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Americas financial situation is precarious. Over the past eight years our national debt has doubled to $14.5 trillion, and our total unfunded liabilities now exceed an astonishing $114 trillion. Thats $1,115,000 per federal income taxpayer.
Even the most unrepentant spendthrift understands that these debts and liabilities are unsupportable, nor can they be solved by immorally targeting the rich. Instead, we must enact immediate, across-the-board spending cuts, with special emphasis on the biggest components of our financial wreck: Social Security, Medicare and Medicaid. These entitlement programs constitute the majority of our unfunded liabilities, because despite being labeled trusts theyre not actually savings plans.
Rather, the programs are essentially pay-as-you-go schemes. (What little surplus the trusts did accumulate was used to fund other government programs, such that nothings been saved.) Operating this way has two terrible consequences. First, because funds arent saved and invested, they dont generate returns. Thus theres no compounding effect for any of the money thats been withheld. Second, for every year that the programs are in existence, their total future liabilities increase.
Moreover, the programs have grown inexorably over time, partly because they were deemed good in principle, and partly because it takes nothing but a vote to increase benefits.
When Social Security was first rolled out in 1936, the promise was that the program would be very limited, both in terms of contributions and of payout. The most anyone would contribute was $360 per year, including the employers contribution. By 2010 entitlement programs cost employees up to $12,648 for Social Security and an unlimited amount for Medicare (at a rate of 2.9% of salaried income). Promised but unfunded benefits grew even faster, with payouts exceeding inflation and the years of retirement coverage continuously increasing. By some estimates, a typical 66-year-old couple today will get back double what they paid in. Its no wonder that our entitlement programs are often compared to criminal Ponzi schemes.
In the past, a myopic focus on the short-term may have allowed some to gloss over the long-term insolvency of the programs, but thats no longer possible. For were now rapidly approaching the time when the money deducted from employees paychecks is much less than payouts promised to program participants. Already today, approximately half of Medicares funding comes from general tax revenues.
Clearly then, our entitlement programs are an unmitigated financial disaster. But if were to properly deal with them, we mustnt limit our analysis to economics alone. For after all, the deepest arguments underlying the programs arent financial theyre moral. Indeed, much of the reason that theres never been any reform of the programs is that until recently, few would question the moral views of mans nature upon which theyre justified.
What are some of these questions?
As recently discussed here and at length here, one fundamental question pertains to whether men are ends in themselves or means to others ends. I wont recap the arguments, but suffice it to say that when the Founders created this land of opportunity (not of entitlements), they clearly enunciated a new American ideal in which each of us pursues our own happiness. This put them squarely in the camp of treating individuals as ends in themselves. Its a camp to which more and more of us are proud to belong.
Another crucial question is whether, in general, men are capable of thinking and fending for themselves.
This question is best answered by observing people throughout history. Compare the success and can-do attitude of citizens living under freedom to those living under any form of statism, and one has to conclude that when left alone men are eminently capable of thinking and fending for themselves. Its only when the state removes and restricts incentives and choices that men become dependent.
For nearly two centuries, Americans, including millions of penniless immigrants, eloquently proved the point. The world marveled at the typical Americans self-reliance, be it his ability to earn a living, build his house, fix his car, or move up the social ladder. In every domain, when left free to think, act, and enjoy the rewards of hard work, Americans surpassed themselves and the rest of the world.
But advocates of entitlement programs deny this. They view man (except perhaps that special breed which constitutes the governing class) as feeble and incapable. He cant think or plan for himself. He must be forced to act for his own good. Indeed, as we saw with the passage of Obamacare, theres no longer even a pretense of persuasion; we childlike peons are to find out whats in store for us when the laws have been passed. Ever since the New Deal, its this paternalistic view thats guided government policy.
Tragically, however, the paternalists have the causation backwards. In actuality, its their myriad of forced redistribution programs that has fostered a mentality of dependence among the populace. With each new program they implement, they further sever the link between personal action and personal outcomes. Slowly people lose the idea of individual responsibility, and begin to believe that somehow theyre entitled to or have a right to the products of other peoples efforts. As a result, Americas independent spirit is waning.
A final key moral question is whether people should be treated primarily as independent individuals or as interchangeable parts of a larger collective.
Here again, history provides ample evidence. Wherever and whenever theyve been free to do so, people have exhibited differing values, plans, and priorities. Societies succeed by respecting and catering to these individual choices and preferences; they fail when individuals arent even recognized. Take, for example, the contrast between the Free Worlds outpouring of diverse and imaginative consumer products with the Soviets monotonously drab and barren output during the Cold War. Or the Maoists brutal mainland uniformity versus the flourishing trade and production of free Hong Kong. Or, for history buffs, the contrast between ancient Athenian and Spartan cultures.
But the evidence isnt only historical, its also intimately personal. We each have unique dreams and aspirations that require differing paths and choices. No one else, much less the government, can know whats best for us (despite what might be good for a fictional average person). College may be generally worthwhile, but the next Bill Gates might be completely justified in dropping out to start a business. Following a safe and steady career path may be good for most, but for the aspiring actor or musician, success may mean taking a very unorthodox route to that one big break.
Yet those pushing entitlement programs see it otherwise. They have a collectivized, one-size-fits-all approach to man. To whatever extent possible, the government should create and impose uniformity: all children should go to public schools until theyre 16. Patients should only be allowed to take drugs approved by some government board. Everyone should contribute 15% of their income to their future retirement and medical needs each and every year. Everyone should retire at 65.
Part and parcel of this collectivized view is the refusal to see individuals at all. Thus theres no recognition that particular people, engaged in particular processes and efforts, earn and produce wealth. By dropping the individual from their worldview, collectivists dont have to confront the moral question of why they find it proper to take from some to give to others.
The result of these collectivist and paternalistic views is a continuous assault on individuals and their rights. This is borne out in the implementation of our entitlement programs.
For example, consider all those who havent yet acquired sufficient skills and experience for a potential employer to justify both their salary and the additional burden of a 15.3% FICA tax. Entitlement programs price these people out of the labor market, and thereby contribute to our stubbornly high rates of unemployment particularly among the young.
The same type of analysis applies to those employees trying to save enough to start a family or a business of their own. For many starting out, the 15.3% withholding tax represents a huge percentage of their discretionary income. Forcing them to prioritize retirement over other genuine values is inimical to their personal success and happiness. Contrary to the one-size-fits-all mentality, peoples circumstances vary widely, and there are often times in a persons life when withholding for retirement is not a good thing.
Next, consider every responsible person who could have and would have saved and invested the equivalent of his mandatory FICA withholdings had he simply been allowed to. Over the years many wanted to opt out of the entitlement programs to build their own nest eggs, but they were prohibited from doing so in the name of protecting them from themselves. Now, thanks to our paternalistic caretakers, all that money is gone.
But it doesnt end there, for not only is inclusion in these Ponzi schemes mandatory to employees, but when FICA contributions are inadequate as they already are for Medicare every taxpayer is forced to contribute to the deficiency via the general revenues.
As bad as all this is, perhaps the most egregious violation of rights comes in the treatment of future generations. Thanks to a complicit majority, those of voting age have for years now sought to burden (some might say indenture) the next generation with their retirement and medical bills. Its a classic case of trying to have ones cake and eat it too. Voters approve and enjoy all the current year spending to which their withholding taxes go, but still expect someone else indeed a whole generation to provide them with the very goods they refuse to set aside.
Redistributing wealth in any form is bad enough, but theres a certain audacity to forcing the young and not-yet-born to become the primary victims. (This type of conflict is far from an anomaly; collectivist schemes to redistribute wealth always pit one group against another, here the strife they cause is intergenerational.)
Having now established the moral and economic bankruptcy of our entitlement programs, the question becomes: what do we do with them? Given how long the programs have run and how many people have been forced to participate, there can be no easy answer. But to get us started, why not look at an analogous situation? There are obvious differences between Madoffs and FDRs Ponzi schemes, but reviewing how Madoffs is being handled does provide two valuable insights.
First, as soon as Madoffs scam was discovered, it was shut down. Second, a trustee was appointed to return what funds remained, and then to reclaim money from anyone whod knowingly or unknowingly profited from the scheme. In justifying this, the trustee appropriately decided that no one had a right to fictitious profits or other peoples money. Since there was no investment to generate returns, the most anyone could get back was the dollar amount theyd contributed.
With this in mind, here are some initial ideas on how to tackle our entitlement mess:
1) Stop the programs immediately. No one would accrue another cent towards Social Security, Medicare, or Medicaid.
2) Continue to make Social Security payments on the existing schedule, but cap the lifetime payouts to the nominal value of past contributions. For younger people this would be an easy transition as they could plan their retirements accordingly. For some older people this would be more difficult, and in those cases of real hardship, they could be added to the welfare rolls. (Indeed, its been argued that entitlement programs are already a form of welfare.)
3) Convert Medicare and Medicaid to a monthly payment similar to Social Security and cap these to lifetime contributions as well.
4) Fund the remaining liabilities through the general revenues. This is already how SMI and Part D of Medicare are funded, but the difference here is that over time expenditures would taper to zero rather than growing exponentially as they do now.
Ending a fantasy is never welcome for those who want the impossible and who think that all they have to do is cast a vote to make it happen. Nor can there be any easy or completely just solutions to a colossal, multi-decade Ponzi scheme. But the solution outlined above has several merits:
It ends the program.
No one is cut-off cold turkey.
Anyone who lives long enough gets back what they put in (less inflation).
Unemployment is reduced by the elimination of the FICA payroll tax.
People are once again able to prioritize their values and plan for their own retirements and medical care.
Finally, and most importantly, future generations can once again enjoy the freedoms and opportunities that were and should be this nations hallmark.
That isn't the problem. The problem is that the money that is taken in isn't invested properly. If I put money in a 401K over 45 years and at age 66 I only had twice what I put in, I'd be livid (or mad at myself for being stupid).
As my husband and I are “seniors” who have paid into the plan with huge sums all our lives, this plan would be rough. Be as it may, I think I would at least sleep better knowing that the country was getting back on track and that my Grandchildren would not suffer.
I think there are enough of us who would accept the sacrifice. It would take a massive education campaign to explain the need and convince as many people as possible. Think about it..... I don’t want to loose the social security and medicare benefits that I have come to accept as my due, but if I am realistic, I have to know that they are going to stop when the money runs out anyway (long before I die), so best to stop now with a plan for our nation’s recovery. The only negative I can think of is that I would make the sacrifice now and then we would allow liberals back in and they would begin the mess all over again and my sacrifice would have been wasted.
As for politicians..... well, we would be forced to go back to the original idea of no career politicians. A person would be elected to go to congress to get done what is necessary regardless of hurting his “re-election status”, then go home and and let someone else follow in his footsteps.
Unemployment is reduced by the elimination of the FICA payroll tax.
I always considered FICA the percentage I could have negotiated for had not the government stepped in and declared it part of my salary. I think the author is wrong in his thinking that this percentage is whats holding back employment at the bottom end of the scale. Its the minimum wage laws (frequently referred to as living wage.)
These minimum wage laws hit the least skilled the hardest. These least skilled are likely to live in regions infested with Democrats who have made that particular area even less likely for businesses to hire by raising the local minimum (livable) wage even higher than the federal requirement. The problem is that the employer must train the individual before they can even use them. The employer has the added expense of training (sometimes to read or do simple math) and then the employer must overcome the employees entitlement mentality too.
Employers respond by moving out of certain districts and, perhaps, offshore.
Immigrants, people in exempt jobs, and welfare queens have been able to qualify for a SS check at retirement by simply working for a few hours per year for a few short years. My beef has always been that Social Security should be saved for people who have paid into it their whole lives, (25 to 30 years minimum, full time at least minimum wage).
Another problem I have is with disability. The disability check should be smaller than the normal retirement amount. Yet, my father received a much larger check due to his heart attacks and triple bypass surgery in his 50's and continued to draw a much higher amount after 65 than he would have qualified for otherwise. After he died, my mother continued to receive this much higher check even though she is much younger than him and not disabled. Yet that is the rules, although I should add that while he worked my dad paid the max amount every year, and that my mother worked and paid in also.
Also, kill Part D, or replace it with a map to the nearest Wal Mart and a list of their $4 generic prescriptions.
If you don't check any boxes, whatever you've paid into Soc Sec is still yours. Medicare is gone. But now there's no FICA withholding at all. And no general income tax increase to offset the loss in revenue from those who opt out and the increased costs of those who opt in. Let those who use pay.
Step 1 would be to freeze current benefits to those on the receiving end now and end cost of living increases.
Step 2 would be to redefine beneficiaries to only those who have paid into the system, eliminating 25% of the benefit amount over a four year period to those who dont belong.
Step 3 would be to offer a one-time cash incentive buyout to those who are within ten years of being eligible to receive benefits including a provision that they will never have social security taxes taken from their checks again as long as they live. This would lower the long-term obligations being faced by those in the younger generations and allow more of their money to go toward their own private retirement accounts that they would own.
Step 4 would be to redefine benefit levels for those who fail to accept the buyout offer. They have a choice, the buyout or whatever results from the redefinition committee.
Those who are between ten and twenty years away from receiving benefits will have their social security taxes lowered a little to help them cope with the redefined benefit levels they will receive.
Anyone more than twenty years away from being eligible to receive benefits will not be able to collect anything from social security. Their social security taxes will be decreased as current recipients die off over time until one day its simply over and done with.
This approach has everyone giving a little and getting something positive in return. Its the only way to get full buy-in.