Exjackly

Please bear with me on this post. I know it is a long one. I thought about splitting it apart, but it makes a lot more sense to me as a whole, since partial implementation of these ideas are much less effective than all of them. Have ideas to add or want to discuss (even flame) mine? Add a comment.

Social Security Problems

Social Security and Medicare are two of the looming issues that will dominate and determine the economic future of our country. As they exist right now, they are welfare programs that will suck up more and more of this country's economic output every year until they are curbed or our country goes bankrupt. The most difficult part is that there are industrial (pharmaceutical) and demographic (AARP) forces that are going to push for them to be expanded and not moderated.

Since those groups are both well organized and well funded, a political solution that is good for the long term health of the economy is going to be difficult, happen slowly and not be sufficient unless there is a crisis which forces expedient change. There are only two alternatives: a) find a multi-billionaire who believes in the cause and/or b) start spreading the word about responsible changes and see if there is enough support for a grassroots campaign.

Anybody who looks into the budget and projections for Social Security will agree it needs to be massively overhauled. This huge program gives to every retiree - whether they need it or not. As the retirees grow - in numbers and percentage of the population - the impact of this program is going to grow significantly.

The problem is that this generosity has to come from somewhere. In this case, it is from the paychecks of millions of Americans. With so many of other people's wallets to draw from, politicians have had no problem making promises of future benefits. To meet those promises, more and more money is going to need to be borrowed and taxed from generations down the line.

This is going to bankrupt individuals if taxes are raised to meet the promises. It is going to bankrupt the government if they are not. This means the system as it exists today is severely broken and needs to be fixed.

While the system is severely broken right now, it is not the concept that is flawed, but rather the implementation. Here are some suggestions for how to go about fixing it.

• Do Not Change Benefits for Current Retirees
  
• Include Social Security in the Federal Budget
• Tax ALL Earned Income Equally For Social Security
  
• Not Everybody Should Be Eligible
• Provide Equal Benefits For All
• Really Balance the Federal Budget Every Year
  

Do Not Change Benefits For Current Retirees

It is critical that the changes to be made to Social Security do not impact current retirees. It would be unfair and disastrous to weaken or remove a major portion of somebody's income for retirement. It would be especially cruel for the government to renege on that promise at a point when many people would find it difficult or impossible to replace that lost income.

Included in this are those who are very close to retirement too. At least the 55+ year olds who would hve very little time to make changes to their financial plans for retirement if changes to Social Security are enacted swiftly.

For those of us who are further out from retirement, the amount of change that is reasonable will grow the more time we each have to deal with the issue. A phased approach is appropriate where the full changes should impact those who are currently in the 40-45 year old range. 20 years is a good amount of time for individuals to adapt to the new program.

Include Social Security in the Federal Budget

The accounting trickery that is used to keep Social Security and Medicare 'off the books' of the annual budget needs to stop. Social Security is not independent. The program will not be shut down just because the 'Trust Fund' becomes empty. Plus, the collected funds are 'borrowed' for use in the current budget anyways.

It is time to stop pretending. Include it. Incorporate the Social Security tax into the income tax. Do the same with the Medicare tax. By consolidating, it becomes clearer how everything is really being paid for and how much we, as a nation, are overspending.

Only then, when the budget and projections are accurate will we really see how bad the issues are. Only then, will we be able to make the hard decisions for sustainability. Only then will meaningful changes be possible.

Tax ALL Earned Income Equally For Social Security

As it is currently implemented, the Social Security tax is among the most regressive taxes in this country? It gets paid on an individual's first earned dollars, but not on their last. The poor pay a higher percentage of their total compensation to Social Security than do anybody else.

The quickest and easiest way to restore some of the equality to this tax would be make it apply equally to all earned income. This would generate additional income to meet the Social Security obligations without increasing the burden on those least able to afford it.

Not Everybody Should Be Eligible

The final step in 'fixing' Social Security is to limit who can collect. This ties in with allowing people to opt out of the retirement portion, but it also covers limiting benefits for people who otherwise would seek them.

Rather than handing it out to everybody who has paid in, benefits should go to those who are not able to provide for themselves. Those who lack assets and who are not earning a living income otherwise. Individuals like Warren Buffet and Bill Gates and Steve Jobs should not receive Social Security. My suggestion? Pick a point that is at 125% to 150% of the poverty level. Set Social Security at that level and phase out benefits at a 1/3 or 1/4 rate (Receive $3 or $4 in income, Social Security drops by $1. ). That way we have defined the minimum somebody will receive.

The actual amount of benefits can be adjusted based on the number of years in the workforce and the age benefits are first taken at, just like now.

If the desire is to limit the beneficiaries even more, there is another step that could be taken. Allow individuals to voluntarily remove themselves from Social Security. Let them have a reduction is Social Security taxes in exchange for not being eligible for retirement benefits. Thus, if I claim exemption for one year, I pay less taxes, but for Social Security calculations, it is just like I was unemployed for the entire year.

Now, before you say it - yes, some people would be in trouble from that. They would claim exemption, not save the money, and be destitute at retirement. This is America however, and along with the Freedom that we enjoy comes the responsibility to accept the consequences of our own actions. If I am able bodied, choose to opt out of Social Security, and don't save - why should I be rewarded?

Provide Equal Benefits For All

For everybody who qualifies for Social Security, the benefits should be the same. Not based on how much has been paid into the system. The changes to the system that I am proposing is to turn it into a safety net and nothing more than a safety net. As such, the idea is to ensure that anybody receiving benefits is able to live at a certain level of lifestyle. That level is consistent, no matter who you are.

If we accept that somebody who has been a contributing member of society for 45 years deserves not to fall between the cracks, does it really matter what they did or how much they made? Does a former janitor deserve less of a safety net than a former stock broker? If they did not save or could not save, should one receive more benefits than the other? If so, which one and why?

Lives well lived are equal in my book. Lets reward them the same.

Really Balance The Federal Budget

Yes, this ties in to Social Security - especially if it is incorporated into the budget like it should be. This ties in because Social Security expenditures are driven higher and higher because of inflation. Inflation is tied in to the federal debt and deficit numbers. Thus, if we balance the budget, Social Security will grow at a slower rate as inflation will also be held down.

Think of it this way: The economy has a certain amount of goods and services for sale. All of these are for sale regardless of how many or how few dollars there are out there. If there are a lot of dollars, people will be willing to pay more for those goods and services. They are willing to pay less if there are fewer dollars out there.

Every time the government spends a dollar it does not have, it creates a dollar. The mechanism of creation can vary, but in effect the federal deficit is a measure of extra dollars created from nothing to buy goods and services.

If the budget is balanced, even if the debt stays the same, we will have a positive effect. The economy will keep growing with more goods and services available. More goods and services, against the same amount of 'extra' dollars means each dollar is worth more.

Now, the federal government is not the only place that can 'create' dollars. Consumer borrowing plays a large role too. The federal government is the largest single entity and has enough power that its debt does influence the inflation rate.

Conclusion

Social Security needs to be modified for long term sustainability. However, the system should not be scrapped in its entirety. With a significant overhaul, it can become a positive program that does what it should and not more. With those changes, it will no longer threaten to damage or destroy our economy or personal lives.

Lets make difficult choices, but with an eye to our long term future. Do not pander to organized political interests. Instead, lets do what is best for ourselves and our country in the long run. Lets reduce the cost of Social Security and make it a safety net instead of a benefit for all. Lets give back our futures to each other and not to a Nanny Nation who knows how to plan for our retirement better than we can do on our own.

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We hear about the federal debt and deficit on a regular basis. Yet, what do those Billions and Trillions of dollars mean to us? What can we do about it? What does it do to us? Does it really matter?

I am here to tell you that it does matter. Those dollars have a big impact on us in many different ways.  In their own way, they are a invisible force pushing the economy in directions it would not ordinarily go.  This is largely for two reasons: the government is huge and its driving force is not economic or material efficiency.

For starters, the US government is so large, that our annual taxes are not enough to pay for it all.  This leads to continual borrowing.  The borrowing increases the future budgets because of the increased amount of interest the government has to pay.  This is bad because not only does it lead to larger budgets for the future, but it gives our government less flexibility to respond to a true disaster.

Additionally, the government borrowing makes it more expensive for us to borrow money.  This is because there are a huge number of individuals, companies, and countries that are willing to loan our government money because they know they will get paid back.  Every dollar the US government borrows is a dollar that is no longer available for us to leverage towards buying a home, building a business, or develop something new.

Government spending also leads to decreased economic growth and employment.  This ties back to the efficiency goal mentioned earlier.  Since the government is not motivated by profit (aka efficiency) it is free to spend money in wasteful ways that do not contribute to the economic engine which drives this country and the world.  While this is not a problem when the money is being spent on basic services that the government should be providing, it is a big problem when the spending is being spent on activities and services the private sector can meet better.

This last item is the one that you and I probably notice the most however.  The more money the US government spends, the more US dollars there are out in the world.  The more dollars there are however does not translate into more goods and services to be bought with those dollars.  So, more money chasing after the same goods and services.  What does that do?  It causes inflation.  So, due to increased government spending, you and I are finding that we need more and more money each year just to stay in place.

My conclusion?  We need to do our best to convince out representation in Washington, DC that we would rather have money not spent than to see it wasted by the government.  Even if that waste is pork barrel spending in our districts.  That is a negative sum game.  Everybody wins if there is no pork barrel spending as opposed to just a few hand-picked winners from Congress.  Even on necessary spending, anything we can do encourage Washington to keep it down or find ways to eliminate spending is effort well spent.

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This is the third post in the Federal Debt Discussion series.  Previous articles discussed the The Scale of the Federal Debt and The Scale of the Federal Deficit.

The Federal Government borrows money for a lot of different reasons.  Some of it goes to funding operations.  Some of it is to balance cash flow with expenses.  Some of it is even intentional to help stimulate the economy and provide a short term push to avoid or get out of recessions.

Regardless of the reason, the total amount of debt has risen over the years.  It has varied some as a ratio of the GDP of our country.  Good or bad, that has been our history.

Debt Markets

When the US government wants to borrow money, it has to go to the same global markets as corporations.  Yes, global.  With advancement in technology and decreases in regulation of money flows, the markets to borrow money are now truly global in size.

Due to the perceived nature of risk, US government bonds and bills are seen as among the safest in the world.  The US has not defaulted on its obligations and is not expected to default either.  All of this, despite have a fiat currency and not one backed by an asset such as gold.

When the US government goes to these markets, it announces how much debt it will be issuing and different entities - individuals, companies, funds, and even countries - bid for the debt.  The highest bid wins, and the higher that bid, the lower the effective interest rate will be.

Those groups that win those auctions get what they want - a secure place to put their money that will pay them back at what is (hopefully) above the rate of inflation.  The rest of the bidders have to find someplace else to put their money to work.

That someplace else is generally in corporate debt.  That is where the problem lies.

Reducing Corporate Borrowing

The available money in the global debt markets is essentially fixed at any given point in time.  It will change significantly over time as to appeal of the stock markets wax and wane and inflation fears ebb and flow.  Other factors have an impact too.

There are a couple of constants.   First, there is less money available to be loaned out than there are requests for it. There are always disappointed groups in the market.  It may be because they could borrow less than they wanted or because they were able to borrow but not on the terms that they wanted.

Second, and more important, is that government borrowing reduces corporate borrowing.  On a very close to a dollar for dollar basis, any money that the US Federal Government chooses to borrow is no longer available for corporations to borrow.

This means that companies looking to expand operations, modernize plants, and purchase land and equipment are unable to do so.  Either they must borrow less at higher interest rates or reduce their plans for expansion.  This is the

The Production Problem

Government spending does not generally translate into new jobs and increased productivity like private investment does.  Part of this will be the different nature of governments and businesses.  Businesses have to be good spenders to get high value for their expenditures in order to exist from year to year.  Governments do not.

When governments borrow money, they reduce corporate borrowing.  The reduced corporate expansion plans result in a slowdown in economic growth due to fewer jobs being produced and productivity not rising as fast as it otherwise could.  Likewise, reducing the amount of government debt helps to encourage corporate growth.
This occurs because government spending does not create jobs and increase productivity like corporate spending.  Our government does not spend our money as efficiently as we do.

Conclusion

As I continue to investigate the impact of the Federal spending habits on our economy, specifically the deficit and debt, it is becoming clearer that the negatives of deficit spending outweigh the positives.  Honestly, the expectation was that the increased money supply created by deficit spending would have a multiplicative effect resulting in a positive impact on the economy.

Instead, what I am finding is that the impact is not as great as expected.  Government spending has less impact than private.  Maintaining significant national debt levels results in greater deficit spending and more borrowing from the future than what can be offset by the reduced value of the dollars that will be paid back.  So, we are stealing from our future prosperity by spending the money now.  Eventually, without a change in mindset and policy the bill will come due and the cost will be significant.

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This is a post in the Federal Debt Discussion series.

Previously, we discussed The Scale of the Federal Debt. This debt did not magically appear. It has been built up over a number of years, and has gone up and down during that time period based on the annual deficits (and occasional surplus) in the federal budget.

There is a lot less information on the deficit than there is on the debt.  From my investigations, it appears that the best source online is the US Government's Treasury Department and their Monthly Treasury Statement (MTS).

This site reports that for fiscal year 2007, our government ran a deficit of $163,681,000,000.

This is a significant decrease.  For comparison, here are the six previous years of data:

• FY 2001 was a surplus of $126,863,000,000 and ended just after the September 11 attacks.
• FY 2002 was $160,252,000,000 in deficit
• FY 2003 was $375,242,000,000 in deficit
• FY 2004 was $411,116,000,000 in deficit
• FY 2005 was $317,265,000,000 in deficit
• FY 2006 was $248,277,000,000 in deficit

As you can see, with the recent economic expansion, the deficit has shrunk significantly from four years ago.  This is to be expected.  The government's collections are a lagging indicator of the economy.  Deficits increase during a recession and decrease during a boom.

It is not that simple however, since there are a lot of variables that impact the deficit beyond the economy.  Things like:

• Congressional approval of new spending
• Tax cuts (or increases)
• Disaster relief
• The available interest rates for issuing new government debt

There is more that impacts this figure than that.  In the end though, it is the annual deficits (and occasional surplus) which ultimately result in the total debt.  Paying attention to the fluctuating deficit will also ultimately be our national route to staying strong economically.

Oh, before I forget, how much of the budget deficit can be traced to interest payments on the national debt?  According to the government's own figures from the Treasury, we spent $429,977,998,108.20 in interest last fiscal year.

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This post is part of the Federal Debt Discussion series.

The American National Debt is a staggeringly large number. It is several times larger than the total amount of US Dollars in circulation. Even trying to visualize that much money in stacks or circling the globe many, many times is very difficult to do.

Fortunately, the sheer size of the debt is not the big issue. It is the size of it in relation to the rest of economy and the federal budget that determines if it is sustainable or not. On that scale, it does not seem quite as bad. Here are some current figures:

On October 17, 2007, at about 11:15 am MST (GMT -7), the debt is estimated to be $9,056,509,178,557.40 - yes that is over $9 Trillion dollars.

This number is both accurate and somewhat misleading as a significant part of the debt is owed by one part of the government to another part of the government. This intra-governmental debt is detailed in the Federal Debt portion of the Treasury Bulletin. The most recent issue shows that about $4 Trillion.

Public Debt

That leaves over $5 Trillion owed to the public. The US Census estimates that there are 303 Million people living in this country.

Translated into per person figured for every man, woman and child, this is:

• $29,700 in total debt
• $16,501 in publicly held debt
• $13,199 owed for future obligations

It is these future obligation that are held by different departments of the federal government, with most of it held by Social Security and Medicare. It is these intra-governmental obligations that are going to reach $0 when Social Security and Medicare go 'bankrupt'.

Debt vs GDP (Gross Domestic Product)

The debt as a percentage of GDP has varied historically over the years. Currently, it sits above 60% of GDP. This means that to pay off the debt in one year, it would take more than 60% of what this country as a whole produces to eliminate the debt. Historically, since 1930 this figure has ranged from just below 20% to around 120% [just after World War II].

Fortunately, the debt is spread out over different maturities coming due any time from the next week to several decades from now. Additionally, our government and economy are seen as strong enough that there are no problems exchanging old debt for new as the old matures. Thus, we are in no danger of an immediate credit crunch.

Looking Ahead

Even with the sheer size of the debt, it has not gone horribly wrong yet. Interest payments are slightly above 10% of the annual budget. Even in a personal budget, paying out 11% of income as interest is a hefty chunk, but is not necessarily an immediate problem. Having a large mortgage payment alone could be enough to reach this level.

The concerns, as will be enumerated later in this series, is that projected increases in mandatory government expenditures - especially Social Security and Medicare - will become a fiscal crisis as obligations grow and the workforce shrinks. The way to avoid that is to address the issues now. Unfortunately, the current Administration and Congress do not appear to be ready to do so.

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