A little more information on why our main Federal budget issue will be Medicare, primarily, and Social Security in the coming decades. You gotta see these numbers, especially if you are under 25 years of age!!

A little more information on why our main Federal budget issue will be Medicare, primarily, and Social Security in the coming decades.

Here are the projected changes in US population from 2015 to 2030, just 17 years from now. (ATTENTION STUDENTS: this is right in the round house punch of your careers!!). 

Age 18 to 64
    Year 2015---199,150,000
    Year 2030---205,349,000

An increase in this age group of 6,199,000 or a 3.1% increase.

Age 65 and older
   Year 2015---47,695,000
   Year 2030---72,774,000

An increase in this age group of 25,070,000 or a 52.5% increase

In 2015 there will be 4.1 people between the age of 18 to 64 for every 1 over the age of 65.

In 2030 there will be 2.8 people between the age of 18 to 64 for every 1 over the age of 65.

That is a 31.7% DECREASE.

Data from US Census: Table 2. Projections of the Population by Selected Age Groups and Sex for the United States: 2015 to 2060

More evidence that the Federal Budget is about Health Care spending and not much else.

How times have changed regarding the Federal Budget.  In 1960, 50% of the Federal budget was allocated to National Defense. In the 2010 budget it accounted for 19%. 

Like squeezing a balloon, virtually all of the difference has been a movement from Defense to Federal spending on Health Care programs. 

Source: Color coded pie charts copied from AEI but from a study by the Philadelphia Federal Reserve

To put this in perspective I will adjust for inflation and put 1960 spending in terms of what that means in today's dollars.  I think that will be helpful in understanding the scope of issue

Defense spending in 1960 dollars was $53 Billion dollars (source HERE). Adjusting for inflation, that would be equivalent to $390 billion in today's dollars. Actual Defense spending in 2010 was $872 Billion---a 2.25 fold increase OVER inflation.

Health care spending in 1960 was $1.5 Billion dollars (source HERE). Adjusting for inflation, that would be equivalent to $11 Billion in today's dollars. Actual Federal spending on health care in 2010 was $846 Billion----a 77 fold increase OVER inflation. YIKES!! But hold on...

 Caveat:  The Federal program Medicare did not kick in until 1965-66 time period so spending in 1960 on health care might be considered low.  Let's use 1970 for Federal health care spending and use that as the base.

Health care spending in 1970 was $12.1 Billion dollars. Adjusting for inflation, that would be equivalent to $68 billion today. Given health care spending in 2010 was $846 billion that would be a 12.5 fold increase over inflation.

Defense spending in 1970 was $95 billion. In today's dollars that is equivalent to $534 billion, Given actual Defense spending in 2010 was $872 billion, that is a 1.6 fold increase over inflation.

To be more accurate and relevant, the economist who wrote this report probably should have used a post-Medicare implementation time period to use as a base.  Given the realities of the Baby Boom generation, that would have been more helpful.

Short explanation of why the Social Security Tax is a "regressive tax" and negatively impacts lower income people. Kinda important to know when discussing taxes in a larger context...

One of the discussions regarding tax policy pertains to "fairness" in the tax code.  One of the issues is that fact that it is possible for lower income people to have a higher "effective tax" rate on income than someone who makes lot of income.  I will use just one example to show how this works---the Social Security Tax.

The Social Security tax that an individual pays on earned income is 6.2%(note: RIGHT now that rate is 4.2% as a result of recent "stimulus plans" BUT this reduction is considered temporary, so I will just use the  6.2% for our  purposes here).  Also, keep in mind the individuals employer pays the same 6.2% of income on behalf of the employee, but we will ignore that as well.

This 6.2% tax is levied on all income up to $110,000.  The tax is NOT levied on the income ABOVE that amount, nor is it levied on dividends or capital gains from the sale of assets (physical or financial). This is an important point!

So, the maximum amount an individual would have to pay in Social Security Tax in a given year would be $6,820 ($110,100 X 6.2%).  Read that again. 

Let's do the math for someone who earns $50,000 and $200,000 per year and see the impact on effective tax rates for both of these people.

The person that makes $50,000 per year would pay $3,100 in Social Security taxes.  The "effective tax rate" for this individual (just for THIS tax only) would be 6.2% of income ($3,100/$50,000 X 100). Makes sense, right?

The individual who makes $200,000 would have the FIRST $110,100 of that income subjected to the Social Security tax BUT the remaining $89,900 would NOT be subjected to the tax. 

We already established at the outset, this would result in an maximum tax of $6,820.  As a percent of this individuals income, this would represent 3.4% of income earned ($6,820/$200,000 X 100).

So, while the higher income worker pays more in nominal dollars ($6,820 vs $3,100), the lower income worker pays a higher effective tax on their income (6.2% vs 3.4%).

This tax is termed a "regressive tax". Meaning the lower your income, the higher the impact the tax has on your total income (in percentage terms).

Is this "fair"? Not sure, but it IS the way it is---at least for now.

Now you know. Go dazzle your friends, family and teachers with this new found knowledge

One element of the Fiscal Cliff explained here. This one LIKELY will affect your paycheck in January. Ouch!

One element of the "fiscal cliff" that just about all wage earners, regardless of income, are affected by is the 2 percentage point DECREASE in the Social Security tax that workers have enjoyed since 2010.  (You didn't know you had a tax cut??) .  It is currently at 4.2% from its "normal" longstanding 6.2%.  The tax is applied on your gross pay (wage X hours worked. Or from your salary if you are a salaried worker).

This temporary reduction was implemented as part of a "fiscal stimulus" bill/law. It served as a quick and easy way to get money into the hands of people, and the assumption was that it would likely be spent in the economy and provide a needed jolt for the demand for goods and services.

This reduction seems small for each person, and it is, but in the aggregate it is roughly about $120 billion on an annual basis injected into the economy.

Because it amounts to so little per person the economic thinking is people wont notice it, hence will be more likely to spend it than to give it much thought about saving it.  This is not entirely true for all people, but it does seem a very likely outcome.

The trade-off from this particular tax cut is that the $120 billion is supposed to pay Social Security benefits for current recipients.  Those benefits are going to be paid regardless.  This will necessitate borrowing to compensate for the tax cut.

There is no such thing as a free lunch.

The consensus right now seems to be this tax cut will expire and go back to 6.2%.  But, as with all things political, we will have to wait and see.

Yesterday I showed you how someone with an income of $45,000 can pay NO Federal income tax (47%-er) . Today I use the same household and show you how they are a major tax PAYER. These things are never as easy as they appear...

Yesterday I wrote a blog entry on how a person or household with an income of $45,000 can end up paying no Federal Income tax on that income and can actually be a net recipient of tax dollars (.  See that HERE.

Today, I want to show that this same household DOES pay federal taxes, but not necessarily the Income Tax. The taxes they cannot escape paying are Payroll Taxes,---Social Security and Medicare taxes. These taxes are dedicated to paying benefits for retirees and other eligible recipients.

The Social Security tax is 6.2% of income and it is applied to income earned up to $110,100.  Any income OVER this amount is NOT subject to the Social Security tax.  So the MAXIMUM that can deducted from someones paycheck is $6,826.20 ($110,100 X 6.2%).  For our sample household, they would pay $2,790 ($45,000 X 6.2%) in Social Security taxes.

The Medicare tax is 1.45% of income and it has NO INCOME LIMIT! As with tax policy, it depends of the what the definition of "income" is. Capital gains and dividends are excluded from the Medicare tax (Social Security tax too), which are generally the province of "the wealthy".  So, our household pays $652.50 ($45,000 X 1.45%) in Medicare taxes.

Remember, these are MANDATORY TAXES. 

The total payroll taxes paid by our sample household is ($6,826.20 + $652.50) $7,478.70.

Federal Income taxes AND payroll taxes both go to the same place---the Federal Governments General Budget--the Big Pot o' Money that is spent on all things federally budgeted for. Social Security and Medicare taxes make a stop through their respective Trust Funds, but only for accounting purposes.

If we add this amount to the "negative" income tax  of  $637(refunded) mentioned at the top, then our sample household effectively has a tax rate of 15.2% ($7,478.70 minus $637.00  then divided by $45,000 X 100).

In this light, our household is certainly not a "47%-er" and net recipient/taker of tax dollars, but percent-wise, they are a major contributor. 

These federal taxes are not the only federal taxes paid by our household. There is the Federal gas tax, other excise taxes levied on a variety of goods we consume, and tariffs on imported goods. These other taxes are more difficult to see, but they should be considered in the over all discussion of tax policy, in my opinion.

See here how easy it is too have a pretty good paying job (teacher?) and be a member of the "47%" at the same time. Nice graphic and my explanation of why it is so...

It is rather easy, actually, given the aggregated tax policies enacted over time.

There are some basic deductions  that you are allowed to subtract from your total income. These deductions effectively reduce the amount of income that is actually subject to the income tax.  Deductions reduce your income subject to tax dollar for dollar.

Also...

There are some basic tax credits that you are allowed to subtract from your total tax bill.  Tax credits reduce your taxes owed dollar for dollar.  Notice the difference between a deduction and a tax credit.  This is important when discussing tax policy.

Both of these are dependent on whether you qualify for them. Some everybody is entitled to and some you get only if you meet certain criteria.

Deductions and tax credits are enacted to further some social, economic, or political goal. Individually,  they are supposed to serve as an incentive to bring about a desired outcome that benefits society.  Collectively, they could serve that purpose OR collectively create problems and/or inefficiencies. 

The following graphic illustrates how a person (or household in this case--a family of 4) earning $45,000 per year in income can owe no Federal Income Tax on that income by using the available income deductions and tax credits.

Source: The Economix

 This assumes the families total income from all sources (wages, interest earned on savings accounts, and "other") is $45,000.

This couples filing status is "Married, filing jointly" (I  assume) and includes both of their incomes combined OR it could be just one of them is the sole income earner.  It does not matter.

Right off the top, they are entitled to take a deduction of $11,900 for just being married. I will keep it at that and do another posting on how your tax bill will be affected by other potential filing statuses.  This deduction ("subsidy") serves to help reduce taxable income in an effort to help defray the cost of running a household with the goal of keeping families together and encourageing couples to stay married. That is/was the intent of the tax policy.

Next, the taxpayer can deduct from taxable income, $3,800 for each person in the household who is legally dependent on the taxpayer. Generally this means children, but it could be a parent, grandparent, or other dependent. You also INCLUDE yourself AND your spouse in the calculation.  This equals ($3,800 X 4)  $15,200.  See how you and your spouse were "double counted" in the calculation, first for being married then as a member of the household.  Assuming no other deductions you are allowed to take, the your income that is ACTUALLY subject to taxation is now ($45,000 - $11,900 - 15,200) $17,900.  This amount is called your "Taxable Income".  It is derived after taking all of your legally available income deductions.

The Federal Income tax owed on $17,900 is $1,813.  If we stopped right there this is how much the taxpayer would write a check to the IRS for ASSUMING they did NOT have any "Federal Withholding" from their paychecks throughout the year.  We will assume that for this exercise, but is likely they would have had some withheld.  Any withholding would off-set the amount of tax owed, either partially or totally.

This  taxpayer now finds they are entitled to a Child Tax Credit of $2,000 ($1,000 for each child). Taxpayers with an adjusted gross incomes of $110,000 or less are eligible for this credit, so this is not necessarily a "gift" to lower income people, however it benefits them a great deal.  Remember, tax credits reduce your taxes owed dollar for dollar.

Now, we subtract that $2,000 from our taxes owed of $1,813 and we now owe -$187.00 in taxes. Sweet!!  The Child Tax Credit is considered a "refundable tax credit" which means if the credit results in a negative number, the taxpayer owes $0.00 in taxes but they are entitled to the $187.00 too!

We are not done with our tax credits yet.  The next one is called the  "EITC", which stands for Earned Income Tax Credit.  This credit is targeted towards low income people--single, married, with or without children.  It is considered a significant anti-poverty policy and enjoys significant bi-partisan support in Congress and the Presidency.  The EITC is WAY TOO COMPLICATED to explain in a few sentences. Wikipedia has a pretty good summary of it here.

This family qualifies for this tax credit too, to the tune of $450.  Because this credit is 'refundable" as well, we subtract it from our tax bill, which currently is a negative $187.00.  So if you add this credit to the the total, this family will receive a tax REFUND check of $637.000. 

This family effectively pays no federal income tax on their $45,000 AND they get an extra $637 to consume or save.

This is certainly a form of income re-distribution BUT as I mentioned earlier, both of these tax credits in particular enjoy bi-partisan support, historically. 

So, now you know how someone earning $45,000 per year can have no tax liability and receive a refund check as well. 

This is a working person (could be a teacher with THAT salary) who would be considered a member of the 47%.  Working and has a good job,  but the net recipient of tax dollars.

Hope this helps with your understanding of the issue.

Entitlement Spending and Public Investment in 3 easy graphs. Hey, this is not a flashy subject but none more important...

The following sets of graphs illustrate the "Emperor has no clothes" in terms of the Federal Budget. Everyone knows the problem but no one does much about it.
Mandatory, or non-discretionary, Federal spending is concentrated in 3 major areas--Social Security, Medicare and Medicaid (and its subprograms). As illustrated in the first graph, these programs over time have steadily consumed a larger part of the Federal budget---approx. 47%!

Other parts of the budget consist of non-mandatory, or discretionary, spending.  Within this category you have "Investment Spending" by the Federal government. The following is a definition of Federal Investment from HERE:

"Federal investment is the portion of Federal spending intended to yield long-term benefits for the economy and the country. It promotes improved efficiency within Federal agencies, as well as growth in the national economy by increasing the overall stock of capital. Investment spending can take the form of direct Federal spending or of grants to State and local governments. It can be designated for physical capital, which creates a tangible asset that yields a stream of services over a period of years. It also can be for research and development, education, or training, all of which are intangible but still increase income in the future or provide other long-term benefits."

The graph below shows the decline over time of Federal Investment as a percentage of the Federal budget.  The implication is that there is significantly less funding for public works projects that confer benefits on everyone that the private market does not supply.

The last graph puts these two areas of the Federal budget together.  Budget dollars are not unlimited.  Over time, mandatory transfer payments to senior citizens and the poor have significantly surpassed non-mandatory public expenditures/investment in infrastructure. 

The Federal government does not do much of anything anymore in terms of physical public goods. They pretty much just write checks.  Think about that.

How do we address this issue? I dunno, I am just a high school economics teacher.  You will have to ask the Emperor and the Court Jesters we call the Executive and Legislative branches.

Nice graphic showing the situation with Social Security...A concern for the young and old...

Go HERE for the source of this graphic in the Washington Post (Via: Jared Bernstein blog).

A concern should be the cross-over point between surplus and shortfall.  There are lots of divergent viewpoints as to whether this constitutes a crisis or not.

Revenues will still come into the fund from current workers payroll taxes (6.20% from workers and 6.20% from employers).  Until now that has been sufficient to pay current benefits.

However, as we pass into shortfall, workers will still pay into the fund from payroll taxes, BUT the Social Security Trust fund will have to redeem bonds (according to the graphic) to pay for the difference.  Where does the money come from to do that?

I am just trying to follow the money trail.  Is it from taxes? Borrowing ("private and/or public)?  Printing? A continued shell game with the Treasury?

A vigorous economic recovery, seemingly remote at this point, would lesson the problem in the short run as a surge in tax revenue from the payroll tax would continue to fund current and future obligations.  While that would be terrific, it would give politicians breathing room to postpone necessary reforms that must take place in order to make the program solvent for the next generation of recipients. 

Nice population pyramid charts to remind us of the ticking fiscal timebomb awaiting the next generation. THIS is what the OWC's SHOULD be protesting...Go South protesters-- towards Capitol Hill...

Click on the video below to see the age-demographic change occurring in the US.  This is ground zero for a potential busted national budget in the coming decades.  Notice the shape of the pyramid in 1981, specifically the proportion of young working age adults to the retired population (65 and older).  It is a distinct triangle with a wide base and narrow top.  There are far more younger workers paying social security taxes and medicare taxes relative to the recipients, 65 and older.  This is ok---this entitlement program is solvent.

 As the decades pass, notice how the pyramid shape becomes more like a pear.  This is not so good.  The proportion of workers to retirees becomes more equal.  However, what does not become more equal is the tax revenue-to-tax expenditure ratio--expenditures will drastically increase relative to the tax revenues (at current payroll tax rates).  Retirees are living longer, there are more of them and their health care needs (read that "costs") will only increase. This is not ok---this will make these two retiree entitlement programs INSOLVENT, unless serious reform takes place--now.  Well, now is almost too late. Should have been done 15-20 years ago.

 Each of the graphs are below as well (Source for the Graphs HERE)

One of the Presidents proposals: Continue the Payroll Tax Cut---nice graphic here showing what that might mean to YOU!

Go here for my explanation of the payroll taxes (Social Security and Medicare) YOU pay on your wages. Currently you enjoy a 2-percentage point temporary cut in the Social Security tax, normally 6.2%.  The President has proposed this cut continue for at least another year. As a result, you get an additional $2.00 for every $100.00 you earn.

The graphic below shows how much in additional taxes wage earners would pay if the tax cut is not extended. This appears to be a dubious tax cut. If you divide the number to the right by 12 months, then by 4.3 weeks in a month, the amount is relatively small.

 At most this acts as a stabilizer ("saves/maintains jobs") and is not stimulative.  We shall see.

Source: Jared Bernstein

The problem with Social Security in one easy chart---too few "youngs" working for too many "olds"....

With all the political talk surrounding much needed reform of entitlement programs, mainly Social and Medicare, the graph below illustrates the heart of the problem.  These two programs are funded directly by payroll taxes levied on current workers wages (go HERE for a primer on these two taxes). Over the last 80 years, because of demographic changes in our population, there are fewer and fewer wage earners supporting an ever increasing number of retirees and other eligible recipients.

Strip away all the high flautin' political rhetoric on the issue you are left with this simple math---Workers must pay more in payroll taxes and/or we cut benefits to the "olds". 

Another option is we "grow" out of the problem---the economy recovers, we get back to full-employment and payroll tax revenues increase---that helps, but it does not reverse the numbers below.

Source: Carpe Diem

A small math problem for you---Your parents and grandparents would be greatful if you can solve it for them...

Math is the greatest enemy of our Federal budget---an increasing number of baby boomers approaching retirement relative to the number of workers working to pay the 6.2% payroll tax that funds Social Security payments. Here are the projected ratios.

Source: Social Security Administration

To Fix this imbalance, possible solutions are:

(1) increase the percentage paid by workers to something more than 6.2%
(2) decrease payments to Social Security recipients (i.e. indexing to a chained CPI)
(3) Some combination of (1) and (2)
(4) Economic Growth---Get to Full-Employment with higher wages (or even without) so at 6.2% more money is available for the "olds".
(5)  Immigration---it is a numbers game. The quantity and quality of your migrants.  If our domestic population is not growing sufficiently then we must look outside the borders.

Am I missing any other solutions? I would like to add to my list...

This cannot be emphasized enough---New charts showing the weight of Entitlement programs have on the Federal Budget..

Two helpful charts that show the rise of direct public transfer payments over time. The first shows, in percentage terms, cash transfers to individuals last year.  The two biggies, Social Security and Medicare, consume 76% of those payments. The rest are crumbs comparably. The second chart shows the rise of payments to individuals relative to defense spending and interest paid on national debt. The scarry part of this graph is it is projected that paying interest on the debt will surpass spending on Defense.  Yikes!! HT: Carpe Diem

An easy 10 step guide as to where your Social Security Payroll Taxes end up. You are not going to like this journey...

1. You and 9 of your friends work this month.

2. Each of you are subject to a mandatory payroll tax of 6.2% of your paycheck for Social Security.

3. Your employer ALSO pays on your behalf 6.2% of y'alls paychecks in Social Security Taxes.

3. Each of you earns $3,000 per month in gross pay (before any deductions). Total income for all of you is $30,000.

4. Collectively you pay $1,860 in Social Security taxes ($30,000 X 6.2%) and your employer pays the same amount. So $3,720 ($1,860 X 2) is submitted to__??___. This is where the story gets murky for most.

5. The payment of Social Security checks to retirees (and others) comes from the Federal Govts "General Fund/Budget" (that monstrosity that the President proposes and the Congress approves)--not from the Social Security Trust Fund, which I believe most people think. This SS tax money you and your employer pay goes directly to the General Fund.

6. Assume this month there are 2 retirees eligible for S.S. checks and each one is entitled to $1,500---for a total of $3,000 in current S.S. obligations. That is a 5 to 1 ratio (10 workers for every 2 retirees)--about right, I believe.

7. The $3,720 arrives in Washington. The US Treasury takes control of it. ALL of it goes into the General Fund BUT only $3,000 goes to retirees. The rest goes into a cash account with the Social Sec.Trust Fund, right??? Not so fast...In an accounting move, the US Treasury issues special Social Security Trust Funds Bonds in the amount of $720 (the amount collected, $3,720) OVER current obligations ($3,000) to the Social Security Trust Fund.  Congress then uses this $720 for, well, whatever they want to spend it on.  Effectively, the Federal Government has borrowed this $720 from itself.  Specifically, they have borrowed from taxpayers. More specifically, they have borrowed from FUTURE taxpayers, but that is for another day...

8. When people say there is no money (to speak of) in the Social Security Trust Fund, they are technically right. Current workers earning money and paying payroll taxes is enough to pay the current obligations for payouts to retirees AND there is some surplus left-over, which Congress borrows every month to pay for other things.

9. Rinse and Repeat

10. As a result of decades of doing this, there is roughly $2.6 Trillion in Bonds (IOU'S) held in the Social Security Trust Fund.  This is a part of the $14.3 Trillion National Debt number that is well known to us all by now.

Have a nice day!!

My explanation as to why Social Security Checks WILL go out regardless of what happens with the debt limit. Man, we are gullible!!.

When you (and all other workers subjected to payroll taxes) work, 12.40% of whatever you earn goes to the Social Security Trust Fund (you pay 6.2% and your employer pays 6.2%). For years this amount has exceeded what was needed to pay retirees Social Security checks. The difference in what was brought in and paid out was the then "borrowed" by Congress to spend on wars, bridges, tax breaks, whatever...The S.S. Trust Fund took US Treasury Bonds ("IOU's) in exchange for loaning the surplus money to Congress. This is known as an "Intergovernmental Transfer"--government borrowing from itself. The Trust fund has lots of these bonds, roughly $2.5 Trillion (yes, that is right) worth. They can redeem them as needed.

Assume the debt limit of $14.3 Trillion is met with no extension.  There have been threats that granny may not receive her Social Security check next month.  Let me show you how this is not possible, unless political leaders "choose" (not forced) to do so.

This $2.5T owed to the SS Trust fund is part of the $14.3T national debt accumulated by Congress. If a deal is not reached, EXCLUSIVE of any decision about what to spend or not spend on out of the Federal budget this is what the SS Trust fund can do.

Little less than $60 Billion is paid out in Social Security checks each month.  The SS Trust fund CAN "cash in" $60 Billion of the $2.5T in bonds they hold. The US Treasury is required to take those bonds and credit the SS Trust fund with the proceeds.  The Trust Fund can now cut checks and granny can go to the bingo parlor with no worries...Because the those bonds have been paid off and they were a part of the $14.3T national debt, the national debt DECREASES by $60 Billion BELOW the debt limit.  Now, Congress can borrow $60 billion MORE to meet other obligations and NOT be over the legal debt limit...Rinse and repeat next month...

This is not a long term solution.  The first question that comes to mind is WHERE did the US Treasury get the money (or electronic credits) to pay off the bonds?  Well, they printed/pressed a button.  Inflationary, you say? Perhaps, but inflation is not the biggest problem we face right now.  (Yes, this is kicking a can down the road, but just a DIFFERENT can...)...

The Federal budget problems have to be addressed, but they don't have to be at granny's expense. 

So, when you hear a politician or a talking head on TV tell you Social Security checks won't go out, they are either not informed or they assume you are not and will believe anything...Don't let it be the latter...

Please read this editorial by Thomas Saving that I base this blog entry on...He is not responsible for any of my misinterpretations of his work... :)

Nice Interactive so you can solve the Social Security problem...Try it out and compare to what I did.

Using the parameters in this interactive provided by the Wall Street Journal, this is how I would go about solving the Social Security problem that looms on the horizon.  The selections I made create a bit of a surplus (the triangle shape to the right of the "0.0"-- +.33%).  After each   ection, I offer explanations and rationales. This is not a prefect simulation, but it is a start.

Seems to me that the problem can only be solved by a mix of tax increases and benefit decreases, that will be progressive in some situations and regressive in others. I tried to do this as sensibly as possible and with some thought...




Source: WSJ



 First, Social Security has to move to a "means tested" entitlement program (the first box checked above).  This means that a retiree's OTHER income (savings, investments, 401K's, physical assets, etc) would be taken into consideration in determining how much in Social Security they would receive. The more you have in other independent assets, the less you get in Social Security you would be entitled to receive.  The problem comes in as you move down the income scales where the government determines the cut-off points for the level of benefit received. Formulas will have to be created and there are lots of pitfalls there.  EVERYONE should receive something (yes, even the rich guys/gals) because if someone contributes all their lives and gets nothing in return, then the program is not an entitlement but a welfare-type program.  This IS an important distinction.

Second, the retirement age has to increase from 67 to 68 (the next box checked above). This is not a huge jump, given the increased life expectancy of the average American.  This is a regressive policy, however.  Statistically, lower income/poor people have shorter life expectancies relative to high income/rich people---wait longer and receive less benefits is regressive in nature.  I soften the impact of this in my last point a little bit down the page.

Third, a payroll tax increase over an extended period of time, from a total of 12.4% to 14.4%. This is a 16% increase in payroll taxes over 20 years.  Currently, workers pay 6.2% of their gross earnings in Social Security and the employer pays 6.2% on your behalf as well, for a total of 14.2%.  This is regressive in that lower income people pay a higher percentage of their total income in payroll taxes than do higher income people.  Currently, the maximum income that is subject to the 6.2% Social Security tax is $106,000.  Any income OVER that amount is not subject to SS Tax.  The interactive does  not give an option for a moderate increase over the $106,000, but I would be in favor of increasing it, but not to the $200,000 level suggested in the interactive. 

Lastly, as mentioned above I would make provision for the "very poor" elderly population amongst us (box checked above).  This is a progressive policy.  Do I really need to explain/justify that one?  Pretty self-explanatory, in my opinion.

I believe my choices reflect a political "Moderates" approach to solving the Social Security problem.  Liberals will not like that I don't put more of the burden on the "rich" and Conservatives won't like that I means tested the program AND raised taxes.  However, I do not know of a better way out of our predicament.  Do you? 

Please try the interactive yourself but really think about what (1) you would do and (2) what could actually be implemented. Two very different things...

My wish for the New Year....YES, it is related to economics...Don't judge me...

Food for thought as we pass into the New Year...

""On Jan. 1, 2011, the oldest Baby Boomers will turn 65. Every day for the next 19 years, about 10,000 more will cross that threshold. By 2030, when all Baby Boomers will have turned 65, fully 18% of the nation's population will be at least that age, according to Pew Research Center population projections. Today, just 13% of Americans are ages 65 and older.""Pew Research Center

New Year, same problem with long-run Social Security and Medicare sustainability...Is THIS the year these programs will be addressed with the seriousness they merit? That is my wish for the New Year---or to lose 25 pounds, whichever comes first.  They both face insurmoutable odds... :)

Who is more selfish---Senior Citizens who won't take reduced benefits to help young people financially, or young people who won't pay more taxes to help old people financially? Good luck with that question...

My students over the last few years have heard something very similar in my lectures, but I have always prefaced it by suggesting this is not something you can say out loud (outside of an academic setting) because these two programs (Social Security and Medicare) are so sacred and personal.  Up to this point, politically, they are off-limits to any significant change.  However, they are the "elephants in the room" that are moving from the recliner to the couch and will soon need a sectional sofa to fit its ever expanding self... 

WSJ: Notable and Quotable-
Robert Samualson

""There has been much brave talk recently, from Republicans and Democrats alike, about reducing budget deficits and controlling government spending. The trouble is that hardly anyone admits that accomplishing these goals must include making significant cuts in Social Security and Medicare benefits for baby boomers. . . .Doing so, it's argued, would be "unfair" to people who had planned retirements based on existing programs. Well, yes, it would be unfair. . . But not making cuts would also be unfair to younger generations and the nation's future. . . . The old deserve dignity, but the young deserve hope. The passive acceptance of the status quo is the path of least resistance—and a formula for national decline.""

What do you think of the following two premises and questions? Are there any alternatives? If so, Washington needs to hear them.... :)

(1) Ask any grand-parent if they would do anything for their grand-children they would say yes...Then why can't we cut Social Security and Medicare benefits to that group of people?

(2)  Ask any Grand-child if they would do anything for their grand-parents they would say yes...Then why can't we raise the Social Security and Medicare taxes on that group of  people.