Bush gears up to privatise taxes

[eek.]

So instead of giving your taxes to the US Government, you will now give them to all those nice unelected people on Wall Street.

This is quite fundamental because he is basically privatising Taxes.

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<TABLE cellSpacing=0 cellPadding=0 width=629 border=0><TBODY><TR><TD colSpan=3>Bush gears up for pensions battle



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</TD><TD vAlign=bottom width=348>By Clive Myrie

BBC News, Washington

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President Bush is expected to launch one of the big political battles of his second term when he gives his State of the Union address on Wednesday.

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Bush says private accounts will help save Social Security



</TD></TR></TBODY></TABLE><!-- E IIMA -->He is set to promote his plan to reform Social Security, the US public pensions scheme.

The 70-year-old programme is one of the sacred cows of American life - so much so that analysts say for a politician to touch it means instant death.

But the number of pensioners drawing benefits is rising relative to the number of workers paying in, and Mr Bush says if nothing is done, the scheme will run out of money.

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Pension reform debate

Over a family game of mah-jongg at a coffee shop in Baltimore, Social Security is a hot topic.

Three generations have come together for a game, and each generation has its own concerns.

There's Katie Hackerman, now in her 80s, who relies heavily on her government pension.

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Once my generation takes all the Social Security - not all of it but a good chunk of it - there's not going to be much left for the younger generation


Leslie Becker,
Baby boomer


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"It would be difficult, really difficult without Social Security," she said.

Her monthly Social Security cheque pays all of her rent.

Her daughter Leslie Becker, in her 50s, is one of millions of Americans who'll retire in the next 20 years.

"My generation, the Baby Boom generation, once we take all the Social Security - not all of it but a good chunk of it - there's not going to be much left for the younger generation. People are panicking," she said.

Members of the next generation include her own daughter Abbey, a university student.

"It's not something an 18-year-old normally thinks about," Abbey admitted, but added, "I have to get a job that pays really well because if I don't have enough money to retire through the Social Security programme, I don't know what I'm going to do."

Bush calls for action

At present, all workers pay a percentage of their earnings direct to the government, which then doles out pensions to retired and disabled people.

Mr Bush's suggestion is to allow workers to put some of their Social Security contributions into private retirement accounts.

But critics say that the accounts will expose Americans to financial risk in the stock market, bankrupt the system more quickly and benefit only investment firms.

<!-- S IIMA --><TABLE cellSpacing=0 cellPadding=0 width=203 align=right border=0><TBODY><TR><TD> The number of pensioners per worker is rising



</TD></TR></TBODY></TABLE><!-- E IIMA -->And it will be incredibly expensive to switch from one system to another - with costs running into the trillions of dollars.

The White House says it is worried about what it calls a looming crisis.

The Bush administration says the figures speak for themselves.

In 1950, 16 taxpayers supported one retiree.

But with people living longer and birth rates falling, today there are only 3.3 workers supporting each pensioner, and by 2018 the system will be paying out more money than it takes in.

This isn't scare mongering, the president says, just cold hard facts.

"If you're in your mid-20s and you're beginning to work, I want you to think about a Social Security system that will be flat bust, bankrupt unless the United States Congress is willing to act now," he said in a recent speech.

He wants Congress to allow workers to put some of their taxes into private investment accounts, which could give higher returns towards their pensions.

Winners and losers

Some Republican lobby groups are backing the president's plans.

But critics say despite demographic changes, a few minor adjustments would keep the pension system going for decades, and that President Bush is only hyping the crisis for political gain.

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</TD><TD class=sibtbg>HAVE YOUR SAY

Bush's plan to reform Social Security will be a huge windfall for Wall Street


Tony, USA

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</TD></TR></TBODY></TABLE><!-- E IBOX -->"We've always had an aging population and Social Security has survived. He wants more privatisation and creating private investment accounts would put millions of dollars into the coffers of Wall Street firms," said Mark Weisbrot of the Center for Economic and Policy Research.

It will be 70 years in August since President Franklin Roosevelt signed law creating Social Security, which has allowed millions to retire with dignity, and he has a special place in the nation's heart because of this.

George W Bush is fully aware he could bolster his own legacy if he gets credit for coming up with a formula to save Social Security. He says he wants Americans to be less dependent on central government, and that partially privatising pensions would do this. But it is an uncertain project, and whatever the outcome, the battle will be fierce - and very risky.

http://news.bbc.co.uk/1/hi/world/americas/4214275.stm

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[xpanda]

So the investor doesn't have a choice where their money is going? If they do, how does this differ from a 401K?

 

[eek.]

There are bigger fundamentals at stake here x.
Vested interests, that need to butt out of the equation before the general population starts to ask awkward questions.

The wealth division in the US between the rich and the poor is massive.
The wealthy in the US pay the lowest taxes in the entire western world as it is.

One horrifying solution that could rear its ugly head in the future is to increase their taxes

The time has come to steer the little people away from such ungodly thoughts.

 

[JDeuce]

Just another difference between the right and left. Righties usually tend to be for personal welfare through hard work where the left tends to be more for social welfare. Whichever one you think is correct comes down to your own perspective.

Social Security has nothing to do with 401ks...totally seperate. As far as privatizing SS, all W's proposing is giving you the option of contributing some of your SS funds to a private account instead of a government slush fund. You'll have a few funds to choose from, so you won't be locked into one. He laid this out pretty well in his state of the union tonight.

Why the democrats are so staunchly opposed to giving people more options, I don't know. Well, actually I do know why...but as far as how they could justify that publicly is where I get hazy...

 

[xpanda]

Thanks for the partisan hyperbole, but my questions were legit since I don't know your system. Seriously, how is this different from a 401K except that you have far fewer choices? (I am presuming a 401K is a tax shelter, like our RRSPs.)

You don't have to have a 401K, you can pass the balance to future generations, you alone own it, not the gov't, and (if they're like ours) you get great tax breaks each year and pay no taxes on the balance if you withdraw at age 65+. How is privatising SS any different than this?

(I listened to the SOTU for about six minutes, as a full hour of sycophants and man-bitches is more than I can bear.)

 

[VOLTITAN]

Xpanda,
What is a 401k retirement plan?
A 401k retirement plan is a special type of account funded through pre-tax payroll deductions. The funds in the account can be invested in a number of different stocks, bonds, mutual funds or other assets, and are not taxed on any capital gains, dividends, or interest until they are withdrawn. The retirement savings vehicle was created by Congress in 1981 and gets its name from the section of the Internal Revenue Code that describes it; you guess it - section 401k.

What are the benefits of a 401k retirement plan?
There are five key benefits that make investing through a 401k retirement plan particularly attractive. They are:

Tax advantage
Employer match programs
Investment customization and flexibility
Portability
Loan and hardship withdrawals

Tax advantage of 401k retirement plans
As touched on in the introduction, the primary benefit of a 401k retirement plan is the favorable tax treatment it receives from Uncle Sam. Dividend, interest, and capital gains are not taxed until they are disbursed; in the mean time, they can compound tax-deferred inside the account. In the case of a young worker with three or four decades ahead of them, this can mean can mean the difference between living at the Plaza Hotel or the Budget 8.

Employer match for 401k retirement plans
Many employers, in an effort to attract and retain talent, offer to match a certain percentage of the employee’s contribution. According to Starbucks’ “Total Pay Package” brochure, for example, the company will match a percentage of the first 4% of pay the employee contributes to their 401(k) retirement plan. Employees at the company for less than 36 months receive a 25% match; 36 to 60 months receive a 50% match; 60 to 120 months receive a 75% match; 120 or more months receive a 150% match.
In other words, an employee working at the coffee giant for over ten years earning $100,000 that contributed $4,000 to their 401(k) would receive a $6,000 deposit in the account directly from the company (150% match on $4,000 contribution.) Anything the employee deposited above the 4% threshold would not receive a match.

So...401K is tax deferred until withdrawal, not tax free. Also it usually has a "matching" component by your employer. The private Social Security system would not have any type of "matching" of contributions by the government for any idea that I have heard.
There are many other types of retirement investment accounts in the USA. A 458 plan is like a 401K (tax deferred) but no "matching." Many local and state governments have these types of plans. Many people also receive pensions from their employer at retirement. Usually a % of there 5 highest years of salary or something like that.
A "Roth" IRA is another important type of retirement account. The key for it is that it grows TAX-FREE. You have to pay income taxes on the income you put in it but you never pay capital gains tax when you withdrawal it...very powerful for long term investing!
The "privitization" of social security is just an idea right now so until something is hammered out you won't know too much. It sounds like Bush wants to allow younger Americans to take only up to about 4% or what they would contribute to SS and put it into "a conservative mix of stock and bond funds" probably index funds or no-load or low fee funds. All you really gotta do X-panda is beat about 1-2% or whatever the hell social security earns and your making money.

 

[JinnRikki]

That brings up an interesting point if bushs plan will take 10% for investment, will the employer have to match that 10% like they do the other 90%?

 

[VOLTITAN]

The wealth division in the US between the rich and the poor is massive.
The wealthy in the US pay the lowest taxes in the entire western world as it is..

(And it is somehow bad that the U.S. doesn't tax its citizens to death like socialist countries? The rich pay a large % of taxes in the U.S., they just still have a lot left over compared to the income of many people. The USA is one of the few countries that you can arrive here dirt poor and if you have a good idea or product or just work hard, you can make a decent amount of money compared to most places in the world.)


..[/QUOTE]One horrifying solution that could rear its ugly head in the future is to increase their taxes..[/QUOTE]
(Yes, taxing our way out of the social security mess is not the answer unless you are a liberal Democrat. I guarantee that is their answer in the future and they will use the leftovers to try and fund more bloated social programs that waste taxpayer dollars.)

 

[JDeuce]

The main difference is 401k contributions are optional, where social security contribution is not. Its automatically taken from your paycheck, and employers are required to match your SS contributions to the government. As far as I know, the only Americans who don't have to pay SS taxes are the ones who work for some kind of government institution which makes contributing to a public retirement system mandatory (called PERS...standing for public employee retirement savings, I think). If thats not the case, someone fill me in.

Social security also helps support people with disabilities, etc...it isn't used entirely for retirement funding.

Privatizing SS is different because you are currently allowed to make early withdrawls from your 401k (albeit with massive tax penalties), but would not be able to do the same under W's private SS retirement plan.

Does that answer your ?...?

 

[919]

i wonder how privitazation would affect those with disabilities...

 

[Phaedrus]

There is absolutely no privatisation of Social Security happening or proposed. Bush's plan is as close to making SS private as California's curiously-named "deregulation" of the power industry, with only state-designated companies having the "privilege" to deal in power, price controls, etc.

"You can do anything you want with your money, as long as it's either this or this" is not a plan to privatise anything.

And at the end of the day I'd give any plan to change Social Security in a meaningful way about 1 chance in 10,000 of making it past Congress. No one wants to be the one who killed the goose, so they pass it along to the next session year in, year out while the problem slowly bloats out of control.


Phaedrus

 

[eek.]

i wonder how privitazation would affect those with disabilities...

The Strategic Genius Bush will explain it to anyone who asks him this simple question.

Once the Republicans get sufficient control in both houses they will be pushing hard for this.

 

[WHALE]

All he has to do is just focus on the USA economy and leave the rest of the world, find there on way ...

 

[xpanda]

Thank you Vol, JD for the lesson in 401Ks.

Bush's plan is as close to making SS private as California's curiously-named "deregulation" of the power industry, with only state-designated companies having the "privilege" to deal in power, price controls, etc.

This is what it was sounding like to my ears. It would be interesting to map the correlation between designated companies in the 'private' SS plan and lobbying efforts/campaign contributions.

What a load of crap.

RRSP contributions here have nothing to do with the employer (no matching of funds) and no tax is paid on withdrawal (if after age 65) as well as receiving huge tax breaks on contributions. Depending on your bracket, you'll receive roughly 25-50% of your RRSP contributions in tax returns the following year, which, if you throw them back into your RRSP, adds up nicely. The only restriction is the amount of foreign investment, which I believe is 20% of the total portfolio. )

 

[Phaedrus]

A great piece by Institutional Risk Analytics, who seem to understand Social Secuirty better than anyone in Washington (and apparently most people not in Washington for that matter.) The Treasury bonds which have replaced cash in the Social Security fund all but guarantee the bankruptcy of SS, or default on the federal debt (since SS is by far the largest single holder of Treasury debt) -- it's just a matter of which entity blinks first.

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Before privatizing Social Security, Take it away from the US Treasury

President George Bush wants to privatize Social Security, but before Congress looks at that issue, it needs to tie up some corporate governance loose ends, specifically how the US government manages surplus funds from Social Security and other agencies. If we are going to keep a straight face while Ken Lay, Franklin Raines, Bernie Ebbers, et al. are publicly crucified for manipulating the reported earnings of a private company, a matter of mere millions, what punishment shall we apportion to the succession of public officials who have misappropriated trillions of dollars from Social Security and other federal trust funds over the past half century?

The single most important issue in the Social Security debate - and the one you almost never hear discussed by the financial media or the talking heads -- is the Treasury's incestuous fiscal relationship with the Social Security trust funds. The misappropriation of surplus funds from Social Security and other dedicated federal trust funds is an act of malfeasance that dwarfs the tomfoolery seen with Enron, Fannie Mae (NYSE:FNM) or WorldCom, yet it is rarely discussed or even acknowledged.

Indeed, the last time we can recall the Treasury's borrowing of Social Security surplus funds being discussed in public was when former SC Senator Ernest Hollings, repeating a habit of years, discussed the issue on the Senate floor in 2003. Hollings, to his credit, joined for more than a decade in a public colloquy with the late Senator from New York, Daniel Patrick Moynihan, describing the looting of the Social Security Security surplus. None of their successors in the House or Senate seem concerned by such issues, this even though the subject has been treated extensively in books and academic studies.

Virtually every President, Treasury Secretary, Social Security trustee and Member of Congress since FDR has been complicit in "borrowing" the surplus contributions made to the Social Security scheme, admittedly a pay-as-you-go, "defined benefit" arrangement with no basis in actuarial reality. This borrowing is evidenced by the "assets" of the Social Security trust fund, as shown in the most recent 2003 report from the Social Security trustees.

The $1.5 trillion in "assets" held by the two Social Security trust funds at the end of 2003 are actually not assets at all, but are instead unfunded liabilities. These accounting entries evidence the amount borrowed by the Treasury, plus accrued interest, from current and past Social Security participants (and their employers). Total US public debt was $4.4 trillion as of January 20, 2005, but "intragovernmental" debt was a further $3.2 trillion, for a total federal debt of $7.6 trillion. More than half of the intragovernmental Treasury debt is held by the Social Security Administration, making it the largest single creditor of the US government.

Intragovernmental debt is issued by the Treasury to agencies with surplus funds needing to be invested. When these same independent agencies like the Post Office need to raise capital, the cash is provided by the Federal Financing Bank (FFB), a government corporation created by Congress in 1973 under "the general supervision of the Secretary of the Treasury."

In plain English, because all federal agencies must place surplus funds into non-marketable debt issued by the Treasury, all federal trust funds are captive funding vehicles of the Treasury. Through this façade, the Treasury's general fund is commingled with that of the Social Security trust funds (and all federal trust funds) because they invest any surplus cash in non-marketable Treasury paper. But the asset behind the non-negotiable Treasury debt held by the Social Security trust funds has long since been spent.

Private companies are not allowed to invest employee pension contributions in their own debt, but that is precisely what the Treasury does with surplus Social Security contributions every single day. When you hear economists and other participants in the Social Security debate arguing about whether the "return" on hypothetical private investments would be higher than the "return" on Treasury debt in the current scheme, gently remind them that there is no asset inside the Social Security trust fund and therefore no financial return.

The key issue to remember in the "debate" over Social Security is that so long as Treasury itself is custodian of the proverbial trust funds, they are merely an accounting entry. Thus when Treasury plans future funding requirements to meet payment obligations to Social Security recipients, the only two numbers that matter are total cash inflows (contributions, employer payments, taxes on benefits) vs. outflows (benefit payments and administration costs). And when that number becomes negative, and the TreaSURY begins to redeem paper issued to the Social Security to pay benefits, the beginning of the end of Social Security will have begun. Only if you believe that the Treasury will redeem the certificates held by the Social Security and other dedicated federal trust funds at par do these pieces of paper become real assets - an assumption few informed analysts are prepared to make given the Treasury's deteriorating credit standing.

Moreover, since $3.2 trillion worth of federal borrowing has been financed off-market via this accounting subterfuge, the Treasury obligations held in the various trust funds may have the effect of lowering the true, "free market" cost of borrowing for the US. Were the $1.5 trillion worth of Treasury debt in the Social Security portfolio free to trade tomorrow, and the Social Security trustees did their fiduciary duty and diversified the portfolio, how much higher would US interest rates be? Our bet is that the Treasury yield curve would be a lot flatter and housing prices a lot lower.

If the Bush Administration really wants to leave behind a better financial legacy for American retirees, some 80% of whom rely upon Social Security payments for the largest single source of their post-employment income, the first key step is to separate Social Security from the Treasury and thereby free the Social Security trust funds and, indeed, all of dedicated federal trust funds -- for everything from highway funds to environmental cleanup to federal deposit insurance -- from the Treasury's fiscal control. Most important, the Treasury would be forced to make cash redemptions and interest payments to the trust funds, ending the current "accrual" deception that allows Treasury to simply "roll" debt maturing in the trust funds. This would compel the Treasury (and, indirectly, the Congress) to publicly justify the government's full funding needs to the private marketplace -- something that America's foreign creditors may soon demand in any event.

Congress should authorize trustees for each trust fund overseen by an FFB recast as an independent federal corporation and whose sole responsibility is to manage and act as physical custodian for federal trust fund assets, independent of Washington's insatiable appetite for cash. Independent trustees for each federal trust fund will have a legal mandate to gradually diversify fund assets out of Treasury paper and into investment grade debt obligations issued by private companies and governments, including the government debt of the other industrial nations. What could be better than allowing workers in nations like China, France and Japan help finance future Social Security payments, toxic waste cleanups or federal pension bailouts (yes, the surplus funds of the Pension Benefit Guarantee Corp are part of this fiscal mess too)?

By making this simple and yet powerful change in the custody and management of all federal trust funds, the Bush Administration would render the finances of government entirely transparent and, more important, force the Treasury to finance all of its cash needs at true "market" rates and in the full glare of public scrutiny. Overnight, the FFB would become the largest creditor of the US, independent from the Treasury's direct control, and also the largest GSE (eat your heart out Fannie Mae). Then and only then will the country be ready for an informed debate on tax policy, federal bailouts for the airlines and other private pension assets, and the related issue of making changes to the now independent finances of Social Security.
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Some further insight and commentary based on reader feedback to the above article can be found here


Phaedrus

 

[eek.]

Yup.
The government plays footsie with accounting stuff just like the private sector.
However the main asset of the US Government is....America (gawsh)

The US Government is particularly fortunate in that it has plenty of scope to increase taxes, thereby covering future liabilities.

I would like to thank the wealthy for all the taxes they saved in the past but will be giving back to society in the future now that their 50-100 year tax holiday is surely coming to an end.

cheers
:drink:

 

[Phaedrus]

eek, I realise that you are basically anti-humanity, and you and I can take as givens many disputes on which we will never reach anything remotely approaching a quorum, for example our respective views of the legitimacy of a program like Social Security (and its equivalent in the UK.)

But even the face of overwhelming support for such morally bankrupt, anti-life, intellectually vacuous premises as Social Security, there are two underlying key premises of the program which are leading to disaster:

1) The classification of a program which is nothing more than a transfer of payment from one worker to another as a form of building security for the future. This is an obvious illusion, one which it is hard to believe anyone takes seriously outside of small children. Interestingly enough, it is also specifically illegal in every country on earth, literally every single one, for a private party to do what the U.S. government (and most others) do to "build security" for its aging citizens.

2) All funds which enter Social Security do so via taxation. Funds not used for immediate expenses are used to purchase Treasury obligations -- obligations which have no source of repayment except either taxation or further borrowing (plus devalutaion via inflation.) This is a recipe for disaster which again, only the very young and naïve could not see.

Now, regardless of our explicit disagreement on the issue of taxation, do you not agree that the above two factors create a problem for Social Security which cannot be solved by mere tweaking? Your most obvious response would be simply to raise taxes, yet most Americans work nearly 1/3 of their year to meet their current total tax burden. What is the optimum level of taxation in your view? 1/2? 2/3? 3/4? 9/10? I mean, assuming that taxation will always be with us and will generally only tend to rise with increasing burdens of such programs as Social Security, where does the mindset of a person like yourself, who wholeheartedly endorses such a state of affairs, imagine a cutoff point coming into existence?


Phaedrus

 

[lander]

Solid post P.

I'm sick and tired of paying for geriatrics to go play bingo.

 

[GAMEFACE]

I agree.

 

[eek.]

The only cutoff I can see is means testing for the receipt of said cash.
I suppose that the wealthier individuals will just have to struggle by as best they can while taxes increase.

The money that goes to people who need it and spend it on the things they require -bills etc is going straight back into and lubricating the system.
And most of what that cash is being spent on is run by the private sector btw.
Utility bills.Food.Drink.etc.

Its not like many of these people are stashing most of it away under the bed or piling it into an already bloated bank account.

If Social Security stopped dead tomorrow a whole load of private sector companies would take quite a hit as that hard cash ceased to flow from
Government->SS receipient->Company

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Heck. The only taxes talked about so far are income based.
Accumulation based taxes on trust funds and death taxes on estates are a whole area in themselves.

Its scary stuff, but ignoring it doesn't mean its not going to be an option in the future.