People in this country are angry.
They're angry for a lot of reasons, but mostly they're angry because they feel they have been, and continue to be, cheated.
And they're right.
The current budget crisis (as opposed to all the other budget crises over the last 50 years) has highlighted something that most Americans have tried... mostly successfully... to ignore for the past.. oh 37 years or so:
We're broke, and we're getting broker.
Not only are we broke, but we've run up about four times as much debt as we have income...
There are of course lots of reasons why we're broke, but to most people it's obvious that "taxes are too low" isn't one of them.
Most people meaning "everyone other than democrats" of course.
Of course, part of the reason why we're broke is because of military spending. Wars are expensive after all... But really, it's only a small part (about 4% or so).
Part of why we're broke is just that the federal government is huge, overstaffed, inefficient and wasteful... A not insignificant part actually (maybe 20%)... but still, not really enough to account for it.
The real reason why we're in a hole, and digging fast is simple:
We have been the (somewhat willing, mostly ignorant and apathetic) victims of the greatest fraud in the history of the human race.
That fraud is called Social Security; which together with medicare, medicaid, and "social safety net" spending (also part of the fraud) make up about 60% or so of federal spending (and growing every year).
Social Security was sold to the American people as insurance, or a pension; which they would pay into for their working life, and when they retired, be able to live on, or at least supplement their income with, just like any other pension.
The problem is, the entitlement package was a pyramid scheme from day one; and congress has been taking their ill gotten proceeds out of it since day two.
The only things that made social security work from the beginning, were demographics, and the single greatest expansion of wealth in recorded history (both occurring between 1945 and 1968).
Initially the age of retirement was set older than the average age of death for workers (the average worker died at 58 in 1934, vs the average lifespan of 65).
That, combined with the increases in birth rates, and reduction in infant and childhood mortality rates from the '30s through the mid '60s; ensured that there would be far more workers being taxed, and more total taxes collected; than people being paid benefits, or total benefits paid; for at least 65 years from 1945.
In 1934, only about half the population made it to 65 (though those that did averaged a life expectancy of 72 years).
Then, the baby boom and the post World War two medical boom happened (these were not unrelated of course).
From 1946 to 1964, birth rates in the U.S. went up by about 50%, while at the same time lifespan increased dramatically (to 72 by 1964).
This ensured a huge and growing surplus in taxes collected vs. benefits paid for the next 30 years or so, as these "excess" people entered the work force.
It also ensured a huge crash, as the post '64 birth rates went back down to normal; meaning that combined with increased lifespans, after around 1986 or so, the retired population would be growing faster than the workforce (as of 2010 about 1.5 million more people leave the workforce through retirement per year than join it through starting employment. That may end up as much as 3 million more within 10 years.)
Since 1934 the number of people who live past the age of 65 has increased from 50% to 77%, with an average lifespan for those who do of over 80 years (the total national average life expectancy is 78, but 23% of the population don't make it to 65).
In 1934 there were about 7 million people in the U.S. over 65 out of a population of about 125 million (about half of which were working). In 2010 there were about 40 million over 65 out of a population of about 300 million (about half of which were working).
The ratio of workers to retirees started out at about 8 to 1 in 1934; but by 2010 had reduced to about 3.5 to one.
Also, inflation in America remained below 3.5% annual averaged until 1968; when it surged to over 10%, reaching almost 20% by the end of the 70s, and it didn't return to normal until the mid 80s (we are now averaging about 3.4%, but most expect inflation to top 10% again within the next few years because of the currency manipulations the fed is making on behalf of the last three administrations).
That 15 year surge of inflation devalued the contributions of every American from before 1968 dramatically, and the situation didn't normalize until 1984; such that all contributions from prior to 1984 are worth about 1/4 what they would have been on a constant dollar basis.
Basically, that period of inflation it took about 10-15 years of social security taxes and flushed them down the drain.
Now, it's around 65 years from 1945, and social security payments are set to exceed receipts within the next two years (or may have done so already depending on whose accounting you believe).
Exactly as one would predict based on how it's structured, and the economic and demographic makeup of America.
We have known this was coming since 1968... Hell we knew it was possible when social security was created in 1934; but assumed the demographics of America wouldn't change as dramatically as they did.
Then the baby boom happened, and the 1970s happened, and here we are.
Social security is a bankrupt fraud. A ponzi scheme. It always has been. The people of America have been conned, and they're angry.
Americans over 50, for the most part, feel they are entitled to their social security benefits. They were promised them, and they paid their entire working life thinking they were guaranteed... but it was a scam.
If social security was really insurance, or a pension, they'd be right. It would be theres, and no-one would be able to take it away. That's how the system was sold to them. Thats what they were taught for decades... and that is a huge lie. A con game.
Because of that "single greatest expansion of wealth in human history" thing I mentioned earlier, the crash didn't have to happen. Social security shouldn't be broke.
If Social Security had been run as a pension fund, it would be flush right now, and for the forseeable future; because all the contributions in excess of payments would have been making money for the last 77 years.
Remember, from 1934 until 1986, the workforce was still growing far faster than the retired population. Not only that, but real income (inflation adjusted) just about doubled (in 1934 the average household income was $1525 a year, an inflation adjusted $25,000. In 2011 the average household income is just under $50,000).
This means that for about 40 years, the surplus was actually about double what it needed to be just to be self sustaining (presuming a 4% annualized average return).
If it was a wisely managed pension fund, with an average rate of return, those surpluses combined with moderate and safe returns on investment would have insured retirees an excellent income; while covering the big demographic hole for the next 30 years, as the rate of retirees exceed the rate of people entering the work force.
However, instead of actually investing that money, congress used it as part of the general fund, in order to make their budget deficits look smaller than they really were (and have done so every year since 1958). No actual investment has been made... in fact they've used those funds to justify even more borrowing and spending.
The thing is, Social Security was never actually organized as an annuity or insurance plan, or even as a conventional pension plan; as it should have been (neither was Medicare/Medicaid, nor state or federal "unemployment insurance" other than private unemployment insurance carried by employers and provided by non-state actors).
If they had been an annuity or a pension and post retirement health care plan; you would own them as your own assets, and you would receive far more from them than the current benefits schedule; plus you'd be able to leave them to your kids, take loans against them or use them as collateral, and set your own payout schedule.
Most people in this country work for about 45-49 years, and the average 22-34 year old today makes $25,000 per year, with wages generally slightly outpacing inflation (so it's reasonable to assume a constant dollar basis).
The contribution to Social Security and medicare that employers and workers combined is 15.2% of their annual wages and earnings (up to $106,800).
15% of that saved annually, earning 4% (just over the 50 year average rate of inflation at 3.4%, which is extremely pessimistic. The average rate of return on pension plans over the past 50 years is about 8%), for 45 years, and assuming never receiving a pay increase (again obviously not correct. The average 50 year old worker makes around $50,000) would leave a 67 year old retiree who began working at 22 and never received anything more than a cost of living raise a fair bit of money for their retirement.
What's a "fair bit"?
Try around $350,000. In fact, even if you just managed to save cash, with no pensions or investments whatsoever, you would have $170,000.
If instead we assumed a normal rate of pay raises (3% annual average across the entire workforce, plus inflation/COLA of 3.4%), and a normal rate of return (8% average for conservatively managed pension plans over the last 50 years) that fair bit turns into between $1 million, and $1.5 million
Oh and these are numbers after taxes, presuming taxes remain at current levels... which they probably won't. Historically, since the 1960s taxes have gone down in this country, but that's almost certainly about to change.
Also remember, this is on a constant dollar basis, so thats expected to rise with inflation. this is a purchasing power parity number with today.
That same 67 year old worker can expect about $15,000 a year from social security, or about $1275 a month (the average retired worker today receives $1180 per month, or $14,160 per year)... or could if the system actually worked, wasn't broken and bankrupt etc...
The average worker survives their retirement at 67 by 11 years. Even if you had only saved cash, and your savings had only kept pace with inflation, you'd be beating the "benefit' from social security, with about $1275 a month.
And of course, if you had a normal career, with a normal pension plan... Well, even being very conservative, you would have something like $95,000 a year.
More importantly, you would have an asset. It would be yours, to do with as you like. You could leave it to your kids, borrow against it to pay off your mortgage, or even take a lump sum to do so and not worry about a payment again... anything you wanted.
And of course, that ignores any asset value you may have, like a house with a paid off mortgage (which, ignoring the recent bubble, will on average increase in constant dollar value about 50% over the life of a mortgage), any other investments or savings etc...
Ok, but what about health care?
An individual health care plan runs about $4-5,000 a year in todays dollars, a family plan usually runs between $8000 and $12,000 (in most states anyway, some are much higher); which in the U.S. is generally paid 80% by employers and 20% by employees.
Since we are talking about individuals, let's presume you can continue that $5,000 a year cost post retirement, but paid out of your own retirement savings rather than medicare.
Even with just savings, presuming your 11 year average retirement you only come out slightly behind Social Security; and with any kind of investment whatsoever you come out at the least 100% ahead.
Note: i should mention that as of today, actually, in general, Americans between 65 and 75 are doing quite well. They have higher median income and assets and lower expenses than the median of the general population. However, the bottom 22% of seniors are not doing at all well, with social security their only real income, and medicare their only medical care.
If Social Security and Medicare had been run as proper pension and health care plans, we'd have no problem with payments, and Americas older population would be rich.
But they're not run that way.
They are, and always have been, taxes; which are conventionally referred to as insurance, as basically part of a massive 77 year fraud.
Well.. 46 year fraud for the medicare portion...
Congress has been taxing everyone 15% for the "privilege" of earning wages, for the last 77 years; and using that money to pay for spending that gets them reelected. In return they have promised that you are "entitled" to a small payout, with the caveat that it's as much or as little as they want to give you, when they want to give it to you, for as long as they want to give it to you.
And yet, people defend this system?
In reality they don't. They defend the idea of the system they BELIEVE they had, because they were defrauded by congress for 77 years.
But it was all a lie.
Now, that lie is being exposed... and people are shocked, and angry. They want what was promised to them.
The politicians are smart enough to know that these people vote, and for the most part young people (who haven't believed they were going to get their social security benefits in 20 years) don't.
So, we're inevitably going to end up taxing the productive more, and accruing more debt.
There are about 150 million workers in the united states, earning an average of $25,000 a year; for a total personal income of about $3.75 trillion dollars a year (this year the actual estimate is $3.51 trillion)
However, only about 47% of those pay more taxes (including social security taxes) than they receive in net payments and benefits.
So that's about $1.85 trillion net positive income.
At this point social security is so broke, and the government has borrowed from it so much; that you could tax every productive worker at 100% of their income for 20 years, and STILL not make up the unfunded liabilities of the system (which currently stand at $18 trillion dollars for social security alone - $62 trillion for the whole shebang - , with an additional 1.4 trillion per year added for the next 20 years).
We'd still be 10 trillion short, and of course no-one would bother working at 100% tax rate, they would just become unproductive workers like the bottom 47%; not only not solving the problem, but making it worse.
Ok... how about we tax total corporate profits? Surely the "big corporations" can afford it, and if we take everything they make, that should cover it right?
Well, no.
Total corporate profits in the U.S. are about $6 trillion annually, and have actually been pretty consistent on a constant dollar basis since the late 80s; minus the internet bubble and the housing bubble.
Ok, so we could tax them at 100% for four years and that would cover it right?
Well no, because if we did, total corporate profits would instantly fall to zero. There would be no incentive to produce profit, and companies would either close up shop entirely, or simply plow the money back into the business as expenses so as to show no profit.
And of course theres the fact that about 50% of all "corporate profits" are actually from small businesses; and half of those are form sole proprietorships or limited partnerships.
Basically your plumber, electrician, corner store owner, mom and pop shop...
Their "profits" are actually their only income... and they wouldn't be able to protect themselves from taxes the way a bigger company can.
50% of the employment in this country also comes from small businesses... You think unemployment is bad today at around 9% (officially. The "real" number is probably more like 15%) how bad do you think things would be if we went to 50% or more unemployment overnight?
Hell, why do you think unemployment is so high today, while companies are sitting on big piles of cash?
Simple: It's because the management of those companies is TERRIFIED of what congress, and this administration are going to do to them. They don't know if they're going to be able to survive whatever it is they do.
In past years, American business could count on the fact that politicians understood you couldn't slaughter all your cows to pay your bills this year, or you wouldn't have any calves to sell next year.
With the current congress and administration... Frankly, businesses see that as a scenario the government might try, in an effort to save their own skins against the rising tide of angry Americans.
OK, what about cutting spending?
Well, it's a great idea. It's something we should definitely do. We could probably cut spending by 20% or so and not have it significantly impact the lives of most Americans, or our ability to defend ourselves, and we absolutely should (that includes cutting 20% off the military, and off current entitlements etc... through waste cuttting and shrinking the federal government in general... REAL waste cutting by people who actually know how to do it, not congress... which won't happen of course).
... And don't try to feed me that con about reducing demand or understimulating the economy. Keynes was wrong, and Bastiat was right. It's all the broken window fallacy, and if you don't understand what that is, go look it up...
There's a problem though...
The remaining 80% of spending really is non-discretionary unless we completely restructure current entitlement programs.
The U.S. government will spend 4.3 trillion dollars this year, on projected 2.8 trillion in revenue; a 1.5 trillion dollar deficit.
A 1.5 trillion deficit is by the way, almost as much as the entire 1998 budget (the last "balanced" budget we had in this country... Actually it wasn't, the last actual balanced budget we had was in 1957 but a certain percent of federal spending is carried off books every year. 1998 had an actual deficit of about $60 billion); at 1.6 trillion... though there has been 33% inflation since '98 so in constant dolar terms the budget would be $2.1 trillion.
From $2.1 trillion in constant dollars to 4.3 trillion..
Not only have we more than doubled the constant dollar budget since 1998 (on 33% inflation, meaning the budget is growing almost 250% faster than inflation... not 50% faster, not 1.5 times faster... 2.5 times faster), we've almost tripled the gross debt from 5.6 trillion to 14.6 trillion.
Half of that 9 trillion increase in debt has been in the last two years. The Bush administration took us from 5.7 trillion to 9.8 trillion in 8 years... But the Obama administration managed to add 4.8 trillion in just two (and on pace to add another 4 trillion before January 2013).
By the by, Bushes last years spending was $3 trillion on $2.6 trillion in revenue, for an actual deficit of $400 billion... at the time thought of as enormously high (and about $200 billion more than projected, because of additional military appropriations).
Obamas first year actual spending was $3.5 trillion on $2.1 trillion in revenue, for a $1.4 trillion deficit. His second year actual spending was $4.5 trillion (almost $1 trillion over budget by the way) on $2.2 trillion in revenue.
Yes a $1 trillion dollar year over year spending increase, that can't be blamed on Bush, in a year that military expenditures were actually reduced, so you can't blame it on the war either.
Of course it isn't really Obama, it's congress; I'm just using the common popular rhetoric.
After this years "cuts" (which really aren't, they're just reductions in the planned increases) we're "down" to a 4.3 trillion planned budget (which doesn't account for overages and off budget expenses, which have for the last two years been more than $1 trillion each year).
Even if we make a 20% real cut down to 3.5 trillion, that still leaves a $700 billion deficit... and that's before you account for the $6.1 trillion a year in total unfunded liabilities we are accumulating... which without huge cuts in entitlements, at best we'll trim to $5 trillion.
In constant dollar terms, and minus the theoretical 20% across the board cuts from shrinking government (which need to happen, but probably won't); 60% of the increase in federal spending since 1998 has come from increases in social security, medicare, medicaid, and social spending programs. Only 20% has come from military spending, and only 10% from "infrastructure" and 'stimulus".
We have to cut entitlements and social benefits. The currently make up about 60% of government spending, and will increase to 100% of federal spending within 10 years (at todays budget levels) if we don't.
There is no choice. It has to be done.
Historically, the U.S. Federal government has never been able to achieve more than a 19% annual 10 year average revenue return on gross domestic product. If taxes increase they reduce personal spending, corporate profits and spending, and overall economic growth, to the point that revenues fall back below 19% within a few years.
At todays levels of GDP of around 15 trillion dollars (and currently not keeping pace with inflation, so it's falling in constant dollar terms; but historically we've grown between 4% and 5% annual average over the last 50 years, slightly outpacing inflation) we can sustain a real expenditure level of about $2.85 trillion.
Our revenues this year look like they're going to be about $2.8 trillion... or just about the maximum we can expect to get based on current economic production. There's really no room for long term "revenue enhancement", and short term revenue enhancement is counterproductive.
We can't tax our way out of it, that's the maximum tax revenue we can collect (at least for more than about 4 years... and the suppression of growth for the following six years will just make the 10 year average the same... so it's the real maximum).
We need to cut about $1.5 trillion from the budget, and a "real" expenditure level of over $2 trillion.
Annually, not over 10 years.
That would be a 20 trillion cut over 10 years if we want to report things the way congress likes to; not $100-$200 billion annual reduction in increases, as we just passed through congress.
$2 trillion, right off the top, no questions no comments no bluffing.
The most we can realistically cut without radically restructuring entitlements is about $900 billion (or 9 trillion over 10 years).
Oh and of course, thats without even starting to pay down the almost $15 trillion in national debt. Let's call it another $500 billion to be able to pay the debt off in 30 years; so $2.5 trillion.
Which, funny enough, puts us right back around 1998 constant dollar expenditure levels +$300 billion or so.
Let me ask you something?
Was 1998 really a horrible year? Was federal spending so low that it killed our economy? Were old people dying in the streets because they didn't have enough social security?
Of course not.
We COULD go back to that spending level in constant dollars (meaning adjusted for inflation since then). In fact, at current revenue levels, if we didn't feel like paying down the debt, we could increase spending by about 40%. Or we could actually use that to pay down the debt.
We can't tax our way out of it, we have to cut. It's that simple.
There is no solution to this problem that doesn't involve cutting spending by about 40%.
Let me repeat that:
THERE IS NO SOLUTION TO THIS PROBLEM THAT DOESN'T MEAN A 40% SPENDING CUT
Or at least no solution that doesn't massively hurt everyone in this country for the next 20 or 30 years.
4% of that or so can come out of military spending, another 4% from discretionary spending (that's a 20% cut in each by the way, it's 8% of the total budget combined); the remaining 32% are going to have to come out of entitlements.
...And that's not going to happen.
Politicians won't do it, because they know they will lose votes.
The AARP and the left wing lobbies won't let them, even if the "right" had the guts to push it, which they don't.
The only thing we can do, is limit the damage as best we can, and work through the pain. There is no other option.
We are going to have to increase the retirement age. There is no other option.
We are going to have to reduce medical spending somehow. There is no other option.
A side rant on that topic... Between 60% and 80% of every dollar spent on medical care in this country goes to taxes, insurance, legal fees, administrative overhead, and regulatory compliance; almost entirely imposed by the government. That's an easy fix, but we won't do it, for the same reasons listed above.
We are going to have to eliminate social security for everyone below a certain cutoff age; and move them to some kind of private accounts system as I describe above. There is no other option.
We have to do it now, or at least soon; because every year we don't the problem just gets worse. It was punting it down the road every year since 1974 (the first time the excessive entitlements spending problem was brought into the congressional sphere) that got us into the mess we're in now.
We have to do it now, because every year we don't the hurting gets worse, and the time it will take to gut through it gets longer.
We have to do it now... because we've run out of other peoples money to spend.
