rate for years and still have over $765,000 untouched to pass on tax-free one day to her heirs (assuming that politicians don’t get greedy, as they usually do, and levy an exorbitant Death Tax on these previously taxed funds).

So why don’t we have privatized Social Security? To answer this question, ask another question. Why aren’t there any funds in the Social Security Trust Fund?

There aren’t any funds in the Social Security Trust Fund because Democrat politicians realized that historical Social Security surpluses could be diverted to finance current spending through the simple device of replacing the Trust Fund surplus dollars with special Treasury Bonds (or government IOUs).

In essence the government said, “I’ll borrow from myself, spend the money, and when Social Security goes into deficit spending in 2010, I’ll increase payroll taxes plus borrow from the General Fund – excuse me, sell back the IOUs, causing the General Fund to borrow and increase taxes to make up the deficit - while pretending the whole time that Social Security is solvent until 2035. By then I’ll be long retired, and some other poor suckers will have to try to clean up the mess.”

Our government has always trusted that we are primarily too stupid, and secondarily too greedy, to privatize Social Security. Too stupid to realize Social Security is a horrible investment for workers, but a great cash cow for politicians to tap for funds to spend to buy our votes. Then we have to be too greedy to stop them from buying our votes and to phase in privatization to pass down a better system to our descendants.

As a final point, and one deserving of a post all its own, if we all had been paying into a privatized account, an S&P 500 index fund (the S&P 500 contains 70% of our stock market capitalization), instead of a government deep in debt, we would have an economy awash in capital. All of our contributions invested in our economy instead of frittered away by politicians would be powering economic growth, and high levels of research, development, and innovation.

As an incidental consequence, the high level of economic activity would also be generating high tax revenues, especially at reduced tax rates.

We would have universal health care through personal Medical Savings Accounts, not a bankrupt Medicare system and Medic-Aid that has been cut so much that doctors are refusing Medic-Aid patients.

We have seen the future, and it works, but only if we can take back control of it from the politicians.

Liberal Plan to Save Social Security

The San Francisco Chronicle ran an article by a particularly ignorant writer entitled, Federal waste we can end, by Susan Alexander, January 28, 2009. I don’t know how her article could have gotten through an editing process, so I’m assuming The Chronicle’s editors are equally ignorant.

Ms. Alexander used Senator John McCain collecting Social Security payments as an example of what she considers Federal waste. Ms. Alexander admits her essential ignorance of the system she is writing about when she states: “How many working Americans are even aware that wealthy retirees receive Social Security checks? I didn't know until the 2008 presidential campaign, when one very prominent "retiree" revealed that he cashed a hefty Social Security check every month.”

Before I go on, I assume Ms. Alexander realizes that many wealthy Americans now contribute 6.2% of their income (12.4% if self-employed), and have contributed to Social Security all their working lives.

I shouldn’t assume too much about Ms. Alexander’s awareness of what I thought was common knowledge of Social Security. She further paraded her ignorance of Social Security when she continued:

(Senator McCain’s) earnings in the Senate, where he contributes 6.2 percent of his income into Social Security, apparently entitled him to this handsome sum on some bureaucrat's chart, but isn't there something wrong with this picture?

Ms. Alexander, Senator McCain contributed from 3% to over 5% of his income into Social Security during each of his many years of military service. I guess I shouldn’t be too surprised if you didn’t know that military members pay into Social Security.

For many years Congressmen didn’t pay into Social Security, even when military members like Senator McCain did.

Under a law enacted in 1983, all members of Congress both contribute to and receive benefits from the Social Security system. Apparently all of them, not just Senator McCain, are what you, Ms. Alexander, consider too wealthy to receive Social Security.

Where would you draw the line, Ms. Alexander? The top one percent of American households make over $350,000 a year, or about $175,000 per person, which is roughly a Senator’s salary. In the wealthiest one percent there are approximately 380,000 Americans over 65 drawing Social Security, receiving a total of about one billion dollars per year (assuming each wealthy recipient received at least the Social Security maximum of $2,323 per month starting at age 66).

Would stopping Social Security payments to the wealthiest one percent of households save Social Security? The $1 billion saved would be almost 0.2% of the over $600 billion paid out in 2008, or an extra $2 per month to each of the less wealthy recipients.

Do you really consider that meaningful progress towards saving Social Security, Ms. Alexander? Your answer has to be “yes,” or why would you write your article? Or perhaps you assumed that The Chronicle editors and readers would be too dumb to do the numbers. It appears you got that right. Thousands will have read your erroneous article and, like The Chronicle editors, not be able to make a common sense evaluation of your position.

A few will read my blog post and realize the truth, but most of them will be conservatives too. To us it is obvious that Social Security is an enormous waste and, by the way, its unfunded liability is roughly $16 trillion (a couple of trillion dollars more than the United States annual GDP).

If the United States was a business, the government of the United States would take it to court for misstating its liabilities, and shut it down for insolvency.

Obama's History Challenged

A couple of weeks ago a letter writer to our local weekly newspaper, the Independent Coast Observer, wondered what earth I lived on. I’m happy to report I live on one with a history book that begins before 1975, and where positions are based on facts and reason.

On election night, Obama said, “Even as we celebrate tonight, we know the challenges that tomorrow will bring are the greatest of our lifetime—two wars, a planet in peril, the worst financial crisis in a century.”

I don’t know how Obama defines “our lifetime,” but mine began with wars against Germany and Japan, and included the Korean and Vietnam Wars. To put events in perspective, more American military were killed in Vietnam in an average four-month period during the last year of LBJ’s presidency than the total killed in Iraq and Afghanistan since 2002.

In the 44-day Battle of the Bulge near the end of World War II, over 19,000 U S military were killed. In the American Civil War, almost 5,000 Americans were killed in the one-day Battle of Antietam, more than in Iraq and Afghanistan to date.

“A planet in peril” must refer to the global cooling that will soon (in less than 2,000 years) mark the end of this current warm interglacial period. Since there has been no warming for the past ten years, it looks like our planet has removed itself from an Al Gore-induced peril panic.

As far as “the worst financial crisis in a century” goes, a century is 100 years, 100 years ago would be 1908, and the Stock Market Crash and Great Depression began in 1929 (21 years later). For Obama and his math-challenged followers, it appears that the event considered the worst financial crisis the world has known occurred less than a century ago. The current financial crisis may get worse, but it has a long way to go to beat the Great Depression.

Since Obama and the Democrats created the current financial crisis through their advocacy of sub-prime loans for “affordable” home ownership and their opposition to Republican attempts to reform Fannie Mae and Freddie Mac, and that the collapse occurred after two years of Democrat control of Congress, the obvious solution would be to throw the bums out.

And start working on the real crises, saving Social Security and Medicare from Democrat neglect.

Still Waiting for Liberals to Leave

Last night at our Gualala Lions Club dinner meeting, a fellow Lion came over to me and smirked, “It looks like your party is going to lose.” I smirked back, “It’s a good thing. Everyone has forgotten what messes Democrats make, so it’ll be good to have a four-year reminder.”

Of course, not for even one moment did I believe that having the Democrats back in power was good for anything in any way. In the immortal words of the dwindling numbers of young Americans, “It sucks!”

However, if another Dark Night of Democrat Rule descends once again upon this proud nation, I will continue to do what I did during previous Dark Nights: love my country, work hard, and try to get sensible government back in office.

I won't act like a Liberal and promise to leave the United States if my party doesn't win [link here].

I can’t blame Democrats for Republican failures. Republicans had Golden Opportunities going back to the Reagan Years to do the “government thing” right, and let them slip right through their fingers. President Reagan showed how direct appeals to the American public could overcome arrogant and ingrained Democrat leadership of Congress. President Clinton then demonstrated how his first two years dedicated to the socialized medicine philosophies of “Hillarycare” could deliver Congress to Republicans, led by Newt Gingrich rallying Americans around the Contract with America.

Unfortunately, Republicans in Congress became what Democrats had been: arrogant and imperious. The American people had elected Republicans to “throw the bums out,” not to be replacement bums. Instead of bringing new ideas, Republicans contented themselves with just tinkering with the old ideas.

When Republicans took control of Congress in 1994, the most important thing to fix was Social Security.

It wasn’t fixed.

Today it’s still the most important government program that needs fixing, but while Democrats run the government, that’s not going to happen.

And as time goes by, it will just get worse.

Maybe in four years we’ll get another chance to do the thing right.

I'll still be here.

Obama's Social Security Lies in Florida

The New York Times continues to be unable to overcome Liberal prejudices and report fairly and accurately. “Obama Criticizes McCain on Social Security,” headlined a New York Times article by Jeff Zeleny, September 20, 2008.

“If my opponent had his way, the millions of Floridians who rely on it would’ve had their Social Security tied up in the stock market this week,” Mr. Obama told a Florida audience.

Oddly, The Times did not include Obama’s remark that followed: “Millions of families would've been scrambling to figure out how to give their mothers and fathers, their grandmothers and grandfathers, the secure retirement that every American deserves.”

That remark by Obama was completely false, and even a New York Times reporter would have known it was wrong. Obama’s first lie was that current Social Security recipients would have been affected. Senator McCain has been very clear for over three years that all current retirees would continue drawing exactly the same Social Security benefits and would not be affected in any way by his partial privatization plan. Further, he has also been clear that his plan would be totally voluntary, and that current workers would have the option of continuing under the old system or contributing to a privatized account.

As FactCheck.org summarizes:

• The private accounts would have been voluntary. Anybody fearful of the stock market's risk could simply stay in the current system.
  
• Obama's reference to "casino culture," disappearing "nest eggs" and gambling with "your life savings" are also misleading exaggerations. Only a little over one-fourth of any workers' total Social Security taxes could have been invested (a maximum of 4 percent of taxable wages, out of the total 15.3 per cent now paid, split equally between worker and employer.)
  
• Speculation in individual stocks would not have been permitted. Workers would have had a choice of a few, broadly diversified stock or bond funds.
  
• While McCain has voted in favor (of) creating private Social Security accounts in the past, and endorsed Bush's 2005 proposal (which never came to a vote in Congress), he is not making a strong push for them as part of his campaign. In fact, a search for the term "Social Security" on the McCain-Palin Web site brings up the following: "No documents were found."

The last point illustrates how far Obama is willing to go in his panic-driven attempts to scare elderly Floridians into voting for him. Obama has to have Florida, or he will end up like Gore and Kerry, so he has chosen to demagogue and lie about an issue that hasn’t even been raised by Senator McCain.

Of course there are always two possibilities: Obama may be too stupid to know about the Republican privatization plan, or he may be intentionally lying. Since Obama is a college graduate, I don’t he’s that stupid, so obviously he’s a liar.

Still, it’s a stupid liar who lies about something so easy to check up on. However, Obama probably thinks the Main Stream Media won’t call him on it, and even if they do, the old folks in Florida won’t notice.

You know, Obama may not be that stupid after all.

Democrats have been lying about and demagoguing Social Security for decades and getting away with it.

Why change now?

Democrats Thanked for Cheating Social Security

While perusing a Google inquiry that led some now-enlightened soul to my post on privatizing Social Security, I came across this website discussing whether the Social Security Trust Fund was worth anything.

I read the post by Angry Bear (slightly left of center economic commentary on news, politics, and the economy) and his readers’ comments, and soon felt I was witnessing the rearrangement of deck chairs on the Titanic. Their debate spent inordinate time and energy discussing the Special Treasury Bonds held in the Social Security Trust Fund that are issued when its surplus is transferred to the General Fund. Angry Bear and cubs felt these bonds were real, and could be negotiated on the bond market the same as any other Treasury Bond. Others disagreed, characterizing them as “play money.”

The cause of the historical diversion of the Social Security surplus occasioned a prolonged round of partisan finger pointing, although it is clearly the love child of LBJ and the Democrats as they sought a means to finance the Great Society, create Medicare, expand the Vietnam War, and do it all without raising taxes.

However, astute bond traders/investors/students of finance noted that the Special Social Security Trust Fund bonds are government bonds that can only be redeemed by our government issuing regular Treasury Bonds redeemable from the General Fund, which would require the General Fund to reduce expenditures and/or raise taxes to fund their redemption.

Hallelujah, they got it right! Of course Angry Bear and his cubs fought on, laying down smoke screens including a gratuitous offer to buy the doubters’ shares of Trust Fund bonds at 10 cents on the dollar.

Their silliness reminded me of my silliness twenty years ago, when I offered to relinquish any and all claims I had for all time against Social Security if they would only refund my and my employers’ total contributions to Social Security. I pledged if Social Security would do this, I would be responsible for me for the rest of my life.

Further, in terms of healthcare, all I asked was that I could stop paying into Medicare and only receive the lifetime medical coverage through the United States military medical system that I was promised upon retirement from the Air Force.

Social Security and Medicare never accepted my generous offer. Had they, I would have taken the $47,935, invested it in an S&P 500 index fund, and each month thereafter increased my investment in the fund by 12.4% (the FICA rate) of my income. At the end of this year I would have an account valued at over $500,000, based on the actual performance of the S&P 500 during the past twenty years.

I get under $2,000 per month from Social Security, so if I stopped investing the $500,000 and took out $2,000 a month, it would last over twenty years (my current life expectancy is fourteen more years, or to age 80). Of course I would keep it invested, and since the rate of return of the S&P 500 since January 1980 for all full-year increment holding periods is 13.9%, I could withdraw an average of $5,790 each month and never touch the principal. That’s almost triple what I’m getting from Social Security, and I would still have half a million dollars for special needs or to ease us through hard times.

Unlike under Social Security, if I died young – like right now at age 66, which is the life expectancy for Black American males – I would still have $500,000 to pass on to Alice and my sons, grandchildren, and great-grandchild.

Mentioning Alice reminds me that if she could have opted out of Social Security only twenty years ago, she would now have an S&P 500 index fund valued at over $600,000, and our combined annual income from our privatized equivalent of Social Security would be over $150,000 without pulling a penny from our total principal of over $1.1 million.

There is an obvious bottom line here, and I’ll spell it out. Like John McCain said, Social Security is an absolute disgrace.

I’ll spell out another obvious conclusion. If Democrats had not demagogued reforming Social Security, our senior citizens would not have shot down their own chances for luxurious retirements by fanatically defending the present abomination.

Not only is it an absolute disgrace, but it is a political football and cash cow for Democrat politicians. They shamelessly pander saving Social Security to gain senior votes, while even more shamelessly diverting the surplus to pander to special interest groups and buy their votes.

In the end it’s poetic justice: Democrats cheat the old of incomes and estates they could have had, and are thanked for doing it, then spend the Social Security surplus to buy the votes of younger Americans so they can be cheated of their futures too, while profusely thanking their cheaters.

I just wish I didn't have to be an unwilling participant in their stupidity.

John McCain was Right - Social Security is a Disgrace

I have been drawing Social Security for two months now, and John McCain was right: “It’s an absolute disgrace, and it’s got to be fixed!” Social Security is a horrible investment using the very simple yardstick of what you pay in compared to what you get out.

I am receiving $1,874 per month, or $22,488 per year. I’ve paid into Social Security for 48 years, and in many of those years I paid at or near the maximum annual contribution. During my real estate career of the past eight years, I paid both sides – the employee and the so-called employer contributions – into Social Security. That made obvious what I already knew: the “employer” contribution has always been paid by me, even when I worked for someone else. If the employer did not have to contribute to my Social Security, he would have had to pay me more, and I would have had to contribute more.

Therefore, all the money contributed in my name to Social Security over the years was paid from my earnings.

Many years ago I offered to take what I and my employer had contributed towards my Social Security (forget even getting interest on total contributions going back to 1958) and invest it myself, and in return I would never ever ask the government for a thing from Social Security.

Think about it. The government would have received a “no interest” loan from me, and all they would need to do to drop me forever as a liability is just give me a few of the Special Treasury Bonds they hold in the Social Security Trust Fund.

Of course they can’t do that. The money I contributed has been spent, used to pay other Social Security recipients and any excess used to pay other government operating expenses, like the Medicare cost overrun. The Special Treasury Bonds are worthless. If they were sold to pay current Social Security obligations, more Treasury bonds would have to be sold immediately to replace the cash needed to pay for other government expenses.

Many Americans, including innumerable PhD’s, can’t understand this, so do this simple test: put $10 in a jar labeled “Dining Out Fund.” Now take the $10 out and pay your phone bill, and in its place write an IOU for $10 to the “Dining Out Fund.” Now go out for dinner (at a real cheap place), and when the bill arrives pull out the IOU as payment.

At this point, even a Democrat would refuse the IOU and demand real money, even as you protest that you already spent it on your phone bill. So you reach into your wallet and pull out the $10 you planned to use to fill your empty gas tank. Then you tell your date, “If you don’t want to walk home, you’ll have to loan me $10.”

Our government has done the same thing, and now each and every American has a $455,000 share of the unfunded long-term liability for future Social Security and Medicare expenditures for which we through our government are obligated to pay.

This situation was brought into clear focus by the mortgage banking crisis, with calls for the government to bail out huge mortgage lenders like Fannie Mae and Fannie Mac. With what?

"People seem to think the government has money," said former U.S. Comptroller General David Walker. "The government doesn't have any money."

Simply put, the government does what is doesn’t allow businesses to do: it doesn’t put its long-term unfunded liabilities on its books, and the total now for Social Security and Medicare is a whopping $53 trillion, or $455,000 per person.

"Health care costs are just amazing," said John Shoven, director of Stanford University's Institute for Economic Policy Research. Total health care costs now consume 16 percent of the economy and are headed quickly toward 30 percent, Shoven said. "Social Security is a big problem, but it's dwarfed by health care. Even the housing problem is dwarfed by health care."

Just the built-in rise in spending on programs for the elderly will cost about 25 percent of workers' payrolls over the next generation, said Richard Jackson, director of the Global Aging Initiative at the Center for Strategic and International Studies.

When I was in the Air Force I griped about having to contribute to Medicare, because at the time military members had “guaranteed” life-time medical coverage in military hospitals. Many military retired near military hospitals. Trust the government to mess things up. Congress passed a law that once a retiree became 65 years old, they had to join Medicare and not be treated in military hospitals.

How about those retirees living near military bases far away from civilian hospitals?

Retirees raised a stink, and for once were listened to. The military retiree program for under-65’s, Tricare Prime, was expanded to Tricare for Life, the secondary insurer to Medicare. So the military retiree gained a little, but basically still came up a loser: the retiree could now use both Medicare facilities without prior approval (which was almost always granted) and military hospitals, but instead of a $460 annual fee covering both retiree and spouse, the annual Medicare fee for a typical retiree and spouse is now $2,360, or roughly one month’s Social Security payment more expensive.

Now I’m having second thoughts about all this, and I realize that John McCain was wrong when he said that Social Security is an absolute disgrace. He should have said that both Social Security and Medicare are absolute disgraces!

California Senators and Social Security - Tweedle Dumb, and Tweedle Dumber

Today a friend reminded me of how angry I got 25 years ago at a stupid remark by California Senator Alan Cranston. He had decided that a terrible abuse of Social Security was being perpetrated by the military. According to Senator Cranston, the United States military, particularly its officers, indulged in an unethical, if not illegal, practice he called “double dipping.”

He defined "double dipping" as retiring from the military and collecting retirement pay, and then getting a civilian job and paying into Social Security long enough to qualify for payments along with military retired pay. Senator Cranston said this was a terrible injustice, to not pay into Social Security during military service, yet work long enough after retirement to draw both. “This disgraceful double-dipping by the military at taxpayer expense must end,” he said, or words to that effect.

What the idiot senator (or at least his multitudinous inept staffers) should have known, but was too stupid to find out, was that the military have paid into Social Security since 1957. Civilian employees of the federal government, not military, didn’t pay into Social Security, then took early retirement, got a job where they paid into Social Security for at least the minimum required ten years – forty quarters – and then drew both federal retirement and full Social Security.

The strong supporters of Democrats, the federal government employees, were the double-dipping scoundrels! The military, a stronghold of Republican support, were blameless. However, many citizens think it was the other way, and some still think that the military don’t pay into Social Security and can "double dip," even to this day.

My friend was one of them.

Since Cranston made a big stink when he accused the military of double dipping, but never publicly corrected himself, most people never learned the truth.

Pause for a moment and consider these facts. When he made his totally erroneous, thoughtless, and careless statement, Cranston had been a United States Senator for twelve years. He served in the Army in World War II, and one of his Senate positions was Chairman, Committee on Veterans’ Affairs. It seems that somewhere along the line, he or one of his many staff assistants would have discovered what I did when I enlisted in the Air Force in 1962: I only made about $97 a month then, not enough to pay income tax, but nevertheless 3.125% was taken from every dollar I earned and dumped into Social Security.

Later, when Medicare was added, the military got to pay into it just like everyone else, even though when we enlisted we had been promised free military health care for life if we served to retirement. So here we were, paying into a system we would never use (we thought). Then we got the next surprise. No more free military health care for life. As soon as we reached 65, we were to be dumped into the Medicare pool, and be persona non grata at military hospitals.

I hope you don’t have to be retired military to understand what a kick in the teeth this change meant. Many retirees had built their lives around living near a large military installation with, among other things, a large hospital. There they and their spouses received excellent health care for possibly ten to fifteen years after retirement, and then when they turned 65, they were no longer welcome. At that point they might have to travel many miles, sometimes hundreds of miles, to get treated in an equivalent civilian facility. Fortunately the military recognized the injustice this created, and established Tricare for Life, which integrates Medicare with military health care.

Getting back to Cranston, he would have been right about the military if he had been talking about the period 1940 through 1956, because during that period no federal employees including the military paid into Social Security. In 1957 the military came under Social Security, but civilian employees of the federal government didn’t have to pay into Social Security until 1984, and then only if they wanted to or were hired after 1984.

Maybe Cranston finally figured it out and helped make the change to bring federal civilian employees into Social Security after he got my angry letter asking him “how in Hell could a veteran United States senator get such a simple and fundamental fact about who was paying into Social Security bass-ackwards?”

I got a reply from him that indicated he and his staffers either ignored me, or couldn’t understand that I was telling them they screwed up.

His even dumber successor as a California senator, Barbara Boxer, has continued Cranston’s tradition of hiring staffers who reply to my letters without ever comprehending any of my issues. I take that back. Once one of Boxer’s replies actually covered the issue I brought up, but Boxer thanked me for my support when my letter clearly conveyed that I disagreed totally with her position. In fact, like Cranston before her, I don’t think she understands Social Security, even though since 1984 Congressmen have been paying into it.

That’s right. Congressmen, like Cranston, used to be able to practice “double dipping” too.

Maybe the weak brains of Democrats like Cranston and Boxer explains why they can’t understand that Social Security will be bankrupt in a decade. What does “Social Security will be bankrupt” mean? It means in about ten years Social Security will be paying out more cash than it is taking in.

“No problem,” say the Democrats, “Social Security has a $1.7 trillion Trust Fund to draw on.”

Really? What’s in that Trust Fund?

“Oh, the Trust Fund is holding special government bonds.”

Ah so, so Social Security will be able to redeem those bonds for cash and continue to pay all the newly eligible Baby Boomers, right?

“Well, not quite. You see, if the government buys back the Trust Fund bonds with cash to then be distributed to Social Security recipients, that cash has to come from other government sources. The only way the other government sources can come up with the cash is to raise taxes, cut expenses, and borrow more.”

Like robbing Peter to pay Paul?

“Not really. It’s more like robbing both Peter and Paul to pay Paul, because other government services enjoyed by Social Security recipients will be cut, Social Security will be reduced when recipients continue to work, and sales taxes, property taxes, and fees will go up to replace the budget cuts required to continue paying full Social Security benefits.”

Well, at least benefits won’t be cut, correct?

“Sorry, benefits will have to be cut too. Social Security eligibility ages will rise, benefits will be means tested, but even after that it won’t be enough to save Social Security.”

So what happens then?

“Simple. Social Security contributions by younger workers will be raised, and then raised again, and … Do you get the picture?”

Will that save Social Security then?

“Probably not. The higher Social Security contributions will mess up the United States economy really bad. In fact, while the economy is struggling paying the extremely high costs of the fruitless attempts to turn back natural global warming, the increased Social Security taxes will probably administer the coup de grace, the killer blow.”

What do we do then?

“Don’t wait. Head for Australia or New Zealand before the rush starts. Or go to Mexico. Mexico will have a lot of room if you get there before all the illegals head back.”

Please click on the label below to see all my articles on this topic.

Saving Social Security Once A Clinton Priority

ICO Editor

Seven years ago President Clinton said we needed “to save Social Security for the 21st Century.” A year later, in his State of the Union address, he announced a plan to "save" Social Security and fund a new type of retirement savings account. Now, even though nothing was done, Democrats say that Social Security is OK and that retirement savings accounts are a bad idea. What changed?

The Editor of the ICO does not think there is a Social Security crisis. He said its trust fund will last until at least 2042. The trust fund, as we all know, is full of Treasury Bonds (government IOU’s) to replace the surplus funds that the general fund “borrowed” and our government spent. Senator “Fritz” Hollings, D-S. Car., says Social Security is being destroyed because the trust fund has been “looted.”

Just what are these government IOU’s in the trust fund? Back in my CPA working years, we called bonds “liabilities,” because they must eventually be repaid. However, our government puts its IOU’s in a “trust fund” and calls them “cash” (an asset).

Just how is the government going to use the trust fund to pay Social Security obligations when cash outflow exceeds inflow in 2018? There are very few options. Taxes could be raised, general fund expenditures could be cut, or borrowing increased. Also, the Social Security tax rate could be increased, benefits cut, or retirement age increased. The point is, one or more of these options have to start in 2018, not 2042. And the second point is, each and every one of these options hurts economic growth and personal savings. The final point, Social Security still is not saved, just extended on life support.

Next week, saving Social Security with personal retirement accounts, just like the ones government employees already have.

(Note to Steve: National debt as a percentage of GDP has been higher in the past, and is already coming back down. It, like many other things, is only considered a crisis by Democrats when Republicans are in power.)