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Old 02-26-2012, 08:04 PM   #21
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Rayvt is quite correct. And (s)he is hardly alone.

tr-statements

Among those quoted are former president Bill Clinton, former U.S. Comptroller David Walker, and the CBO.

"Social Security's Trust Funds are not like private Trust Funds. They are simply budget accounts used to record receipts and expenditures earmarked for specific purposes. A private Trust Fund can set aside money for the future by increasing its assets. However, under current law, when the Trust Fund's receipts exceed costs, they are invested in Treasury securities and used to meet current cash needs of the government. These securities are an asset to the Trust Fund, but they are a claim on the Treasury. Any increase in assets to the Trust Funds is an equal increase in the claims on the Treasury." David Walker, Comptroller General of the United States in an article titled "Social Security And Surpluses: the Government Accounting Office (GAO) Perspective on the President's Proposals" February 23, 1999.

"Trust Fund balances are available to finance future benefits...but only in a bookkeeping sense...they do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes or borrowing." President Bill Clinton in his Analytical Perspectives section of the 2000 budget.

"It holds no real assets. Consequently, it does not generate funds to pay future benefits. These so-called trust fund 'assets' simply reflect the accumulated sum of funds transferred from Social Security over the years to finance other government operations." June O'Neill, former Director of the Congressional Budget Office (CBO) at the CATO Institute's Conference for Women and Social Security.
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Old 02-26-2012, 08:07 PM   #22
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Thank you for making my point. If real wages increase 17% over the next 27 year and Social Security only can pay 80% once the trust fund runs out in 25 how can real benefits increase?

Let say average wages are 40K (close enough for government work) they increase by 17% to $46800. The average benefit is currently $1177 which increase 17% to $1377/month (in today's dollars). The SS Trust fund runs out of money and we move to a pay as you go system and benefits are cut by 20% meaning the average SS beneficiary is now getting $1100.

How is it that $1100 check in 25 years (after inflation) is better than today's $1177 check?

Now if you want to pretend that America workers are more competitive now than were in the last century and we are going to get even bigger real wage increase than we did in the 80s and 90s than I am sure everything will work out just hunky dory.

Of course the last decade hasn't worked out so good for worker's wages in this country which is why concern about SS funding may not be overwrought.
You really are failing to grasp a fundamental relationship. SS is funded by payments that are a percentage of labor income. If labor income goes up by 17% in real terms then payroll tax receipts will go up similarly, assuming the population doesn't grow, but it probably will. That will be enough because by then the Trust Fund will have completed its stated mission of accommodating the baby boomer pig-in-the-python and will have been fully depleted as planned by the 1983 Greenspan Commission.

As for the competitivenes of American workers, which country is the second largest exporter in the world? Which country's auto workers are cheaper than Germany's?
That would be the US in both cases.

The telltale sign of oversimplified thinking is the reduction of complex issues to black and white. It makes for good bumper stickers, but is otherwise inadequate. SS has been a success for the last 80 years or so, but it has required and has had adjustments over the years. Further adjustments will certainly be necessary. A more balanced discussion would be what those adjustments should be:

1. should benefits be reduced?
2. should payroll taxes be raised?
3. should the protection of investment income from payroll taxes be phased out?
4. should the cap on payroll taxes be phased out so that Warren Buffet will pay more to SS than I do?

All of these are possible answers to the fine tuning that may be required decades in the future. But the immediate crisis is the out of control health care costs which the rating agencies and others have identified as the leading threat to the financial well-being of the country. The chicken little approach to SS is at best a distraction from the real issues.
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Old 02-26-2012, 08:27 PM   #23
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You're making the mistake of assuming the "trust fund" is something real. It isn't. Look at the substance rather than the form -- just like the IRS does when they nail people for clever tricks that constitute tax evation.

The trust fund doesn't contain any real assets. It's just a bunch of IOU's from one department of the government to another department of the government. Actually, it's not an IOU, it's a IOme. A book-keeping entry that is only paper figures.
The IOUs are a class of Treasury bonds. Would you care to guess what happens if Congress in its wisdom decides to default on selected Treasury bonds?
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Old 02-26-2012, 09:29 PM   #24
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Either you honestly misunderstand or you are deliberately misrepresenting the situation. SS is fully funded for the next 25 years and more. The department of Defense, for example, is not, although it would make just as much sense to lump DOD with Medicare. However, neither the SSA nor the DOD represents a threat to the financial health of the nation. The rising cost of healthcare, which is predicted to reach to rise from the current 16% to 20% of GDP, does. Whether the nation attempts to cope with the unsustainable rise in the cost of health care through Medicare, through some new govt program, by nationalizing the insurance and healthcare industries or by forcing households to absorb the risk and cost entirely, it is the healthcare cost itself, not SS or DOD or the Park service, that is unsustainable.

The strategy of the political attack on SS has been to blur the distinction between the entirely sustainable SS system and the entirely unsustainable health care system by lumping SS & Medicare. It is completely dishonest. I sincerely hope that does not include you.
Your 20% GDP for medicare figure isn't valid. As a rough cut take all the boomers when retired will literally double the senior population from what it is now. Add in more cost growth in new drugs, new medical procedures, new you can clearly see costs go through the roof. Something has to give ? No ?

SS by itself isn't in awful shape. All of the entitlements taken together are in dismal shape though. If Medicare is allowed to keep on it's sutained growth path then there just isn't enough money floating around in the economy to pay for it all. Add in ever larger debt service and Houston we've got a problem. Another way of saying this, is that the US economy doesn't have the capacity for what has been promised no matter who gets taxed and how high the rates go. Big changes (for the worse) are coming whether you think so or not. The money to pay for it all just isn't there.

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Old 02-26-2012, 09:54 PM   #25
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Wages typically grow faster than inflation which is why the standard of living has grown after all. That is also why the COLA used to adjust your SS PIA prior to retirement is the Average Wage Index. After retirement COLA adjustments are based on CPI-W.

National Average Wage Index

Here's a writer citing data on the subject:

Quote:
Originally Posted by clifp View Post
Thank you for making my point. If real wages increase 17% over the next 27 year and Social Security only can pay 80% once the trust fund runs out in 25 how can real benefits increase?
.
I'm not going to get out my crystal ball and say which will happen. But the clearest source of historical information to me is the SS Trustees' report, Table V.B1 here: 2011 Trustees Report: Section V.B, Economic assumptions & methods

Looking at the real wage differential in the right column, I think I can find periods when the average was above 1.1% and periods when it's been below. I notice that the Trustees picked 1.1% for their intermediate projection, but I don't think their crystal ball is any better than anybody else's.
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Old 02-26-2012, 10:13 PM   #26
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... the US economy doesn't have the capacity for what has been promised no matter who gets taxed and how high the rates go. Big changes (for the worse) are coming whether you think so or not. The money to pay for it all just isn't there.
How much tax can we raise on our children's heads, until they cry out "Down with the geezers!"? People keep talking about taxing the rich, which helps some in the short run, but there are simply not enough of them billionaires.

And then, these boomers will need help. Need lots of care givers to change their Depends.

Yeah, Medicare is going to bankrupt the nation, not SS.

Perhaps we can all get our SS, but have to get our own health care.

Maybe more of us will have to go live the rest of our lives in 3rd world countries, where our money buys more, and is also appreciated by the locals.

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Old 02-26-2012, 10:28 PM   #27
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Khufu, I think you are missing some important facts including that I understand how the system works.

Prior to the crisis, the consensus was that SS needed some tweaks in order to pay future benefits. Now I agree that prior to 2008 the cries that SS was going broke were as much political posturing as financial reality. Modest increases in the retirement age and/or sometype of means testing were the standard fixes. Projection were that sometime around 2020 Social Security would be paying out more than it was taking in.

I agree with author that most important thing to keep social security is a good economy. But reality is for the last 4+ years we have somewhere between an awful to a godawful economy. As result for the first time ever Social Security receipts decreased year to year. (if we are lucky 2012 will return to 2008 level) Meanwhile all of the outgo for SS increased as more people "retired," often involuntarily, at 62. This is a double whammy for the system because folks working at 62 are paying into the program while generally their benefit increase very modestly. Instead of having SS benefit payments exceed revenues by the end of the decade this happened at the beginning of the decade aggravating the funding problems. Several things also happened that hadn't occurred to me prior to looking at the CBO's data, first the disability fund is running out of money in just a few years (one more funding requiring Congress to pay for. Second the lower interest rates on US Government bonds means lower income for the SS trust fund. Like any retirement plan the sequence of returns matters, and 4+ years of horrible news at the beginning of the boomers retirement doesn't bode well for the end.

Sadly the CBO's forecast having been very wrong for the last few years, and instead of adjusting them seem to have the bad gamblers habit of saying my luck is going to turn very soon and continue to forecast increasingly rosy scenarios.

I think you ask the right questions about how to fix SS, and most every panel that has looked at SS has proposed some combination of higher taxes, raising retirement age, and means testing.

However the reality is that only thing government has agreed with respect to Social Security is cut payroll taxes. This may or may not be good economic policy, but one thing is damn sure that cutting payroll taxes only make SS problems get worse not better. Essentially no progress has been made at fixing the long term health of SS.

So it baffles me how anybody can look at the recent financial data, the CBO's track record for making projections for the future, and come to any conclusion other than SS financial future looks a worse than it did 5 years, when it wasn't great.

Now you are right and Medicare is in worse shape, but just because a guy has a gunshot wound to the chest, doesn't mean that knife wound in the leg near a major artery isn't something that needs to be addressed.
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Old 02-26-2012, 10:37 PM   #28
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The IOUs are a class of Treasury bonds. Would you care to guess what happens if Congress in its wisdom decides to default on selected Treasury bonds?
Nothing.
Because the people whose opinion matters (that is, the bond market) know that these aren't real assets or real bonds. That they are just internal memos that the goverment shifted funds from its right-hand pocket to its left-hand packet.
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Old 02-27-2012, 12:44 AM   #29
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The easiest and fasted way to solve the SS problem (not Medicare or Medicaid) is simply to eliminate the cap on OASDI. That is means testing at the start of the pipeline, not at the end when you get benefits. I don't know where I have seen the exact numbers, but eliminating the cap will insure adequate funding for SS for the next 75 years, if not more. We are not talking about just taxing billionaires more, of whom there are a very limited number, but of everyone who makes more than the current cap (which is $110,100 for 2012). People who make just a bit over the cap will pay a little more, those who make a lot more will pay a lot more. I have no problem with not getting a SS tax holiday every mid-September or so if this will solve the problem. If I could live on what I make with OASDI deducted 9 or 10 months of the year, I am certain that I can do so for the extra few months. There is not cap on the 1.45% Medicare portion.

This does NOT raise OASDI on the working poor and it will affect somewhere between 10 and 15% of Americans - not the lower 85%.
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Old 02-27-2012, 03:28 AM   #30
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So it baffles me how anybody can look at the recent financial data, the CBO's track record for making projections for the future, and come to any conclusion other than SS financial future looks a worse than it did 5 years, when it wasn't great.

Now you are right and Medicare is in worse shape, but just because a guy has a gunshot wound to the chest, doesn't mean that knife wound in the leg near a major artery isn't something that needs to be addressed.
SS is a problem decades from now, for which a number of solutions are available. US healthcare is a crisis now. I don't have trouble envisioning a resolution to SS when the time comes. However, I cannot see the US reforming its health care system substantially enough to provide adequate health care to the population on a par with other economically advanced countries. The vested interests in the current health care system are sufficiently funded to defend their stake.

So, a normal triage procedure would be to address the more urgent and more serious problem first.
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Old 02-27-2012, 03:29 AM   #31
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The easiest and fasted way to solve the SS problem (not Medicare or Medicaid) is simply to eliminate the cap on OASDI. That is means testing at the start of the pipeline, not at the end when you get benefits. I don't know where I have seen the exact numbers, but eliminating the cap will insure adequate funding for SS for the next 75 years, if not more.

This does NOT raise OASDI on the working poor and it will affect somewhere between 10 and 15% of Americans - not the lower 85%.
I wonder about this, because so much of the top 1% income comes from capital gains and not income. For instance Buffett with 100K salary, nor Jobs with his $1 would be impacted at all by removing the cap. Anyway I'd be interested in seeing some data on this because with a quick Google I couldn't how much total revenue was collected by the current medicare tax.
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Old 02-27-2012, 03:30 AM   #32
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Nothing.
Because the people whose opinion matters (that is, the bond market) know that these aren't real assets or real bonds. That they are just internal memos that the goverment shifted funds from its right-hand pocket to its left-hand packet.
This is an incoherent opinion. The bond market is willing to buy 10 year Treasuries at an historic low yield of about 2%. It is harder to imagine a stronger endorsement in the language that the bond market speaks.
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Old 02-27-2012, 03:31 AM   #33
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Perhaps we can all get our SS, but have to get our own health care.

Maybe more of us will have to go live the rest of our lives in 3rd world countries, where our money buys more, and is also appreciated by the locals.
Works for me here in Bangkok.
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Old 02-27-2012, 03:35 AM   #34
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I wonder about this, because so much of the top 1% income comes from capital gains and not income. For instance Buffett with 100K salary, nor Jobs with his $1 would be impacted at all by removing the cap. Anyway I'd be interested in seeing some data on this because with a quick Google I couldn't how much total revenue was collected by the current medicare tax.
The national conversation should be focused on why investment income, i.e. the income enjoyed almost exclusively by the richest segment of the society, is specially privileged. That's certainly where I would start. Not just capital gains, but dividends, inheritance, the whole apparatus that has enable the US to be the most highly polarized in terms of wealth of any of the advanced economies.
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Old 02-27-2012, 05:50 AM   #35
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I wonder about this, because so much of the top 1% income comes from capital gains and not income. For instance Buffett with 100K salary, nor Jobs with his $1 would be impacted at all by removing the cap. Anyway I'd be interested in seeing some data on this because with a quick Google I couldn't how much total revenue was collected by the current medicare tax.
If the executives are bein paid with stock, stock options, restricted stock units or any other type of stock based compensation, it is subject to payroll tax if it is salary. Medicare tax of 1.45% is assessed on the entire amount and Social Security of 6.2% up to the limit for both the employer and the individual. This would clearly make a difference, as the past two decades has seen a decline in the median wage but an increase in average income. It means that much of the real increase in compensationi in the US is above the contribution limit for SS.
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Old 02-27-2012, 06:48 AM   #36
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If the executives are bein paid with stock, stock options, restricted stock units or any other type of stock based compensation, it is subject to payroll tax if it is salary. Medicare tax of 1.45% is assessed on the entire amount and Social Security of 6.2% up to the limit for both the employer and the individual. This would clearly make a difference, as the past two decades has seen a decline in the median wage but an increase in average income. It means that much of the real increase in compensationi in the US is above the contribution limit for SS.

You are correct for non qualified options and restricted stock units.
AFAIK incentive stock options ISO are not treated as ordinary income, and you don't pay any type of payroll tax on them. (At least I didn't back 2000) If held for a couple of years all gains are treated as capital gains. These same rules I believe still apply to ESOPs. Now I don't know what the break down of ISO vs Non Qualified stock options, but I do know that some of the startup I've been involved with just a few years ago were handing out ISOs.

I agree that lifting the cap would make a difference. I am skeptical that would be enough to solve the SS funding problem by itself. If somebody wanted to show me some data that lifting the cap would raise $X of hundred billions dollars over the next ten years, I'd be happy to change my mind, but I'd like to have somebody show me the money.

The one thing I should say about Social Security is that unlike says solving the mess of paying for health care in this country, or even trying to work at "fair" tax system that raise sufficient revenue, Social Security is a relatively simple problem to solve. It just takes higher taxes and/or lower benefits. It is telling to me that even relatively simple problems like fixing SS seem to be beyond the capabilities of our government and the citizens.
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Old 02-27-2012, 07:07 AM   #37
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Clifp, not disagreeing with you but qualified stock options are not as common and also not a large part of top exec compensation. Real issues with AMT during the market decline of '01 and '02 have led businesses to prefer restricted stock over ISOs.

On your other points I agree. There is a fairness issue with the cap, but the real 'fix' to SS comes from higher real median wages or more people employed and paying payroll taxes, and unlike health care, SS appears to be much easier to deal with.
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Old 02-27-2012, 08:21 AM   #38
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The easiest and fasted way to solve the SS problem (not Medicare or Medicaid) is simply to eliminate the cap on OASDI. That is means testing at the start of the pipeline, not at the end when you get benefits. I don't know where I have seen the exact numbers, but eliminating the cap will insure adequate funding for SS for the next 75 years, if not more. We are not talking about just taxing billionaires more, of whom there are a very limited number, but of everyone who makes more than the current cap (which is $110,100 for 2012). People who make just a bit over the cap will pay a little more, those who make a lot more will pay a lot more. I have no problem with not getting a SS tax holiday every mid-September or so if this will solve the problem. If I could live on what I make with OASDI deducted 9 or 10 months of the year, I am certain that I can do so for the extra few months. There is not cap on the 1.45% Medicare portion.

This does NOT raise OASDI on the working poor and it will affect somewhere between 10 and 15% of Americans - not the lower 85%.
Raising the cap on income is a phony and unfair solution. It doesn't solve the problem and breaks the tenuous link between earnings and benefits.

Social Security Series-Raising the Social Security Taxable Earnings Cap: Real Reform or Another Placebo? | The Concord Coalition

From the above article:

People also overlook the fact that Social Security taxable earnings lead to Social Security benefits, which are derived by applying a progressive formula to the earnings record on which the tax was levied. While the highest covered earners pay lower Social Security taxes as a proportion of their income, they also receive the lowest return for their tax dollars. Thus, it can be argued that the regressivity of the tax is offset by the progressiveness of the benefits.

Therefore, someone who had $1M of earnings will see those earnings capped at the same cap used to determine OASDI taxes paid as part of the benefit formula before the actual benefit is determined. Otherwise, we would cutting checks to Alex Rodriguez of $1M per month (or some other huge amount). If we lift the tax cap but don't life the benefits cap, then we are turning the program into a welfare program by severing the link between wage income and benefits. ("Thank you for all those extra taxes paid, but sorry, you receive no extra SS benefits based on those same wages.")

More from the article:

"Among the many problems with using actuarial balance as the standard measure of reforms is that it assumes that surpluses generated by the proposals in the early portion of the 75-year period will grow with interest and provide a cushion to cover later deficits. Crediting the new taxes to the trust fund, however, will not in and of itself cause them to be saved. Any new excess Social Security taxes in the early years will flow into the U.S. treasury and help finance other functions of government, as they do now."

This is what Greenspan and company did in the 1980s. Do we want to repeat this flawed idea and be back where we are now?

We would still have annual cash deficits down the road. More from the article:

"The proposal to eliminate the cap and pay no added benefits would still require an additional 13-percent tax increase or 11 percent benefit cut in 2035 to bring the program's tax and spending in line. By 2079, it would require a 23 percent tax increase or a 19 percent benefit cut. The amount of residual deficits would be even larger under the other two proposals."

Raising the cap - it is unfair and won't work. Bad idea.

No cap on the Medicare portion because the benefit is not tied to wages or taxes paid into the program.
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Old 02-27-2012, 08:36 AM   #39
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This is an incoherent opinion. The bond market is willing to buy 10 year Treasuries at an historic low yield of about 2%. It is harder to imagine a stronger endorsement in the language that the bond market speaks.
Rayvt is correct again. The special bonds held by the SS Trust Fund are special issue bonds and are only a bookkeeping entry to reflect money transferred from one arm of the government to another.

From the Social Security Administration's website:

Special-issue securities, Social Security trust funds

Trust funds and types of investments


The Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund comprise the Social Security trust funds. Both funds are managed by the Department of the Treasury through their Bureau of Public Debt. Since the beginning of the Social Security program, all securities held by the trust funds have been issued by the Federal Government. There are two general types of such securities:
  • Special issues—available only to the trust funds
  • Public issues—marketable Treasury bonds available to the public.
The trust funds now hold only special issues, but they have held public issues in the past.

The "special issues" cannot be sold on the open market to the public, as indicated above.

More on this topic:

Social Security Series-Social Security's Trust Funds Mask the Problem | The Concord Coalition

Social Security's earmarked revenues -- payroll taxes and the taxation of benefits -- flow into the Treasury and any surplus not needed to pay current Social Security benefits or administrative costs goes to pay for other government operations. This surplus is credited to the trust funds in the form of special issue Treasury bonds, which amounts to a promise from one arm of government (Treasury) to repay IOUs to another arm of government (Social Security). The trust funds are also credited with interest on their balances, but as CBO points out, “because that interest represents the government paying itself, it provides no net revenues to the government and has no effect on the total budget.”[3]

The key point is that the same trust fund “assets” are a future liability for the Treasury. So while it may be comforting to think of the trust funds accumulating trillions in federal government bonds over the next twenty years, in reality that just means the government will owe itself a lot of money.

When the government posts one of its own securities to one of its own accounts--whether it's labeled a trust fund or something else--it hasn't purchased anything or established a claim against some other person or entity. It has simply created an IOU from one of its own accounts to another. Thus, when the Trustees say that Social Security is “solvent” until 2042 they are only saying that the program will have sufficient claims on the Treasury (i.e., taxpayers) to pay full benefits until that date. The more important issue is how much paying off the IOUs is going to cost and whether it is affordable. When the time comes for the trust fund balances to be converted into benefit payments, the relevant question will be: where does the money come from?

Khufu, please read up on these things so you can learn more about SS.
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Old 02-27-2012, 08:51 AM   #40
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The national conversation should be focused on why investment income, i.e. the income enjoyed almost exclusively by the richest segment of the society, is specially privileged. That's certainly where I would start. Not just capital gains, but dividends, inheritance, the whole apparatus that has enable the US to be the most highly polarized in terms of wealth of any of the advanced economies.
Social Security is a program which replaces wage income, not investment income. This is why investment income is not FICA taxed. When you stop working (as many of us here have done already ), your investment income does not cease. It does not get replaced by Social Security, either, of course. This is why many of us like to "boast" about how our taxes decrease when we ER due to the elimination of FICA taxes from our expenses.

That being said, I would not have a problem with at least some investment income being subject to the Medicare tax because Medicare is funded in some part by general revenues.
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