Social Security needs major changes

The good news is Americans are living longer.

The bad news is many Americans cannot afford to live longer.

Many people do not have enough money saved or in Social Security to provide sufficient income in retirement.  Of course, some are wealthy or have good employer provided retirement plans, but they are a minority.

Most people are at least vaguely aware that Social Security will not have enough funds to make its promised payments to retirees.

The main reason for the shortfall is the decreasing number of people working and contributing to the program compared with the increasing number of people eligible for its benefits.  Current payouts have always depended heavily on current payroll contributions; its trust fund alone is inadequate.

To make matters worse, the federal government has borrowed from the Social Security trust fund to meet other expenses.  In fact, it owes Social Security more than it owes the largest foreign holder of public debt, Japan, which just passed China. 

Now comes a new issue.  The forecast of how long people will live may be too short, meaning that with people living longer than expected and receiving longer payouts, Social Security will face even more problems in keeping pace with its commitments to retirees.

The federal government will struggle to find the money to make payments to retirees, and the challenge will become greater as time goes by.

Meanwhile, retirees themselves will struggle.  About 29 percent of them have less that $1,000 in savings, and 58 percent have less than $25,000.  With so little in savings to support them in retirement, they must rely on Social Security. 

Though it was not intended to be the main source of retirement benefits, Social Security provides most older beneficiaries with more than half their retirement income.  And about a quarter of married recipients and half of single beneficiaries depend on the program for at least nine-tenths of their income.

Whatever the original intent, Social Security is becoming the default pension program just when its resources are becoming inadequate. 

It all adds up.  Fewer contributors relative to recipients, tens of millions of new retirees, Social Security itself owed money, and older people increasingly dependent on it.

Political promises to “protect” Social Security are not enough.  A more comprehensive reform is needed, though it would come at a time when there is great pressure to reduce government spending not increase it.

In the end, it is likely that each of the current problems will have to be addressed.

As life expectancy is increasing, the retirement age will be raised.  It is now on course to reach 67, up from 65.  But it may need to be raised even more, especially as the forecasts on the length of life continue to put pressure on the program.

Its outlays could be cut if benefits to wealthier people were not only taxed, as they are now, but reduced or eliminated at upper retirement income levels.

The payroll tax rate paid by all, especially upper income people, could be increased.  Perhaps the way to attract enough political support for such an increase would be to allocate some of the new funds to optional investments in financial markets.  However, given the increased level of risk, the amounts invested would have to be kept relatively small.

A payroll tax increase would not be sufficient to solve the financing problem.  The debt owed to Social Security must be paid, and that will require an increase in general taxes.  This is a clear example of the problem of pushing today’s federal deficit spending onto later generations.

Payroll tax revenues could be boosted if there were more workers contributing.  Dealing with immigrants already in the country, legally or not, and a return to America’s historic more open immigration policy could produce workers contributing to Social Security as well as new customers for American products.

It also seems obvious that workers should reduce their current spending and save for their own retirements, and they should start while still young.  That would provide security and a cushion for times, like the recent recession, when pensions stagnated thanks to reduced interest rates.  Retirees made a major contribution to economic recovery.

In effect, unless Social Security turns its back on tens of millions of older people in coming decades, it will almost certainly have to become what, for many, it already is – the national retirement plan.

This conclusion and the remedies seem almost incredible.  But the problem of assisting older Americans to survive is growing and potentially catastrophic.

Government consensus crumbling

The American political system isn’t what it used to be.

While change in governing is as inevitable as it is in every other part of life, the transformation of political practices and behavior is radical.

The system is subject to constitutions, federal and state, and to laws made to carry out their intent.  But the United States has always been governed by people who operated by interpreting the laws in an agreed manner.  In short, the political system is based on both laws and common understandings of how the game is to be played.

No constitution or law can deal with every imaginable situation.  While amendments can be adopted to deal with change, more often government operates under a gradually evolving and informal consensus.

In recent years, that consensus has been crumbling – and not gradually.  In Washington and around the country, elected leaders are using their hold on power, however temporary it may turn out to be, to make basic changes in how government operates. 

The filibuster is the most well-known example.  Originally, a rule to halt debate in the U.S. Senate was adopted as a way to prevent endless delay.  It requires a supermajority, now 60 votes, to end debate.

For decades, the Senate had no problem considering bills without a formal vote to end debate.  The filibuster was used only once or twice a year by southern senators intent on blocking civil rights legislation.

Now the threat of filibuster is used for virtually all important bills.  In effect, the simple majority required by the Constitution has been replaced by a supermajority.  That gives great power to whichever party is in the Senate minority no matter who controls the government.

For “originalists,” people who want to apply the Constitution as the Founders wrote it, this should be unacceptable.  Many of those who rely on the new practice continue to insist on their view of the original meaning of the Constitution.

Last week, the head of the Federal Election Commission said that her agency could not make any significant decisions on violations of campaign laws.  That’s because Republicans on the evenly divided six-member Commission say that limiting questionable political financial practices would violate free speech rights.  Is that what the Founders had in mind?

And the Senate, which worries about President Obama making a risky nuclear deal with Iran, wants to force itself into approving an executive agreement.  Until now, all presidents have been able to enter into working agreements falling short of formal treaties without congressional involvement.  This Senate action could set a new historic precedent.

Some senators voted against Obama’s pick for Attorney-General, because she would not promise to operate the Justice Department independent of the White House.  That’s a new standard.  Think of President Kennedy’s brother or President Reagan’s campaign chief of staff, who both served as Attorney General.

In Maine, similar change is taking place, and the driving force is Gov. Paul LePage.

To issue bonds, the Legislature must pass a bill and then send it to the voters.  They decide if the proposed use makes sense enough for the state to take on added public debt.  The campaign debates on debt can be serious and are almost always contested.

After the voters approve a bond issue, the bonds should be issued and the money put to work.  The people are the sovereign, and they have decided and not merely issued an advisory opinion to state government.

But LePage has blocked the issuance of bonds for years until the Legislature gives him something else he wants.  Republican state Sen. Roger Katz, a member of the governor’s own party, has said, “No one, including a governor, ought to have the right to be able to veto what the citizens of Maine do at the ballot box.”

But that’s just what LePage is doing.  In the process, he is changing historical practice, and his action has not been effectively challenged.

Why does LePage believe he can make such a change?  Because he blocked bond issues before he was re-elected, he interprets his election as authorization to change historic practice.  With this attitude, he is in line with members of Congress who see their own elections, not as entrusting them with protecting the generally accepted political system, but as a license to topple it.

A House member of the governor’s party defended his action with words that apply to the recent trend toward change.  “It’s politics,” he said.  Apparently, politics trumps all, including history and the need for consensus.

If business prospers, do new jobs follow?

Do government programs to encourage job creation work or do they merely guarantee corporate profits?

Nobody knows the answer with certainty, but there’s evidence corporations promote development subsidies more to boost their profits than to create new jobs.

The mantra of most politicians is “jobs, jobs, jobs.”  But many of them oppose direct government hiring or projects that will require government contractors to hire more workers.

Indirect corporate support is appealing, because it seems to have no cost for taxpayers.  The benefits are supposed to flow through the business and end up in employee paychecks and corporate profits.

Often government support for business development is offered through extremely complicated programs.  One reason for the complexity is reliance on tax breaks, which can obscure where the benefits really go.

Congress and state legislatures are convinced to enact indirect development measures without a full understanding of how they really play out.  Corporations can sell them based on the possible job gains, which sound politically appealing, without revealing the loopholes from which they expect to benefit.

Legislators believe that, if business prospers, new jobs will inevitably develop.  In that way, two objectives are met: job creation and allowing the private sector, rather than government, to shape economic priorities.  That’s consistent with a free enterprise economy and limited government.

Corporate incentives also have a clear political benefit.  As noted, they are offered without any apparent cost to taxpayers.  There’s no appropriation of public money though they receive support funded by tax revenues.  The flow of money from the taxpayer through the budget to the subsidy is too difficult to track.

Businesses like indirect support programs; their profits are virtually guaranteed even though job creation is not.  Corporate beneficiaries often turn up as political contributors, providing legislators with their own incentive for offering indirect support for business development. 

The New Markets Capital Investment program, recently revealed by the Maine Sunday Telegram, rings all the warning bells of an indirect program.  

Through gimmicks created by the corporations involved but not understood by the legislators, some of whom had received political contributions from those companies, investors will receive about $16 million from the state on a supposed $40 million investment, of which not a penny will have gone to creating jobs.

Instead of believing promises that a public indirect investment will be more than compensated by expected employment gains and resulting added tax revenues, legislators ought to regard the cost of any indirect program as an outright expenditure.

Besides, state business-boosting programs are essentially “beggar thy neighbor” measures.  They are intended to enable one state to pick up investment and jobs that might go to another state.  It’s not a competitive advantage that matters; it’s the gimmick.

At the federal level, Congress does much the same thing, willingly offering indirect corporate breaks while rejecting direct action.  It readily adopts tax breaks for the private sector, passing the resulting unpaid cost of government on to average taxpayers, while rejecting funds for roads and bridges, left to deteriorate.

Perhaps the central problem of both the federal and state governments in accepting such programs is the lack of an economic vision.  A mere commitment to “jobs, jobs, jobs” is not good enough for judging the value of proposed publicly supported programs.

A state with a coherent and consistent policy, not merely “special” job creation incentives, can prosper.  Texas, with its emphasis on little regulation and both major parties pro-business, has boomed.  New Hampshire consistently avoids a state income tax, and its economy has grown.

Maine places a higher priority on the environment.  Some investors, from renewable energy to tourism, can accept and prosper under a strong environmental regime. 

But the state fails to offer a consistent outlook to businesses.  Tax reform and a stable economic and social policy could be more effective than risky trade-offs tailored for specific companies.

The Maine Legislature signed onto an investment gimmick it did not understand in the mere hope of creating jobs.  At about the same time, it was willing effectively to expel one of the largest companies in the world that had already committed to a major renewable energy investment in the state.

The misguided New Markets tax refund program adopted by the Legislature had no chance of replacing the lost opportunity caused by breaking a deal, not involving tax dollars, with energy giant Statoil for off-shore wind energy.

Keeping policies consistent, uncomplicated and fair could produce better results with fewer chances for programs to backfire.  Such policies plus more direct economic support by government would likely produce more jobs.

Government raises taxes, while denying it

These days, people consistently oppose any proposed tax increases by the federal or state government.  Candidates rally support by promising to cut taxes.

If that’s true, the amount of money governments take out of people’s pockets ought to be going down or at least remaining the same.  In Maine, the governor has led the drive to cut the top income tax rate and now wants to eliminate the tax altogether.

If taxes had been brought under control, people ought to feel better.  The reduced costs imposed by government should offset some of the disappointing effects on personal income of the slow economic recovery.  But this is not happening.

One reason is that government uses several ways of tapping the income of most people without the levy showing up as a tax increase.

The most frequently used method is the so-called “tax expenditure,” better known as a tax loophole.  

In theory, the tax system is supposed to treat each taxpayer in similar circumstances in the same way.  That way, each pays its own fair share.

If government wants to encourage certain activities, it can allow some taxpayers to get a break on the amounts they pay.  The U.S. Treasury estimates that these breaks – tax expenditures – in 2013 were $1.1 trillion.

The cost of any break is picked up by taxpayers not getting the benefit of that tax expenditure.  It is built into the amount of money the government needs to raise.  In practice, that means each time government creates or increases a tax expenditure, it raises the taxes on all other taxpayers.

With 169 different federal tax expenditures, each taxpayer may be both getting some benefits and picking up somebody else’s costs at the same time.

At the federal level, many of the tax expenditures go to corporations.  Tax breaks for companies that develop oil production or earn some of their income abroad and leave it overseas are the targets of ongoing debate.  Is a tax expenditure that may have once been justified to help a new business still worth the cost to other taxpayers?

Tax breaks not only go to big corporations to increase their profits, but to individuals.  For example, if you are paying interest on a home mortgage, that interest may be deducted from your taxable income.

Breaks keep being added.  Just this year, the House of Representatives added generous deductions for the dollar value of business gifts of food.

If a state income tax is mostly based on the federal return, as in Maine, the federal tax expenditures influence state tax collections.  In other words, some people pay too much tax to the state, because of a federal subsidy for the oil industry. 

The recipient’s most desirable tax expenditure is the “refundable” tax credit.  That credit can be subtracted from the amount of taxes to be paid.  If there’s a balance, the government sends the taxpayer a check.

The earned-income tax credit, for lower income workers, is perhaps the best known.  Recently, the Maine Sunday Telegram revealed Maine is paying $16 million in refundable tax credits to investors in a project specifically designed to achieve that result.  Maine taxpayers foot the bill.

The tax system is riddled with loopholes.  The most elementary tax reform would be to eliminate as many tax expenditures as possible.  Then, the tax rates for all taxpayers could be drastically reduced.  That’s called tax simplification and is usually most strongly opposed by those benefiting from tax expenditures.

Without tax simplification, all taxpayers will be paying someone else’s bill.  There’s no easy way to know who gets a net benefit, but average taxpayers may wonder how much their taxes could be cut with the end of tax subsidies for energy companies or those with foreign operations.

That’s not all.  Governments can also boost their bill for people without even using the tax system.

The federal government is adjusting how much doctors are paid under Medicare, and the money will come from an increase in charges for upper income recipients.  While not strictly a tax, the funds will flow to the government.

In Maine, a debate now goes on about a bigger adder to electric utility bills to finance support for efficiency measures.  Again, increased rates are not taxes, but the money will flow to the government.

Congress and legislatures impose these new costs, secure in the knowledge they will not be seen as tax increases.

In a bewildering and incredibly complex world of taxes, loopholes and tax-like charges, the average person ends up blind to who gets what and how much.