Wednesday, November 10, 2010

Militant Ginger Balances America's Budget - Part Two

Militant Ginger Balances America's Budget
Part Two

Yesterday, I launched an ambitious project in which I attempt solve America's financial crisis.

In my introduction, I outlined the fact that America's federal spending has reached crisis point - with the government splashing out $1.5 trillion dollars a year more than it brings in from tax revenue.

This is leading to a larger and larger national debt - one the size of America's annual GDP at last count.

But the problem I found is this: You could scrap every wing of government - from the White House to the Post Office - and still find the fed spending more than it brings in.

In fact, just three facets of the federal government account for more than $2.13 trillion in spending - the Military, Social Security and Medicare. Combined, they alone cost $36 billion more than the government brings in.

Today, we're tackling Social Security and Medicare - and just like with alcoholism, the first stage is admitting there's a problem - and it's getting more expensive.

Social Security

It shouldn't be this way. In theory, the payroll contributions working Americans make over the course of their lives should be enough to cover the federal government's Medicare and Social Security commitments - but in fact, there's a shortfall of $363 billion dollars.

This is because, instead of managing the Social Security cash like a pension fund, the federal government have run it like a Ponzi scheme. Since it's inception in 1935, they've repeatedly dipped their fingers into the kitty, depleting the funds and getting away with it because there have always been more working Americans than retirees - and therefore each month's payroll taxes more than covered that month's Social Security commitments.

But when the Baby Boomer generation began to retire, the federal government got caught as red-handed as Bernie Madoff. In the 1950s, there were 16 working Americans to every retiree. Today, there are just 3. As a result, Social Security can only afford to pay out 78% of the retirement funds it promised (and that figure's dropping.)

Before dealing with any other fiscal f**k up, something needs to be done about Social Security - and as I see it, there are only three options (or a combination thereof):
  • Increase Payroll Taxes
  • Cut Social Security / Medicare Payments
  • Raise the Age of Retirement
Personally, I think we should consider all three.

Payroll taxes are only taken from the first $100,000 of somebody's paycheck, so I support Obama's plan to increase that figure to $250,000.

But we should all pay more. At current levels, it would take adding 3% to everybody's payroll taxes just to cover Social Security's commitments - but rather than that, I suggest adding just another 1% contribution. This means that we will at least make a significant inroads into putting Social Security back in the black now - and have the funds to give the payments we've already promised to.

But before everybody on the right wing freaks out, my caveat is that we offset that 1% increase in payroll taxes with tax cuts in other areas, such as income tax. How can we do this? More on that tomorrow - but in any event, understand that my aim is not to have people paying more - just to divert where their tax dollars go.

Secondly, I agree that we should start a staggered reduction in Social Security benefits. If we can only afford to cover 80% of our Social Security payments right now, we should establish a cut off date reasonably far in the future and simply start paying 80% of current payments then. It's not an ideal option - but neither is bankruptcy.

Besides, I'm part of the second generation of Americans raised with the understanding that Social Security would never be enough to live off alone post-retirement.

My wife's Social Security Statement recently came in and she discovered that even if she continued to make her payroll contributions at the current rate for the next thirty years, her monthly payments upon retirement would still only add up to $900 a month. That puts her below the federal poverty line - absurd!

401ks, IRAs and private retirement funds are already the only way we can hope to ever stop working. Considering Social Security payments are already far below what they need to be to live off, I don't see how cutting them in the future makes any discernible difference.

Finally, I think we'll have to make a staggered plan to raise the age of retirement. For a start, it should be equalized - currently women retire at 62 and men at 65. If feminists want equality, it can bloody well start there.

And while I don't really agree with the idea of raising the age of retirement, I think it's something we have to do. It irks me, because isn't the point of living in the greatest nation on Earth that we don't need to work like Victorian factory workers?

But just like our eventual quality of retirement is already dictated by the private investments we make, so too should our age of retirement be. If we have a well-funded 401k and have paid off our mortgage, there's no reason we can't retire at 55 if we so please.

And, of course, there is, a final solution to solving our country's Social Security money pit (and I'm not talking about carting granny down to one of Sarah Palin's 'death panels.')

We could simply get Americans earning more.

Working Americans contribute 12% of their salary to payroll taxes (including company contributions.) If we were able to increase the average American's wages by 20%, wouldn't that solve our Social Security dilemma (as long as we trimmed future payments to prevent the same problem happening in the future)?

I'm genuinely asking. I'm rubbish at maths. But it strikes me that this would work.

How we would get it to work... Well, more on that later.


Before I go, there's the other side to the social insurance money pit - Medicare and Medicaid.

If you think Social Security is a mess, the rapidly expanding cost of Medicare is absurd. It's going to be a $35 trillion dollar debt in the next few years, as spiraling health care costs and increased eligibility swallow up more and and more taxpayer dollars.

I don't have a solution to that - but as it turns out, I don't need one.

I predict that America will have a de facto single-payer health care system in less than a decade - and it will need to, as nobody's worked out how public funds can stretch to cover private medicine at their current costs.

47% of Americans are already on government-funded health insurance - and more are joining each and every year. As private health care increases on cost, more and more people are being priced out of the private system and the private system is pricing itself out of existence.

Within a decade, it'll be just like Britain - we'll have 'free' health care for the masses, and the richest 10% of Americans will have private health care that covers plastic surgery, in-patient accommodation and teeth veneers (because there'll be no profit in covering anything else.)

Get used to it. It's going to happen.

But don't be too despondent. The US Federal Government already spends more per person on health care than France or Britain, both of which have a so-called 'free' health care system. Once America does adopt (either officially or unofficially) a single-payer health care system, there's no reason for it not to be at least as good as either of those two.

It's not a solution - more an eventuality. However even the greatest nation on Earth can't avoid adopting a system in place in every other first-world nation on Earth, no matter how much the right wing wails and gnashes their teeth.

Tomorrow, we'll discuss the other big drain on the American economy - and how to fix that. Stay tuned!

Part three...


One Salient Oversight said...

If we were able to increase the average American's wages by 20%, wouldn't that solve our Social Security dilemma?

The old Reaganite canard will come out: reducing taxes increases revenue because the economy will grow faster!!! (even when the stats show the opposite)

Which is why the standard conservative boilerplate answer is to just keep cutting taxes. In theory if we followed this route, the tax rate will be zero and the government will magically get billions.

And that is how and why the federal deficit grew under Reagan and the Bushes.

Tom said...

OSO, check out this blog, which makes the point that in the US, tax revenues are pretty much fixed at 18-20% of GDP, regardless of the tax rate.

Of course it can't drop to 0%, anymore than it can go up to 100%. Let's simply drop it a bit, see if revenue declines, and keep doing that until it it does. I doubt we're at that point yet.

Susanne said...

Interesting thoughts. I'm glad I can finally read these posts. For some reason I was getting a "this page does not exist" message when I tried to reach it earlier.