by | ECONOMY, SOCIAL SECURITY, TAXES
Under federal tax law, Social Security amounts that people receive are either 1) not taxable if income is low enough; 2) partially, from 0% to 85% as your income rises or 3) fully if you pass a certain income threshold. Your income is based on a Modified AGI which is basically gross income, subject to certain things such as municipal bond interest income.
Should Social Security be taxed? A fundamental principle of taxation is that you should not be taxed on money on the monies you have already paid. Because people have already paid taxes to Social Security by having it withdrawn from their pay, people have this (correct) assumption that when they get the money back, it should not be taxable.
Interestingly, the current method of taxation calculation was set up 15 – 20 years ago. At that time, it was determined that that the average person would collect in benefits much more than they put in; their costs (the amount they put in) would be likely 15% of the total amount they collect. If that’s correct, it seems only fair you pay taxes on 85% on what you collect.
For instance, if a person paid $15K into Social Security over their working years, and then withdrew 100K during their retirement, they should rightly pay taxes on that amount above and beyond what they put in. The problem is that it would not be fair if you put in 50K and get back 100K. In this case, you should only pay on 50%, not 85%
In the earlier years of Social Security, people didn’t put in anywhere near the 15%, they put in more like 1% of the total they collected, and got it back 100x. But it wasn’t even taxed. Then they changed the laws as they needed more revenue. And since then, the percentage that recipients are getting back as opposed to what they do put in, has drastically changed. Now, the average person is putting in more while getting back less, and the situation will only grow more acute as the Social Security Fund runs out of money. The scenario of money-in, money-out has changed.
Congress, in its infinite capacity to forget things, has never changed that rule resulting in more income being fleeced from the taxpayer.
Social Security began as a trust fund to remain separate for American workers. LBJ raided the trust fund and put it in the government’s general fund – to be spent and never repaid. Social Security was also not taxed until the Clinton Administration, and the FICA withholding income tax deduction was also eliminated.
One might think that the double taxation incurred today supports the egregious Social Security system. But actually, the money goes into the general tax revenue account and not in the Fund. The Social Security Administration collects and records the gross Social Security tax receipts, while the net amount, after deductions, is sent to the IRS. Yet the gross amount is spent by the government, resulting in the staggering deficit we face today. According to the Social Security trustees, in a report released last month, unfunded liabilities amount to an $18 trillion deficit.
Social Security is merely an unsustainable ponzi scheme. Considering the fact that citizens will receive far less – of their own money – than they put in, it is morally reprehensible that Social Security is taxed they way it is.
by | SOCIAL SECURITY
The foremost problem with trying to fix Social Security right now is not money. It is dishonest politics. Our system has deteriorated so much that as soon anyone signals any fiscally prudent idea, cries of “you are starving old people” begin. This tactic has stifled any substantive debate that could be solving the crisis we face with Social Security.
Ever since President Bush proposed privatizing Social Security, the Democrats have prevented honest discussion by knowing that any solution is going to have some pain in it.They pull the emotional card and start preying on our vulnerabilities. Their solution has been to propose nothing, wait for the Republicans to make suggestions, and then demagogue it as a means to discredit it.
I propose that – as a matter of principle and proper political behavior – there should be no deriding of a proposal unless a solution is proposed as well. This would allow debate to ensue and hard questions to be resolved. The media would do well to realize that lively reporting on an attack without reporting the hypocrisy of the attacker, is not competent reporting.
President Obama violates this honest way of doing business and legislating. He has already waved his dismissive hand over the privatization solution, by disingenuously asserting that such a proposal would “[tie] your benefits to the whims of Wall Street traders and the ups and downs of the stock market”, even going so far as to suggesting, “people can lose everything”.
But this is simply untrue. Social Security investments would by construction be conservative compared to other investment options already available. Any private account solutions would restrict allowable investments, similar to the way they are presently and successfully limited for IRAs, 401K and section 529 plans. Rational balanced portfolios would be a required alternative, rather than unrestricted speculation. It is often cited that a stock market crash similar to that of 2008 could decimate one’s privatized Social Security retirement — but this could not be further from the truth. Given the long multi-decade span of investing and the long span of receiving the benefits slowly after retirement, it can be shown that none of these investment strategies could ever have performed as poorly as Social Security has.
President Obama inflames the debate by making erroneous statements, but then he does not even have a better solution to propose — and he is our President. Such poor leadership exemplifies why his current approach to this monumental problem is not working. Delaying the day of reckoning makes it that much more difficult to fix the problem.
by | ECONOMY, NEW YORK, OBAMACARE, POLITICS
Having dinner with Scott Rasmussen a couple weeks ago, we got onto the subject of Social Security. He remarked that people have different ideas about Social Security reform. Some people suggest raising taxes or the retirement age, other people want to go with privatization, still others propose reducing the benefits. Interestingly, Scott had a entirely different idea that is simple but brilliant.
Here’s the scope: Allow each Social Security recipient the latitude to pick how he wants his money accrued and allotted. For instance, if you want to retire at 70, then you can. If you want to retire at 65, so be it. If you want to increase benefits, you can tweak your contributions as such. With each person controlling the time frame and/or amount to be collected and reserved, this solution alleviates that one-solution-fits-all approach to reform that undoubtedly helps some and hurt others.
I think Scot’s idea has great potential.
by | ECONOMY, GOVERNMENT, SOCIAL SECURITY
There is a basic concept that when someone works for somebody, they get paid. If part of the pay is eligible for retirement benefits, then that becomes an immediate obligation of the payer. Even though the payments to the employee will not be made until after his retirement, expenses incurred – and funding for that payment originates – at the time it is earned.
Retirement plans are of two types: defined contribution and defined benefit. Both have the same goal; the difference is in the mechanics. Examples of a defined contribution plan are 401Ks and profit sharing. With these, you put the money aside and the money will grow and be there later. Defined benefit plans include Social Security, most state and local pensions, and union plans like GM. These are plans in which people get retirement from some formula related to their salary. But whether it is a defined contribution or defined benefit plan, in both cases, the obligation to pay those benefits originates at the time it is earned by the employee and it must be funded at that time. In the world of business, lack of appropriate funding of those promises of retirement benefits can land someone in jail.
What would you think about someone who promised to put retirement funds aside and didn’t? They would be crooks. And not only that, when they issued their financial reports, they hid the fact that they were obligated to make all of these payments in the future.
We need to hold these legislators that continue to perpetrate this fraud accountable.
by | SOCIAL SECURITY
In another example of reckless rhetoric, Senator Dick Durbin recently stated on Meet the Press that Social Security does not add one penny to the deficit. Of course, this idea is only technically true in the sense that the payments to fund Social Security are being stolen from present day workers who have every right to believe and expect that the money taken out is set aside for retirement pensions. Only someone who has no contact with economics, accounting or the actuality of funding an organization could be as boldly ignorant as Mr. Durbin has been.
Even worse, Durbin went on to claim that untouched, Social Security will make every promised payment for more than 25 years. What an outrageously incorrect statement. There is no money available from any actuarily sound fund of money from which these payments can be made. Social Security is bankrupt and Mr. Durbin knows it. It is despicable that a Senator can boldly lie to the public without rebuke on such an important topic as Social Security.
