Wanna Get Away? The 81% Tax Increase

This comes from Bruce Bartlett’s commentary at Forbes.com and brought to my attention by the Social Security Institute. Mr. Bartlett is a former Treasury Department economist. His analysis is eye opening and educational. Most of us think we know what the social security trust fund is. Most of us are wrong (emphasis mine):

This week, the federal government published two important reports on long-term budgetary trends. They both show that we are on an unsustainable path that will almost certainly result in massively higher taxes.

The first report is from the trustees of the Social Security system. News reports emphasized that the date when its trust fund will be exhausted is now four years earlier than estimated last year. But in truth, this is an utterly meaningless fact because the trust fund itself is economically meaningless…

…government trust funds bear no meaningful comparison to those in the private sector. Whereas the beneficiary of a private trust fund legally owns the income from it, the same is not true of a government trust fund, which is really nothing but an accounting device.

Most Americans believe that the Social Security trust fund contains a pot of money that is sitting somewhere earning interest to pay their benefits when they retire. On paper this is true; somewhere in a Treasury Department ledger there are $2.4 trillion worth of assets labeled “Social Security trust fund.”

The problem is that by law 100% of these “assets” are invested in Treasury securities. Therefore, the trust fund does not have any actual resources with which to pay Social Security benefits. It’s as if you wrote an IOU to yourself; no matter how large the IOU is it doesn’t increase your net worth

…What really matters is not how much money is in the Social Security trust fund or when it is exhausted, but how much Social Security benefits have been promised and how much total revenue the government will need to pay them.

The answer to this question can be found on page 63 of the trustees report. It says that the payroll tax rate would have to rise 1.9% immediately and permanently to pay all the benefits that have been promised over the next 75 years for Social Security and disability insurance…

…But this really understates the problem because there are many people alive today who will be drawing Social Security benefits more than 75 years from now. Economists generally believe that the appropriate way of calculating the program’s long-term cost is to do so in perpetuity, adjusted for the rate of interest, something called discounting or present value…

…Social Security’s unfunded liability in perpetuity is $17.5 trillion (treating the trust fund as meaningless). The program would need that much money today in a real trust fund outside the government earning a true return to pay for all the benefits that have been promised over and above future Social Security taxes. In effect, the capital stock of the nation would have to be $17.5 trillion larger than it is right now. Alternatively, the payroll tax rate would have to rise by 4%.

To put it another way, Social Security’s unfunded liability equals 1.3% of the gross domestic product. So if we were to fund its deficit with general revenues, income taxes would have to rise by 1.3% of GDP immediately and forever. With the personal income tax raising about 10% of GDP in coming years, according to the Congressional Budget Office, this means that every taxpayer would have to pay 13% more just to make sure that all Social Security benefits currently promised will be paid

…As bad as that is, however, Social Security’s problems are trivial compared to Medicare’s. Its trustees also issued a report this week. On page 69 we see that just part A of that program, which pays for hospital care, has an unfunded liability of $36.4 trillion in perpetuity. The payroll tax rate would have to rise by 6.5% immediately to cover that shortfall or 2.8% of GDP forever. Thus every taxpayer would face a 28% increase in their income taxes if general revenues were used to pay future Medicare part A benefits that have been promised over and above revenues from the Medicare tax.

But this is just the beginning of Medicare’s problems, because it also has two other programs: part B, which covers doctor’s visits, and part D, which pays for prescription drugs.

The unfunded portion of Medicare part B is already covered by general revenues under current law. The present value of that is $37 trillion or 2.8% of GDP in perpetuity according to the trustees report (p. 111). The unfunded portion of Medicare part D, which was rammed into law by George W. Bush and a Republican Congress in 2003, is also covered by general revenues under current law and has a present value of $15.5 trillion or 1.2% of GDP forever.

The above analysis does not include any mention of ObamaCare, Cap-and-Trade, or bailouts. Just looking at the above programs – Social Security and Medicare – the following conclusion is a wake-up call of enormous proportions, especially for our children who will bear the brunt and consequences of the unsustainable practices of Statist policies and a federal government which has shown, even under Ronald Reagan.

Taxpayers are now on the hook for:

  • Social Security: 1.3% of GDP
  • Medicare part A: 2.8% of GDP
  • Medicare part B: 2.8 of GDP
  • Medicare part D: 1.2% of GDP
  • Total taxpayer liability: 8.1% of GDP

To sustain this level (minus ObamaCare and Cap-and-Trade costs) will require an 81% increase in payroll taxes for every working American. Taking last years return, multiply by 1.81 the amount you were required to pay. Adding in costs of ObamaCare and Cap-and-Trade (should it pass as threatened during this years post election lame-duck Congressional session) and you will begin to understand what Socialism really means to your paycheck and this country’s future. That’s less consumer spending, equating to less jobs, and slower or negative economic growth for decades and decades to come.

The day of reckoning is waiting to hit us like a brick in the head. Already European economies are in dire straits after years of socialist policies. As Europe figures out how to dig itself out of socialist hell, the fact of Obama’s clueless and adrift leadership is on full display: Deep budget cuts in Europe concern Obama. Since when does addressing a problem become a cause for concern? As Obama moves our economy towards European style socialism, European leaders, quickly realizing the unsustainability of their current system, attempt to reverse course.

It may already be too late for some countries: EU chief warns ‘democracy could disappear’ in Greece, Spain and Portugal.

Then there is this little nugget of comfort: U.S.’s $13 Trillion Debt Poised to Overtake GDP: Chart of Day – Bloomberg. If you think we are going to look a lot like Greece by 2012 you would be correct. The only difference is really the question of who can afford to bailout the United States? The Bloomberg article is a real wakeup call. The CBO estimate of debt exceeding GDP in 2020 is about 8 years off. In as short a time-frame as two years we will be facing a real crisis. Obama’s solution is to raise taxes, with Pelosi talking about the introduction of Value Added Tax of 10% or more. Things are so bad, Democrats are not even bothering with releasing a budget resolution this year, knowing it would impossible to justify the enormous trillion dollar deficits and fearful of the consequences during an election year.

It is now clear the people of this country must retake the reigns of power from the federal government. If fiscal sanity is to be restored, the use of nullification is the only way to meet that goal. By all accounts, time is short – as little as two years. As government growth continues under both parties and differs only in degree, the cancer of Statism must be ripped out by the roots. As I write in Nullification – The Only Way Forward, we can’t afford to wait or trust that federal politicians, the Supreme Court, or lawyers will extricate ourselves from our current predicament. It is up to us. I strongly urge, even beg, that you take the time to read that article.

I am reminded of a joke born during the days of the cold war, when school children went through drills of what to do during a nuclear attack. Some of us may remember some old black and white video of children ducking under desks, hands clasped behind heads as the imaginary bomb exploded. Soon after these drills began, someone with a sense of humor decided to summarize the nuclear attack drill as follows:

  • During a nuclear attack, ensure you never stare directly in the direction of the blast
  • Remove all sharp objects from your pockets and store them in a safe place
  • Quickly duck under you desk, placing your hands over your head for protection and clasping them together. This will protect you from falling objects
  • Plant your head firmly between you legs
  • Kiss your ass goodbye

Should we rely on the slow and unsure tactics of lawsuits, federal courts, and DC politicians and not retake the reigns ourselves through a concerted and unrelenting campaign of nullification, that last bullet will cease to be a punchline and become instead a personal directive. Now is the time to be proactive. Reactivity spells certain doom. There are many who feel that, as Americans, we are soft and will only act when a precipitating event effects our personal lives to the point we find ourselves forced to take notice. If we wait for that event, it is already too late. It is our duty as citizens, parents, and guardians of the Republic to make our move.