We’re spending $3.5 trillion dollars, and taking in $2.1 trillion in revenue. The $1.4 trillion we’re spending beyond our means is our annual deficit, and is added to all prior year deficits. The total of all deficits as of last September 30 is $11.9 trillion. That amount, now just over $13 trillion, is our national debt.
Expenses
Almost 40% ($1.35 trillion of our $3.5 trillion total annual expense) is Social Security, Medicare and Medicaid.
All the money we spend on national defense is is just over 15.5%, and rises to 22%, when including all other security programs. Those two items are nearly 2/3 of what we spend.
The other third is non-security and other mandatory programs, like education, justice, commerce, state department and the like.
Income
Individual income taxes are just over 40% of all taxes. Corporate taxes are almost 7%.
Social security, medicare and unemployment taxes are the biggest chunk – just over 42%. By the way, if you think your social security taxes are put into the so-called “Social Security Trust Fund,” think again. There is no trust fund. We spend that money. But we promise to pay you back. That promise is almost 40% of our annual expense.
Personalizing the Budget
I can see your eyes rolling back in your head. No one thinks in trillions. So, let’s put this budget in terms of your community. To keep the numbers easy, we’ll say that your community spends $100,000 per year, and expenses are split up just like our Federal budget.
$38,500 is put aside for old age benefits. About 13% of your population is 65 and older.
$29,700 goes to education, agriculture, commerce, energy, justice, labor and the like.
$22,000 is for security. You live in a dangerous area, and you’ve been attacked within the last decade.
$5,300 is interest on loans you’ve taken out to finance the amount you’ve spent above your revenues in the past.
$4,300 was invested in your local banks, which nearly stopped making loans due to their bad condition last year. You’ve been repaid about half the amount you lent them so far.
Reviewing the Budget
Right off the bat, almost 40% of your budget is spent for old age benefits for 13% of your population.
You may be able to cut a little here and there, but nothing is anywhere near as significant as that expense. Even if you cut your security budget in half, it wouldn’t be as much of a benefit as cutting the old age benefit by just one-third.
But you know that this is a “sacred cow.” Just look at the civil unrest in Greece and Spain for an idea of what you can expect when you cut benefits that you’ve promised – even if you can’t afford them.
The fact is, though, you can’t continue to promise 40% of the budget to 13% of the population. Someone, at some point, is going to have to tell your community the truth.
The Truth
Old age benefits began during the Great Depression. At that time, US life expectancies were 60 years of age, and benefits were available at age 65. Now, US life expectancies are 77.2, and benefits are still payable at age 65. The age at which benefits are available has not moved, despite the increase in life expectancy of 27.2 years.
When old age benefits began, there were 42 workers per retiree. In 1950, there were 16. Now there are 3.3 workers per retiree.
Some Possible Solutions
1. Age at which benefits are available must be increased in relation to the increase in our life expectancy.
2. Those of us who have provided comfortably for our retirements must consider reduction, or even elimination of our benefits for the viability of the program.
3. Seriously consider the option for a portion of benefits to be available for young workers to invest in capital markets.
4. You decide. Those of us who are parents and grandparents have the responsibility to make tough decisions in order to keep this program viable for the next generations. Yes, we paid into the system. Yes, a promise was made. But we’re paying out more than we’re taking in, and no expense in our budget is anywhere near that of Social Security, Medicare and Medicaid. It’s our responsibility.
We need to acknowledge the problem and fix it.
As always, I welcome your comments and suggestions.
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The numbers you included didn’t shock me entirely until you pointed out that the 40% of expense was going to 13% of the population. That was a bucket o’ ice water.
Well, that and the 7% income from corporations. That was a bigger bucket because – let’s face it – corporations make a heck of a lot more than regular people.
I know I don’t have a problem paying for old folks to go to the doctor or buy groceries. I’m pretty sure that Social Security for me is a complete wash. I’m ok with that. I don’t feel betrayed or that I was promised something I won’t get. That happens every day. It’s no surprise. I’m just not sure I appreciate hearing stories of millionaires drawing Social Security benefits, then complaining about taxes.
Japan has the highest international corporate tax rate @ 42%, followed by the US @ 40%, according to the Cato Institute http://www.cato.org/pubs/tbb/tbb-0309-18.pdf
Unfortunately, raising corporate taxes further would likely result in a lingering high unemployment rate.
Transocean – BP’s partner in the Gulf Oil Spill — is headquartered in Switzerland precisely to avoid paying ANY corporate taxes to the U.S. I say, if they don’t want to pay U.S. taxes then they shouldn’t be allowed to do business of any kind in the U.S.
While you are correct, Jayne, raising corporate taxes will not have enough of an effect to significantly address this problem. Your idea (below) regarding raising FICA ceiling would go much further in addressing the problem, and is one that is very worthy of further study.
That we cap payroll taxes a (rounded off) $100,000 is ludicrous. ARRP has done studies showing if you even increased that to $150,000 we could make Social Security solvent. As usual the lower income people get the shaft while the upper income earners get a pass. I would eliminate the payroll tax cap altogether. Upper income earners already have many tax breaks they can take advantage of. When Warren Buffet says that his secretary is actually in a higher tax bracket than he is, you know the system is broken.
Other taxes being discussed in Congress:
Removal of deductions and exemptions currently available to most taxpayers
Congress may add a National Sales Tax on top of every other tax
Raising or eliminating the cap on earnings that are taxed to fund Social Security (currently capped at $106,000)
Eligibility to receive 100% of social security is age 67 – If you are in your 40’s it could be pushed to 70.
Thanks for your comment, Elisa. This problem is much too significant to be addressed with taxation, i.e., it would be impossible to raise any tax enough to address it. One problem that would occur, for example, with raising the Social Security cap is that both worker and employer would pay 7.65% above the current limits, and, as mentioned previously, we already have the 2nd highest corporate tax rates in the world (and are battling high unemployment).
Raising the eligibility age is an excellent idea, and I think a graduated system of implementation is an innovative and achievable goal.
i think perhaps we should rethink social security and who is drawing and who is paying. my father paid into social security his whole life. he has been on social security for 22 years. my mother never paid into the system – she has been on social security as his spouse for 20 years. my disabled sibling never paid social secuirty – yet has received benefits for 20 years. where did all this money come from? my father never paid in that amount. any time you withdraw more than you pay in – you have a problem.
social security does just that. i am the same. i barely got my quarters in before i started drawing. my spouse worked lots of overtime and usually paid the maximum social security. in 6 months i will get more back than i paid in because i can claim both on my earnings and as his spouse.
anytime you withdraw more than you pay in – there is a problem. social security somehow needs to be fixed. no one in congress has the guts to do it – they might not get reelected. americans don’t want to bite the bullit either.
All excellent points, Gypsytoo. Thanks for your comments.
Instead of Congress retiring at full pay, let’s give them social security and nothing more. Either they’ll fix it or they won’t seek re-election.
I am with you.
And I am, as well. If we held members of Congress to our health care and retirement systems, those problems would be long since resolved.
Ditto.
Exactly my thoughts! Why on earth would we expect a group of people with no vested interest in solving the problem to do so? Politicians in America desire government positions first for the perks, secondly for the power, and thirdly for the commitment to their constituents. If you don’t believe it, then ask them to give up the first, greatly reduce the second, and see if they find seeking an office as desirable. We would have a hard time finding candidates!
But perhaps the ones we get would be more resolved in finding answers because their own skin would be on the line.
Sigh. Here I go again.
The maximum Congressional members can receive in retirement benefits is 80% of their salaries. And they have to be there for years to come close. Of course, there is COLA. So they may end up with the equivalent of a full salary if they leave relatively early and live a very long time.
So before we decide how Congresspersons should be treated in retirement in the future, let’s be sure we know how they are being treated now.
http://usgovinfo.about.com/od/uscongress/a/congresspay.htm
http://www.snopes.com/politics/socialsecurity/pensions.asp
and many other sites.
No one wants to bite the bullet and politicians fold like cheap cameras. For instance, in NJ we have elected a governor who wants to cut the budget. Asked teachers to agree to a one-year
no-pay raise; they all trotted to Trenton to protest. And so on and on.
The real question is do we care enough about the future of our country to take the cuts in payments. We are really looking more like a South American country than the one I grew up knowing. If the cuts don’t happen every person in the country will be much poorer and with fewer jobs.
It is like being a traitor to ones country to push it to bankruptcy. We don’t really love America, we love our current lifestyle. It isn’t one for all, it is all for “me”.
Doing nothing about it will have a high cost. Doing something about it will cause a shock wave of angry protests that could become very dangerous. That is why congress does nothing.
So wise, Idosew. I, for one, would happy agree to a “means test,” i.e., a reduction (or elimination) of benefits depending on one’s ability to pay for retirement. By implementing such a program, as well as significantly increasing the age at which benefits are payable, it would be a start.
Now all we need is someone with the “stones” to propose a solution.
I, too, think those are the best ideas( means testing) to save this country. We must stop thinking of saving any given social program and think of saving the country. We are truely broke. In much worse shape than some of the European country so much in the news right now. Aging is the only thing we can not stop. That demand means we must help the weak and stop the leak to the non-needy.
Gypsy, You may be in for a surprise, as you say in 6 mos. you will be able to claim SS on your record and your husbands… You may be able to clain either one, but not both.
And you can’t ‘claim’ his if you are still married.
just an observation … you mentioned that there are fewer workers per recipients of SS. I have a problem with young people who are milking the system, getting help with college, having children without marriage, and then getting money for childcare … so I feel used when it is suggested that my SS should be cut, at least I paid in for many years.
How could they have paid in for as many years – you are much older? Depending on your life span, and your earnings record, you may very likely receive far more money back from SS then you paid in.
Many agree with you, Elli. The problem is that if you cut all expenses allotted education (about the amount we spend on the interest on our national debt), as well as child care, you’d hardly make a dent in the huge amount of Social Security, Medicare and Medicaid.
Thanks for your opinion, though. That feeling is likely why our Congressional representatives do not take action on this problem.
Interesting information but already well known. I like the part where Payroll Taxes (including SS) make up 40% of INCOME but there is no Social Security Trust Fund. Question, where did the Trust Fund monies go, is there any I.O.U.’s (promise to pay) Trust Fund, and how much is owing the Trust Fund? Any one have the answers?
http://www.socialsecurity.gov/OACT/ProgData/fundFAQ.html#n1 Pertinent parts that answer this question are “s stated above, money flowing into the trust funds is invested in U. S. Government securities. Because the government spends this borrowed cash, some people see the current increase in the trust fund assets as an accumulation of securities that the government will be unable to make good on in the future. Without legislation to restore long-range solvency of the trust funds, redemption of long-term securities prior to maturity would be necessary. Far from being “worthless IOUs,” the investments held by the trust funds are backed by the full faith and credit of the U. S. Government.
The trust funds run surpluses in that the amount paid in by current workers is MORE than the amount paid out to current beneficiaries. These surpluses are invested in special U.S. government securities (Series EE Bonds), which are deposited into the trust funds. If the trust funds begin running deficits, meaning more in benefits are paid out than contributions paid in, the Social Security Administration is empowered to redeem the securities and use those funds to cover the deficit. Bottom Line: We’ve spent The Fund’s surplus and replaced the revenue with worthless I.O.U.’s.
Big problem, these government securities are not negotiable. Therefore taxes would have to be raised to cover the redemption. Forecast, The Fund is taking in more than paying out at least until 2042.
Perhaps we could look at paying back (with interest) the funds we’ve taken from SS. If we can funnel giant amounts of TARP money to the financial system perhaps we could find a way to pay back Social Security dollars besides worthless paper.
Question, what is the amount of the non negotiable I.O.U’s that is owed the Trust Fund, how come the fact that we have consistently been robbing the Trust Fund become the problem of the retirees who have paid into this system? Why not just pay back what is owed the Trust Fund?
Per “The Budget” link above: 1)The amount allotted to TARP is $151 billion, with $73 billion repaid. 2) The amount allotted to Social Security, Medicare and Medicaid in 2010 is $1.441 trillion, with taxes collected for this purpose of $815 billion. The only way to pay back funds we’ve spent for these payments is to raises taxes. No credible tax revenue source is sufficient to repay this money.
For Social Security
Social Security Tax income is deposited on a Daily Basis and is invested in “special-issue” securities in The Security Trust Fund. The cash exchanged for the securities goes into the general fund of the Treasury and is indistinguishable from other cash in the general fund.
Money to cover expenditures (mainly benefit payments) from the trust funds comes from the redemption or sale of securities held by the trust funds. When “special-issue” securities are redeemed, interest is paid. In fact, the principal amount of special issues redeemed, plus the corresponding interest, is just enough to cover an expenditure.
The amount bought in 2009 was $1,049 billion = cash taken in, while the amount sold was $950 billion. Amount of of securities sold = expenditures (payments) . This is for Social Security only.
What has happened is the U.S. Treasury owes the Trust Fund for the Special Issue Securities. The actual SS monies collected went into the General Fund and the government spends the cash for other expenditures (not related to social security).
Actually this is the Ugly Little Secret…the government replaces the social security tax /cash collected with special-issue securities the moment the cash is received. Then cash’s the special issues for social security expenditures (pay outs).
In the annual Trustees Report, projections are made under three alternative sets of economic and demographic assumptions. Under one of these sets (labeled “Low Cost”) the trust funds remain solvent for the next 75 years. Under the other two sets (the “Intermediate” and “High Cost”), the trust funds become depleted within the next 30 years. The intermediate assumptions reflect the Trustees’ best estimate of future experience.
Remember the Trust Fund is Special Issues that replaced the Soc Sec Cash collected.
Some short term/long term solutions:
1. Raise limit on wages subject to Soc Sec taxes.
2. AND/OR raise the percent of wages allocated to Soc Sec
Adjust interest rates paid on Special Issues.
3. Find a better way to manage the Trust Fund
4. Reduce waste in the Soc Sec processes NOT in the amount payed to senior citizens.
5. Extra incentive for seniors to forgo collecting Soc Sec at retirement date.
6. Those who have investments and retirement monies over a certain amount would be unable to collect Soc Sec
7. Even is someone is collecting Soc Sec they should still be allowed to work with no limits on earnings/ no penalty because they would in all actuality also be paying into the soc sec fund.
All of the above or a combination.
http://www.socialsecurity.gov/OACT/ProgData/fundFAQ.html#n6
Thanks for your analysis, Blurati. Great thoughts. Again, with respect to your suggestions one and two, we must be aware that employers pay 1/2 of the 15.3% of wages (7.65% by employer and 7.65% by employee) allocated to Social Security and Medicare taxes – and self employed persons pay the total 15.3%. Noting that unemployment levels are 9.7%, and the fact that US corporate taxes are the second highest in the world, we must be careful not to derail the fragile economic recovery by raising taxes on those who would hire workers.
It’s a complex problem, certainly, with, as you mentioned, likely a combination of strategies, including raising the age at which benefits are available, that will bring the program back to solvency.
Thanks again for a thoroughly researced and well-considered comment.
Having been an employer, self-employed contractor, and employee I’m fully aware of who pays the Soc Sec Tax etc. Although U.S. Corporate taxes are the highest in the world, the U.S. also has the most corporate federal/state tax loop holes, deductions, credits, and off sets of any country in the world. Two of our largest corporations paid “0″ 2009 Federal Taxes, General Electric being one of them.
Also the tax abatements and other incentives states provide corporations all but eliminate state tax responsibility, school tax, and any responsibility for infrastructure. It is incredulous we need to “pay” companies to do business in our states. Forgive me if I don’t shed tears for our U.S. companies large and small; their tax breaks are fantastic. Again having played many roles the most lucrative was to have your own business or be self employed.
Even childcare businesses depreciate part if not all of their home, expense utilities, insurance, food, toys, play equipment, computers, group outings and often car expenses. Pretty sweet deal, most end up paying no Federal Tax.
But then, of course, you already know these facts.
Thanks, as always, for your thoughtful comments, Bluerati. Clearly tax reform is needed for both individual and corporate tax policies, and you certainly have pointed out areas where such corporate reform should start.
It would be nice if we could do something about age related job problems. It is too much trouble to stop companies from getting rid of over 50 types. Lots of us could work and support ourselves much longer than we do.
Maybe we should make SS only for those unable to work and/or who do not have enough money to support themselves. Somehow we Americans seem to feel it is our right to have money sent to us from other’s pockets. A much smaller amout of our money was sent to retired folks in the past.
Then there is the medical side. We would get care for our elder members even if it was not going to help and might make a slow painful death longer. Our fear of elder abuse charges would cause that, even if our minds told us no.
Your suggestion for working longer is an excellent point, Idosew, and is certainly part of the solution. Thank you, as always, for your participation.
Barron’s magazine agrees with this article’s high US debt assessment and gives strategies for minimizing inevitable tax hikes in its cover story this week.