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The 81% Tax Increase

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May 18, 2009 – Comments (22)

There are a number of reasons why I believe that U.S. economic growth will be slower than we had become accustomed to over the past two decades going forward.  One of those reasons is the government's underfunded entitlement programs.  Social Security and Medicare do not have enough money in them and one way or another someone is going to have to pay.  Either taxpayers will have to pay higher rates or beneficiaries will receive lower benefits...or a combination of both.  Either one would act as a drag upon economic growth.  This issue has been talked about a little in the media lately because of the new government reports on these programs, but this is an issue that I strongly believe does not get the attention that it deserves.

Here are a few interesting quotes on Social Security and Medicare that I recently dug up.

"To put it another way, Social Security's unfunded liability equals 1.3% of the gross domestic product. So if we were to fund its deficit with general revenues, income taxes would have to rise by 1.3% of GDP immediately and forever. With the personal income tax raising about 10% of GDP in coming years, according to the Congressional Budget Office, this means that every taxpayer would have to pay 13% more just to make sure that all Social Security benefits currently promised will be paid."

And

"As bad as that is, however, Social Security's problems are trivial compared to Medicare's. Its trustees also issued a report this week. On page 69 we see that just part A of that program, which pays for hospital care, has an unfunded liability of $36.4 trillion in perpetuity. The payroll tax rate would have to rise by 6.5% immediately to cover that shortfall or 2.8% of GDP forever. Thus every taxpayer would face a 28% increase in their income taxes if general revenues were used to pay future Medicare part A benefits that have been promised over and above revenues from the Medicare tax."

The net result

"To summarize, we see that taxpayers are on the hook for Social Security and Medicare by these amounts: Social Security, 1.3% of GDP; Medicare part A, 2.8% of GDP; Medicare part B, 2.8% of GDP; and Medicare part D, 1.2% of GDP. This adds up to 8.1% of GDP. Thus federal income taxes for every taxpayer would have to rise by roughly 81% to pay all of the benefits promised by these programs under current law over and above the payroll tax."

Even if the calculations that were done by this article's author are wrong, and there is probably a decent chance that they are somehow, the fact remains that it will be nearly impossible for the U.S. government to pay the promised benefits for these programs as they currently stand in perpetuity.  As politically unpopular as it would be (that's probably an understatement, it would be worse than unpopular for politicians to cut the benefits of the largest voting group...it could be terminal for their careers) it's time to stop this farce and to actually do something about this.  Dramatic changes need to be made to Social Security and Medicare and they need to be made soon. 

The 81% Tax Increase

Deej

22 Comments – Post Your Own

#1) On May 18, 2009 at 12:37 PM, russiangambit (29.40) wrote:

I heard a few days ago somehwere that our current debt is 45% of GDP (don't know the paticulars). So, following that, our federal tax should 45% flat, not progressive, and on everybody.

The you add sales tax, property tax, fees, state taxes. You can easily get to 70-80% tax.

That is the true cost of our government - 70% of your income. It is crazy.

We are currently paying around 15-20% federal tax, on average. It means that we are putting 20-30% tax on future generations, with interest. This is worse than a banana republic. 

And the stock rally? And people are bullish long term on the US prospects?  Whatever.

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#2) On May 18, 2009 at 12:45 PM, dbjella (< 20) wrote:

Deej -

My question to you is why can't the gov't borrow more money or print more money to cover these costs?

I am trying to determine if there is a correlation to a nations debt and GDP.  Since 1980, these two have been climbing in the US.  People have been warning us that our debt is out of control and this is the first year GDP really fell.  If this recession ends 2010 and GDP starts growing again, then it seems to me that there is no correlation and that our Gov't can create any program it wants all it needs to do is borrow and or print money.

 

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#3) On May 18, 2009 at 12:58 PM, portefeuille (99.60) wrote:

A recent article from the NYT on health insurance in some European countries is here.

In Germany the employee pays 8,2% and the employer 7,3% of the gross pay of each employee that is insured by the "statutory health insurance".

And the price of gas has been around 6$ per gallon for years. No need to panic. It can be done ...

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#4) On May 18, 2009 at 1:19 PM, devoish (98.21) wrote:

Portefeuille,

If the Government regulates what is and is not covered in Germany, decides how much is paid for each treatment, collects from each German and then decides how much is paid to each insurer, for each insured, what do the insurers do besides cut the checks to the Doctors?

On paying for SSI...

Under their policies, tax rates have gone up three times as much for families with children as they have for everyone else over these past three decades. In just the 5 years before we came into office, taxes roughly doubled.

Some who spoke so loudly in San Francisco of fairness were among those who brought about the biggest single, individual tax increase in our history in 1977, calling for a series of increases in the Social Security payroll tax and in the amount of pay subject to that tax. The bill they passed called for two additional increases between now and 1990, increases that bear down hardest on those at the lower income levels.

The Census Bureau confirms that, because of the tax laws we inherited, the number of households at or below the poverty level paying Federal income tax more than doubled between 1980 and 1982. Well, they received some relief in 1983, when our across-the-board tax cut was fully in place. And they'll get more help when indexing goes into effect this January.

Ronald Reagan at the 1984 Republican National Convention, promising not to pay then, for todays SSI expenses.

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#5) On May 18, 2009 at 1:50 PM, AbstractMotion (53.98) wrote:

The biggest problem with all this is that there isn't really a sustainable solution for this without dismantling and revamping the program.  If you actually look at the on paper liabilities right now they aren't THAT bad.  Roughly 2.4 Trillion for the social security trust fund, in terms of surplus money that should be there.  That number is technically lower in terms of assests for Medicare.  I think the simplest solution would just be to dismantle them and send everyone a check.  Put new programs in to simply serve the poor and disabled, this was afterall the original intent of these programs.  I don't know that this will be politically feasible but eventually someone is going to have to take a hit if this program is ever going to be sustainable, people have been clamoring about this for years and years while the boomers have ignored it.  Most of them have were around for the buildup under Johnson and the accounting under Reagen that really turned this whole thing into an awful mess.  Some things like prescription drug coverage are so recent that I don't think you can even claim they had been promised from the beginning.

Basically kill the programs.  Tack on ~2.6 trillion the nation debt and send everyone a check based upon recorded tax data.  It'll be a pain to pay off the debt but at least it will reflect a realistic picture of our nation's liabilities and break the chain long term.  If people want a public pension plan they can buy treasuries/state/municpal bonds.  It worked for my grandmother well enough.  If you die your spouse or family will still have something (assuming they don't hike the estate tax some ridiculous amount).

I really don't know if traditional politics will end up deciding this issue either if the math gets out there enough.  The working class isn't going to accept some a massive tax burden just because a dead politician made a promise years ago.  I garuntee the young and healthy can riot a lot more effectively then those 65+ years old.

Dbjella - it equates to the same thing, you can't really inflate your way out of these liabilities as they're pretty much fixed against CPI.  Inflation itself would be a passive tax on business and employees.  It'd equate to the same thing by a different name.

Portfeuille - This isn't public healthcare though, this is specifically benefits promised to seniors. It's not just healthcare it's also standard of living costs.  Likewise the system needs to be reformed so that surpluses can actually be saved and invested in something besides federal debt.  It also remains to be seen how European healthcare systems will cope with the strain of an aging population.  In fact most projections forecast similar strains for European healthcare systems.  Likewise it's hard to say constantly hiking taxes will solve the problem, look at what's happening in California right now.

Devoish - Regardless of what Regan did the fact of the matter exists that we have a very real problem to deal with because of it and unless he's got a very trillion dollars stashed in a shoebox at his library or something we'll have to find another way to pay for all this or lessen the liabilities that exist.  Social Security has always been a big ponzi scheme the current generation always payed for the benefits of the previous and there existed no mechanism to actually saved surpluses that have none the less been collected since Reagans time and spent elsewhere regardless of the party in power.  Like so many things in todays society it'll start to fail the second steady growth isn't present.  It's a structural problem that wouldn't have been solved by the government misallocating even more money for years.  Likewise looking at California today it's hard to say it's the best place to consult for tax and spending advice.  Funny how Texas has some of the highest levels of employments and property values and California is depending on Federal injections of money every few months.

 

 

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#6) On May 18, 2009 at 1:52 PM, jstegma (29.39) wrote:

Right on the money!  This problem has been around for a long time and it is only a few years until it comes home to roost. 

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#7) On May 18, 2009 at 4:15 PM, devoish (98.21) wrote:

Abstractmotion,

You are correct that neither political party has had the courage to try to pay the bills since Carter. I pick upon Reagan because he was the first to succeed in selling the idea that you didn't have to and could depend upon endless growth. I do not believe SSI is an insurmountable problem. Something like a 1%tax increase would make it solvent for decades.

If you are twenty years old, would you pay 5% more in SSI taxes if you also lowered retirement age and offered full benefits to todays 55 year olds? Buy us out (actually not me, just yet) and enjoy the financial benefits of a worker shortage. You would be offering retirement to 18million people right now, plus about 2 million every year afterwards.

Medicare/caid is something different.

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#8) On May 18, 2009 at 5:42 PM, bostoncelitcs (42.74) wrote:

That must have been why Dubya instituted the largest "tax cuts" during a time of war of any President our country has ever had.

Don't worry about it.  So what if your grandkids are going to be working at McDonalds in Dubai!!

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#9) On May 18, 2009 at 5:44 PM, Melaschasm (54.37) wrote:

devoish, a worker shortage due to early retirement from SSI would reduce the tax base, increasing the tax burden upon those still working even more. 

IMO, the bare minimum reforms needed for SSI is to limit benefits to the poor, and to increase the retirement age at a rate faster than lifespans are increasing.

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#10) On May 18, 2009 at 6:01 PM, AbstractMotion (53.98) wrote:

Devoish,

 

I'm not really looking to buy anyone out, just simply to accept that some monetary obligations exist and settling them before there's nothing else to settle besides promises made by politicians that have long since passed away.  Basically I'd put anyone over 75 on the public dole completely similar to what we have now, probably with a reduction in what medicare will pay for to simply basic and emergency care + checkups and necessary drugs for those treatments.  The government would then essentially payout the existing trust funds in a bell curve shaped fashion to those between the ages of 45 and 74 with the center being around the 60-65 age group which will soon be retiring or expecting to.  Anyone over 60 will be elligible for similar funding at 75 and will have the same scaled back medical benefits but those afterwards would be under whatever rules we end deciding as a nation are appropriate for healthcare.  Costs would be drawn from the general fund and budgetted as such.  

 

Employer side taxes would be mandated to go towards an employees retirement similar to a 401k, if people want a government backed retirement they can invest in treasuries.  Employees could direct their dollars as they please to either their own healthcare, retirement or whatever.  Tax rates would rise temporarily as the debt is payed off and the the 75+ age group is taken care of.  Over time as the other obligations faded out it would go back to normal.

People might have to work 5 more years to give themselves a better retirement cushion too, but they'll have that option.  Long term healthcare is something I think we still need to sort out as a nation and either way it should be inclusive of seniors not just essentially assuming they'll get everything they want.  I also think medication payed for by the public should be subject to government overview as well as Obama suggested, we shouldn't be paying 2x as much for someones medication because in some cases it's been shown to relieve headaches as well (yes our medical system does this).  

 

There's going to be compromises here, retirees will have to realize they were promised more then they had payed for the next generation can afford to and younger workers will have to accept that in order to avoid an increasing longer term burden it'll be necessary to pay some in now to help restructure the system.  Some of the numbers might need to be adjusted, but I think it's a workable solution that has both groups compromising and involved in deciding their own status long term.

 

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#11) On May 19, 2009 at 12:24 AM, StockSpreadsheet (71.51) wrote:

One thing they could do immediately to help Social Security is to eliminate the cap on the tax.  Right now, only the first $50k or something of a person's income is taxed.  If you removed that ceiling, (which makes SSI one of the most regressive taxes we have), then that alone would bring in a lot more money to help make SS solvent. 

I think the new money should be invested in index funds in individual accounts so that we could move away from the ponzi scheme setup that Social Security was initially set up as.  Part of the Ponzi scheme setup was necessary when SSI was set up since they wanted to immediately pay out benefits to seniors that had never paid into the system.  However, over time they could have saved the money and moved it more into a pension-type system instead of the ponzi scheme it still is.  If they had done that, then SSI would not be looking at the problems it is having today.

A similar thing could be said for Medicare.  If it was set up as a health insurance system, like public health insurance systems, then it would not have the huge, unfunded liabilities that it currently has.  They could have saved and invested the premium money like any normal insurer does and  also would not have the huge, unfunded liability it currently has.

My suggestion would be to write your Congresspeople and demand that SSI and Medicare be moved into a more stable, funded setup.  Otherwise, you or your children and their children's children are going to inherit an awful mess in the not too distant future.

 

Craig 

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#12) On May 19, 2009 at 2:00 AM, starbucks4ever (97.75) wrote:

russiangambit,

how does 45% of GDP of debt translate into a 45% income tax? I don't doubt your conclusion that these entitlements are unmanageable in their present form, but the "proofs" should be more rigorous...

BTW the debt actually stands at 11.3 trillion, or 90% of the real GDP (by "real" I don't mean useful or tangible, I just mean stripped of imputed rents and other such accounting tricks). 

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#13) On May 19, 2009 at 2:14 AM, williamsullivan8 (84.71) wrote:

Deej, sorry for an off topic comment, but I think this is important

 

Question for the community:

I red thumb a stock.  Stock rises 2%, S&P500 rises 2%, shouldn't my score decrease by 4 points because I underperformed the index by 4%?  Under the current system my score would remain unchanged in this instance.  What do you all think?

My line of thinking:

A big part of the Fool approach is to invest long term in an index fund.  Well, following that line of thinking, the benchmark is someone who is long the S&P 500.

Well, scoring works great when I green thumb a stock.  Stock rises 5%, S&P 500 rises 3%, then horray I beat the index/benchmark by 2%, so my score goes up 2 points.  However, it doesn't work that way when I short.  I red thumb a stock.  Stock rises 2%, S&P500 rises 2%, then oh no I underperformed the index/benchmark by 4% (I lost 2% trying to short the stock while index rose 2% in the meantime).  In this case, my score should have gone down 4 points, but instead under the current system it would remain unchanged.  My score shouldn't remain unchanged because because when I'm red thumbing the stock, my benchmark shouldn't suddenly change to become shorting the index.  The person long the index--aka my benchmark--isn't going to suddenly short the index when I short a stock.  It makes no sense.  Again, the benchmark is someone who is long the index.  When while I short a stock, the benchmark should still be someone who is long the index.  That's would make sense, and that would also be in agreement with the Fool approach.  Do you follow?  Similar error with one or two other combinations, but I wanted to use only one example to avoid confusion.

 

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#14) On May 19, 2009 at 11:21 AM, dbjella (< 20) wrote:

11) On May 19, 2009 at 12:24 AM, StockSpreadsheet (< 20) wrote:

One thing they could do immediately to help Social Security is to eliminate the cap on the tax.  Right now, only the first $50k or something of a person's income is taxed.  If you removed that ceiling, (which makes SSI one of the most regressive taxes we have), then that alone would bring in a lot more money to help make SS solvent. 

I am absolutely not in favor of this idea.  The problem is not having enough money.  They had it.  The problem is that they spend it on things SS was never designed for.  Add more money will not solve the problem...it is just an excuse to for them to spend more.

I live in MN and our governer is going to "fix" the budget deficit by a few cuts, borrowing and accounting gimics.  The democrats want to raise taxes while while increasing some areas of the budget.  Neither of them want to deal with the problem.  We don't have the money! 

No politician from either party wants to cut.  Giving them more tax money does not "solve" the problem. 

 

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#15) On May 19, 2009 at 11:32 AM, russiangambit (29.40) wrote:

> how does 45% of GDP of debt translate into a 45% income tax? I don't doubt your conclusion that these entitlements are unmanageable in their present form, but the "proofs" should be more rigorous...

zloj, I think that 45% of GDP was the new debt incurred this year. Perhaps, the number a bit overhyped. Still,ideally, all the government obligations should be fianced by taxes. So, if new debt is 45% of GDP, then federal taxes should be 45% of GDP this year . Now, how you translate GDP into personal and corporation income is tricky.

---------------------------------------------

I found this statistic:

Current Tax Receipts Below Historical Average

Since World War II, tax receipts have averaged around 18 percent of the economy, or gross domestic product (GDP). Tax receipts were 17.7 percent of GDP in 2008, slightly below the 60-year average, and are projected to fall to 15.4 percent in 2009 due mostly to the struggling economy.

----------------------------------------------------

So, if our current tax receipts are about 15% of GDP and we are paying on average 15-20% federal tax, then to cover 45% of GDP we need to increase our federal tax 3 times, i.e. 300%. Wow, this is even ore sensational than the 81% increase in the premise of this blog.

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#16) On May 19, 2009 at 11:33 AM, russiangambit (29.40) wrote:

> On May 19, 2009 at 12:24 AM, StockSpreadsheet (< 20) wrote:

One thing they could do immediately to help Social Security is to eliminate the cap on the tax. Right now, only the first $50k or something of a person's income is taxed. If you removed that ceiling, (which makes SSI one of the most regressive taxes we have), then that alone would bring in a lot more money to help make SS solvent.

------------------------------------------

I think I pay SSN tax from the first 95K of my income or so.It is certainly not 50K.

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#17) On May 21, 2009 at 8:18 AM, devoish (98.21) wrote:

Russian,

the SSI is taxed only on the first $103 or $106,000 in earnings in 2009.

Melaschasm and Abstract,

The comment about buying out older workers was posted for its benefit as "outside the box" thinking, it is not something I have really thought about.

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#18) On May 21, 2009 at 2:17 PM, jmt587 (99.87) wrote:

I don't know if I agree with your assumption that it would be political suicide to reform these programs.  I think a lot of people would be quite relieved by a reform that put these programs on sound footing and allowed them to plan for their retirmement with the knowledge of what they could expect the government to cover and what they would be responsible for covering themselves (even if those things were less, and more, respectively, than the current statutes require).  Maybe I'm idealistic, and I realize that the conventional wisdom is on your side (and that most politicians would agree with your assumption), but I'll live long enough to see how it shakes out.  Should be interesting.

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#19) On May 21, 2009 at 2:27 PM, jmt587 (99.87) wrote:

Melaschasm, you mean limit benefits to the rich, right?  Not the poor.  Or did you mean the poor?  That's like the opposite of mean's testing, which is a strategy I think makes a lot of sense (though I will be less better off from it, and it definitely is not "fair", and is again would reward some people that acted irresponsibly and punish some that acted responsibly).

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#20) On May 21, 2009 at 4:36 PM, AbstractMotion (53.98) wrote:

Devoish - Always good to have new ideas tossed.

 

jmt587 - Personally I don't want to see these reformed.  In my opinion that government has pretty much demonstrated it's inability to hold onto a big pile of taxpayer money.  Roll the support of the destitute and disable part of SS into the welfare system and be done with it in my opinion.  I'd feel safer with my money in a bank right now and that's saying something in these times.  

Likewise if I have my savings in an annuity or another financial vehicle I can get it passed on in the event of an untimely death.  I don't see any reason to keep this system going, much less legally obligate people to pay into it.  If people want a voluntary system I'm fine with that, but forcing someone to pay into a system like this is ridiculous.

 

 

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#21) On May 21, 2009 at 5:36 PM, AbstractMotion (53.98) wrote:

Edit - new ideas tossed around*

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#22) On April 29, 2011 at 12:17 PM, stustanton (< 20) wrote:

I'm sorry but this is the kind of thing that disqualifies us economists from saying anything that's believed. Here is someone proving beyond doubt that we haven't been doing exactly what we HAVE been doing for the last 5 generations of our human existence. He just didn't notice. But then, I'm confident that he has a way of explaining THAT away too. The reality is, this system works really well. Make an attempt, guys. We pay 6% in for our working years, and our employer does too, and we get a 22% retirement when we retire, until we die. It's not much, but old-age destitution almost goes away in American society. It's that simple. If that has to go up by 1.9% to make conservatives feel better, then do it for God's sake. But don't give me that nonsense I just read.  Take 100 people proving beyond doubt that it works, and 100 people proving beyond doubt that it doesn't work, and what do you have?  Answer: 200 economists.  Don't pay attention to the economists; just make it work.  Geeze.  Dr. S.

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