Social Security Tax

The Threshold of Change

So as 1934 dawned the nation was deep in the throes of the Depression. Confidence in the old institutions was shaken. Social changes that started with the Industrial Revolution had long ago passed the point of no return. The traditional sources of economic security: assets; labor; family; and charity, had all failed in one degree or another. Radical proposals for action were springing like weeds from the soil of the nation’s discontent. President Franklin Roosevelt would choose the social insurance approach as the “cornerstone” of his attempts to deal with the problem of economic security.

The Social Security Act was signed into law by President Roosevelt on August 14, 1935. In addition to several provisions for general welfare, the new Act created a social insurance program designed to pay retired workers age 65 or older a continuing income after retirement.  (From: the Social Security website.)

SOCIAL SECURITY

is not part of the Federal Budget. It is a separate account and has its own source of income (“Payroll Taxes”). Social Security payments go in the Social Security trust fund, and should NOT be counted as general revenue. The trust fund is supposed to be used to pay future benefits. But, 

As of August 2010, there is less being paid into the Social Security Trust Fund than is being paid out to beneficiaries. Social Security is now using its “surplus”. Government agencies that borrowed from the trust fund, now have to pay the money back. But they’ve spent it. Where will they get it?   (Wikipedia)

With the upcoming elections, candidates talk about the Federal Budget, where cuts should be made, etc. but they cannot touch Social Security which has its own form of financing through income withholdings and matches by the employer into its own trust fund.

Even though Social Security forms a big portion of government expenses, it has a money stream of its own, separate from any national debt debates and discussions.

The national debt is not paid for with Social Security taxes but with money from the general fund of the U.S. Treasury, which comes from income taxes (94%), corporate income taxes (20%), excise taxes (2%), and other miscellaneous receipts (7%) [ % current as of 2014].     (just facts.com)

By all rights, we should ask: Who among the elderly need benefits? How much? At what age? If Social Security and Medicare were considered “welfare” — something the nation does for its collective good — these questions would be easier. We would tailor programs to meet national needs. But entitlements are viewed as a higher-order moral claim, owed individuals based on past performance. So a huge part of government spending moves off-limits to intelligent discussion.

We can only imagine how Roosevelt would view this. He consistently advocated a fully funded Social Security and used his second veto on a 1942 tax bill that delayed higher payroll taxes. But Congress overrode the veto, and Roosevelt was preoccupied by World War II. (Washington Post)

DEFICIT vs. DEBT

Recently there was an article in the paper explaining that President Obama tried to get credit for reducing the “budget deficit.”  The table (see below) extends out to 2017, gradually reducing that. How it is figured, I don’t know (yet).  Though he cannot run for office again, he wants to explain how the deficit has been declining under his watch, but nobody is paying much attention to that.

us_deficit_pct

Debt, on the other hand has been spiraling out of control.  According to a (Democrat) post, G.W. Bush is responsible for that, by not acting toward the end of his term, which might very well be true. I don’t know how that is figured, but cannot believe that in the past six years President Obama could do nothing about that.  In all fairness, it is very tough to get Americans to agree that we all are overspending, and need to do something about that.

debt-as-percent-of-gdp

October 1, 2014 Trent Lott (Republican Senate Majority Whip in 1995) and Tom Daschle (Democrat Senate Minority Leader in 1995) were interviewed and asked why the current congress cannot get along, between the two parties. They came up with various reasons. It was a very interesting interview. At one point Trent brought up the issue of a balanced budget under President Bill Clinton.  It was the only (recent) president under whom that happened, which was through cooperation between both Houses of Congress. Yet the debt kept, and still keeps, climbing.

Wikipedia has a very nice definition:

Suppose you spend more money this month than your income. This situation is called a “budget deficit”. So you borrow (ie; use your credit card). The amount you borrowed (and now owe) is called your debt. You have to pay interest on your debt. If next month you spend more than your income, another deficit, you must borrow some more, and you’ll still have to pay the interest on your debt (now larger). If you have a deficit every month, you keep borrowing and your debt grows. Soon the interest payment on your loan is bigger than any other item in your budget. Eventually, all you can do is pay the interest payment, and you don’t have any money left over for anything else. This situation is known as bankruptcy. If the DEFICIT is any amount more than ZERO, we have to borrow more and the DEBT grows. “Reducing the deficit” is a meaningless sound bite.  Each year since 1969, Congress has spent more money than its income. The Treasury Department has to borrow money to meet Congress’s appropriations. We have to pay interest on that huge, growing debt; and it cuts into our budget big time.

Some suggest: “tax the rich to make up the deficit”. As of the end of 2010, the total worth of all American billionaires is $1.3 Trillion. We could take ALL their worth, not just high taxes, but ALL their WORTH; and it wouldn’t dent our national debt. It wouldn’t even pay this year’s deficit! And if we did take their money to pay some of this year’s deficit, what would we do next year?

The debt, and Interest payments on the rising debt, will be paid by our children and grandchildren through much higher taxes. Is that Child Abuse?

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Notice how the budget, as approved by congress, has a built in deficit amount of $1.27 trillion in order to balance the total expenses. Also note at the right bottom,  the interest on that debt is $251 billion.

“For society as a whole, nothing comes as a ‘right’ to which we are ‘entitled’. Even bare subsistence has to be produced…. The only way anyone can have a right to something that has to be produced is to force someone else to produce it… The more things are provided as rights, the less the recipients have to work and the more the providers have to carry the load.” Thomas Sowell, quoted in Forbes and Reader’s Digest.

In short:

Deficit is a shortcoming of the annual mount spent beyond income.          

Debt is the accumulative amount of deficits year to year, plus interest.

Is Our Culture Shaped By Our Economy, Or The Other Way Around?

Our viewpoint on national debt is not solely based on economics. Rather our current national debt is the result of our way of thinking. Americans, and to a lesser degree our Western partners are extremely good at converting everything into a $ value.  Not only goods and services but also concepts such as pollution, the cost of running a household, psychological issues and more. Within the Western world the priority of those values are assumed to be worldwide. Most economic studies are done in capitalist countries and then extrapolated to all economies.

IN THE SUMMER of 1995, a young graduate student in anthropology at UCLA named Joe Henrich traveled to Peru to carry out some fieldwork among the Machiguenga, an indigenous people who live north of Machu Picchu in the Amazon basin. Here is an excerpt:

Americans, without fully realizing it, were manifesting a psychological tendency shared with people in other industrialized countries that had been refined and handed down through thousands of generations in ever more complex market economies. When people are constantly doing business with strangers, it helps when they have the desire to go out of their way (with a lawsuit, a call to the Better Business Bureau, or a bad Yelp review) when they feel cheated. Because Machiguengan culture had a different history, their gut feeling about what was fair was distinctly their own. In the small-scale societies with a strong culture of gift-giving, yet another conception of fairness prevailed. There, generous financial offers were turned down because people’s minds had been shaped by a cultural norm that taught them that the acceptance of generous gifts brought burdensome obligations. Our economies hadn’t been shaped by our sense of fairness; it was the other way around.

Returning from the Czech Republic in 2009 felt a bit like the above story. I had forgotten how some things were done in California, but life had not stopped there either, so in addition I had to learn the changes as well. The plus side was that I looked at the American culture with other eyes.  I could take some distance from it. My son-in-law pointed to the blog of Dr. Housingbubble a year or so before returning to the USA.  It is a description of the housing bubble development and how it started in Southern California. I also read the Dutch book: Bankroet  (bankrupt) by two financial editors of the NRC Handelsblad (newspaper) Egbert Kaise and Daan van Lent. The writers start with the 1930s depression, then develop the process leading up to the 2007-2008 recession. It mostly deals with what is happening in California but expands to how it affects the rest of the world. The nice part is that they give short explanations of terms commonly used in American articles, but not always understood the same way in Europe.

Another concept to understand is “government deficit.”  Below the differences between how Europeans look at it vs. government deficit in the USA.

All 28 EU member states are committed by the paragraphs in the EU Treaty, referred to as the Stability and Growth Pact (SGP), to implement a fiscal policy aiming for the country to stay within the limits on government deficit (3% of GDP) and debt (60% of GDP); and in case of having a debt level above 60% it should each year have a declining trend.  wikipedia

us_deficit_pct

In the above graph we can see the deficit as % of GDP for the USA, as compared to the European model as described earlier.

The US debt is about 75% of GDP.

A question for you:

HOW COME THE USA DEFICIT AS A % OF GDP DECREASES, WHILE NATIONAL DEBT INCREASES?