Saturday, August 21, 2010

SAR #10233/Weekender

This is a Weekender commentary – which is a revised version of an earlier rant. The regular  Saturday SAR  follows directly below.

Harder than it has to be.

Years ago, Sam and Suzi American were doing well and decided to set aside a little money for when times were not so flush. Each year they invested in bonds issued by the US Treasury. Nothing safer – they are backed by the “full faith and credit” of the United States, just like every other US Treasury bill, note or bond.

This year Sam and Sue had some extra expenses but were a little short – about $41 billion, so they redeemed some of their US bonds, leaving them with only $2.5 trillion in US bonds. A bit more than the Chinese, who only hold $900 billion or so.

Sam and Sue expect – just like the Chinese and everyone else who holds US bonds - to cash out their bonds from time to time – as much as $100 billion a year by 2020, most likely - and anticipate running out of their current nest egg around 2040 after which they'll have to cut their spending by 22%. They will not, however, be bankrupt – no matter what some of the town gossips say.

If Sam and Sue want to make sure they don't run short of funds 30 years from now, sometime between now and then – if they were the Social Security system (and they are) – they could increase the amount of earned income subject to FICA taxes from $106,000 to $300,000 and make the system sound for a long time, 50 to 70 years.

That would make the system a bit fairer, too. Because today everyone who makes less than $106,000 pays 12.4% of their income in FICA (half from their employer, true, but the employer sees it as a labor cost), while a lawyer making $500,000 pays but 2.5% of her income in FICA and those millionaire kids on Wall Street pay only 1.2%.

Taxing all earned income equally at 12.5% the system would take in an additional $370 billion a year and be sound for as far is possible to estimate – even if the payments to the poorest 40% of retirees were doubled, and those folks depend on Social Security for 84% of their income.

Three Card Monte

There's a con game being run in Washington these days with the goal of reducing Social Security and eventually privatizing it. No one will say that, but that's what's afoot. The first step is to keep trumpeting untruths about the fiscal collapse of the system (for which, see above) and the need to reduce benefits now and increase the retirement age now because there will be a shortfall (called bankruptcy, but it's just a shortfall as outlined above) about 2040.

Having faked the Democrats into playing the game, the Republicans are content to sit back and promise to increase the tax rate if the Democrats will gut the system. Then they'll go back on their word (as they have repeatedly for the last 3 years) and filibuster if the bill has any tax increase in it. The aim is to privatize the system and enrich Wall Street even further.

Pretending the United States is too poor to be able to take care of its elders is a sham. No matter what the fiscal hawks and deficit doomsayers claim or do today, it will be the voters of mid-century America who will decide whether more than half of their parents will be forced to live in cardboard boxes and eat cat food, or will be saved from such a miserable fate by taxing the rich at reasonable rates...  as they were under Eisenhower.

The Real 'Problem'

Where is the US Treasury going to get the $40 billion for this year and the $100 billion for 2020 and so on? Simple: the same place it always gets its funds, either through taxing or borrowing or just rolling over the debt like always - just like it gets the money to pay for farm supports, Wall Street bailouts, war in Afghanistan and the utilities for the embassy in Great Britain.

That's a problem for the US government, but even at $100 billion a year it is trivial compared to the overall US budget of $3.8 trillion this year.

Complaint Department.

Meanwhile, the Atlantic should stop calling redeeming US bonds as seeking “infusions” as though it were begging rather than a routine financial transaction between lender and debtor.

The Wall Street Journal should not view buying US Treasuries as being “raided” by the government. It is an investment. At worst it is the US government borrowing – not raiding. Yes, if (and possibly when) the US begins defaulting on its obligations, then Social Security will be in trouble and retirees disappointed. The Chinese will be upset, too. But that's unlikely to happen as long as the grass shall grow and the rivers flow.

We now return you to our regular programming…

4 comments:

Anonymous said...

“I can’t compete and when I do, the rules of engagement change in the middle of the game. I’ll let the powers that be vanquish themselves and return in three to five years to sift through the remains.”

Whose quote is this? Is it appropriate to our current economic and socio-political situation? Why? Or why not?

Cite your references and back up your statements with primary sources, or, optionally, cite direct, factual evidence to support your opinions.

CKMichaelson said...

Anony 2.56 You've got me stumped. Where did I say "I can't ... " or quote someone else as saying that? I may have, but can't find it in this entry.

ckm

Anonymous said...

Sort of a non sequitur but apparently is an Ayn Rand quote....

Vitus Capital said...

Wow. What a great screed. Awesome.