Wednesday, November 07, 2007

Buffet Continued

In my previous post I wrote about Warren Buffet's dubious determination to pay more taxes to the Federal Government. In my opinion, he really wants us, not him, to pay more taxes.

As I thought more about the issue I realized that he is right in one respect. People in the middle-income bracket pay too much in taxes. That is not because the rich pay too little. It is the result of misguided policies put in place by incompetent, corrupt politicians.

I have heard, countless times, of the dismal savings rate of Americans. Small wonder. The government confiscates 6.2% of our income, regardless of our income level, and forces us to "save" it in Social Security. How much do people really have left to "save"? Do you earn 6.2% more than you wish to use for living expenses? Few of us are so fortunate. As has been well documented, the Social Security Trust Fund earns nothing so the confiscated assets of every working American earn nothing. My theory on why it earns nothing is that it is invested exclusively in US Treasury Bonds that have to be repaid with tax money, the money we pay the Federal Government in income tax, for the most part.

If that is not bad enough, Social Security confiscations end at $92,500 of annual income. This is simply neither fair, nor right. It clearly places the heaviest burden for funding Social Security on those least able to afford it, although arguably those to whom it is most important in terms of retirement planning. According to the Statistical Abstract of the United States: 2007 , Table 673 about 17% of households earned more than $100,000 in 2004 (the latest year reported) and so had an advantage over those earning less in terms of the impact of SS confiscations on them. (Household income is not the perfect measure here but all I could find for now.)

So about 17% of households are less burdened by the current system than the other 83%. Should the misery be shared equally? No.

In my view Social Security and Medicare should both be means tested. For those of us in the top 5%, the idea that we "need" SS is ridiculous. If SS is going to continue as it is (a bad idea) then we should continue to pay to the $92,500 cap but not be eligible to receive any benefits.

What would be the impact on the system of removing me, Bill Gates, Rush Limbaugh, Bill Clinton, Ted Kennedy (oops, probably not in it since he has done nothing but "work" for the federal gov't his whole life), John Kerry (oops, same problem) and Warren Buffet from it?

Even though my skills are lacking, please consider the following:

If I received $14,400 annually ( $1200/month) and live to age 80 I would have received $216,000.

As of 2001 (Table 700, 2001 is the latest data available) there were 3,510,000 millionaires in the USA. If we were all removed from SS eligibility (how could any of us object in any meaningful way) and lived only to age 70 the system would save $252.7 billion dollars(based on the figures I used for my case and generalising them). If half of us lived to 70 and the rest to 75, $379.1 billion would be saved and so on and so forth.

The SSA site indicates that SS payments will be reduced, probably to zero, although it is hard to tell, by withholding SS benefits for all earned income over $34,400 (there are other numbers but this is the most common in my opinion). If I understand it correctly, $1 is withheld for every $3 earned.

Not surprisingly only ordinary income is included in the calculation. By 65, most, if not all of the income earned by the vast majority of the millionaires will be dividends, interest , capital gains or pensions. None of this income would reduce our SS payments. We get a break again. We don't need it in the first place. A retiree who has to work to make ends meet has his benefits reduced, but I don't? Ridiculous.

Please do not leap to the conclusion that I am a bleeding heart. I'm not. I realize that, for the most part, we end up where we end up through a series of choices. Generally speaking, those who end up with bad outcomes have made bad choices. That doesn't mean that I should be living off their misfortunes, earned or serendipitous. Nor does it mean that they should live off the fruits of my better choices. Given a choice between the two, however, I would rather contribute meaningfully to their well-being rather than force them to contribute meaninglessly to mine.

This post is long enough. I'll leave medicare to another day.

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