The Road to Perpetual Debt
A brief chronology and commentary of how this economic and social transformation was allowed to occur is fundamental to understanding current issues and prospective outcomes. Major mile-markers along the road may provide some insight into the inevitable destination dictated by existing tax and welfare law. With a compass to guide them, it is hoped citizens may develop the character, strength, and resources needed to survive the major difficulties that lie ahead.
1913 – Passage of the 16th Amendment to the US Constitution provided a means whereby government could legally confiscate money from its citizens. (Note: Conspicuously omitted from the Amendment was any authority for the government to give away the revenue produced by the tax.)
Comment: The 16th Amendment was not rejected by the status quo because, at the time, it was perceived to be a tax only on the wealthy.
Also, creation of the Federal Reserve banking system (1913) provided a means whereby money created by the government could be distributed throughout the economy, but at a cost – interest - and the multiplier effect of fractional reserve lending.
1933 – President Roosevelt, on April 5, 1933, issued Executive Order No. 6l02: "Executive Order Forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates." Banks, were required to turn over gold coin, gold bullion, and gold certificates "owned or received by them," to the Federal Reserve Bank. This included not only gold owned by the banks, but also gold owned by their depositors. In short, on or before May 1, 1933, all privately owned gold in the United States (subject to a few minor exceptions) was to be confiscated by the Government.
As compensation, the owners were to receive paper money, whether they liked it or not. Willful failure to submit to the confiscation was punishable by up to ten years in jail and/or up to a $10,000 fine.
Comment: The Executive Order and supporting legislation clearly violated the US Constitution. It was accepted by the status quo because they were lead to believe the paper currency was as valuable as gold and silver. This law laid the groundwork for the creation of 100% fiat currency, 38 years later.
1935 – Enactment of the Social Security system providing a government guaranteed retirement system for Old Age (OA) low-wage workers. A retirement “Trust” was created funded by demanding an additional income tax of 1% on workers and a matching 1% tax on employers. The Social Security Act of 1935 required all surplus contribution amounts be invested only in US government securities or Securities guaranteed by the US government. This restriction on Trust Fund investment created a “SLUSH FUND” for government spending, instead of a “TRUST FUND” with compounding assets for later distribution to beneficiaries.
Comment: By restricting the surplus cash to investment in government securities, means government can only loan money to itself. This is the same as spending money and calling the same money – savings. An analogy to private savings is placing IOUs in a container and spending the cash, instead of putting the cash in the container or putting it in a bank. To achieve the objective for the savings, at some point the IOUs must be redeemed. Since the cash intended for deposit in the Social Security Trust Funds has already been spent, it is the redemption of the IOUs that is the problem. To redeem the IOUs, in the Trust Funds, government will be required to raise taxes, cut benefits, print or borrow more money, and/or increase the retirement age, again.
Also, while the 16th Amendment may have provided a Constitutional basis for collection of a second income tax (FICA) on wages, it can be argued that it lacked a Constitutional basis for distribution of these specious taxes (inappropriately referred to as contributions) directly to individuals.
1937 - The Federal Insurance Contribution Act (FICA) required workers to pay taxes to support the Social Security system. Payroll taxes were 2%.
1939 - Social Security was expanded to cover dependents and survivors (OASI). Payroll taxes were 2%.
Comment: It was at this juncture that an equity-based retirement program designed for the (OA) working poor was commingled with charitable grants, since no additional premium was exacted for spousal/dependent coverage.
1943 - Mandatory federal income tax (FITW) withholding through the Current Tax Payment Act of 1943 was sold politically as a patriotic means of supporting the war. Also, the withholding mechanism was misleadingly reported as a benefit to taxpayers. Government officeholders, even then, widely regarded it as a means of extracting greater tax revenue.
1950 – Social Security coverage was expanded to jobs outside of commerce and industry, and benefit levels were increased. Payroll taxes were 3%.
1956 - Disability Insurance (OASDI) was created, and expanded over the following years. Early retirement at age 62 for women was permitted. Payroll taxes were 4%.
1961 - Early retirement at age 62 for men was permitted. Payroll taxes were 6%.
1965 – Medicare and Medicaid: The Social Security Act Amendments was signed into law by President Lyndon Johnson on July 30, 1965, in Independence, MO. It established Medicare, a health insurance program for the elderly, and Medicaid, a health insurance program for the poor. These two entitlements while noble in intent, were flawed from the beginning. The estimated future costs of the programs were grossly understated. The combined un-funded liabilities of these programs now threaten to bankrupt the nation.
1971 – The dollar become 100% fiat when President Nixon closed the “Gold Window” whereby foreigners could no longer exchange surplus dollars for gold.
1972 - Automatic cost-of-living-adjustments (COLAs), which index benefits to inflation, were introduced. The formula to calculate increases initially overstated inflation by 25%, and people born between 1910 and 1916 received an unintended windfall. Payroll (FICA) taxes were 9.2%.
Comment: In retrospect, the percentage of COLA increases could have been a flat payment with each beneficiary receiving the same payment based on an average of total benefits. Had this been done beneficiaries on the low end of the scale (with greater need) would receive higher increases and those at the high end (with less need) would receive less. It would also eliminate the compounding gap of benefits between high and low income beneficiaries following retirement. Such a measure would be closer to the original intent of Social Security of providing a safety net for lower income workers.
1977 - The mistake in the benefit formula was corrected. The "notch" refers to the difference in benefits paid to the group that received the windfall and those who retired following the formula correction. Social Security was thought to be actuarially sound. Payroll taxes were 9.9%.
1983 - The National Commission on Social Security Reform was created in response to the actuarial unsoundness of the system. The commission called for 1) an increase in the self-employment tax; 2) partial taxation of benefits to upper income retirees; 3) expansion of coverage to include federal civilian and nonprofit organization employees; and 4) an increase in the retirement age from 65 to 67, to be enacted gradually starting in 2000. Again, Social Security was declared actuarially sound. Payroll taxes were 10.8%.
Comment: Reagan appointed Alan Greenspan to head up the Commission. Asking a banker to reform a government program is like asking the Fox to guard the Chickens. At the top of the list of recommendations in the reform package was an income tax on Social Security benefits. For decades, politicians defended double taxation of wages by proclaiming the benefits would NOT be taxed.
1984 – Taxation of Social Security Benefits. Up to 50% of an individual's or a couple's OASDI benefits were subject to Federal income taxation under certain circumstances. When implemented, it was estimated that less than 3% of retirees were immediately subjected to the new tax. Provisional income thresholds of $25k (Single) and $32k (married filing jointly) were established. The revenue derived from this provision was allocated to the OASI and DI Trust Funds on the basis of the income taxes paid on the benefits from each fund.
Comment: The thresholds were considered relatively high at the time; but, now, (due to the absence of adjustments for inflation) the levels capture an increasing number of beneficiaries subject to the tax provisions. The forces of inflation have pushed nominal retirement incomes and Social Security benefits (which are annually adjusted for Cost of Living Allowances) to levels more than double of that just 20 years ago. Taxation of benefits was not repudiated because at that time, only 2 or 3 percent of beneficiaries paid the tax and it was seen as just another tax on the wealthy. NOTE: The thresholds for taxing SS benefits are not adjusted for inflation and therefore an increasing number of beneficiaries are taxed, each year.
1985 - The Social Security Trust Funds were moved "off-budget" so that the funds earmarked for the Social Security system would be tracked separately from the rest of the budget. Payroll taxes were 11.4%.
1986 - COLAs were increased to respond to minor levels of inflation. Payroll taxes were 11.4%.
1995 - The maximum portion of OASDI benefits potentially subject to taxation was increased to 85%. Provisional income thresholds of $34k (Single) and $44k (married filing jointly) were established for the new tax. The additional revenue derived from taxation of benefits in excess of one-half, up to 85 percent, is allocated to the HI Trust Fund. Payroll taxes were 12.4%
Comment: This Act may be euphemistically referred to as “Medicare Bailout Act.” One might ask if the diversion of revenues from this additional tax on RETIREMENT and DISABILITY (OASDI) benefits to the MEDICARE (HI Trust Fund) may have contributed to the anticipated short fall that has prompted the call for reform of OASDI when it appears a bigger problem is runaway MEDICARE (HI Trust Fund) and Medicaid (General Treasury) spending.
1996 - The Social Security Trustees' Report stated that the Social Security system would start to run deficits in 2012, and the trust funds would be exhausted by 2029. All members of the Advisory Panel agreed that some or all of Social Security's funds should be invested in the private sector. To keep the unchanged system actuarially sound, payroll taxes would have to be increased 50%, to 18% of payroll, or benefits would have to be slashed by 30%.
1997 - All members of the presidential-appointed Social Security Advisory Panel agreed that some or all of Social Security's funds should be invested in the private sector. To keep the unchanged system actuarially sound, payroll taxes would have to be increased 50%, to 18% of payroll, or benefits would have to be slashed by 30%."
1999 - The Social Security Trustees' Report stated the Social Security Retirement System's un-funded liability increased by $752 billion since the 1998 Trustee Report was published. This brings the total long-term un-funded liability to more than $19 trillion.
2003 – Medicare Prescription Drug Benefit: After years of discussion and debate, President Bush signed a new outpatient prescription drug benefit into law on December 8, 2003. Since Medicare’s enactment in 1965, the program has not generally paid for outpatient prescription drugs – despite numerous attempts by Congress and prior Administrations. The new benefit, which will be implemented in 2006, provides beneficiaries with prescription drug coverage that will be offered by private risk-bearing plans.
2006 - Medicare Prescription Drug Benefit: Beneficiaries who choose to sign up for the new drug benefit will pay a monthly premium, estimated to be $35 per month in 2006. Beneficiaries will be responsible for the first $250 in drug expenses, and then will pay, on average, a 25% coinsurance until they reach the benefit limit ($2250 in 2006). Once they reach the benefit limit, they will face a gap in coverage in which they will pay 100 percent of their drug costs up to $5100 in total drug spending (equal to $3600 in out-of-pocket spending). Medicare will then pay 95 percent of drug costs above that amount. These benefit levels are indexed to rise annually with the growth in per capita drug expenditures for the Medicare population
Comment: Like prior Social Security, Medicare, and other social legislation, costs of the new program were grossly under-estimated. This one will add TRILLIONS of unfunded liabilities on the shoulders of “Baby Boomers” and succeeding generations.
2007 – Congress raised the debt ceiling on the “National Debt” to from $8.965 trillion to $9.82 trillion. The FICA cap on wages subject to the “second income tax on wages” was raised from $97,500 (2007) to $102,000 (2008). The combined (employer & employee) FICA (OASDI-HI) tax rates remained at 15.3%. The Federal Open Market Committee (FOMC)
lowered bank discount rates for the first time in two years and injected tens of billions into the sub-prime mortgage and bank credit markets to remediate a weakening economy.
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