by | BUSINESS, ECONOMY, HYPOCRISY, OBAMA, SOCIAL SECURITY, TAXES
USA Today had a spot-on analysis of how misleading federal accounting practices are. In a previous article elucidating how Social Security is not Pay-As-You-Go, I pointed out the fallacy of this “system”, as it is a method of hiding future realities. USA Today takes this concept further and examines the entirety of the government’s deficit reporting:
The big difference between the official deficit and standard accounting: Congress exempts itself from including the cost of promised retirement benefits. Yet companies, states and local governments must include retirement commitments in financial statements, as required by federal law and private boards that set accounting rules.
Exactly. Any business profession which failed to take into account future liabilities would face scrutiny from the SEC.
The main argument for exempting future retirement promises into the deficit calculation is that the government has the flexibility to change the amount it is obligated to pay out by tweaking the formula — such as raising taxes or cutting benefits — while businesses do not typically have that luxury. Such a ridiculous premise. The deficit amounts are always in flux and this excuse only serves to hide the reality of extra trillion dollar obligations that no one wants to fix, own up to, or reduce. A few days ago, I did some number crunching on the “official” federal deficit figures. I can’t fathom the results I’d get incorporating the data USA Today compiled.
From the USA Today findings:
•Social Security had the biggest financial slide. The government would need $22.2 trillion today, set aside and earning interest, to cover benefits promised to current workers and retirees beyond what taxes will cover. That’s $9.5 trillion more than was needed in 2004.
•Deficits from 2004 to 2011 would be six times the official total of $5.6 trillion reported.
•Federal debt and retiree commitments equal $561,254 per household. By contrast, an average household owes a combined $116,057 for mortgages, car loans and other debts.
With folks like Dick Durbin perpetuating the lie, it’s no wonder how ignorant much of the population is with regard to proper accounting practices and fiduciary responsibility.
by | GOVERNMENT, HYPOCRISY, SOCIAL SECURITY
As a CPA, it is frustrating to hear Social Security repeatedly being described as a pay-as-you-go (“PAYGO”) system, which gives credence to something that is terribly incorrect. PAYGO is not a system at all; rather it is a method of reporting that hides earned realities, making it totally unacceptable to accounting professions, SEC, and virtually everybody.
The fallacy of calling it PAYGO is that, in reality, the cash includes everything we are getting in, while the cash out doesn’t include the responsibilities due to come. The cash out formula specifically excludes the trillions promised to existing workers in the future, (while their Social Security tax is being collected today). It doesn’t really describe, as part of the expenses being incurred this year, the amount of future retirement benefits being earned and promised.
In contrast, if you give an insurance company today $100,000 to pay you a retirement pension beginning when you retired at the age of 65, the insurance company (logically and legally), the insurance company would report this as an asset offset by a liability to provide $100,000 of payments in the future. The Social Security system, however, reports that as $100,000 of profits in the year received, while the obligation to account for and provide future benefits is incredibly ignored.
When the cash in is received, that money egregiously goes into the government’s general tax revenue account and not in any Social Security Fund (anymore). The Social Security Administration merely collects and records the gross Social Security tax receipts, while the net amount, after deductions, is sent to the IRS. Yet the gross amount recorded is the amount spent by the government, resulting in the staggering deficit we face today. Therefore, it is outrageous for anyone to say that accounting for the system can be done simply by looking at the cash in-cash out.
The biggest problem with this arrangement is that it puts the burden on the wrong people. We have a growing population of retiring taxpayers and the current generation is paying off the obligation the older generation never paid for. It is a Ponzi scheme in which, depending on how you play it, you manipulate who is paying whose obligation. Therefore, the PAYGO method doesn’t work because the government takes 100% of the money they receive and they do not put away; they need it to pay today’s debt to another taxpayer, while today’s payee is stuck holding the bag.
According to the Social Security trustees, in a report released this past fall, unfunded liabilities – those promises made to individuals solely in exchange for amounts they have already paid for – amount to an $18 trillion deficit. Social Security in its present form is unsustainable.
The term PAYGO is used for the lay person; cute semantics – but misleading at best, willfully dishonest at worst. It mischaracterizes the program for the political purpose of allowing politicians to declare that Social Security does not contribute to the deficit, and therefore, should not be overhauled in any major way. But until we agree to start recording Social Security (and Medicare) in budgets in actuarially sound way, we will never be able to honestly and effectively deal with their fiscal crises.
by | HYPOCRISY, SOCIAL SECURITY, TAXES
One of the most common means by which politicians deceive their constitutents is by referring to Social Security as a either a tax or as a retirement system — but usually only as the politics or issues of the day suit them.
We have politicians who stand strongly behind the concept that Social Security must be maintained because it’s a retirement system that people pay for. I certainly believe, as FDR did when he started Social Security, that this is a forced retirement system. As such, it is critical that the entity managing it (the federal government) include Social Security’s actuarially calculated expenses in the current year. By not doing that with their accounting, they are able to simultaneously mischaracterize Social Security as a tax.
If Social Security is truly a retirement and disability plan, it is patently unfair to also consider Social Security collections as a tax that is paid. This is hypocrisy to the citizens contributing toward their retirement. Therefore, when you hear a politician calling Social Security a tax, understand that such a description qualifies it as an entitlement supported the general revenue fund. It can’t be both. The true Social Security Fund, as it is currently being collected and paid out, has been stolen from the taxpayers.
Social Security as a retirement plan has lost its meaning along the way. Yes, benefits promised to recipients have been much more than the amounts taken from pay. For that reason, and for the way by which Social Security is accounted by the government, the system is broken. Nevertheless, we must fundamentally maintain the view that Social Security is the way by which people pay for their own retirement — if we are to fix the imbalances.
The way to lead Social Security back to health is to convince people that the amounts taken from their pay is protected and truly going to their retirement by reclaiming the Social Security Fund so it reflects that reality. Often when it’s realized how little income tax many people pay, the focus typically goes on to how much people do pay toward Social Security. This is not altogether a bad thing. With citizens trying to retire at the age of 65 but often having life expectancies until 90, people need to contribute more money to their retirement.
We need to restore Social Security to a level of sustainability by moving it back to being a path to retirement, view it as a forced retirement system, and hold it accountable in that regard. By modifying the system to be more like present-day 401ks, people can better realize the amount that they are actually putting in. In doing that, more people will ultimately be happy with their Social Security accounts and will also make a mockery of such recent legislation as the payroll tax holiday.
If though, the powers that be continue to insist Social Security is a tax, then the fact becomes that people are really not paying for their own retirement. Therefore beneficiaries are not entitled to anything other that what Congress on a whim decides, because it is subject to the general revenue fund via tax revenue. This would be an outrageous outcome. It turns Social Security into a means by which the people are dependent on government to provide a modest stipend by extracting money from us.
by | SOCIAL SECURITY, TAXES
Dick Durbin has a love affair with Social Security. How else can one man continuously defend Social Security and mislead the country about its insolvency? He incessantly claims that Social Security does not add to the deficit. What he doesn’t tell you is that is he specifically and purposefully excludes accounting for the billions in promised future payments to workers.
And consider this: A company or organization earns $100.00 but spends $200.00. It only has to pay $100.00 now, while the other $100.00 is due for payment in the future. The question then becomes – to what extent is there an obligation to account for a method of repayment, should you have no money to do so? This is the very situation that Social Security is in. In contrast, the SEC is very explicit in saying that any company which tries to avoid accounting for obligation repayment will be considered to have issued a dishonest financial report.
Yet this is exactly what Durbin has been saying for years – when will he be brought to justice and held accountable for his outright lies?
by | ECONOMY, SOCIAL SECURITY, TAXES
Though I applaud the refreshing boldness that Mr. Cain had shown by proposing to America an actual plan for tax reform, there are two serious drawbacks to his solution that show his fiscal naivete. Most critics would point to the unsavory proposal of having both a sales and income tax in force at the same time, making it possible for future Congresses to increase rates and turn us into Europe. But it is actually the plan’s impact on Social Security that is most devastating.
Cain’s plan would eliminate the Social Security tax and related withholding, and cover retirement pensions as a true “entitlement” (welfare) system out of general tax revenues. This is not what Social Security was intended to be as established by FDR; that is, a system in which people paid for their own retirement. Once liberal politicians started promising individuals far in excess of what their contributions paid for, with no actuarial consideration nor funding whatsoever, Social Security’s demise became assured.
In order to overcome its crippling insolvency, Social Security must go back to its original intent — a self-funded retirement plan. This could be achieved by taking any of many possible forms, but must include the concept that individuals themselves are paying for their own retirement; ie, they are putting money into a plan which will become their invested retirement fund.
By contributing more deeply to the entitlement problem and making Americans further wedded to the government, Cain’s tax plan is a failure. Such a solution ultimately departs from his avowed conservativism.
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, 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.
by | GOVERNMENT, HYPOCRISY, SOCIAL SECURITY
With all the pressing issues of the day, it is outrageous that the moderator of Meet the Press, Mr. David Gregory, spent so much time last week badgering House Speaker John Boehner about President Obama’s religious beliefs and citizenship status. Even though Boehner continuously stated he believed the President was a Christian and a citizen, Mr. Gregory was clearly disturbed with the fact that Boehner had not used his position as Speaker of the House to issue or enforce some sort of official statement. When Boehner replied that it was not his job to tell Americans what to think or believe, Gregory question his leadership capabilities.
Contrast Mr. Gregory’s attitude toward Senate Majority Leader Harry Reid during an interview a few weeks ago and the bias is quite apparent. Harry Reid actually proclaimed on Meet the Press that we are not in a crisis in Social Security, that the Social Security system is “arithmetically sound” and that the problem of Social Security was merely fiction — perpetuated by people who do not like government! Yet, on an issue of such monumental factual error, Mr. Gregory left the Senate Majority Leader’s gross distortion of facts completely unchallenged.
The bias and misinformation continuing to be disseminated by weekend political talk shows is deeply infuriating.
