Clarity on the deficit and the so called debt crisis
There’s a saying in business that one can not manage what he’s not measuring and he is certain to mismanage what he refuses to measure properly.
Let me ask you a question. If you’re working somewhere, it’s likely that you have a 401(k) or a 403(b) type of savings plan for retirement. If you do, would you consider it a wise move to raid your retirement contributions to fund your everyday living expenses? Yes, people do this, but is this really wise? It’s generally not for several reasons, but the main problem revolves around the idea that you can’t “spend it” and “have it” too and if you were to come to me for financial advice, I’d tell you that you either need to cut your living expenses or go out and get another job to increase your income if you wish to preserve your retirement nest egg. Saving money is always the choice between current consumption and delayed gratification. But even determining where the spending or lack of income problems lie requires that one measure properly or do the accounting.
Just as it would be foolish to spend your retirement savings now and expect that you’ll have something set aside for later, it would still be even more foolish to construct your household budget on the basis of draining your retirement savings to cover your current living expenses. By doing this, you’re actually planning to rob from your future to finance your current spending.
Just as this advice would hold for an individual, it also holds for a government. The government has collected a retirement nest egg called social security and its somewhat like a 401(k) in that it’s deducted and earmarked specifically from your paycheck. If you look at your paycheck, you’ll see three different federal taxes that are withheld : Federal income taxes, FICA (Social Security) and Medicare. Why are there three separate federal taxes as opposed to just one, especially since they’re going to the same US Treasury? Well, they’re separate because they’re specially earmarked for a certain purpose. The social security and medicare taxes are earmarked specifically for those purposes and are to fund those specific entitlements. The federal income taxes are for general discretionary spending. When you hear people talking about raising or cutting taxes, it generally applies to this latter component. It might be helpful to think of each of these taxes in terms of three different buckets like this:
Bucket 1—Federal Income Taxes (Discretionary Spending)
Bucket 2- FICA (Social Security)Taxes
Bucket 3- Medicare Taxes
When you think of these as three separate buckets, it’s easy to visualize how things are earmarked and the idea is that whatever goes into a bucket is segregated and set aside for specific purposes. So what goes into the social security bucket should only be used for social security. The same applies to medicare. Separating and accounting for funds earmarked for certain purposes is called Fund Accounting. In other words, Fund Accounting keeps separate tabs on money collected that’ s earmarked for certain purposes and matches it up with related expenditures in the same bucket.
Well that’s simple enough. Three different buckets for three different taxes and we’re keeping everything separate so we know what’s what. But what happens when one bucket begins to get empty while the others are full? Well, sometimes there’s what’s known as interfund borrowing and the empty bucket gets filled with water “borrowed” from one of the other buckets, but this generally is for a temporary exigency and should be replaced whenever the empty bucket fills back up from its own water source (funds). It’s somewhat irregular when a bucket is permanently on empty and its only source of “water” is from another bucket, yet this irregularity is constantly the situation between the buckets for Federal Income Taxes and Social Security. The Federal Income Tax bucket is running empty and its source of water has been the social security bucket. The Federal Income Tax bucket is running out of water for two reasons: insufficient income taxes and too much spending. The greater part of the spending from that bucket (approximately 40%-50%) is defense spending.
It used to be that when we talked about the federal budget, we only were talking about Bucket 1. Buckets 2 and 3 for Social Security and Medicare were considered “off budget” because they held funds specifically for the entitlements. That was the case up to the administration of Lyndon Johnson. Johnson decided to bring the Social Security and Medicare buckets “on budget” to mask the money he was spending on the Vietnam War. This could happen because the social security bucket had an “excess” (i.e. more people working to pay taxes into social security than the outflow to retirees). Bringing these buckets on budget had the effect of shrinking the percentage that defense spending represented of the total expenditure pie and every president since Johnson has used this sleight of hand to hide the excessive level of defense spending buried in Bucket 1. To make matters worse, the excess water in the bucket for Social Security has been drained out to cover the expenditures in Bucket 1.
Measuring things properly sets up a far different analysis than what we’re hearing out of the political class. Once we’re measuring things properly by tracking the funds separately as originally intended, it is clear that there are three separate problems with each bucket or fund:
- The Federal Income tax bucket has been severely underfunded due to insufficient taxes and excessive spending. Nearly half of all expenditures from this bucket are for military spending and the bulk of that winds up in the coffers of the nation’s weapons manufacturers. The huge deficit in this bucket has been funded in part by the excess from the social security trust fund and the rest by borrowing.
- The Social Security tax bucket has an excess as measured by the difference between inflows and money paid out to retirees. This is so because the number of workers paying in is greater than those who are drawing benefits. This is expected to change dramatically as the baby boom generation retires in earnest. The excess has always been illusory because it was really insufficient to fund the actuarially determined liability for benefits. People are basically living much longer than assumed and the taxes here are insufficient to cover that even as the fund shows an excess. As I mentioned, what makes matters worst for this fund is that the money has been taken and used for general spending. The money can not be paid back absent a substantial increase in income taxes.
- The Medicare/Medicaid tax bucket’s problems revolve around the high cost of medical care, demographics and unfunded benefits such as Bush II’s prescription card plan.
If you’ve followed me up to this point, then it should be clear the fallaciousness of republican’s tax cut mantra and the political class’ attempts to cut entitlement spending instead of defense spending. In effect, the tax cuts from Reagan on down to Bush were financed with Social Security Taxes. That also means that our unbridled war spending has also been effectively financed by Social Security Taxes and our retirement money is setting in the coffers of the munitions manufacturers and that of other recipients of corporate welfare. That fact needs to be absolutely clear to everyone.
Has anyone from Obama on down proposed any cuts for the war budget? Has the T-party? In other words, has anyone proposed how they intend to fix the problem in bucket 1 without involving buckets 2 and 3? Not as I recollect. Within the past month, a new defense/war spending appropriation was passed with a $ 17 billion increase over the prior years’ with full bi-partisan support and absent the fractious dissension we’re hearing now. Has anyone proposed how they intend to return our stolen retirement money back to its rightful bucket? No, that discussion is totally off limits.
This so called debt crisis is one that’s been totally created. That’s not to suggest that the republican party isn’t full of idiots, it surely is, but this “crisis” is nothing but an attempt to create conditions where the American people are about to get fleeced. The political class wants to create fear so as to prep everyone for draconian measures that were on the backburner anyway and creating a crisis is the only way they figure that they can get the people to accept the pre-planned austerity measures. We have even the bond rating agencies playing their assigned roles in this. These are the same guys who couldn’t properly rate all the mortgage backed debt that blew up and yet they suddenly have the legitimacy to threaten the credit rating of the US? No, I’m not buying it. This is a set up.
Yes, the entitlement funds have problems, but a step towards resolving them begins with 1) returning our social security tax money to the fund set up for it 2) resolving the problems in discretionary spending and 3) straightening out the accounting so people can clearly analyze the problem. Either raise tax rates to cover defense/war spending so the people know exactly how much this is costing them or cut dramatically those expenditures. But don’t continue this scam and tell me that you’ve got to cut entitlements after that money has been stolen to finance profligate war/defense spending. We nearly outspend the rest of the world combined and it’s a very good chance that much of that is rife with fraud and corruption.
Basically, if you’re not hearing anyone talk about cutting defense, then that’s tacit confirmation that they’re proposing to continue the same game that’s been played for years. Of course, I’m aware that the administration thinks that it will save a trillion by winding down the Afghan and Iraq conflicts, but that’s not enough. There needs to be steep cuts in the military budget and a total overhaul of thinking as far as foreign policy is concerned. If presented a clear choice between retirement, healthcare and education versus filling the coffers of the military industrial complex and incessant meddling abroad, the people will chose the former. The problem is that this clear choice is not presented, but muddled in the numbers, in untruthful debate and the creation of a crisis , all of which we’re witnessing now over the debt ceiling.