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Friday, May 27, 2005
Every Man A Millionaire
MMark noted that my previous post on the social security issue dealt mainly with the event, not the issue. Fair enough.
My take: social security reform is a no-brainer. The current system is not just similar to a ponzi scheme -- it is exactly like a ponzi scheme. As long as you have lots more people putting in than taking out, it works just fine, but the demographic reality of the aging baby boomer population make it impossible to continue the program as it currently exists. The choices (a) do nothing (b) raise the retirement age, or (c) raise the payroll tax dramatically on the wealthiest Americans.
a) Do nothing - Even Calvin Coolidge would be hesitant to let this problem continue down a road that is, in effect, completely surrounded by ditches (not to mention landmines, tiger traps, oil slicks and felled trees). If we do nothing, the system goes in the red in 2017, and by 2042 (or something like that) it is bankrupt. Hmmmm. I was born in 1970. I'll be 72 in 2042. So, those who say there is no crisis are basically saying that we should pay our entire lives into the system, and our children should pay into it too, but we shouldn't really expect to receive benefits for any length of time if at all.
b) Raise the retirement age - This makes sense... but it isn't like you can index it and raise it eventually to 85. Yes, some people will be able to work that long, but only in certain fields. We are, after all, living longer, and more active lives (at least that is what the ensure commercials tell me). But face it, in most fields of work, for most people, productivity seriously drops after age 70 or before. Maybe people in the future will be healthier -- but judging by Sips 3 swirlee lunches -- the jury is still out. At the end of the day, this gets you part of the way, but just delays the inevitable.
c) Raise the payroll tax dramatically -- Currently, you stop paying social security on income over 90k. A practical reason for this is that there are caps on how much money you can take out of the system -- it isn't proportional to income. Requiring the 12% payroll tax on incomes over $90,000 represents a huge marginal tax increase on high income people (consider that they are already in the top brackets for state and local taxes).
Consider: you earn $100 -- the feds take at least $38 for income taxes (it may even be higher). The state (in NY at least) takes another $8. That's $46 bucks for the government BEFORE social security taxes kick in. Your share of the social security taxes is one half of 12% -- that's six, Mmark -- bringing you to a total of $52 in income and social security taxes. Your employer will also be paying an additional 6% on all of your income above $90k -- and face it, taxes on employers are all passed down either through lower wages or higher prices.
Given that you won't be getting anything more in benefits for the higher amounts you put in, this turns social security into what amounts to a welfare/income redistribution program. Not a mandatory insurance program.
For the record, I wouldn't be hurt financially from an increase in payroll taxes on "the rich." But I think this increase would seriously damage the economy so I would oppose it. If you are going to increase taxes, I think it should be done across the board -- I don't agree with people who are enthusiastic about raising taxes on other people "for the good of the country." When it comes to taxes, the burden should always be shared -- otherwise, you risk creating two classes of citizens -- the givers and the takers. I don't think that "taking" from others is my idea of good citizenship. (I know, we are already there... sigh.)
Think about this. If you started from scratch and you had as your goal to a) create a social insurance program for seniors TODAY and make it b) sustainable for future generations... would you ever in your right mind come up with the social security system? Of course not. You would come up with a system that looked a lot more like this:
* You might create a forced 401k plan -- requiring workers to set aside a certain amount of their income to ensure they had something to live on when they were older.
* You might, I suppose, make it somewhat progressive, to deal with the fact that lower income workers couldn't contribute enough of their incomes to provide enough for a secure retirement.
* You wouldn't, however, want it to be perceived as a welfare plan -- since that would make it less popular with the American people who, regardless of the hopes of the class warfare left, view welfare as a negative, not a positive. So you can't make it an income redistribution plan.
* The idea that people would pay into this plan and have their investment completely revert back to the government if they die early would be a complete non-starter. My father, who died at 63, is a perfect example of someone who gave a whole lot more than he received into social security.
In short, I believe the plan we would create would be a lot like the President's social security plan -- with one caveat. Rather than putting a third of your contributions into a mix of stocks and bonds, it would probably be more like 2/3rds (or maybe even the entire thing).
I played around with some calculators, and with 8% of salary put into the program, and a 7% rate of return...an 18 year old making $25,000 his entire life (no salary increases, mind you!), and retiring at age 70 would have more than $900,000 for retirement.
Even with just 4% of salary put into the market -- the President's initial proposal -- the nest egg would be pretty significant -- $450,000. And this is for someone with a pretty modest income... so many people would do even better. And if you are married with two spouses working -- better buy some furniture for your second home by the lake.
So that's it. We have a plan on the table that could make nearly nearly every man and woman in America a millionaire by the time they retire. I can see why Democrats would oppose it. You can't have class warfare if everybody is in the upper class.
Are there risks? Sure. But over the long run, an 18 year old starting today could easily weather a replay of the most negative period in stock market history (great depression) -- so long as they were required to have a diverse portfolio of stocks. And besides... if the economy was worse than the great depression and stocks never recovered -- isn't that going to completely undermine our ability to finance the current social security system anyway? In both cases, the country is in it -- and deep. In the case of the President's plan, at least we have a nestegg to work off of -- rather than IOUs which would require us to increase payroll taxes even more -- exactly what the economy would NOT need in the case of an economic slowdown.
And, if the market is such a risk -- why do our members of Congress put their own money in the market? The answer, of course, is that it is a bigger risk to not invest in the market.
I've gone over a lot of ground un-necessarily here. You guys are far more adept at finance than I am. Just make sure to invite me to your summer homes by the lake.
I made over 300k last year... and all told I paid about 15% of my income in taxes, that's federal, state, local and social security. Part of the reason my taxes were so "reasonable" is that all my income above about 90k, pays no social security tax! Its great.... its like above a certain limit, my tax rate goes down! Awesome!
As far as making everyone a millionaire - no that doesn't work for me. See being wealthy is really great - but it only works when not everyone is wealthy. So for example I have some landscapers, and a house cleaner, plus there are the people who come and do basic repairs on my house, painting and whatnot. And then there are the people who I hire in my business. If they were all as wealthy as I am, they would not work for reasonable wages. They would expect to earn the kind of income I do.
That stuff about making everyone a millionaire sounds good, but it doesn't mean anything. A million dollars in the bank is just a number. What matters is the relative difference between my purchasing power and the purchasing power of the average person. So long as I have more purchasing power I can get first pick of the food in the supermarket, I can dine in better restaurants, I can wear better clothes, I can get first pick of the best doctors, and I can get a big house on Nantucket. You see there isn't enough of the best stuff to go around. So pump up the numbers however you want, my concern is that we maintain a comfortable level of inequality.
Dear Daddy Warbucks -
1. Can I please have the number for your accountant? 15% on 300k. That's pretty spectacular. It is amazing that the top 1% of people can pay 60+% of the income taxes for all of us to suck off of, and still feel like they are cheating the system!
2. Thanks for employing people and helping them feed their families and earn their living. You know what they say, a poor person never gave anybody a good paying job!
3. I don't think you understand the concept of retirement. The landscapers and cleaners and others who you employ won't have access to that money until they get old and stop working. So you don't have to worry about them quitting on you any time soon.
4. Yes, you are right, not everyone can have a big house on Nantucket. If everyone could have a big house on Nantucket, nobody would want to go there anymore -- it would be too darn crowded.
5. Of course, most people don't aspire to a big house on Nantucket, so much as a comfortable retirement that gives them enough to pay their rent, buy groceries and take an occasional trip to see the grandkids. Maybe even go out to dinner. Given your attitude, you must love the current social security system, which ensures that the people who work for you will stay nice and poor, even after they work their entire lives.
6. Here is the bad news (for you): Since you are rich anyway, you will have more money than the poor working suckers who get the new and improved social security. Your relative purchasing power, however, would be diminished. The new system would not benefit you all that much (you are alrerady rich) but it would have a huge impact on the lower and middle classes. Prices go up a bit -- that hurts you and all the other rich -- but those increases are more than offset by the amount gained by the people on the bottom.
7. The best part of this is that the people at the bottom will have a nice nestegg to leave their children, who can then use that. I'm hoping that they use it to start a business that competes with yours and drives you and your family into the poorhouse. Of course, you will still be able to count on social security (new and reformed) to ensure you a comfortable retirement!
Relax daddy. Inequality is garunteed by the constitution. It's called equality of opportunity. We all have the equal opportunity to be unequally wealthy. Get it? It's our equality of opportunity that ensures that the poor can become rich - and the rich can become poor. In fact, you sound kind of lazy to me - you're probably well on your way to proving my point. There was fat cat from Nantucket, who's wealth was so fleeting he...
Lets start where we agree. Social security is a huge ripoff, especially for people of modest means. They hardly make enough to retire on, and have to give it to the government to manage for them. Anyone who knows how to manage money knows they get a poor return on their money. All of us who can afford it, plan for our own retirement, and consider social security lost money. Like you I am also in my 30's and I don't expect to ever see that social security money.
The current Bush plan is of course also a big ripoff. Your gains are capped, and yet you have to take the full hit of any losses. Plus the government "management fees" are outrageous. And plus on behalf of the taxpayer the government will need to borrow $300 billion. Some deal. Thank god I keep my money in hard assets like real estate and foreign security trusts.
As far as taxes go, it is far outside the scope of this board to detail it all. I'll be as brief as I can and outline the strategies for you. First you don't need an accountant to get the breaks on payroll taxes. Above about 90k in income you stop paying it. My nominal salary used to be about 100k (back when I was employed for a major corporation), but I made most of my money on options. Sometime during the year I would liquidate a bunch of them for a major gain. It was always a pleasure because right after that my earnings for the year would blow past the 90k cieling, and I would get to stop playing any more payroll taxes for the rest of the year. I would still pay the normal federal and state witholding, but with no payroll taxes to pay, it means a nice bonus of a few hundred dollars every pay period for the rest of the year. Just ask your HR representative about that, they can explain it to you.
As far as the tx strategies - it only makes sense if your income is above a certain level. You need a really good accountant. I paid mine about 5k this year - but it was worth it because he saved me about 40k. Here are the strategies in brief: you structure fat years and lean years. You lump as much income as you can into the fat years, and have nominally low income in the lean years. If you can afford to live off your savings, you can bring your taxable income to zero during the lean years if you want. You need to make arrangements with your employer like deferred compensation plans etc. Normally in a corporate situation these plans require agreement by the board of directors at your company. During the fat years you need to move money as much as you can into non-taxable vehicles, such a municipals, or by buying options against your own options in an offshore tax haven. Some of these strategies don't work under AMT rules. But that is ok, because AMT is basically refundable during lean years. Essentially during your lean years you manage your income to consume just the extra tax you paid in ATM during the previous year. So basically during a "lean year" I will nominally earn say 100k, and pay my normal tax on that, but it gets refunded to me 100% because I paid AMT the previous year. You can't eliminate your tax completely if you work for a major corporation, but you can manage it well if you earn enough that its worth setting up some of these more advanced techniques like deferred compensation and offshore trusts. You might not be in the right tax bracket yet, but I encourage you to read up on tax planning.
As for the idea of "equality of opportunity" and discouraging "class warfare", I'm with you on that one brother! Keeping that idea in circulation among the have-nots, sure makes like easier for us have mores! Sure in principle I agree with you. If I lost all my money, I could probably make it back, because I know how the system works. So in theory any smart person could make it. In practice its not so easy. Most people don't understand finance and they do the stupidest things with money! Like buying cars and credit! And the rates they pay for health insurance and drugs! Its crazy. You have to understand though that when you are rich, everything is easier. I'll give you some examples. I sometimes buy and sell real estate. I'll buy real estate at auction and flip it for a quick gain. I can do that with a cool head because if I lose 10k its not a big deal to me, plus I can pay cash for it. I'm often bidding against guys who don't actually have the cash. They need to either flip it within 2 weeks, or they need to pony up 5k to get a mortgage just to flip it. So I can confidently outbid them. Also I pay cash for everything. So I'm not paying finance charges. Because I have money in the bank my bank services are free. When I buy stock, I have an actual professional trader who will work the trade for me, and get me a couple points better than the market rate. I own my house outright, so I don't pay mortgage. Things like this add up. In practical terms, a regular person just cannot accumulate the kind of wealth I have through saving and investing. I you don't already have this kind of money, the only way to get it, is by starting a business and making some fantastic gain that rockets you up into this level. Once you are here, its easy to stay here.
I have my own business now, and I have a few people hired locally - just the bare minimum admin and management staff. But most of my labor force is hired from Canada, and Romania. Romania, because its very cheap for some services. And Canada, because they have nationalized health insurance. It makes it so much cheaper for me to hire them, because *I* don't have to pay health insurance - the Canadians pay for it. Personally I don't care if we get nationalized health insurance here, because I won't be part of it either way. But for sure its a competitive liability for the American work force. Lack of a health care solution is just one of the things that makes American labor so expensive.
Despite the name I chose so flippantly, I have never worked int he defense sector.
I am confident that I can follow your advice, at least half-way. I have been able to string together a whole bunch of lean years -- it is alternating them with fat years that I haven't quite cracked!
You seem to believe that the idea of equality of opportunity is some sort of sham that helps keep the "have nots" in check. I don't buy it because I know plenty of people who come from nothing become extremely successful -- financially and otherwise. Some of them even have enough money to buy that house on Nantucket you mentioned, but most are just hardworking people who have built themselves a pretty good life -- even though their parents were in the "have nots".
I don't resent or envy people who are richer than I am. Your house in Nantucket doesn't negatively impact me -- in fact, if I lived in Mass., it would positively impact me because you pay a good buck on property taxes. So keep making money and thanks for reading the site.
I think we are overwhelingly in agreement here. I will quibble on a few minor points. I don't actually have a house on Nantucket. I just used that as an example. I normally lease a house on the cape for several weeks every year. It makes more sense because I don't want to maintain ( and pay taxes on ) a house all year that I just use during the summer.
I should remind you that real estate taxes fund only the locality which collects the tax. So real estate taxes in Nantucket for example stay on Nantucket Island.
But of course you are right, the rich pay a disproportionate amount of taxes. I mean, even though I paid about only 15% of my income in taxes, I still had to write the government a $45k check. There have been years where I have paid over 100k in tax. Like you, I agree that people should be more grateful to the rich who pay for everything. I think the figure you quote is a little bit dated. In 2003 the top 1% paid 32% of all taxes. ( You can get that figure from Rush Limbaughs' web site ). That is really unfair, and it used to be worse! In 2000 we paid 37% of all taxes. In my fathers time, in the 1970's we paid 60% of all taxes, in 1948 we paid 80%. In 1913, when income tax was first instituted, we paid 100%! Well at least the system is getting fairer. Sincethe top 1% of american current earn about 25% of all the income, the system will be completely fair when we pay 25% of our income in taxes. So we are getting close. Just a few more years. Lets hope we don't get some socialist, wealth distribution liberal in the white house who undoes all this. If only Cheney were a little more charismatic, we might get a solid 16 year run and solve this problem.
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I wish you would re-think the Social Security reform issue, though. I don't think the Bush plan goes far enough, but I think it is a huge step in the right direction. The current system is based on a transfer of wealth -- from the young to the old (and to a lesser extent the rich to the poor). We need something that is focused, instead, on the creation of wealth.