Last Saturday, September 12th, tens of thousands of protestors (some say even hundreds of thousands) filled the National Mall in Washington, D.C. to protest the policies of our government and the current administration.
Americans are concerned with the excessive spending and the deficit the government has dug us further and further into. I’ve been vocal about entitlement programs for a few years now, stressing that these programs are Social Security (SS) is running out of money and that means higher taxation and higher inflation for all of us.
Our government has been using SS to offset other spending since 1983. The money that SS collects over and above what it pays out in benefits goes out into the general fund and is spent by congress in any way it congress sees fit. This is done by issuing treasuries back to the ss admin (which are kept in a little filing cabinet in Washington D.C. These treasuries are nothing more than promises and IOU’s from congress to the SS administration. At some point, when the SS admin has to pay out more in benefits than it’s taking in taxes, these treasuries would then be cashed in, and congress would then pay the difference needed for the benefits.
Any surplus (i.e. the amount of taxes collected from workers was in excess of what is being paid out in benefits) we had was supposed to have continued till 2017 with no foreseeable reduction in benefits till 2035.* To that end, Social Security was projected to have surpluses of $87 billion this year and $88 billion in 2010. However, the trustees report in May of 2009 states that those surpluses have fallen to $19 billion this year and $18 billion next year – almost an 80% drop (see Alan Sloan’s article The Next Great Bailout from Fortune.com) and that the trust fund would be gone as soon as 2016.
How’s this possible? A few factors come into play with the biggest being the rise in unemployment. Fewer people working = fewer tax dollars. It gets worse: The report further states that “the revised surplus put out by the SS admin in May 2009 was based on a 9% unemployment rate.”
As of August 2009 the rate has gone up to 9.7%. President Obama has declared that it will rise to over 10% by the end of this year. This means we may actually be running at a deficit right now for Social Security. In addition, since 2008, the first Baby Boomers were eligible to collect on SS and that number only looks to increase. Therefore, fewer dollars being collected in taxes due to high unemployment = more benefits being paid out due to growing Baby Boomer eligibility population.
So the question is this: if congress has not been able to balance the budget with surplus dollars coming in from SS, what is it going to do when it has to start paying money back to SS?
The obvious way to meet budget requirements (to where it will fund the entitlement programs like SS, Medicare/Medicaid or unemployment and potentially a healthcare bill) is the government is likely to have to tax people. Where else is congress going to get the money? The answers are relatively limited – they could raise taxes, cut benefits, means testing or raise entitlement ages and most likely some combination of all of these.
For planning purposes, you should plan on your taxes going up, higher inflation. Therefore look to make sure our money is going to work as hard for you as you work for it by doing appropriate planning to get the most from your investments while minimizing taxes.
There are many strategies for doing so which I help my clients with each and everyday about which I will share soon.
Sources for this post can be found at the following links:
Teeing Up the Middle Class (WSJ online)
Obama’s Tax Problem (Examiner.com)
Obama’s plan to tax only the rich can’t pay for everything, Analysts say (NY Times online)
Top 1% Paid More in Federal Income Tax in 2007 (Economix blog, NY Times)
The Taxman Cometh, as Another Obama Promise Passes its Expiration Date
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