28 September 2012

Social Security

At least once a week I get an e-mail with claims about the Social Security System.  Almost invariably the claims are so far from reality as to be ludicrous.  But people believe the claims because they don't know any better.  With that thought in mind, here are some pertinent facts about "Social Security."

Social Security is, and always has been, a wealth transfer system.  It takes wealth from the working young and transfers it to old farts like you and me.  There is no investment aspect to Social Security; whatever taxes are taken in from FICA are immediately paid out to all the old farts (and some not so old farts).

The Social Security Trust Fund is an accounting gimmick.  It is a myth.  The Social Security Trust Fund was created to justify increasing the FICA tax rate to, allegedly, fund expected future shortfalls in Social Security funding.  That's a crock.  The federal government did a simple trick:  The Treasury issued a special issue of bonds to the Social Security Administration to account for the extra FICA revenues not used by the Social Security Administration and added the excess tax collected to the general fund.  That, of course, was spent.  That special issue of Treasury bonds is nothing but IOUs.

Contrary to common belief, Social Security is not just the Old Age benefit that is usually referred to.  There are four components to Social Security:  (1) The Old Age Benefit; (2) The Disability Benefit; (3) The Survivors Benefit; (4) Medicare.  The FICA taxes collected go out as payments to all four of those components.  The main problem is that over time the federal government, SPECIFICALLY, THE US CONGRESS, has gotten more and more generous (but then that's what happens when you're spending other peoples' money).  Worse than that, the number of recipients of the Disability Benefit has ballooned as lawyers have gotten into the business of suing on behalf of people who don't really qualify for the benefit.  The simple definition for the Disability Benefit used to be that the disabled person was unable to do ANY USEFUL WORK.  Lawyers and judges have corrupted that and driven the system deeper into insolvency.

The FICA tax rate has not always been 15%; it used to be much lower.  It has crept up over the decades as THE US CONGRESS has gotten more and more generous with other peoples' money.  In addition to that, since Social Security payments are based employment, the employers pony up another 15% payment into FICA.  If you happen to be self employed you get to pay BOTH sides of FICA.

Comments about Social Security payment not being benefits are totally false; the claim is being made by people who knows nothing factual about the Social Security System.  Social Security payments are technically indemnification because they were originally intended to be part of an insurance scheme.  Ever wonder what the acronym FICA stands for?  It stands for Federal Insurance Contributions Act.  Note that second word:  Insurance.  The system was designed from the start to be indemnification for the risk of growing too old to work.  The other components came later to cover the risks of becoming permanently disabled and dying during one's working years.  The justification for Medicare is a lot more murky, but politicians being what they are, in 1965 (when Lyndon Johnson was president and Democrats ruled Congress) the US CONGRESS came up with the justification that most medical care goes to those who are old and not very capable of working.

Note that indemnifications are not supposed to be taxed.  Indemnifications restore one to an economic position before a loss occurred.  Therefore they are not taxed.  Note that you don't pay tax on any insurance payments made to you after you suffer a loss., whether the indemnification is from an auto policy, a homeonwers policy, a life insurance policy, or any other kind of private insurance.  The Old Age Benefit of Social Security used to be that way.  Politicians, Democrats in particular but some Republicans also, decided in the 1980s that the Old Age Benefit should be taxed.  That action may have started the notion that Old Age Benefits are earned income.  They are not.

Finally, the Social Security System, in case you missed it before, is a pay-as-you-go system.  The FICA revenues collected go right back out again as benefit payments of Social Security recipients (except for whatever excess goes to the Treasury general fund).  If this were a private plan, THE US CONGRESS would demand that it be FULLY FUNDED.  The term FULLY FUNDED means that there must be sufficient funds available at all times to be able to pay the present value of all legitimate claims on the system.  Not so the Social Security System.  The justification for the initial setup was that, first, the federal government can use its taxing power to cover any shortfalls, and, second, there were a lot more workers than beneficiaries of the Social Security System.  That is no longer the case.  The UNFUNDED part of Social Security grows larger every day.

Once, during the ten years or so that I taught the subject of Social Security at University of Nebraska, Lincoln, one of the former chief actuaries of the Social Security Administration came on campus and gave an hour long discussion on the Social Security System.  He focused on how it originated and how it was set up.  A lot of actuaries from the insurance companies in/around Lincoln Nebraska were in attendance.  The revelations made in that hour stunned those actuaries.  When they walked out of the hall I heard several actuaries talking among themselves.  They kept saying, "It's pay-as-you-go!"  They were stunned because to them a pay-as-you-go system was not only not acceptable under government rules, it was unthinkable from an actuarial point of view.

That is what THE US CONGRESS has bestowed on us.

12 September 2012

The Burden of Knowing Everything Important

They teach the Keynesian B.S. in college macroeconomics courses, if for no other reason than to make students aware that such a line of reasoning actually exists.  What those economics professors fail to say, much less emphasize, is that Keynesian economics does not work.  Worse than that, people who become politicians get degrees in all kinds of fields, including economics, and come away believing in the Keynesian B.S. because no one told them it doesn't work; all the while professors of history were telling them the legends of how FDR saved the USA, if not the world, by applying Keynesian theory.  Worse than that, the true believers of Keynesian B.S. figured that when they got that message there was no point in pursuing economics any further, so they went off to things like ethnics studies, women's studies, the theory of LGBT, and who knows what other productive line of inquiry.

 Worse than that, the people who went on to careers in economics believe the Keynesian B.S. and try to apply it at every opportunity.  So we have the spectacle of Keynesians like Christina Roemer, placed in positions of some considerable authority, making predictions of how things would turn out with and without a government bailout, aka The Stimulus Plan.  Just to make things easier to read, the chart below, when Christina Roemer originally presented it in a press conference had only the two blue lines.  The DARK BLUE line was a prediction for how the US unemployment would recover with the Obama stimulus plan; the LIGHT BLUE line was a prediction of unemployment would recover without the Obama stimulus plan.  The red dots at the top of the chart are actual unemployment experience -- with the Obama stimulus plan.  Now, you can explain that outcome in one of two ways:  1.  Keynesian economics applied to a real world situation does not work, or 2.  it's Bush's fault.  What does the rational mind conclude?



11 September 2012

11 September 2001

The day started out like any other for me. I got up, had my morning coffee, started my computer, and went about seeing what had happened in the world over night. Just one small problem: I couldn't connect with any of my favorite sites which, eleven years ago, included the MSNBC web site. I tried other sites; no luck. I tried any site; still no luck. I kept reloading the MSNBC site and finally got a message that said something to the effect that a plane had struck the World Trade Center. I ran downstairs, turned on the TV, and went to the local NBC channel. Tom Brokaw was in the midst of informing his audience that both towers of the World Trade Center had been struck by large aircraft; the clip of the second aircraft to strike was being run over and over.

Shock. What the hell was going on? As the morning progressed more news came in. The Pentagon had been struck by a large aircraft; United flight 93 had crashed in Pennsylvania. All aircraft in US airspace were being directed to land; those that had not yet entered US airspace were being diverted to other countries. I heard the term "Air Defense Emergency" being announced. That probably didn't mean much to civilians, but having been in command and control in the Air Force, it meant one thing me: WAR. It was the only time I have ever heard that declared in real life. Again, what the hell was going on? More announcements: President Bush was on Air Force One and had landed at Barksdale Air Force Base, Louisiana. Another announcement: Air Force One had departed Barksdale; destination unknown. By that time my wife was up and was watching with the same disbelief that I felt. I finally had enough of the constant reiteration of known events; they were filling time until the next new thing was announced. I went outside into our back yard.

I hadn't been there long when I heard a large aircraft approaching Offutt Air Force Base. I looked out to the north, toward the approach path to Offutt. It was Air Force One on final approach; there was an F-16 flying escort. At some point I heard the F-16 execute a missed approach and then come around and land. So the President was at Offutt. I was now ahead of the TV news people; I came inside to tell my wife. Not long after that the talking head (Brokaw, I think) announced that President Bush had landed at Offutt Air Force Base.

After a little thought,it became clear why the President had landed at Offutt: as an alternate military command center, Offutt had all the secure communications needed for a presidential briefing. President Bush must be in the StratCom underground command post getting a briefing on events that had occurred and what plans there were to do something about it.

Editor's Note: Critics of the Bush Administration would later claim that "Bush was cowering in a bunker" when the country needed him, but that was just another cheap shot by a political party whose reputation for things like that dates back to before the Civil War.

I later confirmed that the President did indeed go to the StratCom command post for a briefing from someone, probably all the key cabinet members, and probably at the National Military Command Center near the Pentagon.

When CINCSTRATCOM, Admiral Richard Mies, received word that Air Force One was on its way to Offutt he drove out to the flight line to personally escort President Bush and his retinue to the underground command post.  Admiral Mies realized that trying to take a party that large to the command post through the labyrinth that is the usual route would be both cumbersome and time consuming so he ordered that the fire escape to the command post be opened so that the entire party could be taken directly to the command post from the lawn of the headquarters building.

Someone by the name of Jim Schiefelbein snapped a picture of Air Force One sitting in the NEACP parking area at Offutt, on "hot alert," engines running, hooked up to a ground communications network. I have a copy of that image, along with a short description of the circumstances.

The rest of the day was spent filling more time with announcements as more information came in about United 93, that this was a hijacking by Muslims, who some of the hijacker's were, and a myriad of details I have long since forgotten. It was announced that all flights inside the US had safely landed. Outside that was pretty obvious. Even military flights, except for air defense sorties, were grounded. I recall some talking head in/around the New York City area talking in an outdoor setting when the sound of a jet fighter penetrated his commentary. The young man actually ducked and wondered aloud whether "it was one of ours." Did he actually think that a bunch of hijackers who had committed suicide and murder also had their own air force? My daughter heard the sound of jet fighters flying around the Ann Arbor/Detroit area.  She told me that she had friends who said they felt uncomfortable with the fighter jets flying around.  Being an Air Force brat, her recollection is that of familiarity and comfort since it is not a sight often seen around the Ann Arbor, Michigan area, where she lives.  One of her friends told her that she was worried about the military aircraft.  My daughter told her that they were doing their job keeping us safe and it wasn't something to worry about.  Such is the ignorance of the civilian populace.

We watched along with everyone else as the twin towers collapsed in a huge cloud of dust and debris. After that it seemed like most of the imagery was of the smoking holes where the World Trade Center had stood that morning.

Toward evening we decided to go out and eat; neither one of us felt like cooking. As we drove to a nearby Thai restaurant we were amazed to see cars lined up at all the gas stations waiting to fill up their tanks. What were those people thinking of? Did they think that there would be no gasoline to be had the next day? Did they think were being invaded by screaming Muslim hoards? How far did they think a tank of gas was actually going to get them? Where were they going to go anyway? It was an amazing sight.

For the next three days, if I recall correctly, all flights in US airspace were grounded, except for air defense flights. There were armed fighters flying over New York City and Washington DC, at least. It was unusually quiet in our neighborhood. The training sorties that Offutt Air Force Base flew most days were grounded too. The airlines were busy inspecting their aircraft, trying to assess the potential for other aborted takeovers and making sure their aircraft were safe to fly. I heard that there was at least some evidence that other flights had been targeted.

Not long after 9-11 I received a rather odd e-mail message from someone who appeared to be in Oregon; he had a name that suggested someone from the Middle East. He had seen an on-line article I had written several years before. He wanted to know if I could teach him how to fly. I forwarded that message to the Omaha office of the FBI. The FBI never acknowledged receipt of that message, but some time later I heard on the evening news that a Muslim militant group had been broken up in Oregon.  In retrospect I have little doubt that if a Democrat knew of the fact that I had assumed the worst with that e-mail I would be branded a "racist" or even a "fascist."  Such is the state of the Party of the Democrats now.  It wasn't that way sixty years ago.