Partners - Stock market, economic and political commentary by Patricia Chadwick

Archive for April, 2015

Social Security and Means Testing – Chris Christie is Right; Donald Trump is Wrong

Monday, April 27th, 2015

Two prominent Republicans recently came out on opposing sides of the Social Security “means testing” debate.

Governor Chris Christie (who has yet to declare himself in the 2016 Presidential race) dared to touch that “third rail” (one that most politicians fear will electrocute them) by declaring that Social Security benefits should be means tested because as it stands today, the arithmetic simply doesn’t work.

Donald Trump (who has hinted that he might throw his hat in the ring for President) took a different tack, arguing that Social Security isn’t an entitlement; it’s honoring a deal.

But if the point is to protect the beneficiaries, will be destroyed by bankruptcy?

Over the weekend, I did a simple analysis by going online to my own social security account (www.ssa.gov/myaccount). You can do it too; when you go to the site, simply click on “Sign In” and set up your own account. You will be able to see year by year your FICA and Medicare wages, and there is a summary of what you and your employer(s) have contributed since your first day of work.

I have already reached the age at which I can collect social security, but I have chosen not to take it yet because I am still working and don’t need it.

BUT and this is a HUGE BUT,

I am eligible, by virtue of the fact that I have turned 66, to receive (and have in fact elected to do so) a monthly payment that is equal to half of what my husband currently gets. Note that this is in addition to what he receives and my current Social Security income does not tap into my future benefits. In fact, my future benefits will increase because I have chosen to receive them at a later date.

Had I chosen to take my normal Social Security payments at age 67, the amount that I (and my employers over the years) had accumulated would have lasted nine years. That’s right. I would have used up all the money associated with my earnings by the time I was 75. But my life expectancy at 67 is another 18.62 years!!!  That means from the time I reach 75 until I die (and if I live till 75, my life expectancy is another 12.77 years or nearly 88 years of age) I will be receiving Social Security money that I never contributed.  Even a third grader can make that calculation.

So Governor Chris Christie is right. The arithmetic simply doesn’t work and it never will, particularly now that the 76 million baby boomers are retiring at the rate of 10,000 per day!

In large measure the numbers no longer add up because longevity has so vastly improved since Social Security was instituted during the Depression in 1935. Back then, life expectancy at birth was 67 years for men and 73 years for women.  Contrast that with today – 76 years for men and 81 for women. And it goes without saying that trend will continue – the older you get, the longer you will live.

Means testing is the only way today to make a dent in the Social Security deficit. In fact the very concept of “SOCIAL SECURITY” implies a benefit for someone in need, as so many were during the dark days of the Great Depression.

Retirees who have been fortunate enough to accumulate significant assets by the time they retire are not in need of that security. But is there anyone in Congress who is bold enough to touch that “third rail” with a logical, sensible and viable formula for means testing? Is anyone principled and courageous enough to take a short term political risk in order to tackle a serious long term problem? Sadly, I doubt it.

Donald Trump is right on one thing: his recommendation that individuals be allowed to dedicate a portion of their own payroll taxes to a personal Social Security account that they could invest is spot on.

Today the money you have deducted from your wages to fund Social Security is not yours; it’s the Government’s money. And if you die prematurely, it is not part of your estate. A personal Social Security savings account would be yours.

For those who fear that private social security accounts run the risk of being subject to the vagaries of the markets, there are plenty of safeguards that could be installed to minimize those risks. The value of compounding returns to monthly contributions is monumental. But that will be the subject of another blog in the near future.

© Copyright 2015 Patricia W. Chadwick


Cut Taxes for the Middle Class But Not for Business and Not for the Wealthy!

Friday, April 10th, 2015

The employment numbers are up and then down. Consumer spending is strong and then weak. Student loans are up, and they never go down. What does this mean for the prospects for economic growth in the U.S.?

One thing is for sure — without vibrant consumers, our economy will not grow at a robust rate. And without a decent level of earnings and rising wages, there will not be vibrant consumers.

So what to do? Here’s one suggestion — cut income taxes for the middle class! They’re the ones who are responsible for the vast majority of the day-to-day consumer spending in the country. They’re the ones who need to save month in and month out for their own retirement. They’re the ones who are burdened by the albatross of educational loans.

All we seem to hear about is how the tax rate for corporations is too high, and capital gains tax rates need to be cut. Nonsense!

Let’s look at the economy in three parts: the corporations, the 1% and all the rest.

During the Great Recession, Congress, as part of its enactment of the stimulus package, gave a special tax break to the corporate sector, in the form of what was called “bonus depreciation.” It was meant to entice companies to engage in capital spending projects that they might not otherwise have made. Frankly, that was a bit of a silly notion. Companies do not (and should not) make long-term investments based on depreciation schedules.

Furthermore, if it was meant to help an economy in dire straits, why is that tax break still in effect seven years later, when corporate profits are at an all-time high? For each of the last several years, Congress has deliberately allowed this benefit (call it “corporate welfare”) to stay on the books, enabling many giant and highly profitable companies to reduce their federal income taxes. It was an ill-fated idea that has been a boon to corporate cash flows and a bane to the coffers of the U.S. Treasury.

Quantitative easing by the Federal Reserve has been a stimulus to the stock market, allowing the already well-to-do (call them the 1%) to become even wealthier. But relative to the vast population as a whole, the uber wealthy can’t spend enough money to impact the economy. Sure they can buy $100 million pieces of art and more private planes and make worthwhile contributions of appreciated stock to good causes, but most of their wealth is invested and turns into even more wealth. I’m not saying that this is evil, but it certainly lacks as a meaningful stimulus to the economy.

Since the Great Recession, the vast middle-class population of this country has found itself squeezed between meager salary increases and rising costs for a wide array of items that somehow don’t seem to be reflected in the CPI — rising co-pays for doctors and medicines, insurance premiums, real estate taxes (based on the increasing value of a house they have no intention of selling), sales taxes, airfares, water and on and on. The one bright spot has been the fall in the price of energy, but who knows how long that will last?

So let’s get to the point. How about a massive income tax cut for the middle class? Something that would hit their pocketbooks in a real and positive way right now? Let’s start with eliminating all federal income taxes on the first $30,000 of wages. According to the tax form calculator (www.taxformcalculator.com), that would provide an additional $2,493 of spending money each year to every wage earner.

Given that there are about 77 million wage earners in this country, that would put an additional $200 billion in consumers’ pockets, or 1.2% of our nearly $17 trillion GDP.

If someone complains that the government can’t afford to lose that $200 billion transfer from its coffers into the hands of consumers, my advice would be to end the bonus depreciation for capital spending; then the spigot from corporate taxes will start to flow once again into the U.S. Treasury.

We are entering the silly season — political gamesmanship for the throngs who think they want to become president in 2016. Let’s see if any one of them addresses this issue of such economic and social importance. If one candidate is bold enough to tackle this issue in a constructive and comprehensive way, I’ll vote for him or her.