debt

Monetary Reform, Part II | Lending and Interest

/ L. M. Walker / 2 Comments

– By: Larry Walker, Jr. –

The interest that U.S. taxpayers pay on behalf of the federal government, for the privilege of having money in our wallets, and to cover irresponsible deficit-spending, is only the beginning of our woes. When it comes to our personal credit needs, American citizens are once again shackled and sold down river. With regards to borrowing and lending, we may be able to take a few pointers from Islamic banking. I know what you’re thinking, but just bear with me. Let me make one thing clear, I am a Christian, and I do not agree with any of the principles of Sharia, except for those it shares in common with the Bible. Upon these, I think most humans can agree. For in this case, we are not talking about matters of heaven or hell; we’re talking about money.

“If one of your countrymen becomes poor and is unable to support himself among you, help him as you would an alien or a temporary resident, so he can continue to live among you. Do not take interest of any kind from him, but fear your God, so that your countryman may continue to live among you. You must not lend him money at interest or sell him food at a profit.” ~ Leviticus 25:35-37

Interest – Sharia prohibits the charging of interest (known as usury) for loans of money. The Bible is also very clear on the matter of usury. The Biblical term for usury, neshek, is strongly negative, coming from a root whose basic meaning is to strike as a serpent. Islamic banking has the same purpose as conventional banking: to make money for the banking institute through the lending of capital. But because Islam forbids simply lending out money at interest, Islamic rules on transactions have been created to avoid this problem. The basic technique to avoid the prohibition is the sharing of profit and loss, via terms such as profit sharing, safekeeping, joint venture, cost plus, and leasing.

Loans in pre-industrial societies were made to farmers in seed grains, animals and tools. Since one grain of seed could generate a plant with over 100 new grain seeds, after the harvest, farmers could easily repay the grain with “interest” in grain. When an animal was loaned, interest was paid by sharing in any new offspring. What was loaned had the power of generation, and interest was a sharing of the result. Interest on tool loans would be paid in the produce which the tools had helped to create.

Monetary problems didn’t surface until societies began using metals, like gold, as forms of currency. When interest was allowed to be charged on loans of metals, with the interest to be paid in more metal, life became more difficult, particularly with agricultural loans. The problem is that inorganic materials, not being living organisms, have no means of reproduction. Thus, any interest paid on them must originate from some other source or process. The same is true with paper money today.

For example, if you borrow money to start a farming business, the only way to pay it back is if you are able to sell your crops to others in exchange for sufficient paper money to cover your expenses, including principal and interest. If your crops happen to get wiped out one season, then most likely, so do you. Even if you borrow money to start any kind of business, and are successful, you must make enough profit to cover the principal and interest payments on the debt. And in case you don’t know it, principal repayments are never deductible for income tax purposes. So a business with $100,000 in profit, which uses it to repay its debt, must then come up with additional money to cover the income taxes thereon; leading to the incurrence of more debt. What we have in the United States is a system of winners and losers, where the big banks always win, while the citizens of the Republic mostly lose.

Mortgage Loans – Let’s say you decide to buy a home for $110,000 by paying $10,000 down, and taking out a $100,000, 30 year – 5% fixed rate mortgage. When the term is over, you will have paid the lender $193,256, plus your down payment, for a total of $203,256. What you get in exchange is the privilege of living in a home which may or may not be worth its original value of $110,000 in 30 years. If your home loses value midstream, as far as the lender is concerned, “too bad”. If you miss, or are late on a payment, the lender will charge you penalties and destroy your credit, preventing you from obtaining future loans. If you get too far behind, the lender will put you out on the street. It doesn’t matter how good your credit was before your troubles, or how long you made timely payments, you will be destroyed. The lender will then confiscate your home, and sell it to someone else, pocketing any profit in the process.

In an Islamic mortgage transaction, instead of loaning the buyer money to purchase a home, a bank might buy the home itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the bank’s profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The property is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabahah.

An innovative approach applied by some banks for home loans, called Musharaka al-Mutanaqisa, allows for a floating rate in the form of rental. The bank and borrower form a partnership entity, both providing capital at an agreed percentage to purchase the property. The partnership entity then rents out the property to the borrower and charges rent. The bank and the borrower will then share the proceeds from this rent based on the current equity share of the partnership. At the same time, the borrower in the partnership entity also buys the bank’s share of the property at agreed installments until the full equity is transferred to the borrower and the partnership is ended. If default occurs, both the bank and the borrower receive a proportion of the proceeds from the sale of the property based on each party’s current equity.

Business Loans – U.S. banks lend money to companies by issuing fixed or variable interest rate loans. The rate of interest is based on prevailing market rates and is not pegged to a company’s profit margin in any way. U.S. banks currently borrow the money they lend to businesses at rates as low as 0.25%. When was the last time you saw an ad for small business loans charging 0.50%, which would give the lender a 100% return? The fact is that banks are still charging rates of between 4.0% and 30.0%, in spite of the cost of money. When prevailing interest rates are too high fewer businesses are able to borrow, thus inhibiting economic growth; and when rates are too low, profit-dependent banks are less willing to lend, also hindering the economy at large. If a business with a profit margin of just 5.0% could only borrow money at interest rates of 10.0% or more, why would it bother?

Islamic banks lend their money to companies by issuing floating rate loans. The floating rate is pegged to the company’s individual rate of return. Thus the bank’s profit on the loan is equal to a certain percentage of the company’s profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded. This practice is called Musharaka.

Risk – Under our present system, if a company has a bad year and misses a few payments, it may be forced into bankruptcy. In the U.S. the risk of failure is placed squarely on the back of entrepreneurs. If a small business owner defaults on a loan, he is run out of business and his future ability to borrow is destroyed. In the case of government guaranteed loans, which are backed by the full faith and credit of you and I, the banks get their money back, while the failed entrepreneur, having been made a personal guarantor, is hunted down by his own government, like a fugitive, for the rest of his days.

Islamic banks also lend through Mudaraba, which is venture capital funding to an entrepreneur who provides labor while financing is provided by the bank so that both profit and risk are shared. Such participatory arrangements between capital and labor reflect the Islamic view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced distribution of income and not allowing the lender to monopolize the economy.

End Usury, Now – Our monetary system needs a complete overhaul. But so far, the only reforms offered have been to further back big banks, at the expense of U.S. citizens. This is not acceptable. Until there is real reform, you and I, our children and grandchildren will remain enslaved. Backing our currency with gold is not the answer. The first step is for the government to begin printing its own fiat currency. The second step is to outlaw the practice of charging interest.

References:

Islam in the Bible – Usury

Islamic banking

Leviticus, Chapter 25

Monetary Reform, Part I | End the Debt

/ L. M. Walker / Leave a comment

~ By: Larry Walker, Jr. ~

The rich rule over the poor. The borrower is servant to the lender. ~ Proverbs 22:7 ~

Free Our Money – So what’s the problem? You know, you think about it all the time. It’s debt, debt, debt! The way our economy is set up now, the only way it can grow is through incurring more debt, either through government, business or consumers. Our economy cannot grow without increasing its money supply, and the only way that new money can be introduced, under the present monetary system, is through debt. But growth through debt really amounts to nothing more than spending next year’s income today. It’s a vicious cycle, one which has reduced millions to poverty, and to lives of indentured servitude. It’s time to end the debt, now. I believe that most good ideas are simple, and that any lasting reform must, like our very Constitution, be rooted and grounded in Judeo-Christian Principles.

There are two ways to approach monetary reform. One involves making changes to our current system, and the other involves a complete overthrow, starting over from scratch. I believe that one method is practical while the other is not. I am from the school of thought that believes it impossible to make the necessary reforms within the present corrupt system. Our monetary system has failed. Revolution is the only solution.

Under the current debt regime, there are two primary ways that our money supply is increased.

  1. The first way is that the Federal Reserve (the Fed) prints new money and loans it to the federal government by purchasing Treasury Bonds through Open Market Operations. The cash then enters the economy by being deposited into regional Federal Reserve banks accounts. Thus, the federal government, as it is today, can only create money through borrowing.

  2. The other way that money is created is through fractional-reserve banking. Under this system, Federal Reserve member banks are allowed to loan out at least ten-times the amount deposited with them in checking and savings accounts. When fewer loans are demanded, the supply of money contracts. It’s only when loan demand is high that the money supply increases.

Let’s face the facts. Consumers are tapped out. Most Americans have lost the equity in their homes and are buried in consumer debt. It’s not that banks aren’t willing to lend, it’s that nobody is willing to pay 4.0% to 30.0% interest on money the banks borrow at 0.25%. The system is broken. So today, our economy is being propped up mainly through deficit-financed government spending, but this will not continue. We have already passed the point of no return. This mark was decisively breached in early 2010, when per capita national debt surpassed per capita personal income. At this point there is no longer enough income to support the federal debt. Every additional dollar the government borrows merely expands the base of government-dependent citizens. If the course is not altered today, the government will eventually run out of other people’s money, leaving its citizens vulnerable to enslavement by an alien entity. So the problem is the federal government’s inability to create new money without incurring debt. If we can fix this, the problem is solved.

What happens when population growth outpaces its money supply? As an example, let’s say we have a two person society comprised of you and me, with a total of $1,000 in our economy. Our per capita money supply is $500. Now let’s say two more people cross over the border and become members of our society. Without an increase in the money supply, our standard of living will decline to $250 per person. This is also known as a recession or even depression. Recessions occur coincident with declines in the supply of money, as there is no longer enough to go around. Economic activity declines without an ability to increase the money supply. In order to maintain our standard of living, our money supply will need to increase from $1,000 to $2,000.

As long as there is population growth, the supply of money must constantly increase. In fact, regardless of population changes, in order for there to be any meaningful economic growth at all, a society demands steady increases in its supply of money. That’s our dilemma today. With U.S. population increasing by approximately 1.0% per year, the money supply must keep pace. However, the only way that the money supply can increase, without reform, is through debt.

Who’s to blame? – We the people have knowingly or unknowingly subscribed to a monetary system in which the Federal Reserve is our master, and we are its slaves. In this respect, we are not truly free. Some blame the bankers; others blame politicians; while still others blame more affluent taxpayers such as small businessmen or corporate jet owners. (By the way, corporations and their assets, including jets, are owned by shareholders; so if you own stock either directly, or through a retirement plan, you might be a corporate jet owner yourself.) In reality, you and I are to blame. We are the ones who have elected ignorant and corrupt politicians, who have allowed our government to maintain a flawed monetary policy.

When our monetary system achieved total failure in 2008, we had an opportunity to institute real reform, but instead we were conned into bailing it out, again at our own expense. The present administration promised change, but instead has delivered more chains. Next time will be different. We know that if we want a different result, we have to try something different. Any political candidate who doesn’t have a monetary reform plan which promotes the creation of debt-free money (fiat money), and solid debt reduction, and balanced budget plans is dead in the water.

“The ax is already at the root of the trees, and every tree that does not produce good fruit will be cut down and thrown into the fire.” ~ Matthew 3:10

Who’s Getting Hosed? – Under our present monetary system, the federal government, through the Treasury Department, prints Federal Reserve Notes and hands them over to the Fed. The Fed then lends the same money back to the federal government in exchange for U.S. Treasury Bills, Notes and Bonds. The Fed then sells some of these Treasury obligations at a discount to its member banks, investors, and foreign governments. The interest paid on these bills, notes and bonds is paid from income tax revenue collected off of the backs of U.S. taxpayers.

If the federal government could ever pay off its debt and balance its budget, it wouldn’t need to borrow as much. With the national debt already in excess of $14.4 trillion, it has become a burden for our government to meet its real responsibilities. This is the main reason why the national debt matters. As politicians do battle over whether or not the debt ceiling should be raised, in this case, to cover its own irresponsible spending, a more critical issue, the creation of money has been left in the hands of the Fed. Under our current system, the money supply cannot increase without adding to the debt. But if there was a way that the federal government could simply issue its own debt-free currency (fiat money), rather than Federal Reserve Notes, it would never have to borrow money from anyone ever again.

The more the federal government borrows, the more it binds U.S. taxpayers to cover its interest payments. It makes you wonder why a U.S. citizen would ever invest in Treasury obligations at all. I mean, in a way, the same citizen who buys this debt is also responsible, through income taxes, for paying the very interest he or she receives. And to make matters worse, the same citizen is taxed again on the interest earned. It’s a spiral of negative returns in which those who actually pay income taxes and invest in government debt are the losers; while the Fed, its member banks, and foreign investors can’t fail.

The Fed also loans some of this borrowed money to its member banks and to other “too big to fail” entities at interest rates currently as low as 0.25%. The banks then provide you and I, and our businesses with loans, or allow us credit, for the privilege of paying them anywhere from 4.0% to 30.0% interest, plus other transaction fees, pocketing the difference as profit. Banks even allow us to open checking or savings accounts for the additional privileges of earning next to nothing, and paying them even more in transaction fees, for the use of our own money. So we pay interest on debt just so the government can issue currency, we pay interest on the national debt, and then we pay more interest for banking and loan privileges. These are hidden taxes of which certain politicians, those who are always harping about higher taxes, seem to be completely ignorant. But we know better.

End the Debt, Now – Why does the federal government print money, give it to the Federal Reserve, and then borrow its own money back at interest? Couldn’t the government simply print United States Notes, rather than Federal Reserve Notes, and spend it into the economy without a middle man? According to Bill Still, yes it can. In fact, Mr. Still says that if the government took this route, it could repay all of its existing debt within a year or two, by simply replacing the old notes with new ones. For more on this, I recommend that you watch his video entitled, The Secret of Oz.

“There is no retreat but in submission and slavery! Our chains are forged!” ~ Patrick Henry

Other References:

Oz Economics

Saving Our Way to Prosperity

/ L. M. Walker / Leave a comment

Yes. You Can.

– By: Larry Walker, Jr. –

According to Barack Obama, “We can’t simply cut our way to prosperity.” Prior historical references: None. Upon hearing such an absurd statement, and being of the homo economicus persuasion, my first instinct is to define what it means to me, and then to determine whether it has any relevance in my life. If we are honest, we must each define what the word prosperity, or rich, means to us. Only after we have defined its meaning are we able to chart a course.

In the WikiHow.com article, “How to get rich,” there are seven steps, the first of which is to define the word “rich.” Obviously it means different things to different people. According to Obama, the word rich means making more than $250,000 per year. A more formal definition of prosperity is “to be fortunate or successful, especially in terms of one’s finances.” For others it means achieving a certain level of prestige, or being able to afford a comfortable retirement, neither of which necessarily involves making $250,000 in a year. How would you define prosperity?

Homo Economicus

The term Homo economicus, or Economic human, is the concept in some economic theories of humans as rational and narrowly self-interested actors who have the ability to make judgments toward their subjectively defined ends. My definition is that men and women are primarily interested in making judgments which will improve their own economic condition. My goal is not to be a millionaire, although that would be nice. My goal is to be able to meet my obligations in life and to remain self-sufficient upon retirement.

In John Stuart Mill’s work on political economy, in the late nineteenth century, he further defined this economic man as “a being who inevitably does that by which he may obtain the greatest amount of necessaries, conveniences, and luxuries, with the smallest quantity of labor and physical self-denial with which they can be obtained.” I have to admit that my goal is also to get the most out of life with the least possible amount of labor, but that’s not exactly how it’s been working out. I work much too hard. What’s your goal?

Yes. You can.

Notice that Obama uses the words, “we and our”, as in, “We can’t simply cut our way to prosperity.” Exactly what does that mean? The last time I checked, “we” wasn’t responsible for paying my bills. Actually, you and I just might be able to cut our way into relative prosperity. But I don’t believe that the federal government can tax and spend us into a utopian paradise. If this were possible, wouldn’t we already be there?

Returning to “How to Get Rich,” the 4th Step is entitled, Delay Gratification, under which we find the following guidance on the path to prosperity:

  1. Are you spending money on things that won’t get you rich?

  2. Are you sticking with a job that doesn’t make that much money to begin with?

  3. In order to get rich, you’re going to have to give up some of the things you enjoy doing now, so that you can enjoy those things without restriction later. For example, you might like having free time, so you give yourself a few hours a day to do nothing. But if you were to invest those few hours into getting rich, you could work towards having 20 years of free time (24 hours a day!) with early retirement. What can you give up now in exchange for being rich later?

  • Cut expenses
  • Get a job that pays more or get a promotion
  • Downgrade or give up your car
  • Downgrade your apartment or house
  • Reallocate your spare time

Although there is an element of truth in the statement, “we can’t cut our way to prosperity”, the fact is that you and I can, individually. The act of cutting, or reducing, my personal expenses causes me to save money. So to cut means the same as to save. By substituting the word ‘cut’ with ‘save’ in Obama’s original comment; what he is really saying to me is that, “We can’t simply save our way into prosperity.” Why, that’s preposterous! It’s as if he is implying that I should empty my emergency fund and retirement savings, spend it all today, and I will be magically ushered into prosperity. But if I did that, then I would be forced to borrow huge sums of money when ready to invest in furtherance of my dreams. But this won’t work out too well, especially since banks normally require a down payment.

The 5th Step in How to Get Rich is entitled, Save Money. It states, “You’ve heard the phrase “It takes money to make money.” So start socking away the extra money you’re making now that you’ve delayed gratification as outlined previously. After all, what’s the point in giving up the stuff you like if you have a hole in your pocket? Start building a “get rich fund” at the bank. Always pay yourself first. This means before you go and blow your pay check on a new pair of shoes or a golf club you don’t need, put money aside in to an account that you don’t touch.” This makes much more sense to me than the idea of squandering my savings, as implied by Obama. So for me, yes, I can save my way into relative prosperity, and so can you. The federal government could do the same, after paying off its massive $14.4 trillion debt, that is. This ought to be Obama’s goal. Yes. You can.

No. Government Can’t.

He jabbers on, “We need to do what’s necessary to grow our economy; create good, middle-class jobs; and make it possible for all Americans to pursue their dreams.“

There he goes with that “our” stuff again. We need to do what’s necessary to grow our economy. That sounds appealing, but fortunately my economy is not yours, and yours is not mine. My economy is comprised of my household, my family, my business customers, vendors, lenders, employees and other obligations. I don’t know where Obama is coming from, but there is one way that the federal government could help to grow my economy, and that would be to stop taking as much of my hard earned money in taxes. That would help quite a bit. If I didn’t have to pay any taxes at all, my economy would be doing pretty well. Try that one on for size! If the government concentrated more on how to take less of my money, then my economy would improve, and so would yours. This simply requires cutting the size of government.

Next, he says that we need to create good, middle class jobs. What exactly is a good, middle class job? Does it require picking up a shovel? The idea of having a good, shovel-ready, middle class job doesn’t exactly mesh with prosperity, at least not in my book. Thanks but no thanks. I don’t really want a middle class job; I would rather have more freedom and prosperity. I don’t believe that group effort is required in job creation. I believe that one economic man can create many jobs. In fact, the true economic man is going to need a lot of help upon reaching his own prosperity. He’s going to need employees, suppliers, accountants, attorneys, financial planners, housekeepers, gardeners, service people, travel agents, retailers, restaurants, auto dealers, gas stations, chauffeurs, etc. It seems to me that Obama’s goal should be to inspire more economic men and women, and greater prosperity, rather than higher taxes, and more mundane, government-manufactured, temporary, shovel-ready, middle class jobs.

Finally, Obama says that we need to make it possible for all Americans to pursue their dreams. But all that’s required here is freedom. Are we not free? As long as I am free, I can do anything, and so can you. Nothing can stop me from pursuing my dreams, yet my dreams are not yours, and yours are not mine. Maybe your dream is to manufacture a product, while mine is to provide a good quality affordable service. Someone else’s dream might involve freeloading off of the toil of others. Just as the word prosperity means different things to different people, our dreams are not all the same. “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.” The federal government didn’t give these rights to me, and it can’t take them away. You sir, cannot spend our way into life, liberty, and the pursuit of happiness, they are the gift of God.

The bottom line: Yes we can save our way to prosperity. That’s how it works in this Universe. It takes money, to make money. Here are a few more steps we can follow along the path to prosperity. Step 1: Cut discretionary government spending back to 1996 levels. Step 2: Force the federal government to start making principal payments against its debt. Step 3: Abolish every new governmental regulation established since January of 2009. Step 4: Vote against Barack Obama and his queer notions about the economy.

Want Tax Hikes? Push the Reset Button

/ L. M. Walker / 1 Comment

Cut Government Spending Back to 1996

– By: Larry Walker, Jr. –

Dialing the top income tax bracket back 15 years without a reciprocal cut in government spending does nothing to preempt the debt bubble. However, if the Golfer in Chief and his inept cohorts remain stuck on reinstating those bygone tax rates, then all taxpayers must necessarily stand as staunchly fixated on cutting the size of discretionary government spending, back to 1996 levels if necessary. Those not willing to regress on government spending really need to stop kidding themselves into believing the silly notion of resurrecting 15 year old tax brackets as a serious solution. If you are confounded, then more than likely you have never heard of inflation, don’t purchase goods and services with your own money, and lack the skills required to balance a simple checkbook. In other words, those who don’t comprehend would better serve the public by resigning from government and returning to their own ruinous private lives.

The fallacy of anointing $250,000 as the top tax bracket of the 21st Century is actually based on 20th Century income tax tables. What worked in 1996 won’t work today. What Barack Obama and fellow democrat party residue from the last shellacking are really talking about is reimposing the top income tax brackets of 1996, which applied some 15 years ago. Omitted from this quandary are two key factors: inflation and the level of discretionary government spending in 1996.

  1. Inflation – As far as personal income, $250,000 in 2011 had the same buying power as $175,085 in 1996. And $250,000.00 in 1996 has the same buying power as $356,969.06 in 2011. Annual inflation over this period was 2.40%. Thus $250,000 isn’t what it used to be.

  2. Discretionary Government Spending – Discretionary spending in 1996 was $532.7 billion compared to the 2012 budget estimate of $1,340.3 billion ($1.3 trillion). If they want us to acquiesce to 1996 tax brackets, then shouldn’t the government backtrack to 1996 discretionary spending as well?

In terms of both inflation and discretionary government spending, the budgeted 2012 discretionary spending level of $1,340.3 billion had the same buying power as $938.6 billion in 1996. And the $532.7 billion actually spent in 1996 has the same buying power as $760.6 billion today. If democrats insist on hiking taxes on those making over $250,000, then a simple compromise would be for them to agree to cut discretionary government spending by $579.7 billion in 2012 ($1,340.3 minus $760.6). This would bring both government spending and income tax rates in line with the late 20th century. But the right thing to do under Obamanomic theory is to simply return to actual 1996 discretionary spending. This requires cutting the federal budget by $807.6 billion, as shown below.
From General

This means cutting National Defense by $463.9 billion, International Affairs by $46.1 billion, General Science, Space and Technology by $15.3 billion, Energy by $10.2 billion, Natural Resources and Environment by $19.2 billion, Agriculture by $2.9 billion, Commerce and Housing Credit by $557 million, Transportation by $3.5 billion, Community and Regional Development by $14.2 billion, Education, Training, Employment and Social Services by $66.8 billion, … etc…

Don’t worry about who gets hurt or rewarded, just cut it, and then tell governmental agencies, “Here’s your budget, now you figure out how best to spend it.” Problem solved. Next question!

“Knowledge is an inherent constraint on power.” ~ Thomas Sowell

“Collecting more taxes than is absolutely necessary is legalized robbery.” ~ Calvin Coolidge

References:

http://www.dollartimes.com/calculators/inflation.htm

http://www.gpo.gov/fdsys/pkg/BUDGET-2012-TAB/xls/BUDGET-2012-TAB-8-7.xls

Off Grid Solutions 2: The Adjustable Principal Mortgage

/ L. M. Walker / 1 Comment
~ By: Larry Walker, Jr. ~
My previous advice proffered the simple concept of a Mortgage in-Kind Exchange. If you didn’t like that notion, perhaps you will like this one. An Adjustable Principal Mortgage is a solution that would allow a mortgage company to temporarily write down the principal amount of a mortgage to an amount comparable to the contracts original debt ratio, and subsequently make adjustments every third year as home prices fluctuate. Once the value of the home equals or exceeds its original cost, no further adjustments are required. Neither the length of the loan or its interest rate is adjusted, nor may monthly principal and interest payments ever exceed the original amount.
An Adjustable Principal Mortgage would spread risk equally between mortgagor and mortgagee. When housing prices return to normal, both the lender and homeowner will have met their objectives; for the former a trustworthy return on investment and the latter a reasonable debt ratio. If housing prices continue to slump, mortgage companies and their investors will lose an amount comparable to the decline in value of the underlying asset, while homeowners losses are likewise mitigated. The value of all mortgage backed securities will be known at any point in time, rather than the present state of uncertainty. The idea is modeled after the Biblical proverb of the unrighteous steward.
The Unrighteous Steward ~ Luke 16:1-9
(1) “There was a rich man who had a manager, and this manager was reported to him as squandering his possessions. (2) “And he called him and said to him, ‘What is this I hear about you? Give an accounting of your management, for you can no longer be manager.’ (3) “The manager said to himself, ‘What shall I do, since my master is taking the management away from me? I am not strong enough to dig; I am ashamed to beg. (4) ‘I know what I shall do, so that when I am removed from the management people will welcome me into their homes.’ (5) “And he summoned each one of his master’s debtors, and he began saying to the first, ‘How much do you owe my master?’ (6) “And he said, ‘A hundred measures of oil.’ And he said to him, ‘Take your bill, and sit down quickly and write fifty.’ (7) “Then he said to another, ‘And how much do you owe?’ And he said, ‘A hundred measures of wheat.’ He said to him, ‘Take your bill, and write eighty.’ (8) “And his master praised the unrighteous manager because he had acted shrewdly; for the sons of this age are more shrewd in relation to their own kind than the sons of light. (9) “And I say to you, make friends for yourselves by means of the wealth of unrighteousness, so that when it fails, they will receive you into the eternal dwellings.”
It’s purely a matter of survival for homeowners, bankers, investors, the U.S. economy, and the nation as a whole. The unrighteous steward did what he had to do to survive. Presently, no one in the United States is doing anything to address the underwater vortex threatening to destroy the livelihood of millions of American homeowners. To date, the actions taken by both government and the private sector have done nothing to avert a looming global economic collapse and worldwide depression.
The Problem
Jane is a 50 year old Georgia resident. She is married with two children. Jane purchased her home six years ago for $333,333. She initially made a down payment of $33,333 and took out a 30-year / 5% fixed rate mortgage of $300,000. She currently has an outstanding mortgage balance of $270,290, and the appraised value of her home has fallen to $150,000. If she were to sell the home today, she would incur a loss of $183,333, which is not deductible for tax purposes. Jane is not in default and can afford her mortgage payments, but one of the things bothering her is that her debt ratio, which started out at 0.90, has risen to 1.80. A debt ratio is calculated by dividing the amount of mortgage debt by the value of the home. A debt ratio of less than 1.0 is considered healthy, while a debt ratio greater than 1.0 is indicative of a loan at risk of default.
Jane feels cheated. By the sixth year, her debt ratio would have been 0.81, but for the decline in the value of her home. Her blood especially boils when she reads stories about homeowners cutting deals with lenders to stay in their houses literally for free, or of others who are in default yet have remained in their homes even after missing a year or two of payments. Jane has a bad, bad feeling that home prices won’t be improving within her lifetime, and fears that she may be foolishly throwing her money away. She would love for her mortgage company to reduce the principal balance of her loan, but that’s probably not going to happen, at least not until after a foreclosure.
So I will pose the same questions that I did last time, even though some of you took issue. “Does it make sense for Jane to sit there, stuck in a home that she can’t sell or refinance; making a payment every month on what she knows is a bad investment?” “Would you continue to invest $333,333 in an asset that you thought would be worth less than half in the future?” Although housing prices may rise over time, they didn’t reach their previous peak overnight, and life is finite. Jane is 50 years old, and doesn’t have another 30 years to waste. Since Jane doesn’t qualify for a loan modification, what options does she have? Presently, there doesn’t appear to be any solution other than to close her eyes, mask her feelings, keep paying, and go down with the ship.
Solution: The Adjustable Principal Mortgage
An Adjustable Principal Mortgage would allow the mortgage company to agree to temporarily write down the principal amount of a mortgage to an amount comparable to the contracts deemed debt ratio, and subsequently allow the principal to be adjusted every third year as home prices fluctuate. Once the value of the home equals or exceeds its original value, no further adjustments are required. Each time the principal is reset, it is re-amortized over the number of years remaining in the original term. The home is re-appraised at the end of each third year, and a new principal amount is calculated based on the ending debt ratio, multiplied by the current value of the home. At the end of the original term, any remaining balance is cancelled and the debt is considered paid in full.
The home may not be sold until its value equals or exceeds its original cost, without incurring a prepayment penalty. The penalty is calculated by subtracting the amount of all principal payments made to date, from the amount of debt owed prior to commencement of the Adjustable Principal Mortgage. In other words, anyone who opts out early will not be able to escape without having to make up the difference between the original debt and the adjusted principal. When the value of the home equals or exceeds its original cost, the homeowner may sell without penalty, paying off the balance at that time.
How it Works
A home appraisal is required at the beginning of the term, and every third year thereafter. At the end of the sixth year, Jane’s home had a fair market value of $150,000 based on a 55% decline in value. That being the case, the principal amount of the loan is written down to what Jane’s debt ratio would have been in that year had her home not declined in value. In this case, had the home not lost value, Jane’s debt ratio would have been 0.81 (see ‘Year 6 Base’ in the table above). The principal amount of the loan is thus reset to $121,631 (150,000 * 0.81) [see note regarding rounding at the end]. Not only is the principal reset to $121,631, but the loan is re-amortized over a 24 year period (the original 30-year term minus the first 6 years). This results in a monthly principal and interest payment of $726 for the next three-year period.
Jane feels better already. There is no longer any reason to doubt. With her monthly payments reduced from $1,610 to $726, she now has an extra $884 to save or spend, both of which will help out her family and the ailing economy either way. At the end of the ninth year, Jane’s debt ratio is a healthy 0.75, and a new home appraisal is required. The new appraisal concludes that the home has increased in value by 50% to $225,000. Thus, the principal will be increased in the subsequent year.
In the tenth year, the principal is raised to $169,703. This is calculated by multiplying Jane’s ninth year ending debt ratio of 0.75 by $225,000 (the current value of the home). The loan is then re-amortized over the remaining 21 years, resulting in a monthly principal and interest payment of $1,089 for the next three years.
Although Jane would not be allowed to sell without incurring a prepayment penalty, she can see on paper that by the end of the twelfth year her debt ratio has declined to 0.69 with roughly $70,000 in home equity. Jane doesn’t mind the increased monthly payment because it is still lower than her original payment of $1,610, and because it was fairly determined based on the value of her home. At the end of the twelfth year the required appraisal determines that the home has increased in value by another 25% to $281,250, so the principal must rise again.
Since Jane’s debt ratio at the end of the twelfth year was 0.69, and the appraised value is now $281,250, the principal amount of the loan is stepped-up to $193,628 (0.69 * $281,250). The loan is re-amortized over the remaining 18 years resulting in a monthly payment of $1,361 for three years. Once again, Jane doesn’t mind the increase because she now has almost $110,000 in home equity, plus she is still paying less than her original payment.
The required home appraisal at the end of the fifteenth year results in another 20% increase in valuation, making the home worth more than its original cost. Since the terms of an Adjustable Principal Mortgage cap any increase in valuation to the home’s original cost, the new mortgage principal is limited to $204,018. This is calculated by multiplying the debt ratio of 0.61 at the end of the fifteenth year by $333,333 (the original cost of the home).
In the sixteenth year, Jane’s adjusted loan principal of $204,018 is re-amortized over the remaining 15 years, resulting in monthly principal and interest payments of $1.613. Jane doesn’t mind this at all because her payments are essentially the same as they were under the original loan, plus she now has over $138,000 in home equity. The biggest bonus is that because her home has returned to its original value, Jane may now sell it free and clear at any time. If Jane keeps the home and it maintains an equal or greater value over the remaining 14 years, her monthly payments will remain $1,613, and her debt ratio will continue to decline.
In the example above, Jane is a winner. If I were her, I would quit while I was ahead by selling the home in the sixteenth year, but that’s her call. If she remains in the home for the full 30-year term, and if existing home prices continue to rise, Jane will have reached her original objective. Now let’s see what happens to the mortgage company.
With an Adjustable Principal Mortgage, at the end of the 30-year term, the mortgage company will have earned $240,583 in interest income and will have recovered $278,235 of the original $300,000 principal. The reason that the principal repayments are short by $22,000 is because the mortgagor shrewdly wrote off a portion of the loan in order to keep the homeowner happy. The mortgage company still receives $218,818 over and above its original investment.
In comparison, had the terms of the original loan been fulfilled, the mortgage company would have received $279,767 in interest and the full amount of the principal. Overall the lender has given up $60,942 in interest and principal payments in order to help out a borrower whose underlying asset had declined by 55% in the sixth year of the contract. The alternative would be to risk foreclosure and an immediate loss, most likely in excess of $120,290 with the additional loss of interest income. In this respect, both the lender and borrower are winners.
Goals / Terms
  1. Temporarily reduce the principal amount of underwater mortgages to the product of the homeowner’s target debt ratio and the home’s current market value.
  2. Require a new home appraisal at the end of each three-year cycle.
  3. Re-amortize the loan over the remaining life of the original term every third year.
  4. Reset the principal amount of the loan every third year based on the homeowner’s ending debt ratio times the new appraised value.
  5. The original length of the loan may not be increased.
  6. The original interest rate remains fixed at the original rate and may not increase.
  7. The value of the home may not exceed its original cost, for purposes of adjusting the loan principal.
  8. Monthly principal and interest payments may not substantially exceed the amount of the original contract. Substantial is defined as meaning within $10 per month.
  9. The homeowner may sell the home at any time, however if it is sold before reaching a valuation equal to its original cost, the homeowner will incur a prepayment penalty. The prepayment penalty is calculated by subtracting the amount of all principal payments made to date, from the amount of debt owed prior to commencement of the Adjustable Principal Mortgage. (Exceptions may apply where reasonable cause exists.)
  10. Once the value of the home equals or exceeds its original cost, the homeowner may sell without penalty, only required to payoff the balance of the Adjusted Principal Mortgage.
Benefits / Costs
Lenders – By implementing the Adjustable Principal Mortgage lenders would potentially eliminate foreclosure losses such as may occur in the example above, multiplied millions of times over. If every underwater borrower decided to walk away tomorrow, it would spell the end of the mortgage industry, the end of the U.S. economy, and a sustained global depression. The costs of home appraisals, origination, and processing fees are passed on to homeowners. Although lenders will recover less than the amount stated in their original contracts, the amount forgone will be entirely based on how quickly home prices rebound, while failure to act would be catastrophic.
Homeowners – Borrowers will have a renewed confidence in the housing market. They will also receive the benefit of lower mortgage payments while their houses are underwater, allowing them to save or spend money that they otherwise would not have. This will result in an extraordinary amount of economic stimulus, at no cost to taxpayers. Homeowners will be responsible for the cost of home appraisals, loan processing and origination fees. Such fees may be paid for preferably out of pocket, or added to the principal.
The Economy – The resulting increase in economic activity will mean restoration of jobs for loan officers, administrative assistants, accountants, real estate appraisers, and others. By reducing the number of foreclosures, abandonments, and short sales, the housing market will improve. As real estate prices begin to stabilize and then increase, home builders and real estate agents will also return to work. Under a capitalist system there are winners and losers. Without changes everybody loses, but by taking action, by spreading the risk and by making the system fair, everyone’s a winner.
“And I say to you, make friends for yourselves by means of the wealth of unrighteousness, so that when it fails, they will receive you into the eternal dwellings.”
It’s time to implement solutions designed to solve real problems. While politicians have wasted time covering the loses of some private sector risk takers, lambasting others, and imposing more restrictive regulations, it has never once occurred to them to propose a real solution. Meanwhile, as private sector lenders have been mired in Congressional hearings, attacked with new regulations, and in many cases forced to accept government bailouts, they have likewise not taken time to resolve the real problem.
Note: All figures are rounded up to the nearest value. The approximation above is not intended to be a cure-all, it’s just an idea.

Data: Original Workbook

Off Grid Solutions | Mortgage in-kind Exchange

/ L. M. Walker / 1 Comment

~ By: Larry Walker, Jr. ~

The first step in any recovery is acknowledging the problem. The second step is having faith that a power greater than oneself can restore sanity. Joe purchased his home four years ago for $300,000. He currently has an outstanding mortgage balance of $270,000. The appraised value of his home has fallen to $150,000. If he sells it for $150,000 today, he will eat a loss of $150,000 which is not deductible for tax purposes. Joe can afford his mortgage payments and has not missed any. Since he doesn’t qualify for a loan modification, what options does he have?
For one, he can continue to pay off the $270,000 debt, plus interest, on a home which has lost 50% of its value, thus incurring more than a $150,000 loss spread over time. Or if he finds this distasteful, he can simply walk away from the home and let the bank and the wizards of DC deal with it. Other than that he really doesn’t have many options. I say he doesn’t have many options, because I know some folks who have already walked away from their homes, renting them out to others while they rent elsewhere, with the idea of dumping them for a loss if things don’t improve in a couple of years.
Does it make sense for Joe to sit there, stuck in a home that he can’t sell or refinance; making a payment every month on what he knows is a bad investment? Would you invest $300,000 in something that you thought would be worth half in the future? Although housing prices may increase over time, they didn’t get to where they were overnight, and life is finite. Joe is 50 years old and doesn’t have another 30 years to waste. So what can the government or private sector do for Joe?
Solution: The Mortgage in-kind Exchange
One of the things eating away at Joe everyday is that he sees House B, a bank owned foreclosure which had an original cost of $600,000, still has an appraised value of $300,000, but has a selling price of just $150,000. Joe would love to purchase House B but he is not able to get out of his current mortgage without incurring a $150,000 loss. Joe would have to come up with a $120,000 payment to get out of his present mortgage, plus make a down payment on the bank owned home, which would make him even worse off.

A Mortgage in-kind Exchange is a unique idea that would allow Joe to sell his home for a loss and rollover the remaining $120,000 loan balance into a more valuable home. It would allow Joe to purchase House B for $150,000 with a $270,000 mortgage. House B would have an appraised value of $300,000 and a mortgage debt of $270,000, thus making Joe whole.
How it works – Joe is allowed to hold an option to purchase House B for a small earnest money deposit of $1,000 which will take the home off the market for up to a year giving him time to sell his old home. If the old home doesn’t sell within a year, Joe may either extend the option by making another deposit, or forfeit.
Benefits and costs – Joe would be better off by being allowed to purchase a more valuable home for the same amount owed on his underwater home. The banks would be better off because they will have reduced their REO inventories without incurring as big of a loss. The economy will improve by allowing faithful homeowners a chance to improve their personal debt-to-equity ratios. Housing prices will improve by removing homes selling for less than fair value from the market. The cost to taxpayers would be zero.
The banks can get involved by matching up faithful homeowners with qualified properties. The government can get involved by getting out of the way, and encouraging the free market to push solutions rewarding those who deserve it the most.
***Revised***

Upside Down In America

/ L. M. Walker / Leave a comment

~ By: Larry Walker, Jr. ~

Obama’s economic theory appears to be a hodgepodge of both supply-side and demand-side theory based primarily on a belief that if the government rewards special interest groups who vote for the chief executive’s political party, then said party will get re-elected.

In other words, Obamanomics is nothing more than a selfish power play. Missing from its objectives are the goals of economic growth and wealth creation. Inherent in its objective is the idea that there is already enough wealth in the nation to divide many times over until everyone is on an equal playing field. Once met, this objective will lead to the end of all economic activity in the United States.

Obamanomics is a theory that works best if the employees of an automaker are its only customers. It also works well if unionized school teachers are the only taxpayers within their respective school districts. In other words, Obamanomics works if the same money earned by an entity’s employees is reinvested in full back into the same entity. If giving incentives to employees is better than giving them to employers, then Obamanomics has nailed it. One can only wonder why those gosh darned employees aren’t hiring more workers.

For example, the Obamanomics version of auto industry bailouts was made with the assumption that if the government helped automakers, then they would produce more and better quality cars which someone would buy, thus returning the industry to profitability. What the theory failed to consider was that the reason American automakers were facing bankruptcy was due to the lack of demand, not supply. It wasn’t that U.S. automakers weren’t producing enough, or the right cars, it was that no one was buying them. And why did the demand for automobiles suddenly come to a screeching halt?

Upside Down

There’s a lot of talk these days about the decline in housing prices, but what does that really mean at a personal level? What are its effects on the economy as a whole? I’ll tell you how I feel about it.

Every waking day, I feel as though I’m mortgaged to the hilt, which is, through no fault of my own, a fact. It’s not a good feeling knowing that it will take many, many years, if ever, for the value of my home to return anywhere close to the amount I owe. What this does to me psychologically is make me not want to spend a dime on anything other than bare necessities.

Everything is basically on hold until my personal debt-to-equity ratio returns to a healthy level. This spills over into decisions I make for the business. ‘If it ain’t broke, don’t fix it.’ That means purchasing a new vehicle, new equipment, new appliances, or for that matter anything related to the house is out of the question.

Wants are out of the question; needs are the priority. They say, “Cheer up, live a little, go out and spend some money and don’t worry about it so much.” I say, ‘Mind your own blanking business.’ For me, until this situation is corrected I will continue to live below my means, and if you mess with me, you do so at your own risk.

Meanwhile, the U.S. government continues to spend us all into oblivion, thus assuring that if I ever do get my head above water again, the government will be there to make sure I drown. What politicians don’t realize is that none of their spending has done anything to improve the personal debt-to-equity ratio of any American, but has rather destroyed that of the entire nation.

As politicians from both major parties stare hopelessly into the abyss on a daily basis, none of them seem to have a clue as to how to fix the real problem. Some politicians have become so discouraged that they have resorted to exhibitionism, while others have convinced themselves that the way back is through incurring more debt. It doesn’t get any more delusional than, “We have to spend more to keep from going broke.” While many have chosen the path of insanity, that’s not the way for me.

Let’s face facts, when the amount of ones debt exceeds a healthy level (a debt-to-equity ratio of 0.5 to 1.5 being deemed healthy) there are only two ways out. (A) Reduce all unnecessary expenditures to a bare minimum applying the savings toward debt reduction. (B) File for bankruptcy and make a fresh start.

Some have chosen the latter, while I choose the former. Others don’t own a home and thus have no idea what I’m even writing about, which is the dilemma of most politicians. Most politicians don’t feel as though they own the national debt, and they plan on being long gone before any tough decisions have to be made. However, most of them will find themselves long gone by November of next year, if a serious effort isn’t undertaken soon.

It doesn’t take three years to solve America’s most pressing problem. I made my decision as soon as the crisis hit. There are only two options: A or B. No. Increasing income taxes on an upside down citizenry, increasing the amount of government regulations upon them, and imposing new health insurance mandates will not solve the real problem.

It’s time to fix the problem of this era. It’s time to pass a budget. It’s time to pay down the national debt. It’s time to reduce the size of government. It’s time to end excessive government regulation. It’s time to overthrow an unconstitutional government mandate. It’s time to make a decision, or get out of Dodge.

“If you’re not part of the solution, you’re part of the problem.”

Point of No Return | National Debt Tops Personal Income

/ L. M. Walker / 2 Comments

Warning - No Return

~ By: Larry Walker, Jr. ~

For the first time since World War II, the National Debt of the United States has exceeded personal income, on a per capita basis. The point of no return was breached in 2010, during Barack Obama’s second year in office, and the derangement continues to spin hopelessly out of control. This means that every dollar earned by an American citizen is now owned by the federal government, and then some. That’s right, the average annual income of most working-class Americans now belongs to the federal government. The warning of Thomas Jefferson has come to pass, “A government big enough to give you everything you want, is big enough to take away everything you have.”

Meanwhile, no senators voted for Barack Obama’s 2012 budget when it came up for a vote in the Senate on Wednesday. A procedural vote to move forward on the president’s plan failed 0 – 97, proving that Obama is basically a lame duck president, with no viable plan for resolving the government-manufactured fiscal crisis.

Historical Per Capita National Debt, Personal Income and GDP

In the year 1929, per capita personal income was $697, while each citizen’s portion of the national debt was $139. The federal government’s debt represented just 16.3% of gross domestic product, and 19.9% of personal income. Although not incurring any national debt at all would have been ideal, the percentage of debt to personal income was at least somewhat bearable back in the day; but this was about to change for the worse.

From Point of No Return

The point where a citizen’s per capita share of the national debt exceeded personal income first occurred at the height of World War II. In 1944, per capita personal income was $1,199, while each citizen’s share of the national debt reached $1,452. At the time, the national debt represented 91.5% of gross domestic product and 121.1% of personal income, on a per capita basis. Per capita national debt would continue to exceed personal income through the end of 1950, five years after the end of the war.

From Point of No Return

The point of no return was decisively breached in the year 2010 (see chart above). Although per capita personal income had grown to $40,441, each citizen’s portion of the national debt soared to $43,732. The national debt represented 92.5% of gross domestic product and 108.1% of personal income, on a per capita basis. The situation has worsened through the end of the first quarter of 2011 with per capita personal income of $41,486, versus per capita national debt of $45,782. Through March of 2011, the national debt now represents 95.1% of gross domestic product and 110.4% of personal income, on a per capita basis.

[In contrast, at the end of 2008 per capita personal income stood at $40,469, while each citizen’s share of the national debt was $32,886. In 2008, the national debt represented 69.8% of GDP and 80.9% of personal income, on a per capita basis. Although the United States government was dangerously close in 2008, it had not yet surpassed the point of no return.]

This might not be as big of a deal if the United States ever paid down its debt, but I can only find six years since 1929 where this actually occurred – 1930, 1947, 1948, 1951, 1956, and 1957. There is no chance of fiscal recovery with a president who, in the face of financial disaster, dares to submit a budget containing multi-trillion dollar per year deficits into the future. Until the right leadership is in place, you, I, our children and our grandchildren can look forward to living in a nation which basically owns us. Is this the same Republic that we inherited from our forefathers? I think, not.

Barack Obama has taken this nation in precisely the wrong direction; he has taken us beyond the point of no return. Yet there is still hope, but such hope, of necessity, lies beyond the realm of partisan politicians. Faith without works is dead. This isn’t World War II. It’s time to dramatically reduce the federal government’s footprint. It’s time to cut government spending. It’s time to lower (not raise) the debt ceiling. Tomorrow will be too late.

References:

Rejected! Senate Votes Unanimously To Ignore Obama’s Budget

Treasury Direct: Historical Debt Outstanding – Annual

Treasury Direct: Debt to the Penny through 3/31/11

Bureau of Economic Analysis: Table 7.1. Selected Per Capita Product and Income Series in Current Dollars (A)

Data Tables:

From Point of No Return

Link to All Data Tables and Charts

Link to Original Excel Spreadsheet

Unequally Yoked | Social Security and the Working Class

/ L. M. Walker / 3 Comments

Liberty?

Public vs. Private Sector Inequities

~ By: Larry Walker, Jr. ~

Did you know that most state and local government employees are exempt from Social Security taxes? Millions of Americans who are covered by state or local retirement plans do not pay into the Social Security system. If Social Security is such a great plan, then why are 17,738,156 [1] state and local government workers exempt? Why does the federal government continue to legally bind the rest of us to a sinking ship? This isn’t 1933 anymore. The time for change is now. Social Security is the biggest fraud in American history.

There is no retreat but in submission and slavery! Our chains are forged! ~ Patrick Henry

Teachers Retirement System of Georgia vs. Social Security

For example, teachers in the state of Georgia are covered by the Teachers Retirement System (TRS). Following are some of the differences between teachers covered by TRS and private sector workers covered by Social Security.

  1. Although Georgia teachers are required to contribute 5.0% of their pay into the TRS, the contribution is considered a pre-tax deduction. Workers covered by Social Security must contribute 6.2% of their pay on an after-tax basis.

  2. Georgia public employers pay a matching contribution of 9.24% into the TRS. Private sector employers pay a 6.2% match to the Social Security Administration (SSA).

  3. TRS contributions are invested in stocks, bonds and other liquid investments earning interest, dividends and the chance for appreciation in value. Social Security contributions are used to pay the benefits of current recipients. Any surplus is borrowed and spent by the federal government which is currently $14.3 trillion in debt.

  4. The normal retirement age for Georgia teachers is 60 years of age. Normal retirement for Social Security recipients is age 65, 66, 67 or greater.

  5. Georgia teachers may retire at any age after 25 years of service. Social Security recipients may not retire until they reach the age of 62 (with reduced benefits).

  6. The amount of benefits received by Georgia teachers is based on the two highest years of compensation. The benefits paid by Social Security are based on the average amount of earnings over a 35 year period.

  7. Georgia teachers become vested in their retirement benefits after 10 years of service. Upon separation from service they may either take a lump-sum distribution or rollover their contributions into an IRA. After the vesting period, Georgia Teachers may also take a lump-sum distribution or rollover the employer contributions into an IRA. Social Security recipients are vested after working 40 quarters, or 10 years, but have no rights to lump-sum distributions or rollovers.

  8. Upon separation of service or retirement, Georgia teachers may either take a lump-sum distribution or rollover their benefits into an IRA account. Georgia teachers may also elect to have their remaining benefits paid to their beneficiaries. Social Security recipients do not have any contractual right to take lump-sum distributions, make rollovers, or to pass benefits on to their heirs.

  9. The maximum amount of annual retirement benefits paid to Georgia teachers is determined by multiplying the average of their top two years’ salary by the number of years of service, and then by 2%. Thus an employee who earned $50,000 in their top two years, with 30 years of service, would receive an annual pension of $30,000 per year, or $2,500 per month [50,000 * (.02 * 30)]. The average amount of benefits paid to Social Security recipients is $14,088 per year, or $1,174 per month. The maximum Social Security benefit for a worker retiring in 2011 is $28,392 or $2,366 per month based on earnings at the maximum taxable amount for every year after the age of 21. The maximum taxable amount of Social Security wages in 2009/2010 is $106,800. [2,3]

Wisconsin Retirement System vs. Social Security

As a second example, teachers in the state of Wisconsin are covered by the Wisconsin Retirement System (WRS). Following are some of the differences between teachers covered by WRS and private sector workers covered by Social Security.

  1. Although Wisconsin teachers are supposed to contribute 5.0% of their pay into the WRS, the contribution is actually paid by their employer (i.e. amounts designated as employee contributions for accounting purposes are actually paid by the employer). [1 (pages 15-17)] WRS employees may also make additional tax deferred contributions to their WRS accounts. Workers covered by Social Security must contribute 6.2% of their pay on an after-tax basis.

  2. Wisconsin public employers pay a matching contribution of 4.5% into the WRS, but since they also pay the employees portion, their total contribution is 9.5%. Private sector employers pay a 6.2% match to the Social Security Administration (SSA).

  3. WRS contributions are invested in stocks, bonds and other liquid investments earning interest, dividends and the chance for appreciation in value. Social Security contributions are used to pay the benefits of current recipients. Any surplus is borrowed and spent by the federal government which is currently $14.3 trillion in debt.

  4. The normal retirement age for Wisconsin teachers is 65 years of age, or 57 with 30 years of service. Normal retirement for Social Security recipients is age 65, 66, 67 or greater.

  5. Wisconsin teachers may retire as early as the age of 55 (with reduced benefits). Social Security recipients may not retire until they reach the age of 62 (with reduced benefits).

  6. The amount of benefits received by Wisconsin teachers is based on an average of the three highest years of compensation. The benefits paid by Social Security are based on the average amount of earnings over a 35 year period.

  7. Wisconsin teachers become vested in their retirement benefits immediately and may either take a lump-sum distribution or rollover the employer contributions into an IRA upon separation. Social Security recipients are vested after working 40 quarters, or 10 years, but have no rights to lump-sum distributions or rollovers.

  8. Upon separation of service or retirement, Wisconsin teachers may either take a lump-sum distribution or rollover their benefits into an IRA account. Wisconsin teachers may also elect to have their remaining benefits paid to their beneficiaries. Social Security recipients do not have any contractual right to take lump-sum distributions, make rollovers, or to pass benefits on to their heirs.

  9. The maximum amount of annual retirement benefits paid to Wisconsin teachers is determined by multiplying the average of their top three years’ salary by the number of years of service, and then by 1.6%. Thus an employee who earned $50,000 in their top three years, with 30 years of service, would receive an annual pension of $24,000 per year, or $2,000 per month [50,000 * (.016 * 30)]. The average amount of benefits paid to Social Security recipients is $14,088 per year, or $1,174 per month. The maximum Social Security benefit for a worker retiring in 2011 is $28,392 or $2,366 per month, based on earnings at the maximum taxable amount for every year after the age of 21. The maximum taxable amount of Social Security wages in 2009/2010 is $106,800. [2,3]

Unequally Yoked

When it comes to retirement, not all Americans are treated equally. State and local government workers have great advantages over private sector employees. Not only does the private sector pay the salaries of state and local government workers through income and property taxes, and not only do we contribute towards their retirement, but we allow them to have better retirement plans than ourselves. As most of us sit, chained to the broken and antiquated Social Security system, state and local government employees continually bargain for more and more. Here are the major inequities in a nutshell.

  • Most state and local government employees contribute less towards their retirement plans than those covered by Social Security but receive back more in benefits. Wisconsin public employees contribute nothing towards their retirement yet receive back more in benefits than comparable working class peons.

  • State and local government employees have portable retirement accounts which actually exist. Americans who are covered by Social Security don’t have any portability of savings, nor have their funds been set aside or invested in any manner.

  • State and local workers have greater options for early retirement based on age and the number of years of service, while Social Security patrons must wait until the age of 62 to receive a reduced amount of benefits.

  • The age of full retirement for those covered by Social Security continues to be pushed back due to the lack of funds, while state and local employees are allowed to quit their jobs and take their savings with them at any time.

  • State and local employees are paid retirement benefits based on an average of their top 2 or 3 years of earnings, while Social Security benefits are calculated using an average of 35 years of earnings.

  • Social Security benefits are limited to $28,392 per year, in 2011, no matter how much is earned in a lifetime. The benefits paid to most state and local plan recipients are for the most part unlimited.

Not all workers in the United States are covered by Social Security, so why don’t the rest of us have a choice? Since state and local retirement plans are required to invest contributions in a fiduciary capacity, why doesn’t Social Security? What makes state and local government employees better than the average American? Wouldn’t privately owned and managed retirement accounts be an improvement for all Americans? It’s time to end Social Security. It’s time for all American workers to be treated equally. The ‘Nanny State’ has failed. The era of big government is over. Give me liberty, or give me death!

Sources:

[1] WISCONSIN LEGISLATIVE COUNCIL – 2006 COMPARATIVE STUDY OF MAJOR PUBLIC EMPLOYEE RETIREMENT SYSTEMS

[2] Social Security Administration – Answers

[3] Your Retirement Benefit: How It Is Figured

Other References:

Teachers Retirement System of Georgia – 2010 Annual Financial Report

Wisconsin Department of Employee Trust Funds – 2009 Annual Financial Report

Wisconsin Retirement System (WRS) Benefit Summary

Links:

Chile's Private Accounts Turn 30 – Investors.com

Bill Baar's West Side: NBC LA: A New Party Within a Party? Labor-Skeptic Democrats

Obsolete Government Programs, Part 2 | Medicare

/ L. M. Walker / 3 Comments

Personal Responsibility

You Paid How Much For Medicare?

~ By: Larry Walker, Jr. ~

Medicare is a social insurance program administered by the United States government, providing health insurance coverage to people who are aged 65 and over, or who meet other special criteria. Some say that Medicare operates similar to a single-payer health care system, but with one key exception: Medicare Part A, the part that we pay for all of our working lives, only provides hospital insurance, and it doesn’t kick in until after the age of 65. Thus, Medicare is more akin to an excessively expensive, mandatory, long-term health care plan than anything else. Although there is a health insurance aspect to Medicare, known as Part B, it’s not free either. Medicare Part B requires the payment of additional monthly premiums upon retirement of between $96.40 and 308.30 per month, depending on the recipient’s level of income at the time.

Medicare is partially financed through payroll taxes imposed by the Federal Insurance Contributions Act (FICA) and the Self-Employment Contributions Act of 1954. In the case of employees, the tax is equal to 2.9% (1.45% withheld from the worker and a matching 1.45% paid by the employer) of the wages, salaries and other compensation in connection with employment. Until December 31, 1993, the law provided a maximum amount of compensation on which the Medicare tax could be imposed each year. But, beginning January 1, 1994, the compensation limit was removed. A self-employed individual must pay the entire 2.9% tax on self employed net earnings, but may deduct half of the tax from income in calculating income tax. Beginning in 2013, the 2.9% hospital insurance tax rises to 3.8% on earned income exceeding $200,000 for individuals and $250,000 for married couples filing jointly. [1]

Times Have Changed: Medicare is Obsolete

In the 1960s, Medicare was introduced to rectify the following problems: health care for the elderly and health care for the non-elderly with pre-existing conditions. The FICA tax was increased in order to pay for this expense. Both problems are listed below, followed by modern day private-sector solutions meant to address the same.

  • The U.S. had no federal-government-mandated health insurance for the elderly; consequently, for many people, the end of their work careers was the end of their ability to pay for medical care.

  • The U.S. had no federal-government-mandated health insurance for all those who are not elderly; consequently, many people, especially those with pre-existing conditions, have no ability to pay for medical care.

Most Americans would be able to afford real health insurance, or better plans, were we not forced to pay huge sums out of our current pay, for benefits that some will never see. For example, Barack Obama paid a total of $48,496.29 in Medicare taxes in 2010 alone. This means he paid $4,041.36 per month for long-term hospital insurance benefits that he won’t realize until he turns 65. A portion of the $48,496.29, namely $5,730.23 was actually paid by his employer, which would be you and I. Could Mr. Obama perhaps find a better deal in the private-sector? I would hope so. Would you pay $4,041.36 per month for long-term hospital insurance coverage if you had a choice? “AFLAC… AFLAC… AFLAC”!

Obama's Medicare Tab

Medicare Benefits

Medicare has four parts: Part A is Hospital Insurance. Part B is Medical Insurance. Medicare Part D covers prescription drugs. Medicare Advantage plans, also known as Medicare Part C, are another way for beneficiaries to receive their Part A, B and D benefits. All Medicare benefits are subject to medical necessity. The original program was only Parts A and B. Part D was new in January 2006; before that, Parts A and B covered prescription drugs in only a few special cases.

Medicare Premiums

Most Medicare enrollees do not pay a monthly Part A premium, because they (or a spouse) have had 40 or more 3-month quarters in which they paid Federal Insurance Contributions Act taxes. Medicare-eligible persons who do not have 40 or more quarters of Medicare-covered employment may purchase Part A for a monthly premium of:

  • $248.00 per month (in 2011) for those with 30-39 quarters of Medicare-covered employment, or

  • $450.00 per month (in 2011) for those with less than 30 quarters of Medicare-covered employment and who are not otherwise eligible for premium-free Part A coverage.

All Medicare Part B enrollees pay an insurance premium for this coverage; the standard Part B premium for 2009 is $96.40 per month. A new income-based premium schema has been in effect since 2007, wherein Part B premiums are higher for beneficiaries with incomes exceeding $85,000 for individuals, or $170,000 for married couples. Depending on the extent to which beneficiary earnings exceed the base income, these higher Part B premiums are $134.90, $192.70, $250.50, or $308.30 for 2009, with the highest premium paid by individuals earning more than $213,000, or married couples earning more than $426,000. In September 2008, CMS announced that Part B premiums would be unchanged ($96.40 per month) in 2009 for 95 percent of Medicare beneficiaries. This would be only the sixth year without a premium increase since Medicare was established in 1965.

Medicare Part B premiums are commonly deducted automatically from beneficiaries’ monthly Social Security checks. Part C and D plans may or may not charge premiums, at the programs’ discretion. Part C plans may also choose to rebate a portion of the Part B premium to the member. While private-sector health insurance premiums are deducted from employees’ paychecks on a pre-tax basis, Medicare taxes are confiscated from employees on an after-tax basis. Is that fair? Upon retirement, if one wishes to pay for Medicare Part B, the premiums are conveniently deducted from retirees Social Security checks on an after-tax basis. Is that fair?

Still Clueless?

Three-quarters of all taxpayers pay more in payroll taxes than income taxes. Do you get it now? It’s time for this to change. It’s time to stop confiscating money from today’s payroll checks to cover tomorrow’s health care needs. It’s time to give American citizens more of our own money so that we may provide for our current needs. All that we ever hear from the Democrats is how many Americans can’t afford health insurance. Did it ever dawn on any of them that maybe the reason we can’t afford health insurance is because we are being robbed blind by a 15.3% payroll tax? Out of every American paycheck, 15.3% is being literally looted and squandered by the federal government. We are being robbed by a 1933 law which has outlived its usefulness. It’s time to end Medicare and Social Security. All past obligations of Medicare must be immediately privatized through legitimate private-sector insurance companies.

References:

[1] http://www.ssa.gov/OACT/ProgData/taxRates.html

http://en.wikipedia.org/wiki/Medicare_(United_States)