Getting Ready for Hard Times (Art#16) Part 4

 

As expected, the disinformation contained in the 2006 Social Security Trustees Report continues the practice of selective terminology and creative accounting to conceal irrefutable facts, again proving the saying that “If you repeat a lie often enough, people will eventually believe it."

 

Example:  The word "Contribution" is employed to make it appear that the specious second INCOME TAX on wages is voluntary, that the payment is a gift or donation. If you think the FICA tax is a contribution, tell your employer that you no longer wish to donate and instruct him to STOP deducting it from your paycheck.  Tell him you believe you are more capable of funding your own future retirement than the government. The terminology used is no more egregious than the accounting.

 

The Summary of 2005 Trust Fund Financial Operations  reported that the OASI-DI Trust Funds received total income of 701.8 billion (Contributions 592.9, Taxation of Benefits 14.9 and Interest 94.3) and expended 529.9 billion.  "Assets increased by $171.8 billion in 2005 to 1.86 trillion because income to each fund exceeded expenditures." The report also stated: "Over the 75-year period, the Trust Funds require additional revenue equivalent to $4.6 trillion in today's dollars to pay all scheduled benefits. This unfunded obligation is $600 billion higher than the amount estimated last year.

 

Comment:  The reported increase of $171.8 billion in assets is a "GROSS" amount that is grossly misleading. The reported $1.86 trillion in Trust Fund assets (government IOUs) that purportedly represent accumulated surpluses of past years is also bogus and misrepresents irrefutable facts. The statement “income to each fund exceeded expenditures” is demonstrably false.

 

Question: If the Trust Funds increased as reported, then ask the Trustees or your Congressman to explain how and why the unfunded obligation increased by $600 billion. Or more importantly, ask them to explain what they are doing to STOP the increases in unfunded obligations. The short answer is "NOTHING". The unfunded obligations are out of control, but that is not the answer you may expect from your government representatives.

 

The report further stated: “Annual cost will begin to exceed tax income in 2017 for the combined OASI-DI Trust Funds, which are projected to become exhausted and thus unable to pay scheduled benefits in full on a timely basis in 2040 under the long-range intermediate assumptions.”

 

Comment: As documented below, annual expenditures for Social Security and Disability benefits already exceed "net" revenues provided by the FICA tax.

Commingling of FIT and FICA Taxes

 

The Trustees have not adjusted gross Trust Fund income for “business expense” deductions that benefit employers. The actual cash amount of the combined FICA taxes are commingled with the federal income tax (FIT) and employers may deduct as "business expense" all the wages (that also includes all the FIT and FICA taxes extracted from employees' pay checks) and including the employer's matching share of the FICA tax.

 

IRS Wage and Tax Expense (Business) guidelines (for employers) state: “You should treat the taxes you withhold from your employees' pay as wages on your tax return. You can deduct the employment taxes you must pay from your own funds as taxes.” See: Social Security Surplus Myth  

 

EXAMPLE: By using a 35% Corporate Tax Rate as typical, the net cash received by Treasury (after expensing wages & taxes) may be estimated. $592.9 (combined contributions) billion multiplied by 35% equals $207.5 billion. The estimated difference of $385.4 billion represents the net income to the IRS (derived from the FICA tax) after adjusting for business expensing. Interestingly, the NET income of $385.4 billion in contributions plus interest and benefit tax revenue of $109.2 is is only $494.6 billion. That is $35.3 billion less than the 2005 benefit expenditures of $529.9 billion. Using real math instead “fuzzy” math exposes the fraud.

 

The REPORTED Social Security Trust Fund SURPLUS of $171.8 billion in 2005 transposes to an estimated $35.3 billion dollar DEFICIT!

 

Summary: Much of the Trustees report is deliberately misleading to make it appear the program is in much better financial condition than it is. Note: One might ask how legislators or trustees can reform Social Security or any other social welfare or tax policy when they appear incapable of connecting the dots between conflicting tax and welfare laws. 

 

Also, in 2005, the IRS collected in Corporate and Individual Income Taxes  

of $307.1 billion and $1.11 trillion; respectively. Since most of the individual income taxes are based on wages, approximately one-third of those taxes are offset (and retained by Corporations) by reductions in corporate income tax on profits because of “Wage & Tax Expensing”.  But, that is another story!

 

With US wages over $5 trillion it doesn't take an accountant to figure out that elimination of the Corporate Income tax and its replacement with a 2% gross sales tax on business would significantly alter the federal budget. A balanced US federal budget could become a practicality, not an impossible dream. A deliberate strategy could be developed to phase out tax and accounting policies that are bankrupting the country. Reductions in accounting expenses by business, government, and private citizens would lower the net costs of the gross sales tax on the economy and remove much of the potential for fraud in the current system. 

 

I suspect the spirit of American entrepreneurs may be exaggerated. Much of the spirit may be engendered by a small businessperson’s recognition that the tax code is biased toward employers over employees. An additional incentive may be that he can keep his own set of “books”.

 

Solution to the Dilemma of Un-funded Liabilities

 

The simplest solution to the funding problem is to revisit and revise the original law that created Social Security. The Social Security Act of 1935 states: "In addition to other taxes, employees shall pay an income tax on 1% of wages up to $3,000 and every employer shall pay an excise tax on individuals in his employ of 1% on wages up to $3,000 on each employee." http://www.ssa.gov/history/35acviii.html#Excise

Note: There was NO provision in this enabling Social Security statute that would allow Corporations to expense FIT and FICA taxes paid by employees to reduce corporate tax liabilities. More importantly there was nothing in the enabling legislation from prohibiting employers (corporations) from deducting employee Social Security taxes.

 

Curiously, while the 1935 Social Security Act prohibited individuals from deducting the Social Security tax on their individual federal income tax returns; no similar prohibition was applied to their employers.

 

"DEDUCTIBILITY FROM INCOME TAX

SEC. 803. For the purposes of the income tax imposed by Title I of the Revenue Act of 1934 or by any Act of Congress in substitution therefore, the tax imposed by section 801 shall not be allowed as a deduction to the taxpayer in computing his net income for the year in which such tax is deducted from his wages."

 

From the above it can be seen, that a clear tax bias that favors net profits over over net wages was established in the enabling legislation and succeeding legislation has compounded the bias to the point where the corporate income tax law cleverly disguises $100s of billions in corporate welfare. This and similar legal ambiguities are bankrupting America.

 

By reversing the current practice of increasing business profits by deducting taxes paid by their employees as a business expense, the actual FICA & FIT tax rates might be lowered for business and their employees and still attain a balanced budget and long-term solvency in this and other programs. 

 

For those who may still harbor doubts about the US Government's stewardship of your taxes and the Trust Funds, please read the Government Accounting Office (GAO) statement to the President and the Congress

 

Brief Summary of GAO Remarks to Congress

 

  Quote: Material deficiencies in financial reporting (which also represent material weaknesses and other limitations on the scope of our work resulted in conditions that, for the ninth consecutive year, prevented us from expressing an opinion on the federal government’s consolidated financial statements.

 

The federal government did not maintain effective internal control over financial reporting (including safeguarding assets) and compliance with significant laws and regulations as of September 30, 2005.

 

Moreover, as a result of the material deficiencies we found, readers are cautioned that amounts reported in the consolidated financial statements and related notes, certain information contained in the accompanying Management’s Discussion and Analysis, and other financial management information that is taken from the same data sources as the consolidated financial statements, may not be reliable.

 

More troubling still, the federal government’s financial condition and long-term fiscal outlook is continuing to deteriorate......The current financial reporting model does not clearly and transparently show the wide range of responsibilities, programs, and activities that may either obligate the federal government to future spending or create an expectation for such spending. Thus, it provides a potentially unrealistic and misleading picture of the federal government’s overall performance, financial condition, and future fiscal outlook.

 

The federal government’s (explicit and implicit) fiscal exposures now total more than $46 trillion, representing close to four times gross domestic product (GDP) in fiscal year 2005 and up from about $20 trillion or two times GDP in 2000. About one third of the approximately $26 trillion increase resulted from enactment of the Medicare prescription drug benefit in fiscal year 2004.

 

This translates into a burden of about $156,000 per American or approximately $375,000 per full-time worker, up from $72,000 and $165,000 respectively, in 2000.These amounts do not include future costs resulting from Hurricane Katrina or the conflicts in Iraq and Afghanistan. Continuing on this unsustainable path will gradually erode, if not suddenly damage, our economy, our standard of living, and ultimately our national security. Unquote

 

GENERAL SUMMARY

 

If you believe that "Getting Ready for Hard Times" has overstated  the economic perils facing this nation, you might also consider these facts provided not by me, but by your government!

 

Assets of the trust funds (according to the Trustees) provide a reserve to pay benefits whenever expenditures exceed income.  (President Bush has repeatedly stated that the Trust Funds hold IOUs on money that has already been spent). The question then arises - WHO will redeem the IOUs?

 

Almost 3 of 10 of today’s 20 year-olds will become disabled before reaching age 67.

 

70% of the private sector workforce has no long-term disability insurance.

 

52% of the workforce has no private pension coverage.

 

31% of the workforce has no savings set aside specifically for retirement.

 

By 2031, there will be almost twice as many older Americans as today – 37 million to 71 million.

 

There are currently 3.3 workers for each Social Security beneficiary. By 2031 there will be 2.2 workers for each beneficiary.

 

In 1935, the life expectancy of a 65-year old was 12 ½ years, today it’s 17 ½ years.

 

BOTTOM LINE: Fiscal exposures (including unfunded liabilities) of the federal government has more than doubled in the past five years. The government has spent the money intended for the Trust Funds. Both statute and implicit government debt is picking up momentum.

 

If the US government cannot pay its bills with corporate profits at record levels and with employment at historic highs, how can economic catastrophe be avoided during the next recession? It's not rocket science. The economy is being stimulated by consumer spending that is increasingly being funded by unsustainable debt throughout the society. There will be a day of reckoning,  it may arrive with little warning, and the devastating possibilities are beyond imagination.

 

If you still harbor doubts of the impending peril to national security and its unpredictable time of arrival, READ THIS:

 

Since 2000, federal fiscal exposures reported by the GAO have increased $26 trillion, an average annual amount of $5 trillion.

 

During the five-year period (2001 – 2005), the IRS reported Total Internal Revenue collections of $10.39 trillion an annual average of $2 trillion.

 

By comparing the 5-year totals of average federal fiscal exposures to tax collections, the magnitude of the problem is exposed. Annual fiscal exposures are 2 ½ times the amounts of tax collections and the divergence is growing exponentially.

 

After reviewing irrefutable evidence provided in the this and previous articles, can any objective, rational person conclude that UNLESS immediate action is taken, an economic collapse of historic dimension is unavoidable? To believe otherwise is to believe in the "Fairy God Mother", "The Tooth Fairy", or the "Impossible"!

 

Personal Note: I have done all I can to WARN of this approaching catastrophe. Since it appears unavoidable, the best advice I have is reduce spending, get out of debt, save some money and hope it will be enough to survive hard times. Good luck!

 

Doing Your Part to Improve America

 

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Getting Ready for Hard Times