Solutions to Financial Problems
Although a small percentage of the population realizes it, our country has very significant financial problems. According to a 2007 report by the U.S. Government Accountability Office (GAO), the total debts and the present value of the unfunded commitments of the U.S. government over the next 75 years, excluding future military, Medicaid and general government spending, equal $50.5 Trillion, while the total net worth of U.S. households equals $53.3 Trillion. This means that, under current fiscal policy or anything similar, the federal government will need to consume substantially all, or perhaps all, of the current wealth of U.S. citizens and earnings thereon. In GAO's publication titled The Nation's Long-Term Fiscal Outlook: January 2007, GAO said: "GAO's current long-term simulations continue to show ever-larger deficits resulting in a federal debt burden that ultimately spirals out of control." This year, GAO said that in about two decades, if revenues stay at about 18.3 percent of GDP -- the level we are used to experiencing -- they will not even cover net interest expense, Medicare, Medicaid and Social Security. On December 4, 2007, the Atlanta Journal-Constitution reported that interest expense is now the third largest expense of the federal government. A "brief analysis" of the Social Security and Medicare problems can be found here (PDF). General Tax Simplification Proposal. I would keep the Social Security and Medicare taxes, subject to the revisions to Social Security and Medicare discussed below, and greatly simplify the individual income tax as follows:
The net income of self-employed persons would be subject to tax. The passive activity loss rules would have to be retained. Social Security benefits should be tax-free until an individual recoups his/her contributions, provided that the individual could allocate the recoupment to different years as chosen by him/her. Health care provided by the employer would be excludable to the average HDHP premiums amount. Divorce payments would not have tax consequences to payer or payee. Personal residence sales would be tax-free. One of the most complex aspects of completing an individual income tax return is the calculation of taxes on dividends. A significant percentage of the population owns some stock. Often, the tax savings from applying the long-term capital gains rate is very small. A simpler approach to providing relief from double taxation would be to entitle domestic C corporations to a deduction equal to the product of their dividends paid multiplied by the average percentage of stocks held by tax-paying persons and entities (as determined by a government agency), and then require dividend income to be reported on income tax returns of individuals, trusts and estates and taxable corporate shareholders as ordinary income. Thus, for example, if the national average of stocks held by individuals, trusts and estates and taxable corporations (including S corporations) was seventy-five percent for a year (75%), each C corporation could deduct 75 percent of its dividends. In lieu of the national average, a company that knew the breakdown of its shareholders between taxable and tax-exempt could apply its actual percentage. The above proposal is designed to create friction that will stop the growth of federal spending. Under such a simplified individual income tax system, the vast majority of individuals could do their own tax returns. That factor would eliminate much of the burden of the current system. Furthermore, virtually everyone could understand the system. In order to help the U.S. remain competitive, the maximum corporate income tax rate should be reduced to 25 percent. Consideration should be given to the possibility of utilization of a value added tax (VAT) to replace the corporate income tax. The other areas of the income tax system, corporate tax, partnership tax and qualified retirement plans, need to undergo similar simplifications. In 2007, I wrote an article on how the pension law could (and should) be simplified. The article was titled “The Need to Simplify Federal Pension Laws, and some Possible Means of Doing So.” It was published in the Summer 2007 edition of Journal of Pension Benefits. The estate tax exemption needs to be increased, and the estate tax rate needs to be lowered. Simply put, I do not like deficits. On July 28, 2008, excluding special appropriations, the Bush Administration estimated that the 2009 fiscal year deficit would be $482 billion. With special appropriations, the total projected deficit exceeds $560 billion. From 2002-2006, the accumulated Federal deficit, net of Social Security’s annual surpluses, was approximately $1.5 Trillion (that’s $1,500,000,000,000). Exclusive of Social Security’s surpluses (that were “loaned” to the General Fund), the aggregate deficit for 2002-2006 was approximately $2.3 Trillion. At five percent (5%), annual interest on $1.5 Trillion is $75 Billion. There are approximately 120 million full-time workers in the U.S. That means that the annual interest payment due to the deficits over the 2002-2006 time frame is more than $600 per full-time worker. The total debt now owed to the public is approximately $5 Trillion. At 5 percent, interest expense is $250 Billion, or about $2,000 per full-time worker. These payments need to be made very year. Considering the massive entitlement problems outlined below, running deficits during times of relative prosperity shortly before the storm is imprudent. Republican candidates, including Saxby Chambliss, will sponsor significant tax cut proposals such as the “Fair Tax” bill, knowing (or hopefully knowing) that they do not work from an economic perspective. At the same time, they will grow the government at an incredible rate. Look at their records from 2001-2006. It’s up to you, the voter, to call them on this deception. Some people (including some economists) say our deficits are not a problem because, as a percentage of GDP, they’re in line with historical averages over the past 30 years. The GAO and CBO disagree. Why that logic is flawed: Our debts have continued to increase in current value terms and a mountain of retirement entitlements is about to become due. Prior to 1981, federal debt never exceeded $1 Trillion. With $700 billion “bail-out,” federal debt will soon approach 11.3 Trillion. (That’s over 4 times annual tax revenue.) Adjusting for inflation, using the U.S. Department of Labor’s CPI calculator, $1 in 1980 equals $2.66 today. That means that today’s debt should not exceed $2.66 Trillion to be in line with 1980’s debt standard. Add in, per the GAO, $41 Trillion of unfunded liabilities (in present value terms) and we have a potential disaster on our hands. Entitlements Proposals. According to a March 2007 report by the Government Accountability Office (GAO) titled SOCIAL SECURITY REFORM Greater Transparency Needed about Potential General Revenue Financing: A "brief analysis" of the Social Security and Medicare problems can be found here (PDF). “GAO’s long term budget simulations show that current fiscal policy is unsustainable and, absent changes, will lead to an escalating spiral of federal deficits and debt.” In November of 2005, then Federal Reserve Chairman Alan Greenspan said: “Unless the situation is reversed, at some point, these budget trends will cause serious economic disruptions.” In 2007, Federal Reserve Chairman Ben Bernanke said: “If early and meaningful action is not taken, the U.S. economy could be seriously weakened. . . . a vicious cycle may develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits.” In April of 2007, Treasury Secretary Henry Paulson said: “Without change, rising costs will drive government spending to unprecedented levels, consume nearly all projected federal revenues and threaten America’s future prosperity.” In its 2007 Report, the Social Security and Medicare Board of Trustees said:
In its 2008 Report, the Social Security and Medicare Board of Trustees said:
The projected entitlements growth chart is as follows:
Source: United States General Accountability Office, 2005. Social Security annually runs a surplus and has done so for many years, and that surplus is “loaned” to the General Fund. In exchange for the money, the Social Security Trust Fund receives IOUs from the General Fund. So, when you hear that Social Security is solvent until 2040, realize that true solvency exists only until 2017. Social Security statements now include notices about the uncertainty of future financial solvency. The CBO’s chart on Social Security is provided below:
Source: Congressional Budget Office. In 2007, the U.S. Treasury Department reported that "reform can be fairer to future generations the sooner that it is initiated as the burden of reform will be spread over more people than in the case where reform is delayed. Generational fairness therefore provides an important reason to reform Social Security sooner rather than later." As presently designed, in present value terms, young people will pay $13.6 trillion more in Social Security payments than they will receive in Social Security benefits. A solution for Social Security: First, take the annual surpluses out of the hands of Congress and invest them in traditional pension plan investments (stocks, bonds, etc.), while giving people the right (but not the obligation) to invest their respective shares, with commensurate adjustments in benefits. In other words, if someone invested his share and did better than the Social Security Trust Fund, his benefits would be increased accordingly. (If he did worse, his benefits would be reduced accordingly.) Such a step should keep Social Security solvent until some time in the mid to late 2020s. Second, hold a national referendum to let the people decide whether taxes should be increased from the current 6.2 percent to 7.0 percent to keep benefits constant, or instead taxes should remain the same and benefits should be gradually reduced by 11 percent. If the result was a benefit reduction (of 11 percent), that reduction could be phased-in over 3 years. Third, for people born after 1985 (who would be impacted by the System’s eventual insolvency), add dollar-for-dollar matching contributions on the first two percent (2%) of an average worker’s salary for tax-deductible contributions to an IRA or qualified plan, in order to produce a benefit that makes up approximately 150 percent of anticipated lost benefits when Social Security becomes insolvent in the early 2050s. A person making less than the average worker could elect to receive the two percent (2%) of matching contributions on a one percent (1%) of compensation contribution to an employer plan or IRA. Matching contributions and their earnings would be forfeited if the contributions that produced them are withdrawn prior to retirement or disability. A phase-in of these matching contributions (i.e. lesser matching amounts) would apply to people born before 1985, but expected to live beyond the insolvency date. Also, the normal retirement age would be pushed back one year for people born after 1985. Beginning in 2052, cash received by Social Security would be pro rated and distributed based on the traditional formula. Finally, annual benefits increases should be tied to a price index tied to senior spending, instead of being indexed by labor cost increases. There are numerous ways to solve Social Security’s problems. The sooner action is taken, the better. When I ran for U.S. Senate in 2004, I met with an employee of the Federal Reserve Bank who held a PhD degree in economics. He said that he thought that, in its present state, Medicare will destroy the economy. The GAO has essentially said the following:
While Medicare needs to be preserved, Medicare benefits need to be cut. One possible solution would be to make Part B more of a 50/50 program (eliminate the deductible and premiums and have half of all services paid by beneficiaries or keep the premiums and deductibles and raise co-pays), while eliminating the Part A deductible ($1,024 for 2008) and adding twenty percent (20%) coinsurance to Part A. The 20 percent figure could be reduced for lower income people (e.g. to 10 percent) and increased for people of greater means (e.g. to 30 percent) in order to alleviate hardships on lower income persons and maintain a 20 percent average. Any surplus assets of Part A should be invested in stocks and bonds, similar to the Social Security surplus assets. These changes could be phased-in over a period of five (5) to ten (10) years. Another option would be to hold the Medicare percentage of the budget or GDP constant, while adjusting deductibles, premiums and coinsurance accordingly. For prescription drugs, all except the catastrophic coverage piece of Medicare Part D should be repealed, and the government should negotiate with the drug companies for group discounts for seniors. According to a January 2008 study published on the Annals of Internal Medicine website, Medicare Part D's prescription drug benefit led to only a seventeen percent (17%) reduction in out-of-pocket costs for 2006. Medicare reimbursements to providers should be pro rata, instead of the current situation wherein reimbursement rates for some procedures are low relative to reimbursement rates for other procedures. Wellness concepts (i.e. less costs for people who do things necessary to be healthy) need to be incorporated. HHS should provide the public with a range of normal treatments for medical problems. All Medicare expenditures should be cost-effective. For example, if a "tried and true" procedure is 80% effective and costs $500, and an innovative new procedure that costs $10,000 is estimated to be 90% effective, Medicare should only cover the "tried and true" procedure. Medicare benefits should begin only upon attaining Social Security normal retirement age. Medicare Advantage Plans should be eliminated. Note that I don't try to "sugar coat" the problems or suggest solutions that hide reductions in benefits. If life expectancies keep increasing, other means of reducing Medicare benefits will need to be considered. (See the health care section for other means of reducing health care costs.) Similar to Social Security, the sooner that action is taken to fix the problems, the better. There are only 4 real solutions to the entitlements problem. They are increased taxes, reduced expenditures, substantially reduced health care costs, increased immigration, or a combination of these 4 things. Regarding increased immigration, see the following Pew Research Center findings:
While I am in favor of a reasonable immigration policy, I am not in favor of immigration growth in the manner or to the extent described in the Pew Research Center Report. Farm Subsidies. Farm subsidies need to be eliminated. They apply to a few crops. Much of the subsidies are paid to corporate farms. According to the Heritage Foundation: "commercial farmers -- who report an average annual income of $200,000 and a net worth of more than $2 million dollars -- collect a majority of farm subsidies." Pressure must simultaneously be placed on all foreign governments to eliminate them as well. See: U.S. News and World Report March 3, 2008 Chart of Hot Commodities. The 3 commodities listed in the chart (soybeans, wheat and corn) receive substantial federal subsidies. The March 3, 2008 article of U.S. News and World Report is titled "Fresh Profits from the Farm." Near its end, the article provides: "So, recession or not, don't expect most agricultural commodities to come back to Earth in the near future . . ." Monetary Policy. Printing of money is not a solution to these problems.
Historically, democracies have collapsed over loose fiscal/monetary policy. Growth of the money supply invariably leads to inflation. See: Ron Paul: What the Price of Gold is Telling Us (PDF). According to the July 26th - August 1, 2008 edition of The Economist: "Lax monetary policy allowed Americans to build up debts and fuelled a housing bubble that had to burst eventually." Growth of the money supply should be limited to reasonable objective standards that coincide with real economic output growth, so that the Federal Reserve Bank and/or federal government does not penalize savers by creating inflation. Limits should exist with respect to the interest rate powers of the Federal Reserve Bank.
Allen Buckley shakes hands with Comptroller General David Walker, Head of the U.S. GAO. |
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