“Marginal tax rates are already high, distorting behavior.”

Two of the most accurate sentences I’ve read this week.

On our wages being uncompetitive… I could not agree more I’m shocked whenever I read about a local manufacturing business opening, expanding, or even highering.

How do you operate in a globally competitive marketplace paying twice the average wage of South Korea, for a 40 hour week compared to their 50 hour week… and their average highschool graduate has the same math skills as our average college graduate?

Best hopes for our entitelment culture to moderate their expectations

Thus I don’t think increased payroll taxes are an answer. Marginal tax rates are already high, distorting behavior. We need to broaden the tax base, not raise the rates further.

For some reason, debates about SS begin with the premise that people shouldn’t pay more to get a higher benefit. Since initial benefits are indexed to average wage growth and people live longer, the value of what they get from SS will be higher. There’s nothing unreasonable about paying more now to get more later.

Social Security’s shortfalls have been exacerbated by bad fundamentals of the US economy over the last 20-30 years. With real wage growth mainly concentrated to the rich (and with SS indexed to /average/ wage growth), the tax base for FICA taxes have not grown as quickly as initial benefits for new retirees.

I would agree with you on separating the general account deficit from Social Security (the latter ought to be actuarially self-funding), however the problems with Social Security have been evident for a decade and nobody has mustered the political will to act on them. Making it a piece of a larger tax reform could make it easier to get something done? I’m happy with any fix, as long as I have time to plan ahead BEFORE I retire in the not-so-distant future. Right now I can’t count on anything.

For 2010 there is $264B of “Social Insurance and Retirement Receipts” that are “on-budget” and $740B that are “off budget”. The former, apparently, is primarily Medicare and Unemployment. The latter is Social Security and Disability. (I believe they were placed off-budget as part of the 1986 reform?)

In any case, the Social Security surpluses were relatively small from 1985 through 1996, totaling just $523B compared to a cumulative deficit of $2.9T over those 12 years. The surpluses did reduce the amount borrowed by 18%, but it is a stretch to suggest that they created the deficit spending. The politicians would have been perfectly willing to borrow more money if they had needed to do so.

After that, the surplus picked up rapidly. It more than doubled from $67B in 1996 to $150B in 2000. Moreover, the federal coffers were flush from the dot.com profits with the “on-budget” numbers showing just a $77B deficit from 1997 through 2001.

Perhaps that played a role in the Bush tax cuts? The large Social Security surpluses were projected to continue for many years (the recession changed that), so President Bush may have seen this as a way to return the funds to the economy (instead of doing something “stupid” like restraining the growth of the national debt?). But prior to Bush, either the surplus was comparatively insignificant or the budget was already roughly balanced.

Ironically, the page I’m looking at (from the 2009 budget report) shows the deficit declining to just $200B by 2012 (where it would once again be balanced by a Social Security surplus). Keep that in mind any time you hear a CBO projection… I wouldn’t be at all shocked if the actual combined deficit were still over $1T in 2012.

I have always been of the notion that the general account deficit and the SS actuarial issues should be two separate discussions, because it’s so easy to be unclear on what you are trying to solve. Perhaps I’m wrong. But from what I’ve read in the general press on Bowles-Simpson, no one is making it clear that one is to fix SS for the long term, and the other is to address general deficit reduction.

In any case, those surpluses are finished. Social Security’s cash flow is presently negative, and is projected (after a slight brief rebound) to get steadily worse over the next 20 years. The “proposed fix” didn’t do anything that would change the immediate cash flow, as far as I can tell, instead phasing in the changes gradually over many years. Unless I’m wrong, it really WAS targeted at the true problem?

And I very much agree that subsidizing the general account through extension of a flat/regressive tax is a bad idea.

But honestly, I don’t know what to expect. I see a trade imbalance, a steady job drain, massive deficit spending (that would normally stimulate the economy), and a demographic challenge on the near horizon as the baby boomers approach retirement. I am simultaneously trying to defend my portfolio against spiraling inflation and a deflationary/stagnant “lost decade”. Selling bond investments, yet also paying down debt.

I’m feeling much the same about the market that I did in early 2007. The difference is that it was an easy choice then to pull money from equities and invest it in CDs (5% yields), Treasury notes, and TIPS.

Today? Could again sell a quarter of my holdings and put it in cash, EXCEPT that appears to be what everybody else is doing. And as a rule of thumb, following the herd is a great way to lose money. So I’m slowly deleveraging while I wait for something to move. Inflationary rally or deflationary crash? Wish I had a clue…

I could see state and local goverments default… that would probably have an impact on the feds ability to borrow.

I could see the guarentee to Fannie and Freddie go away overnight (since it arrived in much the same way.) That would spook people.

I always read you comments because you’re extreemly inciteful… just wondering which shoes you are expecting to drop.