Free Market Way To Fix Social Security: Sell Government Assets to Cover Unfunded Liabilities

For years I have read on ways to "save" or "fix" Social Security. I honestly never came across many exceptional proposals. At best a decent solution would be taking various aspects of certain solutions and mixing them with other solutions. As someone who is only 30 years old I honestly don't believe I will get Social Security. Also I don't believe I should be responsible for other people and they save for retirement.

Social Security was created back in August 14, 1935. Social Security was created as a means tested program for the elderly that was designed to help the victims of the Depression. It also provided support to the unemployed. However, history shows that even when people didn't have the means to support themselves individuals would reach out to their fellow man through charitable actions. Back in the early 1900's there were hundreds of charities listed in local directories that would assist people during rough times.

 The total unfunded liabilities of Social Security is $26 trillion according to a 2015 Senate Trustees report. What this figure represents is if you had to pay off all the liabilities for Social Security today you would need $26 trillion in the bank account to cover the liabilities. It is important to point out that over time this figure will continually increase as more people are entering the Social Security system. 

The question is how to pay for the unfunded liability of Social Security. Does the government have assets it could sell to fund this? The answer is the government has plenty of assets it could easily sell to pay off the unfunded liability.  A study done in 2015 shows that the approximate land of the United States is worth $23 trillion and $1.8 trillion of the value is held by the federal government. One idea could be to swap government land for Social Security benefits. Say the present value of your Social Security benefits are worth $100,000 the government could offer you an equal amount worth of land (preferably land that is in the state you live in). This would reduce future liability of current retirees off the books. Recipients  of the land could sell the land to others if they wanted to and put the land to better use.

The Institute for Energy estimates that the government has roughly 1,194 billion barrels of oil and 2,150 trillion cubic feet of natural gas. Currently, a barrel of crude oil is worth  ~$43/barrel would yield ~$51 trillion in value.  Natural gas is worth ~$2.92/thousand cubic feet would be worth about ~$6 trillion of value. In total between the crude oil and natural gas would be worth almost $57 trillion (note I did these calculations based on recent crude oil and natural gas prices). Of course the government could wait until crude oil hit a high in order to sell (doubt this will happen as we can't give the government credit for understanding how markets work). A combination of land, oil, and natural gas can be sold either to individuals, public corporations, private corporations, and even internationals companies and investors. This would not only raise revenue but would be more productive since the assets would be put to work.

The unfunded liability for Social Security of $26 trillion could be met by selling a portion of the $57 trillion in assets in oil/gas assets. After we paid off the unfunded liability of Social Security with government assets I would make some changes to Social Security (this would be phased in over a period of 5 years). The first would be to increase the age in which you can take Social Security to 70 years old. Currently individuals who wait every year past full retirement age (FRA) receive an additional 8% of retirement benefits. I would end this additional increase of 8% in benefits as well. Only the government is generous/foolish enough to offer an increase in benefits of 8% when even public equity markets can't guarantee this.  However, I would keep the cost of living adjustment that Social Security offers. The maximum you would be able to collect is the amount you are eligible for at full retirement age.  With advances in medical technology life expectancy will continue to increase allowing people to live comfortably into their 80's and 90's.

Also I would allow younger people to opt out of Social Security and have the opportunity to save and invest that money for their retirement. Currently, the government taxes 6.2% on the employee and 6.2% for the employer for a total tax of 12.4%.  A Reason poll from 2013 shows that 62% of Americans favor the opt out of Social Security.  There should still be an option for people that want to stay in Social Security. Currently, Social Security benefits are either taxed at 0%, 50%, or 85% depending on the income of the individual or couple. One possible fix is increasing the taxation of Social Security to 100%.

The bottom line is that Social Security that can be fixed with a combination of selling government assets. The unfunded liability of $26 trillion can be solved by: swapping government owned land for Social Security benefits selling a portion of $57  trillion of natural gas and oil that the government owns. Also over a 5 year period I would increasing the minimum age to collect Social Security to age 70, increase the taxation on Social Security to 100% (up from a maximum of 85%). Once the unfunded liability of Social Security is paid off young people should be allowed to opt out of Social Security. These steps listed would allow Social Security to wind down in a method that wouldn't burden future generations.

Decline of America Through Debt: $109 Trillion Unfunded Liabilities and Debt (Medicare, Social Security, Medicaid, Etc)

In thinking about the economic condition of the United States I sometimes worry that maybe our best days are behind us as a nation. History has shown that empires can last hundreds of years before they collapse. When examining the data of the unfunded liabilities of the United States it is hard to see how the United States will continue to have a high standard of living.

In August 5^th, 2011 the United States lost its AAA credit rating. A credit rating measures how likely a country or company is able to pay back their debts. Although, the current credit rating is AA+ it is clear unless the government gets it act together we will be heading down the wrong path.

Currently the national debt for the United States is over $16 trillion dollars. This doesn't include the annual deficits we have been having which in 2012 was $1.1 trillion (I like how people are excited if the deficit is less than predicted even though it is a trillion dollars). The deficit was $1.3 trillion in 2011. The United States also currently has a very low interest rate on the debt at around 3%. However if interest rates increase to a more normal rate of 6%-7% than the interest payments required would increase from about $432 billion to $864 billion. However, our GDP (or how much we produce) is only $15 trillion. One might look at this and say “Gee we could pay back the debt in one year if we really wanted to”. However there are some problems with this. According to the 2012 U.S. federal budget the United States spent $3 trillion in just one year. What isn’t included in this estimation are unfunded liabilities for government programs.

The 2013 Social Security Trustees report shows that by 2033 Social Security won’t be able to pay out full benefits and will only be able to pay out 77% of benefits. Social Security has an unfunded liability of about $9.6 trillion. Medicare has an unfunded liability of about $39 trillion. Medicaid has an unfunded liability of $20 trillion.  Let’s not forget the newly created Obamacare which will is estimated to create a $17 trillion unfunded liability.

This is all at the federal level we haven’t even gotten down to the state level, city, or county level. Joshua Rauh in this EconTalk podcast estimates the unfunded liability from state pensions is $4 trillion. Actually believe it or not New York city has the highest unfunded liability with $122 billion. Then you have cities like Chicago have an unfunded liability of $42 billion. 

So let's add it all up: 

Current U.S. debt: $16 trillion

States unfunded liability $4 trillion

Medicare unfunded liabilities: $39 trillion

Medicaid unfunded liabilities: $20 trillion

Obamacare unfunded liabilities: $17 trillion

Social Security unfunded liabilities: $9.6 trillion

Student loan debt: $1.1 trillion

Increase in interest rates: $864 billion

2013 projected deficit: $642 billion (will see if this comes true)

$109 trillion (or roughly 7 times our current GDP)

As Dr. Walter E. Williams points out the government spends $3.7 trillion per year. Now if you wanted to "soak the rich" and make them pay for the spending you could tax everyone making over $250,000 at a 100% tax rate and you could only run the government for 190 days. Taking the profits of all the Fortune 500 companies would run the government another 40 days and confiscating the wealth of the billionaires in the United States will allow the government run into the fall season. Clearly, we have a spending problem and not a revenue problem.  

Bloomberg Article: Medical School $278,000 Debt (Because Lack of Free Markets)

This recent story from Bloomberg got me somewhat irritated today. The story discusses how medical school students are burdened with medical school debt. Going to a private medical school for 2012-2013 is over $50,000 according to the AAMC. What is really shocking is that 79% of medical school students will have more than $100,000 in debt. Note this is just for going to medical school this doesn’t even begin to look at overall debt (mortgage, car payments, credit card debt, etc).

I examined the 2012 physician compensation report (by Medscape) which can be found here. Salaries range on the low end of $156,000 for pediatrics to $315,000 for radiology. Specialties like gastroenterology can make over $300,000 while plastic surgeons make $270,000 and internal medicine doctors make $165,000. What I found it interesting that 9% of doctors don’t discuss the cost of treatments considering they don’t even know what the costs are. In the business world you would be out of business if you had no idea what the costs were.

The question is why is medical school become so expensive? Medical knowledge has only grown exponentially over time and you could argue doctors know actually face competition because patients can often Google their symptoms and figure out what they have (doctors also use Google as well). This surgeon discusses what practicing surgery was like in the 1970’s.

Supercomputer Watson (made by IBM) can analyzed 1.5 million records in seconds, attend medical school under a minute, in just two years researchers at the for-profit IBM have reduced the size of Watson from a master bedroom to a pizza box while increasing the speed by 240%. Conventional medicine can get diagnoses right only 50% of the time while Watson can get around 90% of cases correct (less for cancer given how complex they are). Of course, these percentages will only improve over time.

What is interesting is that the average MCAT and GPA scores of the people who get accepted into medical school has steadily risen since 2001. According to this medical journal from 1911 there were 129 medical schools which is roughly the same number of medical schools in 2013! Granted since 1911 the population has exponentially grown exponentially so by definition there are fewer people per doctors.  This may be why so many doctors don’t spend much time with patients.

A no-brainer would be to allow more medical schools to open to allow let more people become physicians. Starting a medical school is no easy task either. Another no brainer is allowing nurse

practitioners and physicians assistants as I mentioned in this post. The empirical evidence I have seen shows nurse practitioners and physician assistants as just as effective as doctors and cost a fraction of what doctors cost.  The cost of medical education falls is yet another example of the Peter Rule. The Peter Rule which states that: over time if prices rise and qualify suffers look to government intervention as the culprit. 

1980-2010 Government Spending Receipts and Outlays

Spending data from 1981 to 2010 is now in. The data shows that the U.S. is now spending $3.45 trillion per year. To put this in perspective the United States government spends over $100,000 per second. The next logical question should be what is this money spent on? First spending is separated into mandatory and discretionary spending. This is language is mysterious since you could argue all spending is discretionary. The largest expense for 2010 was Social Security which cost $695 billion. The next largest expense was the Department of Defense which spent around $664 billion. Next on the list is unemployment/welfare/other spending coming in at $571 billion. Clearly, running a government isn’t cheap the question should be are we getting our what we pay for?

Despite what people say the government doesn’t have a revenue problem it has a spending problem. Looking at the data from 1981-2010 it is crystal clear that the annual increase in revenue was 4.52%, however the annual increase in spending was 5.89%. Spending has on an annual basis been 30% higher than revenue. People and politicians talk about taxing people their fair share, but isn’t the government already spending more than its fair share? There is absolutely no amount of money politicians cannot outspend. The annual deficit seems to have exploded in the past few years. In 2008 the annual deficit was only $454 billion. By 2010 it increased to $1.25 trillion.

One solution people have is to tax the rich. Let’s put this into perspective. Essentially what these people are saying is we should tax the most productive people because certain elected people spent too much money. This to me does not make any sense. Why should the rich be punished because politicians spent more than they had? We could tax everyone who made over $250,000 (the new millionaires and billionaires according to President Obama) at a 100% tax rate and this would only raise $1.97 trillion. This number is unrealistic because if the government taxed anyone 100% there would be no incentive to work. If the government wanted even more money they could take all the profit from Fortune 500 companies which would amount to $400 billion. Of course if Congress ever announced this you would see 500 companies and millions of people flee to other countries.

The solution is to just spend what we have. Individuals and families create budgets that they have to follow. If Congress were able to freeze spending for a few years (without any gimmick legislation to remove the freeze or else they would have to resign) we would slowly start to see surpluses. In addition to this, if we lowered the corporate tax rate, eliminate taxes on dividends and interest, got rid of many burdensome regulations we would start seeing money from all over the world flow into the United States. In addition to all this the government has 650 million acres (around 30% of all the land in the United States) Clearly, some of these assets along with other assets like buildings could be sold to raise money. Not only would selling land to the public raise money it would also increase revenue since people do have to pay property taxes every year. If someone tells you we don’t have enough revenue you should ask them well how much is enough?

Relationship Debt and GDP Growth

This chart is from a paper in the American Economic Review from 2010 by Reinhart and Rogoff. The study followed countries over a 200 year period and looked at the relationship between debt and GDP growth. Seems pretty clear that more debt does lower GDP growth.

S&P Downgrade: Who Is to Blame?

With Standard and Poor’s (S&P) downgrading the United States debt there has been a lot of blame as to who is at fault. The S&P 500 reacted to the news by dropping 6.66% on Monday. Today the market was up almost 5%. David Axelrod senior advisor to President Barack Obama said that the downgrade was the credit downgrade was a “tea party downgrade”. Michael Moore wanted to arrest S&P officials (which is what Italy tried to do when S&P downgraded them only Italy wanted documents as well). Rick Santelli the man I would credit most with creating the tea party said that if it weren’t for the tea party the U.S. would be BBB.

Let’s sort out some facts first. Standard and Poor’s is in the business of reporting the credit rating of companies and sovereign nations. Moody’s and Fitch which are two other credit rating agencies kept their AAA credit rating for the United States. Standard and Poor’s did not err in their decision. In 2010, the United States took in $2.38 trillion. The very same year the United States spent $3.55 trillion. So in essence we are spending $1.17 trillion more than we take in yet we have the highest possible credit rating. If individuals overspent this much they wouldn’t even be credit worthy. Not only are we spending more than we are taking in but we have more than $14 trillion in debt. With all these facts the United States should have perhaps even a lower credit rating then S&P gave us.

Another interesting idea is why people are blaming credit rating agencies for the downgrade when it is really the fault of the people for electing people that take money from one person and promise it to someone else. The United States got the downgrade because of political instability and unclear and murky recommendations from the recent legislation. It would be as if a person called someone overweight (when they are) and the overweight person said, “I am not overweight you just don’t know what overweight is”. The parallel is yesterday when the President claimed at a press conference the other day that we truly are AAA even though we are told that is not true. People seem to blame the credit rating agencies for the downgrade and the 2008 financial crisis. In the 2008, financial crisis people were claiming S&P was too loose with its credit rating agencies. Now they claim people that S&P is being too harsh. I think the credit rating agencies realized after 2008 they had to make their criteria more stringent, but even with that said the United States should have been downgraded.

Credit Ratings Of Nations Around the World

Debt Ceiling Debacle

Recently, the House of Representatives passed a deal a day before the August 2nd deadline to raise the debt ceiling. The debt ceiling will cut $2.1 trillion over a 10 year period. Only $210 billion per year but that still is something. I am suspicious of what “cuts really mean”. Looking at the deal it looks like most of the “cuts” are smoke and mirrors and are do not start any time soon. The debt ceiling would be increase immediately by $400 billion. The problem is that the money is spent right away however the cuts don’t come until years later.

Discretionary programs (includes defense spending) would be cut by $741 billion. The discretionary cuts for 2012 would decrease by $21 billion and $42 billion in 2013. Yes, these numbers do seem large however in the context of $14 trillion in debt they would be just chairs on the Titanic. In addition to this, $156 billion would be saved in interest because the United States would have a lower interest rate. This is where I am a little lost because unless the government can refinance its debt I don’t understand how they will save money. Standards & Poor’s and Moody’s I would imagine are on the verge of downgrading the United States credit rating to AA or possibly lower. If the credit rating of the United States were downgraded it would increase the cost of interest not save money. Another problem is how spending cuts are defined. An important question is what is the baseline for the cut? If politicians are saying we get cuts from things we were already were cutting to begin with or used overstated figures to begin with it could look like there is a cut when in reality nothing really happened.

One of the biggest problems we have is not discretionary spending but non discretionary spending. This includes programs like Medicare, Social Security, and Medicaid. In 2010 the United States government spent $3.45 trillion on payments to individuals. People can get paid through Social Security, Medicare, unemployment benefits, and federal assistance programs. The GDP for the United States was around $14 trillion in 2011. This would say that close to a quarter of all of GDP is just the government sending checks to individuals. In fact, payments to individuals were 2/3 of all spending for 2010. In 1952, payments to individuals were under 20% of all federal spending.

The government holds over $1 trillion assets in building and equipment. In addition to this there is around $919 billion of assets in land. Also the government owns $392 billion of mineral rights. These assets consume even more government resources since they have associated maintenance and replacement costs. The assets could be sold off to private investors who would pay taxes on them, create jobs, and increase productivity. One great idea is for the government to trade people government owned assets for Social Security benefits. The Social Security beneficiaries would have assets that they could use or sell if they wanted to and the government would be putting wasting assets to better use. Another idea for Social Security is to allow people to opt out of it. The idea would be to phase out Social Security over time since it takes money from the young to pay for the old. Privatizing or changing the age people can retire will prolong the solvency of Social Security a few years but the solution to solving Social Security is to phase it out.

Around 7.54 million people are on unemployment benefits. I would be interested to see what would happen if unemployment benefits were cut 10% or even 20% to see how people would respond. It would be wiser to set up the unemployment benefits would be to pay 100% of the benefits for a few months and then start lowering the percentage of benefits by 15% or so every month so people didn’t become dependent on it. I would much rather spend the unemployment benefit money on training out of work people than just paying people to do nothing.

I unfortunately I don’t see a brighter future on the horizon in the United States unless politicians take serious steps in order to get our fiscal house in order. I am really surprised neither party talked about this during the debt talks. Politicians talk about raising revenue. This could easily be accomplished by getting rid of the arcane and complex tax code we have and replacing it with a flat tax that would tax everyone at the same rate without deductions. Doing this would save everyone time and money and bring in more revenue since people wouldn’t be trying to shift income or assets to avoid paying taxes. Time will only tell our destiny though.

Debt Ceiling Nonsense and What the Government Should Be Doing

With the debt ceiling approaching soon it seems as if seems as if politicians will have to figure out what to do regarding the financial state of America. The Democratic Party wants to cut spending on programs that don’t spend that much money while raising taxes on the most successful people in society. Republicans on the other hand want to cut more spending while not increasing taxes.

I would argue that not raising the debt ceiling would be a step in the right direction. If nothing gets done spending will have to be cut. The only thing that would have to be paid is the interest on the debt. The 14th Amendment required that the United States pay interest on the debt before anything else. According to the Treasury the interest on U.S. debt for 2011 will be over $385 billion. Also remember that the United States currently has an AAA (highest) credit rating. Standard & Poor’s and Moody’s who rate the credit of sovereign countries have threatened to downgrade the United States if they don’t pass the debt ceiling. People have been saying if we don’t pass the debt ceiling we will default on our debt. I am not sure how they can claim this when the interest on the debt is $385 billion and the Treasury last year took in $2.3 trillion (while giving $467 billion in refunds). However in 2010, the government spent $3.46 trillion. It doesn’t take a financial wizard to figure out that in 2010 we had a deficit of over $1 trillion. So the interest on the debt is around 16% of all of the income the government takes in. The largest item for the national budget is Social Security. In 2010, $695 billion was spent on Social Security benefits. The second largest item was the defense budget which was $664 billion. Unemployment and welfare benefits were $571 billion for 2010. What I never understood is why the government separates spending into mandatory and discretionary. As households know all spending is discretionary. I am really boggled when the media says we have to raise the debt ceiling. If people simply called their credit card and raised their credit limit every year the credit card company would soon cut off their credit.

The United States government is bringing in plenty of revenue however Congress decides to spend more than they take in. One no brainer would be to let people opt out of Social Security. This would decrease the future obligations to future retirees which will slow down spending. The same thing should be done for Medicare and Medicaid. Some other no brainers would be to abolish the Department of Health and Human Services, Department for Education, Department of Energy, Department of Agriculture, and Department of Labor. Getting the government out of many aspects of our lives will not only save money but increase productivity since these displaced workers will have to find jobs in the private sector. Eliminating these departments would save close to $200 billion. The United States in 1948 spent under $800 per person and by 2004 this number reached $4,300 (both adjusted for inflation).

Military spending could also be reduced. We have close to 78,000 troops in Europe and over 47,000 in East Asia. I am all for the country defending ourselves but do we really need all these troops in places that are relatively free and safe. I don’t see China or Japan mobilizing thousands of troops in countries all over the world.

On the revenue side it would make sense to go to a flat tax and get rid of all loopholes and deductions to make the tax system much simpler. Americans spend 6.1 billion hours each year just complying with the tax code. Not only do Americans spent time on the tax code, but also complying with more regulations every year. In 2009 alone 60,000 new pages of regulations were added. The cost for these regulations was $1.75 trillion. Moving to a flat tax will make the tax system easier and simpler however I have a feeling: tax attorneys, CPAs, and real estate agents would lobby against a flat tax. The current tax system creates so many inefficiencies and waste. I am all in favor of a tax return that can fit in on a postcard with easy to read print. Also lowering the tax rate of dividends and capital gains to 5-10% percent would allow more Americans to keep money in their pocket and attract investment from overseas. Since 54% of people are invested in the market in some way (either through 401k plans, mutual funds, or IRAs) a vast majority of people would see an increase in their dividends. Dividends are a double tax since corporations already pay taxes on their income and then shareholders have to pay taxes on the dividends when they receive them.

Many empires have collapsed over time. It is possible for America to collapse if we don’t start taking serious steps to get our fiscal house in order. Politicians are only doing what the people elected them to do. If we don’t make changes soon our country will no doubt start to collapse like a house of cards.