Trust Not in Trust Funds
"Trust fund" is such a comforting term, especially if you're lucky enough to have one. It conjures up pictures of country clubs, prep schools, Paris and Nicky and other super-rich kids reeling out of clubs in the meatpacking district at three in the morning.
And on one level, we've all got a trust fund: the Social Security and Medicare trust funds, which are supposed to ensure a safe retirement for all Americans. You very likely missed it, but the trustees who oversee the two programs put out their annual report this week. In some ways, there's no real news. If you've been paying attention at all, you know that Social Security and Medicare are in long-term trouble. This year, the trustees estimate the Social Security trust fund will hold out until 2041. Medicare is in far worse financial shape because of skyrocketing health care costs, and its trust fund will only cling to life until 2019. On the face of it, this doesn't sound so bad. After all, 2019 is a decade away, and 2041 - that's almost Star Trek territory. Yet the trustees also spoke about the programs in apocalyptic terms, talking about "enormous challenges" and "funding warnings" and "detrimental economic impact."
So what gives? Well, the real problem is what's in the trust funds - or more accurately, what's not in there. The theory behind the funds was that the government would bank all the extra Medicare and Social Security tax revenue that's been coming in while the 78 million baby boomers are in the workforce. Then the government could draw down on the trust funds once the boomers start taking out of the system instead of paying in.
But that's not what happened. For many years now, the federal government has basically used all of its money to pay all of its expenses, and that includes Social Security and Medicare taxes. The government has long been using the "surplus" from these funds to pay its other costs, and giving the funds Treasury bonds in return (actually a special kind of "intergovernmental" bond used when the government owes money to itself). There's nothing secret or illegal about that, and there's nothing wrong with the bonds. Still, it is an accounting maneuver that allows government to shift money from one pocket (Social Security and Medicare) to pay bills in another pocket (the rest of the government). That's a boon for elected officials because then they can avoid pesky political problems like being forced to raise taxes or cut popular programs.
But now the party's almost over. The most frightening part of the trustees report is that Medicare needs to start drawing on its "trust fund" this year, probably to the tune of about $8 billion. Since the government has already borrowed the money for other things, it needs to start paying the Medicare trust fund back. Where will the money come from? From "general revenue" - essentially your tax dollars and mine. Eight billion dollars isn't huge in terms of this year's $3 trillion budget, but this is just the beginning of a much bigger trend. This problem hasn't even started rolling yet -- the first baby boomer won't even start drawing Medicare benefits for another three years.
People often talk about the trust funds as if the nation won't feel the pain until the funds actually run dry, but that's simply not the case. Since there's not that much there there, the government is going to give itself a financial hernia paying back the trust funds and keeping up with demand. The Government Accountability Office estimates we have $53 trillion in liabilities ahead of us over the next 75 years, mostly from Medicare and Social Security. The inevitable logic is that government will have to slash other programs to pay for these entitlements, or we'll have to raise taxes, or we'll have to cut people's benefits. And the longer we wait, the tougher the choices we'll face.
That's why we need to start talking about this now. We can fix these problems - although granted, some options are tougher than others. Some alternatives, like raising the cap on Social Security taxes or pushing back the retirement age, are pretty straightforward, and we can discuss the pros and cons pretty easily. Others, like the kind of major reform of the health care system that will probably be needed to fix Medicare, are going to be confusing, messy and difficult. But we need to start having a national conversation about this problem, and not be lulled into a false sense of security. Because it's absolutely certain that the American public will not allow the government to make major changes to their retirement benefits or their health insurance without their consent. So we'd better get the public in on this debate. Because we're running out of time.
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Raising Social Security/FICA tax revenue does not have to be done in the usual, "straightforward" , manner of just increasing either the tax rate or the cap above which earned income is no longer taxed. (I would actually prefer increasing taxes on unearned income such as capital gains or "deferred interest," but this may not be politically feasible for now.) A more palatable way is to have a "donut hole", with earnings up to the current cap of $102,000 taxed as before, but then not taxing further earnings up to a quarter of a third of a million dollars, with earnings above the top of the donut hole being taxed. No increase in the tax rate would be needed. This would be more politically palatable, as not raising taxes on the (broadly defined) middle class, but would still require a Democratic President and both Houses of Congress to become law.
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Scott Bittle and Jean Johnson say that "raising the cap on Social Security taxes [is] pretty straightforward." Actually, Social Security/FICA taxes, which will have to be raised, can be adjusted more effectively than by raising the earnings cap from the current $102,000 to a higher figure. Rather than add to taxes on the upper-middle class (now including those earning even $200,000 or more per year, since they are feeling financially squeezed and are not seen as rich, merely "well-to do") and to avoid political problems, there could be a "donut hole" without FICA tax between the current cap and $250,000 or even $300,000, with the tax resuming above the donut hole and continuing up to whatever level is needed to keep Social Security solvent. The lower figure could be adjusted for cost-of-living increases, and the upper figure could be raised as needed. This would not be politically possible unless Democrats controlled the White House and both houses of Congress, but might be feasible in that case, especially if more FICA money were clearly needed and if the donut hole system came to be seen as a way to save the middle class from new taxes. This would be seen as "squeezing the rich," but might be passed to save Social Security.
My vote is for reinstating the tax breaks Doofus gave the uber-rich at my expense. And while we're at it, how about changing the rules of government, so that when the politicians want to start a dirty little war somewhere to help their friends at Exxon and Lockheed get richer, they can't take funds out of Social Security to pay for it. If the Republicans want to keep up this little (but expensive) war in Iraq, let them do it the old fashioned way, by paying for it.
LOOK AT THE TAX BREAKS AND THE WAR IN A DIFFERENT WAY.
HOW WOULD THE SAUDI'S CASH OUT OF THE USA BEFORE THE BABY BOOMERS RETIRED?
HOW WOULD THE MILITARY INDUSTRIAL COMPLEX CASH OUT?
WAR IS THE ANSWER MY FRIEND. WAR ALLOWING TRILLIONS TO BE STOLEN WITH LITTLE OR NO OVERSIGHT.
WELFARE MOTHERS HAVE 3 OR 4 AGENCYS WATCHING EVERY DIME THEY GET IN WELFARE.
HAILBOURTON CAN TELL AUDITORS TO "GO TO HELL" LEGALLY AND GET MORE NO BID CONTRACTS.
IT IS SAUDI OWNED.
Headquartered in Dubai, dad.
At this point I don't trust the fools to get it right. Our S.S. benefits are being spent. I would rather get what I've put in throughout my life & re-invest it myself. (Which, at this time would sadly be all in foreign markets). Then if I make bad decisions, I can just call the Fed & they'll bail me out, right? Unbeleivable that our tax money can go to keep some bankers from jumping out of their windows. They screwed the pooch, let 'em jump.
They got it right, for THEM.
Oh, you mean right for YOU?
Well, why do you think they have any interest in what YOU want??
I agree that we'd better get the American public in on this debate since they will not allow the government to make major changes to their retirement benefits or their health insurance without their consent. The quickest way to do that may be to stop misrepresenting our fiscal condition by masking the deficit with the trust fund surpluses. In 2007, the so-called unified deficit was $162 billion. At http://www.whitehouse.gov/news/releases/2007/10/20071011-1.html , the White House bragged about this stating the following:
As a percentage of the economy, the deficit is now lower than the average of the last forty years. Tax cuts work to promote economic growth, and that economic activity brings in higher revenues to the Federal treasury.
The trouble is, the federal debt went up $499 billion! The chief reason that the unified deficit is so much lower is that it didn't count the $187 billion borrowed from Social Security and the $106 billion borrowed from other trust funds. You can see the numbers at http://home.att.net/~rdavis2/def09.html . Hence, as opposed to being healthy, the general fund is actually a deadbeat which will going to have a very tough time paying back all of the money that it's bumming off the trust funds. If politicians stopped misleading the electorate about the state of our finances, they might be able to get their support in fixing it.
Simple, A Public Central Bank that prints money without interest, that doesn't need to borrow money.
Why should we borrow our own money? In this way enough money stays in the system to pay the bills.
We need to fire the private bankers at the Federal Reserve and establish a public central bank.
Let me give you a different point of view on this. I been paying INTO Social Security and Medicare for almost 50 years now. Now that I'm almost to the point where I can start drawing something back, you're telling me I have to forget about it. The government can't keep the promise it made.
Ok, but I want every penny I paid in paid back, with interest. Bail me out just like they did Bear Sterns.
When you retire you will get all you paid in back in about 9 years with interst. If you live longer than 9 years. which a lot of women do, you will be drawing against and emply account. But your check will keep comming every month.
Sure, JBS, I suppose you want it all back at inflation-adjusted dollars, too??
Before we can have a meaningful discussion, we need a long forgotten principle called the TRUTH.
For the past 8 years, David Walker and the GAO have declared the Treasury Dept's Financial Reports rubbish. They have "no material support" for their numbers and their accounting procedures completely avoid GAAP. Generally Accepted Accounting Procedures, the standard by which an individual or corporation gets fined and/or goes to jail for breaking the procedures.
Simple example. The Treasury claims the deficit for the US Government in 2007, was approx $280,000,000,000. Hurray! We are lessening the annual deficit! This is while the Fed noted, the official National Debt increased approx $500,000,000,000 in 2007. We don't need a sliderule or calculator for this one.
I have zero hope for a country who's leaders are either sinister liars, or arithmetically challenged. (It's not even Math, it's basic Arithmetic) Because they continually walk around reporting the $280B, and the press prints it as fact.
If you can subtract $280B from $500B and get zero, then you have zero chance for a substantive discussion of anything related to fiscal policy.
One of the main goals of the neocons and the Bush administration is to eliminate all social benefit programs. They want to keep taking taxes from working people, but give all that money to their elite Republican friends. Like the thirty billion dollar bail-out they just gave to the rich wall street owners of Bear Stearns.
Of course it's a very simple thing to solve. For example, in my lifetime I and my employer have and will contributed, with accrued interest, at least $500,000 to social security. If only 5% is paid out to me, only the interest earned on my money, I would receive $25,000/year, and the principal would remain untouched, and be left for others who come after me. Social Security does work. If the Republicans steal my money and give it to their friends, then it doesn't work.
The best way to repay what Bush has stolen is to increase taxes on the wealthy. The social security tax should be assessed on all income. And, as Gore said, that money should never be stolen by the federal government and used to pay for other expenses. It's like parents stealing their kids' college funds and using it to pay for fancy vacations. "Trust" fund means the money must be held for the beneficiaries, and can be used for no purpose other than the designated (retirement) purpose.
What the hell, why is this government spending money on the poor for health care and retirement? Don't you know we have to rebuild Iraq, bomb Iran, spend on the poor needy defense contractors, and spread democracy through wars and occupations. What's wrong with you folks. Get with the program.
The full retirement age is based on maintaining a 50% death rate, so the government does not have to pay any paid for benefits but to half of the investors. The government gets 15% of all wages (up to $102,000) in America and is so incompetent as an investment manager, if we could we would have fired them, they do not invest our money and grow the funds. The problem with Social Security is totally caused by government. No, matter your political party affiliation, and setting aside your thoughts on issues. We all need to remember what it is to be an American Citizen. We need to make sure our elected representatives obey their Oath of Office and keep their Oath of Allegiance. See http://tinyurl.com/2znnvl Know whom you are voting for. http://www.fms.treas.gov/fr/index.html The government caused the entire problem with Medicare with unfunded mandates, and prohibited Social Security from negotiating the price of drugs, so the taxpayers are being raped.
Casting the Social Security and Medicare trust funds as being in trouble belies the fact that they are no more or less obligations to repay along with the entire NATIONAL DEBT. We are going to have trouble repaying it all, not just SSA and Medicare. To single out SSA and Medicare as somehow negotiable is to elevate debt to China above debt to American citizens who have contributed to the SSA and medicare systems. In other words, this is a RED HERRING floated by the right wing still agitating to destroy the NEW DEAL.
The plan was flawed from the begining by, as the authors correctly note, the debt being carried in government bonds, those revenues then being used in lieu of taxes to fund government operations. The cheif benefactors of this were those that benefited from the tax cuts that the funds from SSA and Medicare allowed, namely the rich. If this is allowed to stand, the wealthy will have successfully robbed, over a period of thrity years, 53 trillion dollars from a trusting public.
If the Bush tax cuts are rolled back, the obligations to SSA and Medicare can be covered. Think about this the next time you feel sorry for the taxes of the rich going back up to where they should be.
SS and Medicare benefits have always been negotiable. Sometimes they are improved, as when full cost of living increases were implemented in the 1970's and a Medicare drug benefit was introduced a few years ago. In 1983, benefits were effectively cut, as the full retirement age was raised and income taxes on benefits were raised for higher income beneficiaries.
SS and Medicare are not the same as the national debt. If the country defaults on its Treasury bonds, it will be locked out of the bond market for years to come. We'll either get runaway inflation or a collapse in the economy or both.
If you are a younger baby boomer, expect to get screwed. If you are member of Gen X or Gen Y, expect to be screwed even worse. In the meantime, we have a war to fight in Iraq and eventually, we will get the bills for it.
Blessed are the children, for they shall inherit the national debt.
Point taken on negotiability, practically and historically. But that does not mean SSA and Medicare should be more negotiable than other debt.
The natioanl debt is negotiable too. The falling dollar is a part of that negotiation that is unfolding right now. We are telling the foreign debt holders to accept repayment of up to half of what was lent.
T-bill holders are also suffering some degree of devalutaion in the basis of their securities because of the falling dollar, to the extent that inflation in import prices and commodities errode that basis. To keep up, the T-Bill rate would have to be adjustable.
So no, we can't overtly default, but the effect of inflating our way out of debt is tantamount to negotiating a settlement of debt.
The solution is still the same. Repeal Bush tax breaks, screw whichever of the holders of the SSA, Medicare or national debt you feel is politcally easier if you have to, but don't think that the bond market is any more sacrosanct than social obligations owed to Americans.
ROLL BACK EVERYTHING THAT REGEAN DID TOO.
BRING BACK REGUALTIONS AND BRING BACK SECURITY FOR OUR NATION.
THE SOCIALIST PROGRAMS, AS THERY CALL THEM. Allow American Eldery to keep the economy going when everything else fails.
Give the elderly as raise in Social Security and aks them to spend it all. That will create work and jobs.
The broken window effect.
The solution would be for the rich to give it back... I see my death before that happens !!!!!
Based on their bios here, the authors have absolutely no background in economics, public policy, sociology, or any other relevant field. They seem to be journalists.
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