Monday, November 26, 2007

Will our great-great-grandchildren pay for their long dead grandparents? (on Kevin Drum; Washington Monthly)

Today, Social Security retirement costs 4% of GDP. By around 2050 that should grow to 6-7% of GDP and remain there ad infinitum -- at which point average income should have doubled.

IOW, if you make $50,000 a year, your equivalently employed grandchild should make $100,000 in 2050. You now pay 12.6% FICA (divided w/employer); your grandchild may have to pay 20% FICA (w/employer): leaving you with $44,000 to pay for everything else; leaving your grandchild with $80,000 to pay for everything else (adjusted for inflation -- which adjustment wont, for good reasons, even take into account 3DTV for the same $600 price tag). Sound like a monumental crisis?

Today, we use excess FICA inflow to pay for "government owned" bonds that go into a so-called "Trust Fund" which supposedly insures Social Security when today's (arbitrarily frozen-for-all-time?) FICA tax is no longer enough to cover the multiplying baby boomers -- on or around 2017. At which 2017 point we are to gradually raise the income tax -- instead -- to cash the otherwise meaningless Trust Fund bonds. Without such "advance planning" for our retirees futures we would be forced to raise the FICA tax a whole 1/10 of 1% a year -- as average income rises 1 1/2% a year -- an unexplained taboo.

Actually, in the vicinity of 2017, we wont be forced to raise the income tax to cash the bonds, after all -- we could, instead, run up the national debt by selling bonds to cash Trust fund bonds instead (only if politicians are less than responsible): raising the specter of our great-great-great-great grandchildren paying for the retirement benefits of their long-long dead grandparents.

Today we pay for on budget items (army, farm subsidies) through a combination of short falling income tax and excess FICA receipts. By 2047, or whenever the Trust Fund bonds run out, we will no longer pay out Social Security with a combination of excess income tax (or bond sales?) and short falling (25% short) FICA.

At which whenever point we are scheduled to begin paying for Social Security retirement exclusively through FICA (after a big one-jump increase) -- and begin paying for on budget items exclusively through income tax (after a proportionate cut). What a unique in all the world retirement system -- could only have been hacked out by some easily confused politicians.

Posted by: Denis Drew on November 28, 2007 at 11:06 AM | PERMALINK

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