Posted by Mary Bottari on November 12, 2010

Erskine Bowles and Alan SimpsonWatch out, they're coming. After an election cycle in which Republicans worked themselves into a lather in an attempt to convince voters that the deficit was the source of all their economic woes, the political elites and their Bankster backers are coming for the middle class. What better time for us to start a new publication -- "Pillage and Plunder Alert"? And what better inaugural event than the release of the draft report prepared by the co-chairs of the Presidential Deficit Commission?

The two chairmen of the deficit commission, former Clinton Chief of Staff Erskine Bowles and former Republican Senator Alan Simpson, surprised Washington Wednesday with the release of their own draft recommendations on federal debt reduction. They were supposed to issue a report December 1, after the full 18-member panel had been given a chance to vote on each item. Knowing that it would be next to impossible to achieve a high level of support on the commission for their recommendations, the raiders decided to go it alone. Their package appears to be about three-fourths cuts and one-fourth revenue raisers.

First, Go After the Sick and the Elderly

High on the list of people who have to "feel the pain" are the sick and the elderly. The co-chairs want to "increase cost-sharing for Medicare." In other words, they want seniors' copays and deductibles to increase. Plus, they want a cap on catastrophic medical costs, tossing the severely ill over the cliff. But in what many found to be the most ominous development, the co-chairs navigated far outside the boundaries of their mandate to launch a frontal assault on Social Security.

"The commission's mandate was to deal with the country's fiscal problems. Since Social Security is legally prohibited from ever spending more than it has collected in taxes, it cannot under the law contribute to the deficit. Their proposal would cut benefits for tens of millions of middle class workers who are overwhelmingly dependent on Social Security for their retirement income," said economist Dean Baker.

The commission co-chairs also recommend raising the retirement age for Social Security. "They're talking about raising the retirement age, because people live longer -- except that the people who really depend on Social Security, those in the bottom half of the distribution, aren't living much longer. So you're going to tell janitors to work until they're 70 because lawyers are living longer than ever," says Nobel Prize-winning economist Paul Krugman.

When millions of seniors have just seen their retirement savings go up in smoke, is it really the time to be talking about slashing Social Security? AFL-CIO President Richard Trumka was blunt: "The chairmen of the Deficit Commission just told working Americans to 'Drop Dead.' Especially in these tough economic times, it is unconscionable to be proposing cuts to the critical economic lifelines for working people, Social Security and Medicare."

Spare the Whales, Harpoon the Minnows

Most economists agree that focusing on the deficit during a major economic downturn is counterproductive. But if you are sincerely concerned about the deficit caused by endless war and a massive financial crisis, the best way to solve the problem is to put America back to work. Working people pay taxes. The unemployed do not.

Economist Jamie Galbraith puts it best: "The only way to reduce a deficit caused by unemployment is to reduce unemployment. This must be done with a substantial component of private financing, which is to say by bank credit, if the public deficit is going to be reduced. This is a fact of accounting. It is not a matter of theory or ideology; it is merely a fact. The only way to grow out of our deficit is to cure the financial crisis."

At Wednesday's press conference Alan Simpson said, "we have harpooned every whale and some minnows" in order to come up with their recommendations. But it is notable that while the minnows are drowning, those blubbery whales on Wall Street have dodged the harpoon. Galbraith recommends that the big banks be forced -- once and for all -- to clear their books of the toxic assets that are preventing them from lending. Private lending is critical to getting the economy moving again. But it may not be enough.

With a recession this steep, more revenue is needed to put Americans back to work. Dean Baker notes that the "glaring omission" of the Deficit Commission draft is that while it includes taxes on the middle class, it does not include plans for any type of tax on the financial sector, an idea supported by commission members. He notes that a tiny tax on destructive Wall Street speculation alone could raise $1.5 trillion over 10 years, a hefty chunk of change that can be used to put Americans back to work and reduce the deficit.

Despite the deficit hype, polling shows the American public is clear that the deficit didn't crash the economy, Wall Street did. Moreover, Americans know that the big bailed-out banks are doing nothing to improve the situation. Nomi Prins nailed it when she wrote in her book It Takes a Pillage, that to stop the rampage we need to restructure the financial system to help the many and not the few. We can start by making Wall Street pay to put America back to work.

(Stay on top of the fight for a financial transaction tax and sign up for Pillage and Plunder Alerts at www.BanksterUSA.org.)

Mary Bottari

Mary Bottari, CMD's Deputy Director, is an experienced policy wonk and consumer advocate who has served as a senior analyst on trade.

Comments

As someone (can't remember who) pointed out, the early release by the two chairs of the commission report -- the one that was NOT signed by any other members and was not supplied to the White House for review -- allowed these two gentlemen (one Republican and one faux-Democrat) to frame the issue as a take-it-or-leave-it-these-are-your-only-options document.

I clearly heard the acceptance of that frame on NPR's Morning Editition yesterday morning, November 18. The discussion centered only on which of its recommendations should be accepted or perhaps argued against -- but included no hint that other solutions might not hurt ordinary Americans the ways these suggestions would AND would add more to our long-term economic health. (Like closing 750 of our 800 or so world-wide military bases, for instance.)

SOCIAL SECURITY: PRESERVING THE SYSTEM AND EXPOSING THE DESTRUCTIVE FIXES
By Emeritus Professor of Mathematics, John M. Bachar, Jr.
Email: jmbachar@sbcglobal.net
November 2010

Starting with President George W. Bush, there has been an incessant effort by Wall Street, wealthy investors, bankers, conservative politicians, and others, to privatize the Social Security retirement system (official name: OASDI Trust Fund - Old-age and Survivors Insurance and Federal Disability Insurance Trust Fund). OASDI is the most successful government program in US history, but those who would privatize it pass out, knowingly or out of ignorance, a steady stream of misinformation, errors, or distortions of fact. Add to this group still others, who wish to “fix” the system they deem in “crisis”. Amongst the latter group is Alan Simpson (social security “is like a milk cow with 310 million tits”, and, on social security reform, “we’re trying to take care of the lesser people in society …”), co-chair of President Obama’s “National Commission on Fiscal Responsibility and Reform”, whose recent (11/10/2010) Co-Chairs Report would drastically cut retirement benefits and increase the retirement age to 69.

Recently (August 2010), the Board of Trustees of OASDI released their annual report. For each of the 73 years of OASDI benefit payments, the annual contributions to the fund have EXCEEDED the benefit payments. Moreover, the OASDI Trust Fund assets at the end of 2009 are $2.54 trillion. The dollar level of the Trust Funds is projected to be drawn down beginning in 2025 until assets are exhausted in 2037. This is primarily due to an aging population. Over the course of the next 20 years, the cost of paying Social Security benefits will rise from its current 4.8 percent of G.D.P. to about 6 percent of G.D.P.

There are several easy structural changes that can be made to the OASDI taxation system that will easily provide for sufficient annual contributions and assets growth to take care of the retirement needs of the increasingly aging population, as well as the replacement of the existing 73-year old REGRESSIVE OASDI taxation system by a PROGRESSIVE one (see below), and without reducing retirement benefits nor increasing the retirement age. The detailed analysis of these structural changes is based on the data contained in the collection of US individual income tax returns for the 16 year period of 1993 through 2008. Regrettably, the “privatization” and “fix-it” groups discussed above are clueless about these facts.

Every year since the1937 start of retirement/disability payments by OASDI, there has been a "cap" (it changes from year to year) on each person's salary/wage earnings (=earned income) as well as an OASDI tax rate. This means each person pays a payroll tax (at the current OASDI tax rate) on all earned income up to the current cap, but not beyond. Furthermore, non-salary/wage income (=unearned income) is not, nor ever has been, taxed for OASDI purposes. The inherent nature of the taxation system used to acquire contributions to the OASDI Trust Fund is REGRESSIVE. This means that the percentage of gross income (= earned plus unearned income) paid into OASDI DECREASES as gross income INCREASES. The following examples will demonstrate this fact. (The current cap is about $100,000 and the current OASDI rate is 6.2%)

Example 1. Earned income below $100,000, no unearned income: percentage of gross income (=$100,000) paid to OASDI equals 6.2%.
Example 2. Earned income $200,000, no unearned income: percentage of gross income (=$200,000) paid to OASDI equals 3.1%.
Example 3. Earned income $310,000, no unearned income: percentage of gross income (=$310,000) paid to OASDI equals 2.0%.
Example 4. Earned income $500,000, $120,000 unearned income: percentage of gross income (=$620,000) paid to OASDI equals 1.0%.
Example 5. Earned income $2.2 million, unearned income $4.0 million: percentage of gross income (=$6.2 million) paid to OASDI equals 0.1%.

In calendar year 2008, tax returns listing a gross income of over $200 K (= only 3% of all tax returns) held 30% of all US gross income, yet less than 3% of the listed gross income was paid to OASDI; returns listing over $1 Million (= only 0.23% of all tax returns) held 13% of all US gross income, yet less than 0.6% of the listed gross income was paid to OASDI; finally, the $10 million and over Adjusted Gross Income class had an average gross income of $37 million, yet paid an average of less than 0.006% to OASDI!

The tables below show the effect of five different progressive tax rate systems (applied to ALL INCOME, not merely to salary/wage income) for OASDI contributions. Typically, these systems LOWER the rate for OASDI payments for 85% of all tax returns (= below $100,000 annually) in comparison to the 6.2% rate now paid to OASDI. This is because the total income of these 85% consists almost entirely of salaries/wages, and everything below the salary/wage cap of $100,000 is taxed at 6.2% for OASDI contributions.

Here is a brief description of the five tax rate systems. (Please note that there are INFINITELY many tax systems that can be devised; only five have been chosen).
Keep in mind that all five systems tax ALL INCOME MINUS SOCIAL SECURITY BENEFITS, not merely salaries/wages below the cap on salaries/wages (currently about $100,000). Only salaries/wages were taxed for the past 73 years, and only the amount of salaries/wages below the cap level (which changes over time) are taxed. Currently, the tax rate on salaries/wages below $100,000 is 6.2%.

Here is a description of tax rate system 1 (the others are all progressive as well).
Tax rate system 1: 4% on all income below $30,000 (40.3% of all tax returns in 2008); 5% from $30,00 to $75,000 (24.6% of all tax returns in 2008); 6% from $75,000 to $200,000 (22.1% of all tax returns in 2008; currently, those from $100,000 to $200,000 pay as little as 3% to OASDI); 7% from $200,000 and up (13.0% of all tax returns in 2008; this group pays from below 3% to as little as 0.006% to OASDI).

If these five systems had been used during the 16 year period of 1993 through 2008, the following results would have ensued:
In addition to providing more than the annual retirement/disability needs produced under the existing regressive taxation system, the annual OASDI Trust Fund assets at the end of 2009, for each of the five systems analyzed, would have INCREASED from the current $2.52 trillion (2008) to:
$3.47 trillion for tax-rate system 1; $4.17 trillion for tax-rate system 2; $4.27 trillion for tax-rate system 3; $4.41 trillion for tax-rate system 4; $4.83 trillion for tax-rate system 5.

For those who may be interested in the details of the analysis, see the following two tables (request by email)..