Revising Entitlements – Time to Quit Shouting Against a North Wind

WHERE  HAS  COMMON  SENSE  GONE?  No. 21 Thomas Paine

June  2011 –  The politically accepted definition of the word entitlement is another progressive creation. The progressive interpretation of the word entitlement, which liberals love to use freely, (no pun intended) can be stated in many ways but is best summarized as “…being free from not having something that someone else has just because the someone else worked for it.” WHERE HAS COMMON SENSE GONE?

The dictionary provides an accurate definition of the word’s real meaning.

Entitle: “…..to furnish with proper grounds for seeking or claiming something.”

It then follows when the true meaning is applied, an entitlement it means something that has met the “proper grounds” test. Therefore the real definition debate should actually center on “proper grounds” not merely “perceived need or desire”.

The progressive concept of entitlements is so pervasive in our society it is not possible to make the term go away completely. This being the case it is time to take a lesson learned from the liberal play book. Now is the time to create an attitude shift which will bring the correct dictionary meaning back to the word entitlement.

But how can this are done?  I have a simple proposal. In fact it is so simple it would certainly work and it might even go relatively unopposed by those politicians who have

so willingly corrupted the perceived meaning of entitlement.

But first I must make a disclaiming statement:  I am not a politician. I am not an economist. I am not an actuary, I am not a mathematician. I am merely a common, ordinary citizen who has become fed-up with the lack of leadership universally shown by elected officials and their liberally biased non-elected appointees. The need for my disclaimer arises from the subject matter I will be discussing in this essay. Even so, this subject matter requires only a minimum amount of mathematical ability to be understood. (After all we want the average politician to have a chance at understanding what is being proposed). I believe the facts supporting this proposal have all been obtained from reliable sources ( if one considers government sources reliable).

I will discuss a powerful way to put accurate meaning back into the term entitlement without attacking the concept head-on. By doing so I run the risk of making a proposal in which willing politicians, economists and actuaries can surely find some inconsistency.  An inconsistency is one of  the most widely used weapons of any politically motivated individual. They find an error in a proposal, no matter how trivial, and exploit it and magnify it until the entire proposal can be claimed as defective and thus not worthy of consideration; however, I believe the concerned public is now becoming too attentive to any longer let such demagoguery slide by unchallenged.

The present clash inWashingtoncenters around unsustainable entitlements yet neither major political party is willing to attack the entitlement issues directly. Both parties are trying to maintain their present political cover by claiming as a solution to the problem:

(1). Reduce government size and therefore spending on and by government. Reduce taxes and burdensome regulation, thereby boosting the economy and allowing economic growth help manage a burdensome sovereign debt sometime out in the distant future………

Or alternatively….

(2). Increase government size and government control over more aspects of the economy thereby bringing the knowledge and expertise of government into the private sector which is incapable of progressive activity on its own volition. Increase taxes and spending to fund the governments expanded activity which in turn will provide the economic stimulus needed to cause economic expansion and reduce future national debt obligations…….

WHERE HAS COMMON SENSE GONE? Either approach, applied to entitlements as presently envisioned has been tried before and failed and will surely fail again to achieve the claimed results.

What then must we do? One thing for sure is we must not try to “solve” the problem by adding to the byzantine regulatory and tax structure already in existence. Fine, so what do we do?

We must address head-on the present cost and benefit basis of Social Security and Medicare. At the same time we can address the issue of the national debt which is starting to severely constrain the Government’s ability to act in even a somewhat rational manner. We should also start to normalize the federal tax structure in order to provide some clarity to the way FICA functions from an employer and a worker point of view. BUT most of all we should revert all Social Security and Medicare functions to an earned benefit functionality.  Great if you can do it you may say, but this still leaves the large fiscal drain caused by Food Stamps and Medicaid and several other byzantine government programs. Therefore we must recognize that the readily available and consequently overused provisions, of both Medicaid and Food Stamps are  strong incentives for a significant part of the national population to not to seek work. These programs must be changed as part of a general restructuring of entitlements.

Let’s look at a few facts: The situation today is (2010 figures): The average person in theU.S.earns $40,584 annually. In some regions of the country average earnings are higher and in some regions the average is less. ForTexasthe average wage is $39,493. InConnecticutit is $56,001. FICA deductions from pay are: OSADI – 6.2% and H.I. – 1.45% for a total of 7.65%.

A like amount is also provided by a person’s employer and for a self-employed person the listed deduction amounts are doubled. In other words a self-employed person earning the average national wage will need to pay $6209 to the government even before federal and state income tax, property tax and other revenue generating fees are applied. Is it any wonder more and more people are finding it easier to revert to Medicaid and Food Stamps than to try to maintain a reasonable life style under a crushing tax burden when they can earn up to $22,000 per year and still have full access to all available government subsidies? Is it any wonder people find it burdensome to attempt self-employment when they are capable of making it a success? Is it any wonder employers are reluctant to hire more people or give wage increases when the cost of doing so ratchets ever upward and the rules are changed capriciously and often?  Is it any wonder people feel helpless in the face of ever increasing costs which result in part because of the government’s debasement of the dollar through overspending on unsustainable subsidies?

So what must be done?

Two things must happen. The existing Medicare and Social Security systems must be allocated to each individuals account on the basis of its present value calculated in accord with what has been previously promised.  For those under 65 any future contributions resulting from earned income must be allocated to individuals on the basis I will now describe.

For our average employee 7.65% of his wages will be deducted annually, converted into 30 year Treasury bonds and held in a government account that is identified to him personally as his property. The funds in this personal account will generate an additive amount based on compound interest derived from the average annual thirty year Treasury bond rate in effect for the year in which the funds are deposited. The employer, or the individual if self-employed, will deposit a similar amount in a 401-k account for the employee and the employee will have the option of matching the funds deposited in this account on an annual basis. Any employee matching contribution will be done on a pre-tax basis as is the case today. These funds will also be converted into 30 year Treasury bonds and placed into a 401-k account  where they will grow tax free until withdrawn, or remain tax free if rolled over into an IRA when the persons retires from the workforce. Existing IRA rules will apply. There will be no other special subsidies in the way of earned income credits or medical funding accounts.

What will these accounts provide for the individual?  Let’s look at one example.

Assume at age 35 a person who has not previously worked starts earning the  year 2010 average national wage and continues working steadily for 30 years until age 65. Furthermore assume his pay is increased by one percent annually and the government 30 year bond rate is increased annually by one percent from its initial rate of 4.35 percent in 2010. In other words 4.39 percent for 2011 and 4.44 percent for 2012, etc. At the end of 30 years this interest rate would be 5.81 percent. (A very low rate when compared to historical averages over the past 30 years). Further assume the FICA rate stays at 7.65% for the full 30 years (something not very likely under the present system).

Provided the individual has not drawn down his accounts, at the end of thirty years they will be worth: (1) FICA: $142,986, (2) IRA $142,986 and if matched by employee contribution $284,972. Thus the individual can have a grand total of up to $428,958 that can be drawn down on a taxable basis or rolled into a private source annuity that will continue to generate income while providing funds for retirement.

Notice that the individual did not start this plan until age 35 and retired at age 65 in the example (this was done to keep the 30 year bond interest calculation simple). In reality, an earlier start date is almost a certainty and a later retirement date is an individual’s option. A one percent average annual pay rate increase is also a very conservative figure. A review of the average annual national wage for the past 15 years indicates a 2.91 percent annual pay increase is the norm.  The average 30 year Treasury bond rate over the same 15 year period has averaged just over 7.31 percent, again making our maximum 5.81 percent look very conservative. But that has been my point; even with extremely conservative estimates the funds generated by the individual accounts can be substantial. If historical averages are applied the sample accounts used in our example would be valued at over one million dollars at age 65. All that is required for this result is the systematic application of FICA funds to individual accounts at the same interest rates the government seems perfectly willing to pay the Chinese or any other entity.

But what would happen if the individual became sick or was without employment for a period of time? The individual could draw out funds from the private, government account at any time, for medical or living expenses, should sufficient funds not be available from other sources such as savings or insurance. Even though funds withdrawn would be taxable, the medical expenses would offset the tax on withdrawn medical cost funds. Funds for living expense would get no special tax treatment but since the individual would in effect be spending his own money there would be every incentive to restart work in some capacity as soon as possible.

The government would also win big since the funds used to pay the interest on debt which is today going overseas would stay at home, as would the deb in our example. Bookkeeping wise this would be a double win for the government since interest paid on the accounts would be actually payment-in-kind (more debt) and the government would not  have to print more money to pay the interest on this debt. Only when the funds were withdrawn by the individual would the government be required to provide printed money and even then some of it would be returned to the government via the tax system So, to summarize the benefits of the proposed system:

(1). The individual would receive an annual statement of their accounts. They would always know what their status was. Should the account growth exceed their expectations they could consider retiring at age 60 or even 40 for that matter. The distribution of available funds would follow the same procedure in any case.

(2). The individual would be compelled to understand some basic elements of personal finance. This knowledge would serve him well on his life journey, and he would develop an increased regard for expenses that can only come from spending one’s own money. The incentive to remain unemployed would be eliminated.

(3). What if the individual became so chronically unemployed or ill they deplete their FICA account? Once their private government account was depleted they could start hardship withdrawal from their 401-k account . In the extreme case that the 401-k account also was depleted private charity and Medicaid from the states will come into effect. But the individual will have to share their government and 401-k account information to verify a true need exists before qualifying for Medicaid or public charity. The number of persons having themselves classified as disabled would be dramatically reduced since it would be in their interest to work in any capacity up to the limit of their ability.

(4). The “free lunch” which has been enjoyed for so long by so many at the expense of others would be over. There would be virtually no wards of the government and the era of politically inciting have-nots against haves would be over.

(5). The government would see an immediate reduction in actual direct annual interest payments on the internal national debt thus providing the ability to pay down existing external debt.

(6) The term entitlement would once again have factual meaning since the “proper grounds” for an entitlement would be self-proving.

(7). A government sponsored  Ponzi scheme that is much abused by some individuals would be ended. The government would no longer have an incentive to persist in the deceit and obscurantism prevalent in the FICA system at present.

(8). Best of all. The funds remaining in the accounts, at the death of the owner would really be entitlements. They would remain as property of the deceased’s estate to be distributed as planned by the individual prior to death, or in lieu of any plan, as by existing law.

This has not been a particularly easy subject to reduce to simple terms but I have tried and I ask for your forgiveness if it has still seemed weighty. The time is now right to dissolve a corrupt government system and replace it with a program that benefits all and is conducted in an open, straight-forward and honest manner by both government and individuals. The system being proposed will do exactly that. It will be free from constant government meddling and personal abuse.

Do I believe the example plan proposed is the only way forward? Of course not! But I do believe it contains some useful information and it can serve as an example of what could be achieved if the voters instill sufficient incentive in their elected representatives and then strongly support those same representatives in developing a creditable plan.

T.P. – 2011

Click here to see supporting FICA spreadsheet.

2 responses

  1. I already posted on this website twice, youre afraid to post the truth I wrote. The truth is, you can’t handle the Republican lies I told about, on this lying website,

    1. ParkerCountyBlog | Reply

      Mr. Yeary,

      This blog has never refused to post comments by anyone intentionally. If you have examples, please bring them to our attention and we will consider them. It is not our desire to screen opinions on the blog. Our hope is that all our readers will participate by expressing their opinions.

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