An angry man from Montana has part of it right and part wrong

Every now and then I receive e-mails containing propaganda about Social Security.  One came in today, January 23, 2011.  Supposedly, it was written by an angry man in Montana who had written to Alan Simpson, former Republican Senator who is a member of the President’s deficit commission.  I have reproduced it below; I feel certain that this is not protected by copyright.   Now some of his seems concerns seem legitimate, but the third item on this list is just flat out wrong.  I will address that paragraph at the bottom of this page. 

From a man in Montana ....who - like the rest of us - has just about had enough.

Hey Alan,

Let’s get a few things straight…

1. As a career politician, you have been on the public dole for FIFTY YEARS…

2. I have been paying Social Security taxes for 48 YEARS (since I was 15 years old. I am now 63)…

3. My Social Security payments, and those of millions of other Americans, were safely tucked away in an interest bearing account for decades until you political pukes decided to raid the account and give OUR money to a bunch of zero ambition losers in return for votes, thus bankrupting the system and turning Social Security into a Ponzi scheme that would have made Bernie Madoff proud…

4. Recently, just like Lucy & Charlie Brown, you and your ilk pulled the proverbial football away from millions of American seniors nearing retirement and moved the goalposts for full retirement from age 65 to age 67. NOW, you and your shill commission is proposing to move the goalposts YET AGAIN…

5. I, and millions of other Americans, have been paying into Medicare from Day One, and now you morons propose to change the rules of the game. Why? Because you idiots mismanaged other parts of the economy to such an extent that you need to steal money from Medicare to pay the bills…

6. I, and millions of other Americans, have been paying income taxes our entire lives, and now you propose to increase our taxes yet again. Why? Because you incompetent bastards spent our money so profligately that you just kept on spending even after you ran out of money. Now, you come to the American taxpayers and say you need more to pay off YOUR debt.

The third paragraph claims that “you political pukes decided to raid the (Social Security Trust Fund) account.”  "...thus bankrupting the system and turning Social Security into a Ponzi scheme…”  Well, where did this angry man go wrong?  In fact, Social is not bankrupt, and has not been raided.  That is a claim that has been around for decades.  It has never been true.

Social Security is no more a Ponzi scheme than any legitimate private insurance policy from a major insurance company.  Think about it, Social Security is paid for by a stream of revenue paid in by workers, their employers and by the self employed.  The money is used to pay the small expense of operating the system, less than one percent, and to pay benefits.  Surplus revenues have accumulated through the last 27 years.  Every dime of those surpluses has been invested in U.S. Treasury bonds that pay interest and promise to be redeemed at face value with that interest.  Private insurance companies collect premiums from those who buy their insurance.  They use those premiums to pay for the expenses of their operations (salaries and and agents' commissions), to pay benefits, and to make profits for their shareholders. But who accuses them of being Ponzi schemes?  No one.

Neither Social Security nor Medicare have added one dime to the federal deficits.  In fact, both programs have had surpluses and have helped to finance deficits with investments in Treasury bonds.   Neither program should be reported in the federal budget because both are off budget items paid for with FICA taxes.  Yet, the man from Montana is right to be angry that the first place that many Republican politicians think to find ways to cut the federal deficits is to cut these important programs that are no part of the problem or the general budget.

A one third cut in employee FICA taxes could be trouble for Social Security

Is the Payroll tax holiday a trap?

A battle to resolve what to do after the “Bush tax cuts” were to expire led to an agreement between Republican leaders and President Obama introduced a stimulus tax cut involving Social Security payroll taxes.  For the first time in 27 years, the payroll tax was reduced from 6.2% to 4.2% for all workers. President Obama claimed that he wanted the reduction as an economic stimulus.  Of course, providing tax cuts to the lowest income workers will certainly provide a stimulus, but they will also divert $112 billion from the Trust fund. 

 Because of the temporary tax cut, for the first time in 27 years, the Social Security program will run a deficit.  The deficit will be the difference between payroll tax revenues, and the combination of benefit payments and the small expense of operating the program.  For the last 27 year Social Security has had yearly surpluses and the trust fund has accumulated $2.6 trillion dollars in surpluses.  Those surpluses have been borrowed by the federal government to cover deficits in the general fund.  Here’s the catch, the money is to be repaid to the trust fund from general revenues, but the government has had to borrow 12 trillion dollars over the last 30 years, so it will have to borrow in the commercial bond markets in order to reimburse the trust fund.

Now, with the Republicans in control of the House of Representatives, just how likely are they to default on the reimbursement.  If you have no idea, try “VERY LIKELY”.  For decades, the Republicans have insisted that there is no trust fund; they claim it is a fiction, so why would they intend to repay money to a fund that they claim does not exist?  The trust fund is the Achilles tendon of the Social Security program.  Cut it and the program is crippled and ripe for the kill.   If there was to be a payroll tax holiday, it should have been paid for from cuts in income tax withholding, not from FICA premiums. 

The payroll tax holiday is set to expire in December 2011, so won’t we see a repeat of the same arguments about taxation that we saw this year?  Won’t the Republicans insist on extending those cuts and further weakening the program?  Their dream, as expressed by Newt Gingrich back in the 1990s, is to see programs like that wither on the vine, starved to death from lack of funding.

The President needs sound advice regarding what is needed to preserve Social Security for future generations.  He will not get it from his deficit reduction committee.  They implied that Social Security is part of the deficit problem even though the program has provided surpluses, not deficits, to the consolidated budgets. 

See Professor David J. Ekerdt’s column in the Christmas day edition of the Kansas City Star at the following website:    http://voices.kansascity.com/entries/social-security-has-strong-future/

Concerns about the Deficit Commission report

There should be a wide ranging discussion about the report from the “National Commission on Fiscal Responsibility and Reform”.  They called their report the “Moment of Truth” and, in fact, it does present some disturbing facts that should concern us all. There are a few issues in just a few paragraphs of the report that should be sufficient to start an analysis.

The following paragraph is taken directly from the report:

“Our nation is on an unsustainable fiscal path.  Spending is rising and revenues are falling short, requiring the government to borrow huge sums each year to make up the difference.  We face staggering deficits.  In 2010, federal spending was nearly 24 percent of Gross Domestic Product (GDP), the value of all goods and services produced in the economy.  Only during World War II was federal spending a larger part of the economy.  Tax revenues stood at 15 percent of GDP this year, the lowest level since 1950.  The gap between spending and revenue – the budget deficit – was just under nine percent of GDP”

In 1993, after his election, Bill Clinton asked Congress to raise taxes on high income families and individuals.  Clinton had inherited large deficits from George H.W. Bush who had inherited big deficits from Ronald Reagan.  During their time in office, first Reagan and then Bush, added three trillion dollars to the national debt.  When Carter left office the total national debt was $909 billion dollars, when George H.W. Bush left office the debt had more than quadrupled to four trillion dollars.  The Clinton tax increases were retroactive to January of 1993.  Under Clinton the deficit shrank during every year of his administration.  By the time that he left office, the deficits had disappeared and there had been three years of surpluses.  Clinton left a surplus budget that lasted into 2001, the first year of the Bush administration.  Immediately, after the first Bush tax cuts, deficits were back.   

From 1976 until 1984, Social Security ran small budget deficits totaling about 27 billion dollars, but after the new Social Security law was passed in 1983, tiny Social Security deficits were erased and since then surpluses in that program have helped to disguised the true size of the federal deficits in the general budget.  Since 1984, Social Security has accumulated around $2.6 trillion dollars in surpluses; those surpluses have served to finance the deficit spending in the general budget.  Clinton’s first surplus came from Social Security surpluses.  Most of the next two surpluses came from Social Security as well.  But Social Security revenue was not sufficient to conceal all of the deficits after the George W. Bush tax cuts of 2001 & 2003.     

Upon taking office in 2001, George W. Bush cut taxes.  The Democrats demanded the 10% bracket for low income Americans.  Those couples with the highest incomes received a tax cut from 39.6 to 38.6 on taxable earnings above $307,050.   In 2003, a new tax bill cut rates for high income recipients from 38.6% to 35% for couples with taxable earnings of $319,100 over.  Starting in 2002, revenues dropped from 19.5% of GDP to 17.6% while spending increased from 18.2% to 19.1% of GDP.  Deficits returned.   In 2003, Bush started an unnecessary war in Iraq that was not paid for. Federal revenues decreased to 16.1% and spending increased to 19.7%, widening the deficit.   The following is from the report:

“Since the last time our budget was balanced in 2001, the federal debt has increased dramatically, rising from 33 percent of GDP to 62 percent of GDP in 2010.  The escalation was driven  in large part by two wars and a slew of fiscally irresponsible policies, along with a deep economic downturn. We have arrived at the moment of truth, and neither political party is without blame”  

The fact is that the commission report only shows the publicly held debt.  It does not reflect internal debt, assets held by and owed to the 239 federal trust funds.  The biggest trust fund, of course, belongs to Social Security which holds $2.6 trillion of the gross national debt.  Looking at the gross national debt, the total debt, the numbers are a bit more disturbing.  Instead of 33% in 2001, the gross national debt was actually closer to 57% of GDP.  Instead of 62% in 2010, the gross national debt was 94%, much more than just the debt owed to the public.  Money owed to the trust funds will have to be repaid and will require tax increases or more public borrowing.  The obvious answer is to roll back the Bush tax cuts especially those for high income families.  Those tax cuts have been the cause of our burgeoning national debt.  The next paragraph sums up problems that this country will face if something is not done now.

“Over the long run, as the baby boomers retire and health care costs continue to grow, the situation will become far worse. By 2025 revenue will be able to finance only interest payments, Medicare, Medicaid, and Social Security.”

You can review the report at the following link. 

http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf

Most of the data for this blog was taken from Internal Revenue tax rate schedules.

 

Gross national debt calculations were taken from the following website:

http://www.usgovernmentspending.com/federal_debt_chart.html

Oil shortages will be the biggest problem for our country

While people fret about the Social Security trust fund, they are generally unaware of a much larger problem that faces us in just over 10 years.

What is the true cost of gasoline, diesel, and other oil based products?  Is it the price that we pay at the pump, or is it the total cost which includes the cost of protecting oil producing areas and pipelines that help to feed our hunger for cheap fuel? 

The Highway trust fund went insolvent in 2008; money from the general budget was transferred to the trust fund to pay for upkeep and construction of our highways, waterways and bridges. In short, income taxes and borrowed money are now being used to pay for those things.  The deficit commission has suggested a 15 cent a gallon fuel tax increase.  That may be enough to fund the Highway infrastructure, but it is not enough to pay for protecting our oil supplies.

  

In fact, the price of oil includes, the costs of refining, distributing, and selling fuel, but those costs are just the tip of the iceberg.  The federal fuel tax is 18.4 cents.  Each state has a fuel tax as well.  Those taxes vary widely throughout the United States with the lowest fuel tax in Alaska, a state with few roads and a huge amount of state revenues derived from oil production in the state.  The highest fuel tax at the pump is 32.1 cents per gallon in Wisconsin.  That tax is adjusted for changes in the consumer price index.   Pump prices are the costs that we see, and pay directly, but that’s not all, folks, there is still the cost of providing military might to protect oil producing countries.   As reported in his book BLOOD and OIL, Michael T. Klare spelled out that we have a huge military force dedicated to protecting oil supplies and pipelines in various parts of the world.

With the wars in Iraq and Afghanistan, we realize that there are huge costs for fighting wars in the oil producing areas of the world.  Afghanistan may have no oil but it is in a strategic area and has common borders with countries that produce enough oil for export.   Mr. Klare spells out the fact that our country is involved in arming friendly countries and providing training for local armed forces to protect oil production and pipelines in other countries.  Our naval forces in the Persian Gulf region are there to protect vital waterways through which oil is moved to ports around the world.  Our allies in the region, Saudi Arabia, Kuwait and others depend on those waterways to protect their shipping.  Our navy can also provide air power to protect our allies and support our troops on the ground in Afghanistan and Iraq and the region. 

The military costs of protecting oil sources and transportation add to our budget deficits.  Those costs are paid for by taxation and borrowing.  Money spent to protect our oil sources is an indirect cost of having cheap fuel for our cars and trucks as well as for heating for our homes and factories.  Oil is an important commodity that greases the wheels of our economy and controls our destiny.  Our dependence on oil is the major reason why we need to move to alternative, renewable energy resources immediately.

We are not alone in our dependence on oil.  We face stiff competition for cheap oil from the Russians and the Chinese.  They also have forces and allies in the region to protect their oil interests.  Peak oil production gets closer with each passing day.  Some experts predict that the peak will occur in about 10 years.    At that time, oil production will slow and world supplies will dwindle.  If we do not move now toward a more energy independent future, we will face serious consequences in just over a decade.

Sources for this blog are:  Blood and Oil by Michael T. Klare

Information on peak oil can be found at:  http://www.investmentandbusinessnews.co.uk/headline/peak-oil-is-less-than-a-decade-away/11863

A table showing fuel taxes by each state:  http://www.gaspricewatchusgastaxes.com/.asp   See how your state compares. 

Decades of propaganda have become "common knowledge"

From the History section of the Social Security website:
http://www.socialsecurity.gov/history/trustchart.html

REALITY OF THE TRUST FUND (This statement appeared in every Trust Fund Report from 1955-1959) Public discussion of the investment aspects of the old-age and survivors insurance program sometimes reveals a serious misunderstanding of the nature and significance of the trust fund operations. The Board of Trustees believes that it has a responsibility to correct any misapprehensions among persons who look to the old-age and survivors insurance program for basic protection against income loss because of retirement or death. The charge has been made that the requirement of existing law that the receipts of the old-age and survivors insurance trust fund which are not currently needed for disbursements of the program shall be invested in Government securities constitutes a misuse of the funds. It is suggested that this type of investment permits the Government to use social security tax collections to finance ordinary Government expenditures, and that hence such collections will not be available to pay social security benefits in future years. It is said that the securities represent IOU's issued by the Government to itself and that the Government will have to tax people a second time for social security to redeem these IOU's. The investment of the assets of the trust fund in Federal obligations, as required by law, is not a misuse of the money contributed under the insurance program by covered employees, employers, and self-employed persons. These contributions are permanently appropriated by law to the Federal old-age and survivors insurance trust fund which is separate from the general funds of the United States Treasury. All the assets of this fund are kept available and may be used only for the payment of the benefits and administrative expenses of the insurance program. When the Treasury pays back money borrowed from the trust fund, the public will not be taxed a second time for social security. If taxes are levied to redeem the securities held by the trust fund, these taxes will not be levied for the purpose of paying social security benefits. Rather, they will be levied for the purposes for which the money was originally borrowed, such as the costs arising out of World War II. Taxes would have to be raised to pay back the money borrowed to cover the cost of the war; whether the obligations were held by the trust fund or by other investors. The fact that the trust fund, rather than other possible investors, holds part of the Federal debt does not change the purpose for which these taxes must be levied. Since all the social security contributions are permanently appropriated to the trust fund, they are not available to the Treasury to redeem Federal obligations held by the trust fund. The operation of old-age and survivors insurance trust fund investment is similar to the investment of premiums collected by a private insurance company. A private company uses part of its current premium receipts for payments to beneficiaries and for operating expenses. The balance of its receipts is invested in income producing assets. Such investments are commonly limited by State law to the safest forms of investment so that policyholders will be assured that their claims against the company will be satisfied when they become due. Government securities ordinarily represent a considerable part of these investments. The purpose of investing these receipts is, of course, to obtain earnings that will help meet the future costs of the insurance and thus reduce the premiums the policyholders would otherwise have to pay for their insurance. Social security tax collections are handled in much the same way. Investments of the trust fund, however, are limited by law to only one type-securities issued by the Federal Government. There are two principal reasons for such a restriction. One is similar to the motivation of State legislation dealing with investments of private insurance companies: it is designed to ensure the safety of the fund. Government securities constitute the safest form of investment. The second reason is that it keeps this publicly operated program from investing reserve funds in competitive business ventures. Such investments by the trust fund would be completely out of harmony with accepted concepts of the proper scope of a governmental activity. The securities held by the trust fund perform the same function as those held by a private insurance company. They can be readily converted into cash when needed to meet disbursements, and the earnings on these investments make possible a lower rate of contributions than would otherwise be required. In investing its receipts in Government securities the trust fund, as a separate entity, is a lender and the United States Treasury is a borrower. The trustees of the fund receive and hold securities issued by the Treasury as evidence of these loans. These Government obligations are assets of the fund and liabilities of the United States Treasury which must pay interest on the money borrowed and repay the principal when the securities mature. In other words, the Treasury borrows from a number of sources. It borrows from individuals, mutual savings banks, insurance companies, and various other classes of investors; and it borrows from the old-age and survivors insurance trust fund. The securities held by the fund are backed by the full faith and credit of the United States, as are all public debt securities; they are just as good as the public debt securities held by other investors. The purchase of Federal obligations by the trust fund from the Treasury does not increase the national debt. The national debt is increased only when and to the extent to which the Federal Government's expenditures exceed receipts from taxes levied to meet those expenditures. When such a deficit occurs, the Treasury must borrow sufficient money to meet the deficit by selling Federal securities. The volume of the securities sold to meet a deficit is not increased by the purchase of such obligations by the trust fund. The purchase of Federal obligations by the trust fund in a period when the Treasury has no deficit to meet would result only in a direct or indirect transfer of Federal debt from other investors to the trust fund. The total amount of the public debt would remain unchanged