United We Stand, Divided We Fall

There are many proposals and some discussions to deal with the Social Security insolvency. Here are some below.

Simpson Bowles Plan
Domenici Rivlin Plan
The Heritage Foundation Plan
The Concord Coalition Plan
AARP Discussion
United We Stand Proposal

It should be noted that the AARP has no proposal but has done a good job communicating many of the options available.
Harry Pukay-Martin

We will be beginning a review of the Social Security Retirement Program starting 11/27/2013, the eve before Thanksgiving. This review will include the financial results for the period FY 2008 thru FY2012 and projections for FY 2013 and FY2014. It will also include the different organizations that have made proposals in this area as well as the many options suggested by various parties to bring this program back into solvency. We will also offer our proposal to solve this important national issue. Finally, we will review various recent opinions concerning this important conundrum. Let us begin.

According to the Office of Management and Budget of the Executive Branch of the Federal Government, the expenditures for Social Security increased from $617 billion in FY 2008 to $731 billion in FY 2011. By FY2012, these expenditures were $773 billion and constitute 22% of the Federal budget. As baby boomers retire over the next years, the expenditures will increase dramatically. For instance, by 2018, Social Security expenditures are projected to be $1,086 billion. This is a 40% increase in just 6 years.

FY 2008 $617 Billion
FY 2009 $683 Billion
FY 2010 $707 Billion
FY 2011 $731 Billion
FY 2012 $773 Billion
FY 2013 $818 Billion
FY 2014 $866 Billion

The taxes to support these social security benefits were less than the actual payments made for the first time starting in 2010 and will continue to be in deficit for the foreseeable future. The surplus from the years prior to FY2010 were put into special bonds. These bonds are projected to be completely exhausted by 2033 and social security will be bankrupt at that point. As a consequence, all social security payments will be cut across the board by 23%. See the latest report from the Trustees at http://ssa.gov/pressoffice/pr/trustee13-pr.html.

This is the overall Fund. However, the Social Security Disability Fund will be bankrupt by 2016 and requires immediate legislative action. If not addressed, disability income will be reduced 27% across the board for all recipients. To avoid bankrupting the retirement fund sooner than it should, new revenues or lowered costs in this disability program will be necessary.

Harry Pukay-Martin

According to a recent article entitled ‘Labour pains’ in the Economist magazine of November 2, 2013, the share of national income by labor has been falling since the 1980’s across the world. Before that time, it had been a very constant figure. In the United States, labor’s share has decreased from 70% in the 1980’s to 64% by 2010. This share is much worse if you exclude the top 1% of the earners. According to the Economist, the culprit for this decrease in income during the 1980’s and 1990’s was automation as ‘cheaper and more powerful equipment, in robotics and computing, has allowed firms to automate an ever larger array of tasks.’ In the 2000’s it has been globalization as labor in the US was replaced by labor in China and other low cost countries.
Given the decrease in labor’s share of US income, it is imperative that the tilt of the US federal tax system for capital and against labor must be addressed. Otherwise, the distribution of income after federal taxation will be further skewed, an unreasonable and unfair result. That means that dividends and carried or investment interest must be taxed as ordinary income. The capital gains holding period must be changed from 1 year to 5 years. In addition, the relatively free ride of the elderly must be addressed and social security retirement benefits should be made fully taxable.
Harry Pukay-Martin

Not all income is treated and taxed the same way. Salaries and wages are taxed at ordinary income tax rates. Dividends, capital gains, social security income, and carried interest or investment interest are given favorable treatment and are taxed at much lower rates. This is not fair to the working population of the United States. This favoritism distorts income distribution, lowers the saving rate, and distorts the wealth distribution. Tax dividends, social security income, and carried interest or investment interest at ordinary tax rates. For capital gains, continue the current favorable tax treatment for them since they are earned over a long period of time. However, change the holding period for capital gains from 1 year to 5 years. This insures that the gain is earned over a long period of time and it rewards long term investment rather than mere speculation.
Harry Pukay-Martin

We need to stop the madness in Washington DC as the US Government was shut down for 2 weeks and we almost defaulted on the US Debt. It is not about the players, it is about the process. The points of time and the process when real negotiations occur over budget allocations, deficit reduction, and debt levels need to change. I suggest passing two bills. The first, a permanent No Budget No Pay Act. In that bill, the FY 2014 budget must be passed by February 28, 2014, the FY 2015 budget by June 30, 2014, and subsequent budgets must be passed by June 30 each year-3 months before the start of each new budget year. This allows time for proper planning and implementation of these budgets. It also penalizes the responsible parties for bad behavior rather than the rest of the country. If Congress fails to pass the budget and the President fails to sign it, the Congress and each member’s 3 highest paid staffers, the President, his cabinet, and the 3 highest paid staffers in each department will not be paid until such a budget is passed. No retroactive pay would be provided.
The second bill allows the US Debt ceiling to increase automatically as required by the financial needs of the US without Congressional approval. However, the bill requires the permanent No Budget No Pay Bill provisions to be followed. It also requires a 5 year balanced budget to be passed by Congress by December 31, 2014 with a balanced budget or surplus achieved in FY 2020. Subsequently, the bill requires a balanced budget over each 10 year period or economic cycle. Finally, the bill also requires Congress to take action if the Social Security Disability and Retirement or Medicare programs are not solvent for 75 years based upon the report of the fiduciaries of those funds. Their report is usually received in May each year. Congress would have to act by December 31 of each year to meet the solvency deficits each year. If Congress fails to act on any of these fiscal requirements, and the President fails to sign them into law, the Congress and each member’s 3 highest paid staffers, the President, his cabinet, and the 3 highest paid staffers in each department will not be paid until such actions are taken. No retroactive pay would be provided.
These bills will change the dynamic in Washington D.C. as they require the Congress and the President to address the budget and entitlement issues on a timely and on-going basis. No longer will these negotiations involve a US government shutdown or US debt default but instead require a focus on the budget, the deficit, and the US debt level, the real issues facing our country.
Harry Pukay-Martin

The Economist ran an editorial in the September 28, 2013 publication entitled ‘The Missing Millions or the Rising disability claims may explain America’s shrinking labor force’. The article notes the drop in the US unemployment rate from10% in late 2009 to 7.3% in late 2013 but emphasizes that the real unemployment rate would be much higher if the labor participation hadn’t fallen to a 35 year low at 63.2% (from 66% in 2007).

The availability of Social Security Disability may be the main cause of this decline in the work force participation rate according to an unpublished study by Mary Daly of the San Francisco Federal Reserve Bank and others. According to the study, the awarded benefits from the large increase in disability applications would explain between 31% and 59% of the observed decrease in the labor participation rates of the 16 to 64 year olds. Since few folks leave social security disability benefits once on them, this low labor participation rate may continue. That will be a problem for our economy as it strengthens. In addition, it makes the looming 2016 bankruptcy of the Social Security Disability Fund even more important.

It is imperative that the Social Security Disability Fund be reformed as soon as possible. We hope that the Congress and the President will act soon.

Harry Pukay-Martin October 15, 2013

The Columbus Dispatch ran an editorial October 3, 2013 entitled A different path needed with a subtitle Fiscal crises could be curbed with a balanced budget amendment. The proposal is to have an amendment to the US Constitution requiring a balanced budget. It forces the President and the Congress to become fiscally responsible given our current debt crises and a trajectory of that debt that gets progressively worse over the next 50 years unless reasoned action is taken. It is a very good thought especially given the efforts by Governor Kasich and others in Ohio along these same lines. I see two issues. First, to amend the US Constitution is a formidable task and one that should be undertaken only for very broad and fundamental purposes. Though the debt crises is a major issue and could bankrupt our country, other steps should be taken to handle this lack of fiscal responsibility by our representatives first before moving to that drastic step. Second, the amendment requiring a balanced budget each year would be economically damaging to the country. During bad times, the federal government should and will naturally run a deficit given the support mechanisms in place (unemployment compensation, welfare, Medicaid, food stamps, etc.). During good times, the federal government should run a surplus as the support mechanisms are not needed as intensively.
A step to take before amending the constitution might be to expand what Congress did when they passed the ‘No Budget, No Pay Act’ in the early part of this year. That act required that the US Federal budget for FY 2013 be passed by April 15, 2013 or Congress would not be paid from that day forward. The Act worked. A budget was passed before the deadline. The expanded No Budget No Pay Act would include a requirement that the Congress pass and the President sign the Fy2015 budget by June 30, 2014 and pass reforms for the entitlement programs (Social Security Disability and Retirement, Medicare, and Medicaid) by December 31, 2014. If they do not, the Congress is not paid nor is the President and his cabinet. In subsequent years, the budget must be passed by June 30 and the entitlements reformed (if required based upon the Trustees Report) by December 31. If they do not pass these bills, the Congress is not paid nor is the President and his cabinet after the appropriate deadlines.
Harry Pukay-Martin 10/4/2013

Richard Rubin of Bloomberg published a report on September 18, 2013 noting the 9% decrease in IRS collections in fiscal 2012. This decrease in collections of enforcement actions has been due to a decrease in the IRS staffing, policy changes at the IRS, the diversion of manpower to the Accountable Care Act, the decrease in income between 2008 and 2010 because of the decline in the economy, and the one time increases in 2011 caused by the agency’s voluntary disclosure program for undeclared offshore accounts. According to Rubin, 5,000 front-line enforcement division employees were shed between 2010 and 2012. According to the data we gathered from the IRS website, the exams and collections division lost 2,988 personnel (from 44,802 in FY 2010 to 41,814 in FY 2012) or 7%. This cut in manpower exacerbates the effect of the substantial diversion of manpower to administer the Accountable Care Act.

The agency’s Fresh Start initiative also caused a slowdown in collections. This initiative should be abandoned and the manpower reapplied to the collection and auditing of tax returns. Again if you have less money, there is less mission. We need the IRS to collect the monies owed to the Federal government. Starving the IRS is more than counterproductive. It is foolish and the height of stupidity. Edward Karl, VP for taxation at the American Institute of CPAs may have said it best about the IRS. ‘Oversight is appropriate. Effective administration is appropriate. But so is full funding.’

We again recommend adding $3 billion to the IRS budget for FY 2014. That will be returned 4 to 10 fold in additional collections as more audits and other collection activities can be undertaken to shrink our $450 billion tax gap to a more reasonable level.

Harry Pukay-Martin 10/3/2013

The budget impasse in Washington is causing much uncertainty within the Federal government and requiring much contingency planning, a great waste of time. It is also causing major problems at the State levels, within the Healthcare industry, and with all others working with the Federal government. An article in the Columbus Dispatch on September 4, 2013 entitled ‘Budget logjam hobbles states, lab, contractors’ testifies to this critical issue.
The Congress and the President are not doing their jobs and there are no consequences to them personally and directly. We need to correct this situation by passing another No Budget, No Pay Act now. Under that act, Congress, the President, and his Cabinet will not be paid after the budget deadline unless a budget has been passed. For this year, the budget deadline is September 30, 2013. Next year, the budget deadline is June 30, 2014. For every subsequent fiscal year, the budget deadline is June 30. Let’s get the trains moving again.
Harry Pukay-Martin 9/6/2013

Cato Institute released a spectacular policy analysis on August 6, 2013 concerning the Social Security Disability Program. It was written by Tad DeHaven and is entitled the Rising Cost of Social Security Disability Insurance. DeHaven notes it is one of the largest programs of the federal government, has doubled its costs over the last decade, and will be bankrupt by 2016. Originally designed to be a safety net for severely disabled workers, it has become an extension of unemployment compensation or an early retirement vehicle for many people. This is due to the poor policy changes made by Congress over the years as well as a lack of a disciplined administrative process. Dehaven’s recommendations entail major cuts to the program as well as review of privatizing the benefit. I found his most helpful contribution to the dialogue about this important program was the detailed history he provided of the Congressional changes made over the years.
We, at United We Stand, LLC. agree that major cuts are necessary and easily accomplished with this out of control program.
For the full report go to cato.org and select the Social Security tab on the left side of the main page.
Harry Pukay-Martin September 4, 2013