Obsolete Government Programs, Part 2 | Medicare

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Times Have Changed: Medicare is Obsolete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)

Obsolete Government Programs, Part 1 | FICA

My Roots, circa 1918

“Free at last! Free at last! Thank God Almighty, we are free at last!” ~ MLK, Jr.

~ By: Larry Walker, Jr. ~

Are Social Security Benefits an Inalienable Right? ~

The Federal Insurance Contributions Act (FICA) is codified at Title 26, Subtitle C, Chapter 21 of the United States Code. The FICA tax is a United States payroll (or employment) tax imposed by the federal government on both employees and employers to fund Social Security and Medicare —federal programs that provide benefits for retirees, the disabled, and children of deceased workers. Social Security benefits include old-age, survivors, and disability insurance (OASDI); Medicare provides hospital insurance benefits. The amount that one pays in payroll taxes throughout one’s working career is indirectly tied to the social security benefits annuity that one receives as a retiree. Some folks claim that the payroll tax is not a tax because its collection is tied to a benefit. The United States Supreme Court decided in Flemming v. Nestor (1960) that no one has an accrued property right to benefits from Social Security. [1]

There has been a temptation throughout the program’s history for some people to suppose that their FICA payroll taxes entitle them to a benefit in a legal, contractual sense. That is to say, if a person makes FICA contributions over a number of years, Congress cannot, according to this reasoning, change the rules in such a way that deprives a contributor of a promised future benefit. Under this reasoning, benefits under Social Security could probably only be increased, never decreased, if the Act could be amended at all. Congress clearly had no such limitation in mind when crafting the law. Section 1104 of the 1935 Act, entitled “RESERVATION OF POWER,” specifically said: “The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress.” Even so, some have thought that this reservation was in some way unconstitutional. This is the issue finally settled by Flemming v. Nestor. [1]

In this 1960 Supreme Court decision Nestor’s denial of benefits was upheld even though he had contributed to the program for 19 years and was already receiving benefits. Under a 1954 law, Social Security benefits were denied to persons deported for, among other things, having been a member of the Communist party. Accordingly, Mr. Nestor’s benefits were terminated. He appealed the termination arguing, among other claims, that promised Social Security benefits were a contract and that Congress could not renege on that contract. In its ruling, the Court rejected this argument and established the principle that entitlement to Social Security benefits is not a contractual right. [1]

So did you think that Social Security Benefits were an inalienable right? Think again.

Times Have Changed: Social Security is Obsolete

The Center on Budget and Policy Priorities states that three-quarters of taxpayers pay more in payroll taxes than they do in income taxes. The FICA tax is considered a regressive tax on income (with no standard deduction or personal exemption deduction) and is imposed (for the years 2009 and 2010) only on the first $106,800 of gross wages. The tax is not imposed on investment income (such as rents, interest and dividends). As a side note, the Earned Income Credit was enacted in 1975 to “offset the burden of social security taxes and to provide an incentive to work”. More recently the Making Work Pay Credit of 2010 and the 2% Payroll Tax Cut of 2011 were enacted with a redundant goal: “to offset the burden of social security taxes”. Why are Social Security taxes deemed to be so over-burdensome?

Perhaps Social Security has outlived its usefulness. In the 1930s, the New Deal introduced Social Security to rectify the following three problems: retirement, injury-induced disability, or congenital disability. It introduced the FICA tax as the means to pay for Social Security. Following are some of the difficulties that existed for working-class Americans prior to the Great Depression, countered with modern day private-sector innovations meant to address the same.

  • The U.S. had no federal-government-mandated retirement savings; consequently, for those people who had not voluntarily saved money throughout their working lives, the end of their work careers was the end of all income.

But times have changed. Prior to the Great Depression there weren’t many incentives in place to encourage saving towards retirement, nor were there as many options available as there are today. Nowadays employers, employees and the self-employed can choose between numerous retirement plans not limited to the following:

  1. Defined-Benefit Plans

  2. Defined-Contributions Plans

  3. 401(k) Plans

  4. 403(b) Plans

  5. Individual Retirement Accounts (IRAs)

  6. Roth IRAs

  7. Qualified Insurance Annuities

  8. Simplified Employee Pension’s (SEP)

  9. Savings Incentive Match Plan for Employees (SIMPLE)

This isn’t 1933 anymore. The time to end Social Security is now. Since we are able to choose between so many pre-tax options which result in the deferral of income taxes until the funds are withdrawn, why are we still stuck on pouring good money down a bad hole? By now, everyone knows that any surplus once heralded by the Social Security Trust Fund has been confiscated and comingled into the government’s general fund. And we all know that the government’s general fund is more than a whopping $14 trillion in the hole. If working folks and their employers weren’t chained by the bonds of mandatory contributions to Social Security we would be living on easy street.

If we were not forced to pay this mandatory tax of 6.2% (12.4% for the self-employed) on earned income up to the limit of $106,800, we would be able to save a greater portion of our own money into the modern retirement vehicles mentioned above. Loosing employers from burdensome payroll taxes will likewise allow them to provide a greater portion of benefits to employees. However, with government-run Social Security literally robbing us of our retirement savings, and ‘investing’ it in the abyss of debt and irresponsibility, known as Washington, DC, there is little leftover for most Americans to save. In fact, if every dollar of Social Security tax paid on my behalf since I began working had instead been invested in the S&P 500 Index; I would now be a millionaire. But since I haven’t had any choice in the matter, I may just have to settle for the paltry poverty level rations offered by Social Security. What’s worse is that thanks to Social Security, on the day that I die the government-squandered fruit of my labors will go with me.

  • The U.S. had no federal-government-mandated disability income insurance to provide for citizens disabled by injuries (of any kind—work-related or non-work-related); consequently, for most people, a disabling injury meant no more income (since most people had little to no income except earned income from work).

Nowadays, most employers offer mandatory and voluntary disability insurance plans through legitimate insurance companies. Likewise, all employers are required to provide Workers Compensation. Many of us would be able to afford our own portable disability insurance plans were we loosed from the bands of the FICA Act.

  • There was no federal-government-mandated disability income insurance to provide for people unable to ever work during their lives, such as anyone born with severe mental retardation.

Nor is there any such government-mandated disability income insurance today, the key word being insurance. Who in their right mind believes that the federal government provides insurance? If the federal government wants to provide real insurance for persons in need, then the responsible thing to do would be to pay for private-sector insurance policies, on behalf of those in need.

Social Security is an idea that has outlived its usefulness. It’s time for the United States to begin weaning itself off of Social Security. Let’s stop pretending that we are living in 1933. We have options in the 21st Century that didn’t exist in the 20th, but our options are severely constrained by the bonds of old stale ideas. Although it’s doubtful whether Social Security ever served its original purpose, it is indisputable that times have changed. In the 1930’s Americans had no safety net, today we know that we must provide for our own retirement security. However, the amount we are able to save is limited by the amount of money being confiscated from our earnings to cover past obligations. Get a clue. Three-quarters of all taxpayers pay more in payroll taxes than income taxes. Do you get it? It’s time for this to change. It’s time to phaseout Social Security. The age of federal government mandated retirement looting is over.

References:

[1] http://www.ssa.gov/history/nestor.html

http://en.wikipedia.org/wiki/Federal_Insurance_Contributions_Act_tax#cite_note-4

Social Security: A Breach of Trust

Reviewed

– By: Larry Walker, Jr. –

Notes on 2010 Financial Statements of the U.S. Government

“I am a firm believer in the people. If given the truth, they can be depended upon to meet any national crisis. The great point is to bring them the real facts.” ~ Abraham Lincoln

“The ignorance of one voter in a democracy impairs the security of all.” ~ John F. Kennedy

Proponents of a bankrupt federal government continually proclaim that Social Security is solvent. They boast in the Trust Fund’s fictitious surplus balance of $2.6 trillion as proof. But even Note 24, of the United States Government’s Notes to the Financial Statements, for the year ended September 30, 2010 states that while, “In the private sector the term “trust fund” refers to funds of one party held and managed by a second party (the trustee) in a fiduciary capacity” that, “In the Federal budget, the term “trust fund” means only that the law requires a particular fund be accounted for separately, not that funds are actually set aside.” It further states that, “…as far as the federal government is concerned, earmarked funds, including the Social Security Trust Fund are the property of the federal government.”

In other words, as far as the government is concerned, any money it receives on our behalf may be spent in any way it desires, as long as an appropriate book entry is made. The money we have been paying in towards retirement security has already been spent. Note 24 goes on to verify this by stating that, “The government does not set aside assets to pay future benefits or other expenditures associated with earmarked funds (i.e. Social Security).” And further that, “The cash receipts collected from the public for an earmarked fund (i.e. Social Security) are deposited in the U.S. Treasury, which uses the cash for general Government purposes.”

As I explained in “The Social Security Bust Fund”, the federal government has summarily confiscated and spent every dime of the $2.6 trillion surplus, which would have comprised the Social Security Trust Fund, and has replaced it with non-marketable, special-issue, Treasury securities. Since these special-issue securities are an asset to the Trust Fund and a liability to the U.S. Treasury, they therefore cancel each other out and, according to Note 14, “are eliminated in the consolidation of these financial statements”. However, as we shall see later, they actually do appear on the financial statements and are detailed in Note 24.

During any fiscal year, when a trust fund’s disbursements exceed its receipts, then these special-issue securities require redemption. Note 24 warns us that, “Redeeming these securities will increase the Government’s financing needs and require more borrowing from the public (or less repayment of debt), or will result in higher taxes than otherwise would have been needed, or less spending on other programs than otherwise would have occurred, or some combination thereof.” Since less repayment of debt is a non-issue, the only options the government has in order to pay back what it has stolen from the Trust Fund are to borrow more from the public (i.e. increase the debt ceiling indefinitely), raise taxes, or cut spending on other programs.

In effect, there is no Trust Fund. The total amount of Social Security taxes collected within each fiscal year is spent on that year’s benefit payments. If the total receipts exceed the amount of benefit payments, then the surplus is taken by the Treasury and spent on general expenses. However, if the amount of benefit payments exceeds receipts, such as happened in 2010, then the Treasury must borrow more from the public in order to reimburse the Trust Fund. In the fiscal year ended September 30, 2010, the government collected a total of $552.8 billion in Social Security taxes, and paid out $574.9 billion in benefits. The difference was made up by the Treasury paying out some of the accrued interest that it owes on past borrowings. Of course, the interest which was paid out had to be borrowed from the public because, the government has been running trillion-dollar plus budget deficits for the past two years.

You should review the financial statements of the United States Government for the fiscal year ended September 30, 2010 for yourself, and draw your own conclusions. I have and I am sad to report that the Social Security Trust Fund is nothing more than an empty promise. Let’s check the balance sheet.

As of the close of fiscal year 2010, the federal government had total assets of just $2.9 trillion. As you can see above, there is no account named the “Social Security Trust Fund” which contains a balance of $2.6 trillion. The sad truth is that the federal government would have to liquidate nearly all of its assets including property, plant and equipment in order to raise the $2.6 trillion which it owes to the Social Security Trust Fund. So where’s the money, you ask? Like I said from the beginning, “It has already been spent.”

Among the government’s assets, only $428.6 billion was classified as “cash and other monetary assets”. Digging down into Note 2 of the financial statements, we discovered that the actual amount of cash was just $332.0 billion. Further, we discovered that out of this $332.0 billion, only $112.6 billion (103.6 + 9.0) was actually “unrestricted”, meaning available for use on government operating expenses. The remainder, which was listed as “restricted”, included $200 billion which was held by the Federal Reserve in the Supplementary Financing Program (SFP*), $18.6 billion held by the Foreign Military Sales program, and another $0.8 billion which was curiously omitted from explanation.

The other monetary assets listed were International Monetary Assets of $70.4 billion, Gold of $11.1 billion, and Foreign Currency of $15.1 billion. (It’s interesting to note that the government owns 261,498,900 troy ounces of gold, and that its book value is listed at $11.1 billion, or at the statutory value of just $42.22 per ounce. If valued at the fair market value of $1,307 per troy ounce on 9/30/2010, then the value would actually have been $341.8 billion.) A detailed explanation of cash and other monetary assets may be found in the narrative section of Note 2.

The Supplementary Financing Program (SFP)*

It’s worthy of noting that the SFP is a temporary program that deposits cash with the Federal Reserve to support Federal Reserve initiatives aimed at addressing the ongoing crisis in financial markets. It’s interesting to note that the Federal Reserve has control of more of the government’s cash assets than the U.S. Treasury, and that the crisis in the financial markets is deemed to be “ongoing”. Following is a more detailed explanation of the SFP as reported by Bloomberg, on February 25, 2010:

“The Supplementary Financing Program, in which the Treasury Department sells bills and places the proceeds in a Fed account, will be part of the Fed’s strategy for rolling back its extraordinary assistance to the economy and financial markets, the central bank said in its monetary policy report to Congress yesterday. The report also said the program was temporary and wasn’t an essential element of the Fed’s toolkit.”

“The program helped the Fed manage the more than doubling of its balance sheet as it battled the financial crisis and will be part of the central bank’s eventual efforts to withdraw more than $1 trillion in excess bank reserves.”

“The Treasury said the decision to move to $200 billion reflects the program’s outstanding balance between February and September 2009, before concerns about the debt ceiling forced the government to shrink the program. President Barack Obama this month signed a $1.9 trillion increase in the limit to $14.3 trillion.”

Show Me the Trust Funds

Where is the Social Security Trust Fund shown on the government’s financial statements? As you should understand by now, the government borrowed and spent all of the money and owes it back to the Trust Fund, however, you won’t find an entry matching $2.6 trillion on the balance sheet. Per Note 14, “Intragovernmental debt holdings represent the portion of the gross Federal debt held as investments by Government entities such as trust funds, revolving funds, and special funds. This includes trust funds that are earmarked funds. For more information on earmarked funds, see Note 24─Earmarked Funds. These intragovernmental debt holdings are eliminated in the consolidation of these financial statements.” However, the net amount of all of the government’s sacred trust funds does appear in the Net Position section as Earmarked Funds in the amount of $646.9 billion. What this means is that when all of the government’s various trust funds are netted together, the $2.6 trillion Social Security Trust Fund is reduced to a surplus of just $646.9 billion.

I created the following condensed table based on the one shown in Note 24 (the original is too large to be shown here). As you can see, when the $2.6 trillion surplus balances of the Federal Old-Age and Survivors Insurance Trust Fund, and the Federal Disability Insurance Trust Fund are netted against a $941.0 billion deficit in the Military Retirement Fund, a $765.6 billion deficit in the Civil Service Retirement and Disability Fund, a $406.9 billion deficit in the Medicare-Eligible Retiree Health Care Fund, and the rest of the trust funds, the net balance is just $646.9 billion. This is shown as the amount of “Earmarked Funds” which the government owes to itself out of its $14.1 trillion of accumulated deficits. In financial terms, the federal government has accumulated losses of $14.1 trillion since its inception. It may also be the only entity on earth with the audacity to proclaim that the $2.6 trillion, which it borrowed from funds which were supposed to have been held in trust, is somehow secured by its $14.1 trillion in accumulated losses. In reality, both the Federal Government, and the Social Security Trust Fund are insolvent.

Earmarked Funds (click to enlarge)

In conclusion, the only options that the government has of recovering the $2.6 trillion surplus, which our generation has dutifully paid into Social Security, are to either; (1) borrow more money from the public, (2) increase taxes, or (3) reduce spending on other programs.

  1. Borrowing more from the public, in order to pay back that which has already been borrowed from the government, could put the nation’s credit rating at risk, thus jeopardizing not only Social Security, but our National Security.
  2. Increasing taxes on the public in order to make up for what we have already paid in taxes, which should have been set aside for our welfare instead of having been squandered, is not acceptable.
  3. The only viable option is for the federal government to fundamentally restructure, privatize, or discontinue every governmental agency, program, subsidy, enterprise, and special project which does not take in more money than it spends. This includes all Government Sponsored Enterprises, the Postal Service, and Amtrak. If it’s not making money, then it must either be restructured in a way so as to become profitable, sold to the private sector, or terminated. After that comes the selling off of government owned property, plant and equipment, gold and any other non-productive asset held by the federal government.

References:

Financial Statements of the United States Government for the Years Ended September 30, 2010, and 2009 – http://www.fms.treas.gov/fr/10frusg/10stmt.pdf

United States Government Notes to the Financial Statements for the Years Ended September 30, 2010, and 2009 – http://www.fms.treas.gov/fr/10frusg/10notes.pdf

Current Report: Financial Report of the United States – www.fms.treas.gov/fr/index.html

Fed Says Treasury’s SFP Bills Advance Monetary-Policy Goals – http://www.businessweek.com/news/2010-02-25/fed-says-treasury-s-sfp-bills-advance-monetary-policy-goals.html

The Social Security Bust Fund

Privatization

Opt Me Out

– by: Larry Walker, Jr. –

If it sounds too good to be true, it usually is” was a catchphrase used by the Better Business Bureau to alert the public to shady business practices. The phrase was in use since at least 1954. In 1962, the BBB produced a short film titled, “Too Good to Be True”. – The Big Apple

The assets of the Old-Age, Survivors, and Disability Insurance Trust Funds represent the accumulation over time of the difference between income and outgo. The growth of the assets from the end of December 1986 through the end of September 2010 is shown below by calendar quarter.

Assets grew from about $47 billion at the end of December 1986 to about $2,585 billion ($2.6 trillion) by the end of September 2010.

So where’s the money, you ask? Well, to be blunt, there is none. You see, by law, the trust funds are not allowed to hold cash. Instead, they must invest their money into what are known as, non-marketable, special issue (SI), government securities. That’s right! The whole $2.6 trillion “surplus” has been mandatorily invested in the U.S. Treasury. That would be the same Treasury which is currently $14,025,215,218,708.50 in debt. Through 12/31/2010, the Treasury owed a total of $9,390,476,088,043.35 on marketable public securities, and another $4,634,739,130,665.17 on intergovernmental debt (including the amount owed to Social Security). In other words, the government owes the Social Security Trust Fund $2.6 trillion, other governmental agencies $2.0 trillion, and the public another $9.4 trillion.

So where’s the money, you ask? As I said before, there is none; it has already been spent. Yet these special-issue securities are miraculously able to both earn and pay interest at the same time; that is if you can call issuing new debt to the public “earnings”, and paying with IOU’s “interest income”. Interest on these non-marketable special-issue investments is paid (i.e. accrued) semi-annually, at the end of June and the end of December. “Because the trust funds hold no cash, investments are redeemed each month to pay for benefits and administrative expenses. When investments are redeemed, interest is paid. The amount of interest paid is used to offset the amount of investment redemptions.”

In other words, the Treasury pays interest to the Social Security Trust Fund, but not in the form of cash, rather in the form of additional special-issue securities. (Huh?) Interest is only physically paid out when money is needed for benefits and other costs.” And where does the money come from to pay the interest? You guessed it! It comes from income taxes, which you also pay. That’s right! The government requires you to pay 6.2% of your wages into a mandatory retirement plan, and then taxes you on the same income again to pay the interest which your investment is earning. Does this sound like a shady business practice yet?

For example, let’s say that John Q is 50 years old and has $250,000 in a 401K plan. Now let’s say that he devises a scheme whereby he is able to borrow and spend the entire $250,000, and pay it back with interest over time. Let’s also say that he is allowed to pay back simple interest of 2.8%, by merely issuing additional promissory notes. By the time John Q retires at age 65, he will have amassed a retirement fortune of $355,000 (on paper that is). As far as where his first retirement check will come from, why that would be from himself. As John Q’s retirement plan begins to make payments it will need to redeem a portion of the promissory notes issued by John Q. Since John Q is no longer working, and no longer has income with which to pay the debt, he’s out of luck. Perhaps John Q would have been better off by investing real money into a legitimate investment vehicle.

Why in God’s name would anyone make an investment which required them to cover the return on the same out of their own pocket? And worse yet, why would anyone do this when the initial investment and earnings are used to pay for other people’s retirement first? Won’t the “fund” be broke by the time you retire? Yeah, that’s the point. And to make matters worse, our return on investment appears to be crashing; which is good in the sense that we are the ones paying the interest, and bad in the sense that the return on our retirement savings is plummeting. (Huh?)

Diversification 101“Never put all your eggs in one basket.” It looks like the federal government has violated this rule in requiring that federal agencies invest only in federal government securities (special ones at that). The federal government can’t even balance a budget, let alone return a surplus; so why in the world would anyone invest their sacred retirement money in an entity which is currently $14 trillion in debt, and will not be able to earn a surplus, let alone breakeven for the foreseeable future? The truth is that if given a choice, most American’s wouldn’t. The problem is that we don’t think that we have a choice. Why don’t we have a choice? Who does this country belong to? Whose money is at stake? Perhaps it’s time to revisit privatization?

Photo Credit: http://www.johncrabtreephotography.com/

References:

http://www.ssa.gov/oact/ProgData/newIssueRates.html

http://www.treasurydirect.gov/NP/BPDLogin?application=np

http://www.ssa.gov/cgi-bin/transactions.cgi

Social Security and Medicare’s Missing Link

I’m sure that everyone is aware of, or should be aware of the problems facing the Social Security Administration. For example, here’s an excerpt of the bleak outlook from the 2009 Report issued by the Social Security and Medicare Boards of Trustees. The report points out the obvious problems that have been debated for decades. You may skip this part if you want to get straight to my point below.

A MESSAGE TO THE PUBLIC:

Each year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs. This message summarizes our 2009 Annual Reports.

The financial condition of the Social Security and Medicare programs remains challenging. Projected long run program costs are not sustainable under current program parameters. Social Security’s annual surpluses of tax income over expenditures are expected to fall sharply this year and to stay about constant in 2010 because of the economic recession, and to rise only briefly before declining and turning to cash flow deficits beginning in 2016 that grow as the baby boom generation retires. The deficits will be made up by redeeming trust fund assets until reserves are exhausted in 2037, at which point tax income would be sufficient to pay about three fourths of scheduled benefits through 2083. Medicare’s financial status is much worse. As was true in 2008, Medicare’s Hospital Insurance (HI) Trust Fund is expected to pay out more in hospital benefits and other expenditures this year than it receives in taxes and other dedicated revenues. The difference will be made up by redeeming trust fund assets. Growing annual deficits are projected to exhaust HI reserves in 2017, after which the percentage of scheduled benefits payable from tax income would decline from 81 percent in 2017 to about 50 percent in 2035 and 30 percent in 2080. In addition, the Medicare Supplementary Medical Insurance (SMI) Trust Fund that pays for physician services and the prescription drug benefit will continue to require general revenue financing and charges on beneficiaries that grow substantially faster than the economy and beneficiary incomes over time.

The drawdown of Social Security and HI Trust Fund reserves and the general revenue transfers into SMI will result in mounting pressure on the Federal budget. In fact, pressure is already evident. For the third consecutive year, a “Medicare funding warning” is being triggered, signaling that non-dedicated sources of revenues—primarily general revenues—will soon account for more than 45 percent of Medicare’s outlays. A Presidential proposal will be needed in response to the latest warning.

The financial challenges facing Social Security and especially Medicare need to be addressed soon. If action is taken sooner rather than later, more options will be available, with more time to phase in changes and for those affected to plan for changes.

http://www.ssa.gov/OACT/TRSUM/index.html

The Missing Link

My dilemma may be found in the title of the report itself. To be more specific it is found in the words ‘Social Security and Medicare Boards of Trustees’. Of course my first question is who’s on the board(s)? And my second is who’s supposed to be on the board(s)? Following is another excerpt from the 2009 Report.

Who Are the Trustees? There are six Trustees, four of whom serve by virtue of their positions in the Federal Government: the Secretary of the Treasury, the Secretary of Labor, the Secretary of Health and Human Services, and the commissioner of Social Security. The other two Trustees are public representatives appointed by the President, subject to confirmation by the Senate. The two Public Trustee positions are currently vacant.

So if I am reading this correctly, ‘the other two Trustees are public representatives appointed by the President, and subject to confirmation by the Senate’. And to date, please correct me if I’m wrong, ‘the two Public Trustee positions are currently vacant’. The Board of Trustees is composed of the following four individuals:

  1. Timothy F. Geithner, Secretary of the Treasury, and Managing Trustee
  2. Hilda L. Solis, Secretary of Labor, and Trustee
  3. Kathleen Sebelius, Secretary of Health and Human Services, and Trustee
  4. Michael J. Astrue, Commissioner of Social Security, and Trustee

One has to go back to the 2007 Report to find the last time that the two public trustee positions were functional. Here’s an excerpt from the 2007 Report:

The other two members, John L. Palmer and Thomas R. Saving, are public representatives initially appointed by President William J. Clinton on October 28, 2000, and reappointed by President George W. Bush on April 18, 2006.

http://www.socialsecurity.gov/OACT/TR/TR07/I_intro.html – wp1000302

The only other lapse I can find is in 1990. George H. W. Bush was sworn into office on January 20, 1989. The public trustee positions became vacant at the end of 1989, and they were vacant for all of 1990. In 1991, President Bush appointed Stanford G. Ross, and David M. Walker.

Here is a link to a historical listing of the Boards of Trustees:

http://www.segurosocial.gov/OACT/TR/trustees.html

So what’s my beef?

There is no public oversight over Social Security and Medicare. There has not been any public oversight for the last two years and I don’t see any on the horizon. A public corporation can’t even function properly without outside board members. Without independent, external oversight there’s no telling whether we are on the right path, or whether we are even getting the truth.

So 2008 passed without public trustees. Then 2009. Now it’s 2010 and no one is even talking about this? With major issues looming for both Social Security and Medicare, my beef is that the American people deserve to have competent, non-governmental, outside, public trustees on the Social Security and Medicare Boards of Trustees in order to monitor, verify, and criticize the information that is being disseminated. Granted this may not be the most desirable job, both positions need to be filled. That’s my beef.

Give Me a Tax Cut, or Give Me Death II

Small Business Tax & Toil

By: Larry Walker, Jr.

Small business owners, like myself, pay twice as much in Social Security and Medicare Taxes as regular employees. Yet when we ask for a payroll tax cut on our own pay, what we get from the government is a crackdown on regional banks to give us more loans. Aside from the fact that 140 of these banks have failed since January 16, 2009 (here), what Obama’s Cluelessian economists fail to understand is that wealth is not created through amassing debt.

If Obama wants to run the Federal Government based on the myth that wealth is created through debt, that’s one thing, but his attempt to sell this ideal to small business owners like myself makes him look inept. Small businesses are already in debt. Adding more debt does not translate directly into increased sales, but rather into higher monthly principal and interest payments (aka. ‘paying current expenses out of future income’). It’s one thing to borrow money to start a venture, or to secure lines of credit for working capital, but it’s entirely another to pile debt upon debt in a degenerating economy.

Wealth is created by increasing sales of products and services while maintaining or reducing expenses. Bankruptcy is achieved through maintaining or increasing expenses in the face of declining revenue. It is a fact, not a theory, that Obama’s reckless economic policies will lead to the latter.

So what is the Small Business solution? What could possibly help small business owners survive in the face of a colossal governmental failure? A payroll tax cut for one. And what is it that justifies a payroll tax cut for small business owners? As I pointed out in Part I, small business owners pay an unfair burden of Social Security and Medicare Taxes, and we receive nothing in return. By nothing, I mean that we will receive the same benefits as regular workers after having paid twice the amount of payroll taxes (see the chart below).

Click To Enlarge

What we are asking for is fair. What we are asking for is economic justice. We want the Federal Government to stop unfairly burdening small businesses with an unjust burden of payroll taxes with no corresponding benefit. All we want back is some of our own hard earned money, produced from our own toil, in order to improve the future economic outlook of our communities and our nation.

If we get our desired tax cut, what will small business owners do? We will have been aided in paying our bills, in reducing our current debt, in not having to lay off additional workers, and in having survived for another day. And we will have done so with our own money, and not through a government handout.

Who will die? When I say, “give me a tax cut, or give me death”, it won’t be me or my fellow entrepreneurs who die. The first casualty will be the next laid off employee, and eventually the Federal Government. Every employee we lay off leads to negative government revenue, and reduced GDP. Most of us can scale back on spending and survive, but one can only cut so much before creditors are jeopardized. The Federal Government is well on the road that leads to death.

We will survive, but will the Federal Government? Small businesses have been cutting back on spending in the face of the economic decline. The Federal Government, on the other hand, has been increasing its debt. If Obama’s incompetent economic theory leads to the bankruptcy of the United States government, then that is just a natural consequence of spending more than annual revenue, year after year. Eventually the principal and interest payments will surpass revenue. But that’s Obama’s plan and not the road for me. As for me,

Give me a tax cut, or give me death!

Tips: 5 Ways To Manage Business Debt

Give Me a Tax Cut, or Give Me Death!

Small Business Tax & Toil

By: Larry Walker, Jr.

I have been contemplating all the blood, sweat, and tears shed by Small Business owners such as myself. Having been in business for the past 9 years, I have come to the realization that:

  1. I am paying a hell of a lot in Taxes (and government mandated fees), and

  2. I am feeling mighty underappreciated.

The Federal Government, under the American Recovery and Reinvestment Act of 2009, chose to give a Social Security tax cut, the Making Work Pay Credit, to workers making under $75,000 per year. That’s all well and fine, but what about the Small Businesses who pay those wages? Small Business Owners have to pay double the amount of Social Security and Medicare taxes on our own pay, plus a matching amount on what we pay our employees.

As the owner of an S-Corporation, in order to write myself a paycheck I am hit with 25% in Federal Withholding Taxes, 15.3% for Social Security and Medicare (since as an owner-employee both halves come out of the same pocket), 5% for State Withholding Taxes and Federal and State Unemployment Taxes. Excluding Unemployment Taxes, I have to withhold and pay in 45.3% of my pay every month. On top of that, since I have employees, I also have to match 7.65% of their pay for Social Security and Medicare Taxes.

As a side note, I also have to pay County business license fees, Federal and State license fees, County property taxes, State Sales Taxes, Federal Excise taxes on telephone, cell phone and internet usage, interest and principal payments on a Federal SBA loan and other business debts, professional liability insurance, health insurance, matching retirement contributions, etc. … and then the actual operating expenses. When it’s all said and done, in return for my contribution to society, I get to keep about 20% of my gross income (toil). But lets just keep the focus here on Social Security, Medicare, and Income Taxes.

As an example, let’s say I have to write gross pay checks for myself and my employees of $8,000 per month. And let’s say $5,000 of that is for me, and the other $3,000 is for two employees. In order to pay myself $5,000 I have to set aside $2,265 for taxes ($5,000 * 45.3% = $2,265). In order to pay my employees $3,000 I have to set aside an extra $229.50 ($3,000 * 7.65% = $229.50) to match Social Security and Medicare.

So to summarize my gross pay started out at $5,000, but my net take home pay wound up being only just $3,117.50 (see the chart below). In the end, I have spent a total of $8,612.00. My employees took home $2,770.50, I took home $3,117.50, and the Government took home $2,724.00.

click to enlarge

When times are good and I can afford to take a full paycheck I have to fork over 45.3% of my earnings to the Government. When times are tough and I can’t afford to pay myself a full paycheck I still have to fork over 45.3% of my earnings to the Government. And when the business makes a profit, the Government will be standing there laying claim to another 30% or more of my toils (25% Federal Taxes and 5% State Taxes).

And now the Federal Government, through the Senate’s Health Care Bill, is proposing to:

  • Add an Excise Tax on Comprehensive Health Insurance Plans

  • Burden us with Employer Reporting of Health Insurance Costs on W-2 Forms

  • Hike Taxes on Health Savings Account Withdrawals by 10%

  • Raise the “Haircut” for Medical Itemized Deductions from 7.5% to 10% of AGI

(See How Does the Reid-Obama Health Bill Raise Taxes on Your Current Health Plan?).

If there is any common sense at all in Washington D.C., Congress and the President will realize that Small Businesses employ most of America, and that Small Business owners pay an unfair burden of Social Security and Medicare Taxes. And we receive nothing in return. By nothing I mean that business owners do not get double the Social Security and Medicare benefits for paying twice what the average worker pays into the system. When liberals start whining about tax cuts for the rich, perhaps they should try standing in the shoes of a small business owner. They would not last a week. They would die from their own complaining.

Do Small Business Owners deserve tax relief? You’re damned right! What can you do about it in Washington D.C.? Well, if you want Small Businesses to spend more, hire more, and stop the lay offs, then stop squeezing us.

  1. Give small business Owners an immediate tax cut of 50% of the Social Security and Medicare Taxes on the wages that they pay themselves. This is not only fair, but it would be just that simple.

  2. Or, if you really want to be fair, then give us a 50% tax cut on the Social Security and Medicare Taxes on all the wages that we have paid so far this year. It’s time to act.

Give me a tax cut, or give me death!

Government-Run vs. Private Health Insurance

The table above was revised on 08/30/09.

click image to enlarge

Government-Run vs. Private Health Insurance

More Honest Debate

First of all, 60% of private sector health insurance providers are non-profits who must by law disclose their records to the public. You can find their tax returns online including information about programs, and compensation.

Most of the remaining companies are publicly traded and by law must file 10K and 10Q reports with the SEC. Their financial information and compensation information is also available online on various websites.

Information on government-run health insurance programs (i.e. The Public Option) may also be found online. The Social Security Administration issues an annual Trust Fund report. (Note: Both public trustee positions are still vacant.)

In comparing the three types, it is clear that something is wrong with the federal government. I have to disclose that I did not include the funds that Medicare obtains from general government revenues, above, because this money comes directly from income taxes.

Medicare Part A is funded primarily by payroll taxes assessed on an individual’s total wages. Medicare B and D is funded primarily by premiums charged to Social Security recipients (which I might add is kind of redundant).

To be brief: For-profits are by necessity in the black. On the other hand, government-run insurance is in the tank. In fact, Medicare is projected to exhaust it’s assets by 2017 according to the 2009 Annual Trustees Report.

So I ask this question. Who is better qualified to manage health insurance: ‘government workers’ in Washington, DC or the Private Sector? I think you know the answer.

Solution: With proper regulation and oversight, turn over Medicare, and Social Security to the Private Sector. Bigger government is not the solution, it’s the problem.

[Update: Expanded table and updated sources on 08/30/09]

Sources:

  1. http://www.bcbsm.com/home/bcbsm/annual_report.shtml

  2. http://www.redorbit.com/news/health/1639322/kaiser_foundation_health_plan_inc_and_kaiser_foundation_hospitals_report/

  3. http://www.hcsc.com/about-hcsc/finance.htm

  4. http://www.marketwatch.com/investing/stock/unh/financials

  5. http://www.marketwatch.com/investing/stock/ci/financials

  6. http://www.marketwatch.com/investing/stock/wlp/financials

  7. http://www.marketwatch.com/investing/stock/hum/financials

  8. http://www.marketwatch.com/investing/stock/aet/financials

  9. http://www.ssa.gov/OACT/TRSUM/index.html

  10. http://www.ssa.gov/OACT/TRSUM/index.html

Getting Honest About Social Security – Part 3

We begin with the Congressional Budget Office’s Estimate of the President’s Budget (above). Why wait until tomorrow? It’s on the CBO’s website at http://cbo.gov/?

You will recall from Part 2, that entitlement spending (aka mandatory spending) is comprised of the following:

Entitlement Spending, at $1.595 trillion in FY 2008, is over half of the U.S. Federal Budget. The largest entitlement spending programs based on FY 2006 were Social Security and Medicare, as follows:
  • Social Security – $544 billion
  • Medicare – $325 billion
  • Medicaid – $186 billion
  • All other mandatory programs – $357 billion. These programs include Food Stamps, Unemployment Compensation, Child Nutrition, Child Tax Credits, Supplemental Security for the blind and disabled, Student Loans, and Retirement / Disability programs for Civil Servants, the Coast Guard and the Military
In FY 2009 and 2010 alone, entitlement spending is projected to exceed government revenue by some $290 billion. So the United States is facing a budget deficit, in just two years, before spending one dime on our defense, education, veterans pensions, and other vital programs. And this wasn’t supposed to happen for another 31 years?

Is anyone still seriously considering dumping another $1 trillion dollars into this government-run ponzi scheme?

Obama said he wanted an ‘honest debate’ on his health care proposal. Well, here’s the problem. We can’t afford to waste another dollar on some misguided government program, no matter how noble. Social Security is little more than a government-run Ponzi Scheme. Medicare is only 1/2 funded by premiums. Isn’t Medicare an example of government-run health care?

What kind of health insurance company would only collect 1/2 of what it spends on claims year-after-year, after year? I’ll tell you. A government-run health insurance company. Like that commercial says Mr. president, “You Need A Plan!”

Solutions abound, but what Obama is proposing isn’t one of them.

To even begin an ‘honest’ discussion on Social Security, Medicare, Government Option Health Care, or any other ‘reform’ proposed by ‘government workers’, you first need to get honest with the public, and then your proposals had better include the following:

  • Reductions in government spending
  • Reductions in government programs
  • Privatization of government entitlement programs
  • Budget balancing initiatives
  • Incentives for private investment
  • Incentives for private business growth
  • Incentives for private job creation
  • and, Policies that promote individual liberty

Getting Honest About Social Security – Part 2

What are Entitlements?

Entitlement Spending, at $1.412 trillion in FY 2006, is over half of the U.S. Federal Budget. The largest entitlement spending programs are Social Security and Medicare, as follows:

  • Social Security – $544 billion

  • Medicare – $325 billion

  • Medicaid – $186 billion

  • All other mandatory programs – $357 billion. These programs include Food Stamps, Unemployment Compensation, Child Nutrition, Child Tax Credits, Supplemental Security for the blind and disabled, Student Loans, and Retirement / Disability programs for Civil Servants, the Coast Guard and the Military

How Is Social Security Funded?

Social Security is funded through payroll taxes. Through 2017, Social Security collects more in tax revenues than it pays out in benefits because there are 3.3 workers for every beneficiary. However, as Baby Boomers start to retire and draw down these benefits, there will be fewer workers to support them. By 2040, the revenues to pay for Social Security will be less than the expenditures.

How Is Medicare Funded?

Unlike Social Security, Medicare payroll taxes and premiums cover only 57% of current benefits. The remaining 43% is financed from general revenues (i.e. including any surplus remaining from Social Security). Because of rising health care costs, general revenues will have to pay for 62% of Medicare costs by 2030.

Medicare has two sections:

  • The Medicare Part A Hospital Insurance program, which collects enough payroll taxes to pay current benefits.

  • Medicare Part B, the Supplementary Medical Insurance program, and Part D, the new drug benefit, which is only covered by premium payments and general tax revenues.

How Will the FY 2008 Budget on Entitlement Spending Affect the U.S. Economy?

Through 2012, entitlement spending is budgeted at about 10.5% of GDP, with payroll tax revenue at about 6.5% of GDP, so that these unfunded obligations add to the general budget deficit. For example, in FY 2006 Social Security brought in $608 billion in “off-budget,” extra funds from payroll taxes. However, other entitlement programs had expenses that far outweighed this “extra” revenue, creating a mini-deficit of $574 billion within the entitlement spending budget alone. The amount increases to $784 billion by 2012.

Long-term Impacts

Long-term, however, the impact of doing nothing about these burgeoning unfunded mandates will be huge. The first Baby-Boomer turns 62 this year, and becomes eligible to retire on Social Security benefits. By 2025, those aged 65+ will comprise 20% of the population.

As Boomers leave the work-force and apply for benefits, three things happen:

  1. The percentage of the labor under 55 stops growing, providing less payroll taxes to fund Social Security.

  2. GDP growth declines to less than 2% due to fewer workers.

  3. By 2040, Social Security alone brings in less than it spends.

Getting Honest

Obama has stated that any further debate on his health care reform proposals needs to be “honest debate”. He implies that critics have been dishonest, which means we’re just lying.

In looking at the facts above, one need only ask the following question:

Are the budgetary problems facing ‘government workers’ in Washington, DC caused by the private sector, or by the government?

Obama wants to overthrow the private health insurance industry and fold it into a government run entitlement. Yet, the federal government has proven itself incapable of managing its current programs. How is adding more of the burden to the government going to resolve the baby boomer issue?

With all due respect, as a wise man once stated, “government is not the solution to our problems, government is the problem.”

What we need to be discussing is a way to turn over the government’s primary entitlements: Social Security and Medicare to the private sector, not the other way around. If not, the next thing ‘government workers’ will be proposing is how they can fold State, and private pension money into the black hole of the Social Security Ponzi Fund.

Obama’s solution: Solve a problem by compounding it. “We have to spend more money to keep from going bankrupt.”

American’s are simply saying, “No”.