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Archive for April 25th, 2012

The Social Security Board just released its Trustee’s Report, and it’s generated the usual hand wringing about the program’s long-term demise – much of which is perfectly appropriate for reasons I’ve already discussed.

But I’m usually unhappy about the press treatment of this issue.

Here’s some of what Stephen Ohlemacher and Ricardo Alonso-Zaldivar wrote for the Associated Press.

Social Security is rushing even faster toward insolvency, driven by retiring baby boomers, a weak economy and politicians’ reluctance to take painful action to fix the huge retirement and disability program. The trust funds that support Social Security will run dry in 2033 – three years earlier than previously projected – the government said Monday. …Unless Congress acts – and forcefully – payments to millions of Americans could be cut. …Potential options to reduce Social Security costs include raising the full retirement age, which already is being gradually increased to 67, reducing annual benefit increases and limiting benefits for wealthier Americans. Policymakers could also increase the amount of wages that are subject to Social Security taxes. Social Security is financed by a 6.2 percent tax on the first $110,100 in workers’ wages. It is paid by both employers and workers.

There are two flaws with what’s written in this story. One is a sin of commission, failing to expose the government’s dishonest accounting. The other is a sin of omission, analyzing the issue solely through the lens of government finances.

1. The sin of commission is that the story assumes the Social Security Trust Fund is real, when it is nothing but a collection of IOUs. When extra Social Security taxes are collected, the Treasury keeps those monies and spends them on other programs. In exchange, it engages in a bookkeeping exercise and credits the Social Security Trust Fund with some government bonds.

When one part of the government owes another part of the government some money, it is a wash. There’s no pile of assets to finance benefits. Those bonds simply represent a claim on future taxpayers.

This is why politicians can play dishonest games, such as approving a payroll tax holiday and declaring – by waving a magic wand – that this won’t affect the amount of IOUs in the Trust Fund. Just in case you think I’m joking, the AP story notes that “Congress temporarily reduced the tax on workers to 4.2 percent for 2011 and 2012, though the program’s finances are being made whole through increased government borrowing.”

Needless to say, that’s phoniness on top of phoniness. I guess the next step is for politicians to enact legislation adding several zeroes to all the existing IOUs. They can then declare that Social Security is solvent. Problem solved…other than the itsy-bitsy problem that there’s still no money.

2. The sin of omission in the story is that it focuses on the government’s finances and overlooks the implications for households. It is possible, at least on paper, to “save” Social Security by cutting benefits and raising taxes. But such “reforms” force people to pay more and get less – even though Social Security already is a very bad deal, particularly for younger workers.

My video on Social Security reform explains that personal retirement accounts are the only way to simultaneously deal with government finances and household finances in a constructive fashion.

Sadly, neither Obama nor Romney seem interested in this type of pro-growth reform.

By the way, I don’t mean to pick on the Associated Press. The report excerpted above simply happened to be the first one I read. You ‘ll find the same myopic analysis in the Wall Street Journal and Bloomberg, to cite just two of many examples.

In closing, Social Security reform is actually the least important of the entitlement reforms. The long-term fiscal problems caused by Medicare and Medicaid are much larger. This three-part video series looks at the reforms that could address all three programs.

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Many years ago, before it became associated with foreign intervention, neo-conservatism was simply a term for former liberals who migrated to the right. It was said that they had been “mugged by reality.”

We may need a new term, perhaps “Holly-tarians,” for folks in the entertainment industry who have begun to realize the downside of excessive government. I’ve already favorably cited Clint Eastwood for his pro-flat tax views and dismissed Arnold Schwarzenegger on national TV as a de facto statist, but there are other actors who deserve some attention.

I don’t know whether Jon Lovitz is a budding Hollywood libertarian, but (in addition to being a very funny character actor) he certainly seems a bit upset with Obama’s class-warfare approach to fiscal policy.

Since I couldn’t figure out how to embed the file, click on his image and it will take you to an audio file of him ripping Obama, high taxes, and occupy poseurs. Warning, there are plenty of naughty words, including ubiquitous F-bombs.

I will make one correction to his rant. He says that middle-income people have the same deductions that are available to rich people. That’s not really true. Rich people, as I have explained before, don’t rely on wage and salary income like the rest of us. Instead, they earn capital income and business income, which opens the door to a much larger degree of tax planning.

For what it’s worth, this is why Obama’s proposed tax increases won’t raise nearly as much money as projected.

But since politicians doubtlessly will increase spending in anticipation of higher receipts, the net effect will be bigger government and more red ink. In other words, business as usual in Washington.

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