A Giant Insurance Company With An Army

With Tax Day now behind us, it’s worth looking, again, at where our tax dollars come from and also how our tax dollars are spent.  The Brown Bear helpfully sent me an article reporting on the Taxpayer Receipt prepared by a nonpartisan group called the Committee for a Responsible Federal Budget.  While the original article is behind the Wall Street Journal website paywall, a Fox Business reprint of the article’s text is available on-line.

The Taxpayer Receipt shows how every $100 in federal taxes was spent in 2016 — and, to give a sense of the trend lines, how that same $100 was spent in 2011, too.  The result supports the conclusion memorably expressed by the line I’ve used as the headline for this piece:  the United States has become a “giant insurance company with an army.”

Why?  Because half of all federal spending goes to Social Security, Medicare, Medicaid, and health programs, and that number is growing, with Social Security spending up 17% since 2011, Medicare up 15.1%, and Medicaid up 25.4%.  Social Security gets by far the biggest piece of the federal spending pie, receiving $23.61 of every $100 in tax dollars.  Medicare places second, with $15.26.

And what about that army?  National defense comes in third, with $15.24 of every $100 in taxes paid.  That amount dropped 22.3% from 2011 to 2016, incidentally.

On the spending side, the lesson from these numbers is clear:  we’ve become an enormous social welfare state, with benefits continuing to expand.  As the percentage increases from 2011 to 2016 indicate, the growing spending on such programs is crowding out our ability to fund other programs, like transportation infrastructure, federal parks, space exploration, and every other federal initiative you can name.  And the increased spending isn’t helping the nagging problem of Social Security solvency, either.  The program is underfunded by at least 20 percent, and under current projections the Social Security Trust Fund (not exactly an accurate moniker) will run out of money in 17 years.

Oh, and here’s another interesting data point — fully $6.25 of every $100 in tax revenue goes to pay interest on the national debt.  That number is growing, too.

On the tax generation side, the individual income tax provided 47% of the $100, with payroll taxes producing 34%, corporate income taxes 9%, and customs duties and excise taxes another 9%.

Now, get back to work!

The Ever-Present Direct Government Payment Solution

Yesterday I saw an article that I think capsulizes what has gone wrong with the direction of our country.  The article reported that Senator Elizabeth Warren, that darling of the progressives, wants to send every senior citizen in the country a check for $580.

Why?  These days, I’m not sure that there actually needs to be a reason for a politician to propose a direct government payment to some constituency or another, but the stated reason is that Senator Warren believes the payment is needed because the cost of living for Social Security recipients increased last year.  Social Security benefit payments already are indexed to inflation, of course, but this year the formula that calculates the cost of living indicated there should be no increase.  So why do we need to make a $580 payment?

Photo credit Tim Pierce 

Well, Senator Warren contends that “Congress’s formula is volatile and does a poor job of reflecting what older Americans actually spend.”  She apparently has more perfect insight into the true spending habits of seniors.  She notes that part of the reason why the index didn’t increase this year is that gas prices fell and argues that seniors don’t drive as much as other Americans.  If there’s an empirical basis for that conclusion, I haven’t seen it, and working stiffs who walk to work, or take public transportation, might properly be skeptical of that claim.  But in any case it makes no sense as a policy matter:  in past years, when gas prices have surged, the existing formula has yielded increases to Social Security payments.  So if seniors, in fact, drive less than other Americans, then in prior years they got a windfall when their benefit payments increased to reflect higher gas costs that they weren’t paying.  In short, even if the cost of living formula is improperly weighted as to gas prices given senior spending habits, the advantages and disadvantages even out.

How did Senator Warren come up with the proposal to send Social Security recipients a check for $580, or about 3.9 percent of their current benefits?  According to the article linked above, it’s not by using the alternative inflation calculation Democrats propose for seniors, which would produce a 0.6 percent increase in benefits.  No, according to Senator Warren 3.9 percent represents the average increase of compensation for CEOs last year.  It’s not clear how that 3.9 percent number was calculated and which CEOs were included in any analysis that was done — was it limited to CEOs of America’s largest public companies, for example, or did it include the CEOs or proprietors of every business in the country? — but in any case there is no correlation between “CEO compensation” and Social Security benefit levels.  You might as well determine Social Security payment increases by looking to changes in the salaries of NBA players, or law school professors, or federal bureaucrats, or the presidents of unions.

So why choose CEOs?  Because people like Senator Warren consider them to be the evil greedheads in our society.  They make lots of money and run impersonal corporations — so they must be evil by definition.  Of course, the CEOs of public companies have enormous management responsibilities, their salaries are set by boards of directors whose members can be removed by shareholder vote and paid by the corporations themselves, and they often get sacked if their company is struggling.  But those realities don’t matter.  Senator Warren’s proposal will allow some people to argue that Congress favors CEOs over senior citizens.  And, of course, there are a lot more senior citizens than CEOs.

This is what we’ve come down to:  politicians like Senator Elizabeth Warren will do just about anything to rationalize the government cutting checks to directly pay off a chunk of the population and build her resume as a populist icon.  She’s not alone, of course, which is why we have a federal government that runs jaw-dropping annual deficits of hundreds of billions of dollars despite taking in record levels of tax revenue.

I’m afraid that the system is broken.

The Jobless Jobs Report

After a few months of encouraging jobs growth, the December employment report was a bummer. It indicated that the economy added only 74,000 jobs — far below the 200,000 that most economists were forecasting. Even though the job growth news was disappointing, the unemployment rate declined, because another 347,000 Americans stopped working or looking for work.

The economists think that December’s job growth number was an aberration that may have been caused by cold weather or other temporary conditions. Let’s assume they are right — although economists seem to be wrong in their forecasts much more often than they are on the money — and the job growth returns to the 150,000 to 200,000 new jobs per month rate we saw for most of 2013. Even if that happens, I think the focus on the job growth number is misplaced.

We need jobs, to be sure — but we also need to have people working and looking for work, which is why the 347,000 number is the more important one. Since the Great Recession began more than five years ago, millions of people have dropped out of the labor market, and the percentage of Americans who are working is at its lowest point in decades. Why have those people given up? What are they doing with their lives? How do we get them back into the job market?

These are not abstract questions. The viability of programs like Social Security depends on a healthy job market in which working Americans are funding the payments to those who are retired or otherwise eligible for benefits. Every person who stops working because they cannot find a job won’t be making that contribution — and the long-term viability of the Social Security system and similar programs becomes more perilous.

The loss of the contributions of millions of expected wage-earners inevitably will have a dramatic impact, and if we can’t figure out how to get people to reengage in the job market, we can expect to see dire predictions of the consequences for Social Security benefits. That inevitability is deeply concerning to us forty- and fifty-somethings who have been paying into Social Security for decades and hope that it is still around when, years from now, we reach the point of retirement.

The Real March Madness

UJ’ s post notwithstanding, every red-blooded American cares about the real March Madness — not some ever-present Social Security funding issues. Social Security problems will be around forever.  The NCAA Tournament, on the other hand, is a one-and-done thing where you live for the moment.  What could better epitomize modern America?

We are glad that the Ohio State Buckeyes, which won another Big Ten Tournament championship, are the overall number one seed.  It looks like the Buckeyes fared well in the brackets, and it looks like the Big Ten did well, too.

We’ll watch to see who wins the play-in game to face the Buckeyes, and we will watch the NCAAs with great anticipation.  We want to see the upsets, the underdogs, the last-second buzzer beaters, and the Cinderella teams.  It is a heck of a lot more entertaining, and uplifting, than thinking about Social Security funding.

March Madness

Nope I am not talking about your typical March Madness, the NCAA basketball tourney. March for me represents the month that I receive my annual social security statement. Anymore I often wonder if it is worth the paper it is printed on.

The first page of the document always talks about Social Security’s future and every year it says action is needed soon to make sure the system will be sound when today’s younger workers are ready for retirement, but in reality another year has come and gone with our politicians in Washington having done nothing about it.

Last year the document said that in 2016 the government will begin paying out more in benefits than they collect in taxes, this year that date has now been revised to show 2015. The statement also says that without changes the trust fund will be exhausted by 2036 as to 2037 mentioned last year.

I’m frankly not surprised by these revisions at all. I was at a party recently where all of my friends are 60+ and every single one of them is planning on drawing on social security at age 62 for one reason or another.

Either it is because of the stock market being flat for the past ten years leaving a lot less in their 401k accounts then they expected.

Or they were the victim of a downsizing and they had to take work at a much lower salary.

Or because they now have medical issues and they need the money to pay the higher deductibles, co-pays and out of pockets that their employers are asking them to pay, not to mention the expense of prescription drugs.

Some just plain say I want to get something out of the program and they don’t know if it is worth waiting til full retirement age to do so because they may get a lot less.

It’s a tough decision because if you start drawing at age 62 as opposed to your normal retirement age your payments are 30% less than they would be if you wait. If I wait to age seventy I can collect a tidy sum of $33,324 annually, but I may get nothing at all – – – – oh the madness !

A Cold, Icy Hand

The Congressional Budget Office is forecasting that the Social Security system will pay out in benefits more than it takes in this year, and the chief actuary of the Social Security Administration seemingly agrees.  The threshold will be crossed much earlier than expected because the current economic recession caused receipts from payroll taxes to decline — due to the high unemployment in the country — while the payouts have increased due to some people taking retirement earlier than was planned.  The imbalance is a matter of some immediate concern, although the chief actuary states that the system has a considerable balance.

The demographics of the Social Security system are inexorable, however.  The reality is that Americans are living longer and longer and therefore are receiving Social Security payments for longer periods than before.  In addition, the forthcoming retirements of millions of Baby Boomers — who all at once will stop contributing and starting receiving — will place an enormous strain on the system.  As a result of these factors, we will have fewer and fewer workers supporting payments to more and more retirees.

For those of us who are at the tail end of the Baby Boom, or younger, news about the solvency of the Social Security system is of the keenest interest.  We’ve faithfully paid into the system for decades, and lately we’ve come to wonder whether we will ever see benefits from those contributions when our retirement date arrives.  We pray that Social Security will be a reliable part of our retirement income planning — and when we read that the system is paying out more than it takes in already, years earlier than was anticipated, it is like a cold, icy hand clutching the heart.

COLA Zero (Cont.)

I’ve previously criticized President Obama for proposed a $250 payment to Social Security recipients, and others, who will not be increasing a cost of living increase in their benefits this year due to the lack of measured inflation.  I’m disappointed, but frankly not surprised, to see that Republicans also appear to be going along with the proposal. They just want to pay for it from existing “stimulus” funds, rather than new borrowing.  In the interests of even-handedness, then, I make this post to criticize congressional Republicans, as well as President Obama and congressional Democrats, for their profligate ways.  Republican leaders may talk tough about fiscal responsibility and reining in spending, but when the time comes to stand up for that principle, in a way that might cost them some political capital, they are no more resolute than the most big-spending liberal — but are a heck of a lot more hypocritical.

American taxpayers should despair about the irresponsible individuals running our national government.  The bailout bills and stimulus bill were like the crack cocaine of spending legislation:  once members of Congress and the Administration saw how easy it was to enact massive, rushed, poorly vetted spending bills, their solution to every economic problem, and every political problem, is to enact legislation that shovels money that the federal government doesn’t have to individuals and entities who don’t really need it.  With all due respect to senior citizens, they are, as a group, no more in need as a result of this recession than any other demographic group.  There is simply no reason to spend $14 billion to give them an additional $250 — other than to curry political favor with a group that votes.

COLA Zero

This year Social Security recipients will not be receiving an cost of living increase in their benefits because inflation has been negative for the year due to the drop in energy prices.  It is the first year since 1975 — when Social Security benefits were pegged to inflation through COLAs — that Social Security benefits will not increase.

Senior citizens and their lobbying arm, the AARP, are a potent political force, and therefore it is not surprising that politicians, including President Obama, have immediately weighed in and argued that the federal government should make a $250 payment to more than 50 million senior citizens, as well as veterans, railroad workers, and people with disabilities.  You can do the math — such a proposal, if enacted, would add more than $12 billion, perhaps as much as $14 billion, to the federal deficit.

I have nothing against senior citizens, but I do object to what seems like blatant pandering.  The current weak economy has thrown millions out of work and affected the standard of living of countless millions more.  Why should senior citizens, who already receive significant sums in federal benefits, receive an additional cash payment from the government?  Social Security benefits have been pegged to inflation for more than 30 years, and seniors have done pretty well as a result.  Take a look at this chart published by the Social Security Administration.  The COLAs have worked to the significant advantage of seniors; in 2008, for example, seniors received a 5.8 percent increase in their Social Security benefits.  I know a lot of people who would have been happy to receive a 5.8 percent compensation increase at the end of last year.

If this is the year when prices don’t increase, and therefore no COLA increase is forthcoming, why should we change our approach?  Why should our already already overwhelming federal deficit be increased by billions more?  If we can’t resist shoveling out more money when a time-honored formula says we shouldn’t, is there really any hope that our politicians will be able to show the resolve necessary to bring our ridiculous deficit spending under control?

The Power of Demographics

Here’s an analysis of the federal budget and unfunded liabilities that should give everyone pause — particularly those who will be working over the next few decades to fund these currently unfunded liabilities. Last night UJ noted that President Obama has shown a refreshing willingness to tackle big problems. Maybe Social Security and Medicare will be next on his agenda.