advice from a fake consultant

out-of-the-box thinking about politics, economics, and more…

On Bilking The Sophisticated, Or, Check It Out: We’re Suing Banks! September 6, 2011

Filed under: Economics — fakeconsultant @ 9:54 pm
Tags: , , , , , , ,

I took a break to enjoy the holiday, as I’m sure many of you did, but my inbox kept busy, and on Friday came a doozy, courtesy of the Washington Post.

You remember that little bit of a banking crisis we had a couple of years back, where banks around the world might have possibly, maybe, just a little, conspired in a giant scheme to package toxic mortgage loans into Grade A, investment-ready securities instruments, which then blew up in everyone’s faces to the tune of a whole lot of taxpayer bailouts?

Well all of a sudden, it looks like an agency of the Federal Government is looking to do something about it, in a real big way.

Last Friday the Federal Housing Finance Agency (FHFA) announced they’re suing 17 firms (I’ll give you a list, bit it’s pretty much all the usual suspects); depending on who you ask the Feds are seeking an amount as high as $200 billion.

As Joe Biden would say, it’s a big…well, it’s a big deal, anyway, and that’s why we’re starting the new week with this one.

“An artist is only answerable to himself. He promises nothing to the centuries to come save his own works. He stands caution only for himself. He dies childless. He has been his own king, his own priest, and his own god.”

–Charles Baudelaire, as quoted in the book Cezanné and Beyond, edited by Joseph J Rishel and Katherine Sachs

So what do we know?

As we said, on Friday the Washington Post and others reported that there were a series of lawsuits filed by the FHFA in their capacity as Conservator of the assets of Fannie Mae and Freddy Mac against darn near everyone.

The FHFA is alleging, to make a long story short, that everyone involved misled Fannie Mae or Freddy Mac (the “Entities”, in the words of the lawsuits), to some extent, and that the misleading involved making representations to the Entities about the various metrics related to what Fanny and Freddy were buying from these banks.

For example, it’s alleged that when certain banks sold batches of mortgage loans to the Entities, they lied about how many of the owners were actually living in the homes; that makes a difference when you’re trying to figure out how likely a borrower is to pay back a loan.

It appears that a defense the banks will offer is that Fannie and Freddy were “sophisticated investors” who should have known the risks buried in the batches of loans they were buying (and they were sophisticated investors: they bought, literally, trillions of dollars worth of loans) – but if it can be proven that the banks were lying about what was in the loan packages, that defense might not do so well in front of a jury.

Everyone involved” includes Bank of America (B of A), Citigroup, JP Morgan Chase, Countrywide (which means B of A is actually being sued twice), Deutsche Bank, Credit Suisse, the UK’s HSBC and Barclays Banks, France’s Société Générale, the Royal Bank of Scotland, Nomura Securities (representing Japan), and GE and GM (GE Capital is a surprisingly large and varied business; GM got in the banking business to finance auto sales, and you may today know them as Ally Bank).

Of course, Wall Street is also part of “everyone”; that’s why the list also includes Goldman Sachs, Morgan Stanley, and Merrill Lynch (which means, thanks to acquisitions, that B of A is actually getting sued three times). The City of Memphis also proudly makes the list, thanks to First Horizon.

Some notable names not on the list? Key Bank and Wells Fargo, who seem to have escaped action so far; there’s also UBS (Union Bank of Switzerland), who was already served with a similar lawsuit in July.

It is difficult to determine exactly how much money is involved, as various sources disagree, but we know that Deutsche Bank is being sued for about $14 billion, all by itself. (B of A is being sued, all told, for a bit over $50 billion; they’ve already paid out more than $12 billion this year to settle another similar claim.)

Felix Salmon, at the Seeking Alpha website, has created a chart that seeks to measure who is in the most trouble here; by his measure JP Morgan Chase is far and away at the top of the list…except that the current incarnation of B of A represents three of the top eight spots on his list, which suggests the FHFA is targeting them for the most recovery. (Salmon used the number of individual defendants, how many pages were in the lawsuit, and whether the suits seek punitive damages as his yardsticks; from there he calculated a score that makes up his rankings.)

All this had to happen right now, it appears, because a statute of limitations is in play; the WaPo reports that a failure to file the suits would have meant the FHFA would have lost the ability to recover those monies. (It’s also reported that pre-lawsuit negotiations were stalling, and those negotiations will presumably continue, with a series of impending court dates to help, shall we say, sharpen the focus.)

Now that is pretty much all the story I have for you today on this one – except for a bit of a “discuss amongst yourselves” to finish things up:

It has been suggested that the FHFA is in an inherently conflicted position in all these cases. That’s because the agency is acting as both the regulator of these banks and the “victim” as we seek any monies that may be due from any fraud.

So what would be a better situation?

Should the FHFA continue to regulate the banks they’re suing as a victim, or should another regulator be put in place…or should another Conservator be appointed, leaving the FHFA as “just a regulator”, and not a victim?

It’s a question worth about $200 billion, more or less – and even in these times, that’s still a lot of your money.

 

On Running Your Own Government, Or, Why Pay The Military? July 30, 2011

I have not been talking about the insanity around the debt ceiling and debt and deficit and the efforts of Republicans to drive us all off the cliff, but I am today – and I’m going to do it by allowing you to grab ahold of this problem and see for yourself just how unbelievably bad this manufactured crisis is going to be.

You will hear a lot of conversation about the consequences from others; today, however, you are going to get the chance to be both the President and the Secretary of the Treasury, and you will get to decide for yourself exactly what bills the Federal Government should and should not pay as the cash runs out if a deal is not made by the time borrowing authority runs out.

At that point you’ll be able to see what’s coming for yourself – and once you do, you won’t need me to tell you what ugly is going to look like.

“…no state has the right to secede unless it wishes to…[and] it is the President’s duty to enforce the laws, unless somebody opposes him…”

William H. Seward, deprecating President James Buchanan’s efforts to preserve the Union, as quoted in the book Battle Cry of Freedom: The Civil War Era

So before I go sending you off to take the reins of power, let’s fill you in on a few things that you’ll need to know.

If no one has explained it to you yet, the Great Big Fuss that is going on right now is set around two issues: there are those who feel that the best way to make this economy better is to ensure that the Federal Government is a smaller player in our economy and not running on a deficit; many of these folks feel the way to achieve this is to make immediate, drastic, cuts in Federal spending.

At the same time, the United States has run up against its “debt limit”. That means the US will be unable to borrow money to fund ongoing government operations, and as you’ll soon see, right now we borrow a lot of the money we need to run today’s Government.

So if you are one of those who seeks to immediately cut Federal spending, you could force that to happen by refusing to allow the Federal Government any more borrowing authority; the fear of what could happen after that is presumably going to force the opposition to accept any deal, no matter how draconian, just to obtain that borrowing authority.

Naturally, the bigger a hostage you’re holding, the more draconian of a deal you hope you can make, and holding the “Full Faith and Credit of the United States” hostage is about as big as it gets; that’s why the Republicans are pushing for everything right this very second, from the end of Medicare and Medicaid to the right to mine uranium right next door to the Grand Canyon.

So with all that in mind, let’s talk money.

In the month of August, the Federal Government is expected to take in $172.4 billion.

There will be a mess of bills that are coming due during the month; that amount totals $306.7 billion, and that means about 44% of the bills must go unpaid.

Where’s that money go?

The Big Five are interest on current debt, which must be paid to avoid a default, payments due to defense contractors, Social Security, Medicare, and Medicaid; the five of those, alone, will be just about $160 billion.

And that leaves $12.4 billion to fund everything else the Federal Government has to do.

That would include the remaining cost of supporting our several wars, the entire Federal law enforcement establishment (for example, the FBI, DEA, ATF, Immigration and Customs Enforcement, the TSA, the Border Patrol, the Federal Marshals’ Service and the Bureau of Prisons), the National Parks Service and the Forest Service, the Centers for Disease Control, the Weather Service…well, just about every single thing the Federal Government does, except the Big Five.

So that’s the situation – and now it’s time for you to become the boss and make the choices:

The fine folks at Bloomberg Government have created an interactive tool that allows you to point and click your way to figuring this stuff out.

You will find your spending choices, and you just click on what you want until you run out of money, which the handy bar on the left will manage for you. When the bar turns red…you’re out of money.

“…Each month, I put all my bill collectors’ names in a hat, reach in, and pull out a name. That’s who I pay. If you keep calling here, then your name is not going in the hat next month.”

–Steve Harvey, quoted in October 2003’s Vibe magazine

OK folks, so now you know where to go, and you know what to do, so let’s make something happen.

Take this tool and use it to create a conversation about just what really is at stake, and watch the look on your friends’ faces when you point out that the entire Federal Government is about to go out of business if Republicans have their way.

I’d tell you the looks on their faces would be priceless – but that’s not true.

Absent a debt ceiling deal, the price is actually going to be about $134 billion, which is the money we’re just not going to have next month, when we’re not doing things like paying for the salaries of active-duty servicemembers or food inspectors or the guards out there at the Supermax.

It should be a fun time, all the way around – unless, of course, you’re one of the 300 million or so of us who are gonna get screwed over by it all.

 

On Hole Cards, Or, “Drill, Baby, Drill”? Why? Is Canada Out Of Sand? May 25, 2011

In America, today, there are three kinds of drivers: those who look at the other gas pumps down at the ol’ gas station and think: “Oh my God, I can’t believe how much that guy’s spending on gas”, those who look at their own pump down at the ol’ gas station and think: “Oh my God, I can’t believe how much I’m spending on gas” – and those who are doing both at the same time.

Naturally, this has brought the Sarah Palins of the world back out in public, and once again the mantra of “Drill, Baby, Drill” can be heard all the way from the Florida coast to the Arctic National Wildlife Refuge.

But what if those folks have it exactly backwards?

What if, in a world of depleting oil resources, the last thing you want to do is use yours up?

To put it another way: why isn’t all our oil part of the Strategic Petroleum Reserve?

Consider the inexorable logic of the Big Lie. If a man has a consuming love for cats and dedicates himself to the protection of cats, you have only to accuse him of killing and mistreating cats. Your lie will have the unmistakable ring of truth, whereas his outraged denials will reek of falsehood and evasion.

–From the book Ghost of Chance, by William S. Burroughs

So here’s the thing: we produce a surprising amount of our own oil right here in the USA (in fact, we’re the world’s third-largest oil producer), but we don’t produce enough to cover our current use, and that’s why we import about half of the roughly 19 million barrels of oil we use daily. The vast majority of that is used in vehicles or for heating; almost none is used to generate electricity.

Our largest suppliers of oil, despite what you might think, are not all from the Middle East: instead, it’s Canada, Saudi Arabia, Mexico, Nigeria, and Venezuela, in that order.

(Perhaps you’re thinking: “Canada? Oil?” Yes. Canada and Oil. They provide us with more than twice as much as Saudi Arabia from huge “oil sand” resources, primarily in Alberta; the exploitation of those resources has created a huge environmental controversy.)

Now if you ask me, an ideal situation would be one where we decided to get out of the business of using oil altogether – and to help make my point, we have some helpful numbers from a guy that you pay every day to figure this stuff out: Mark Doms; he’s the Chief Economist for the US Department of Commerce, and, to paraphrase Little Feat, he’s always handy with a chart.

According to Doms, 60% of our 2010 trade deficit (about $265 billion) represents the cost of imported petroleum products, and if things continue through December as they did the first three months of this year, in 2011 every American, man, woman, and child, will pay a “tax” of about $1000 to import all that petroleum.

Do you know what we, individually, spend on gas? In March of this year, the average household spent just over $300 on that month’s gasoline; 5 months ago that number was $56 lower. The way it works out, every time gas goes up 10¢ a gallon, it costs the average household another $7 a month.

And that’s not all: less than half of the total cost of imported oil is paid at the pump: about 44% of imported oil is used by businesses; another 15% is used by governments across the USA, and that means almost 60% of the cost of imported petroleum is “folded into” the price of everything else.

(A quick author’s note: you’ve seen the words “oil” and “petroleum” used liberally in this story; the exact literal reality is that in each instance we should really be referring to “petroleum products”, and that’s because we import and export not just crude oil, but a variety of other petroleum products. I get tired of using the phrase “petroleum products” over and over, and I’m probably using “oil” and “petroleum” more interchangeably than I should.)

So get this: if we were out of the importing oil business, we’d save about $300 billion a year – and as it turns out, over a 10-year period we could actually convert the entire US auto fleet to electric cars powered by windmills by providing $15,000 cash “buy-outs” for today’s 135,000,000 gasoline cars and building the wind generation and “smart grid” we’d need to support the effort…and doing all that would cost…wait for it…about $250 billion a year.

If I get the math right, 20 years after we first started building windmills and subsidizing cars, everything would be paid off; and every year after that the US economy would generate a $300 billion “profit” on our investment – unless the price of a barrel of oil goes up. If it does, the amount of money coming back to our wallets every single year from then on, obviously, also goes up.

And if we were out of the “using oil for driving” business, once everything was paid off we could put almost $4000 a year (in today’s dollars) right back in the pocketbooks of every family in this country – which, if you ask me, represents a pretty good “tax cut”.

Let’s also keep in mind that any new oil drilled on our public lands might not necessarily end up in the US; that’s because even if oil companies were 100% free to “Drill, Baby, Drill” in our waters to their hearts’ content…they’d also be perfectly free to sell as much of that same oil, anywhere in the world, to whatever entity might end up being the highest bidder – and today, our friends in places like India and China are desperate to be that high bidder.

Put all of this together, and you get back to the question I posed at the top of the story: why in the world would we be in a hurry to “Drill, Baby, Drill”, when we could, instead, put all our efforts into getting out of oil, which would save us so much money that the conversion pays for itself?

Then, when oil’s running $400 a barrel or so, let’s use our oil to pay China back the trillion dollars we owe ‘em…which, at current production rates, would only take about 400 days, assuming it were possible to divert all our production for that purpose.

To state it a bit more ironically, it may be that the smartest thing we can do right now is to conserve every possible drop of oil we have…until we don’t need it any more, and it becomes a sort of Strategic Cash Reserve that can help strengthen the dollar and reduce the national debt in the years to come, both at the same time.

Or to put it another way, the next time someone tells you they want to “Drill, Baby, Drill”…you can step right up, look them square in the eye, and ask: “Why do you hate America?”

And won’t that be fun?

 

Social Security: Get On The Phone Tuesday And Wednesday And Help Fight Cuts March 27, 2011

So it’s been about three weeks since we last had this conversation, but once again we have to take action to try to keep Social Security from being the victim of “deficit fever”.

I know that doesn’t make a lot of sense, considering the disconnect between Social Security and the deficit—but once again it’s “Continuing Resolution” time on Capitol Hill, where some use the threat of an impending shutdown of the Federal Government to extract concessions from the other side…and some on the other side try to make points with the voters by out-conceding their opponents.

So Tuesday and Wednesday of next week, there’s a national push on to get voters to call their Senators and remind them to vote for an Amendment that is a big ol’ “I’m not willing to cut Social Security just because other people philosophically want to cut Government any way they can” kind of reassurance to the voters, and I’m here to encourage you, once again, to make a couple phone calls and do some pushing of your own.

I’ve also been storing up a couple somewhat facetious random thoughts which will be the “garnish” for today’s dish; you’ll see them pop up as we go along.

First, the I’m A Bit Confused Dept.: There’s an ad currently running on TV for a drug called Intuniv. The drug is for children who are suffering from ADHD, and the visual image features a mother coming out the doors of the school with her “now-perfectly-behaved” 11- or 12-year-old child.

What comes next is the warning that the drug might—well, I’ll just quote the Intuniv website…

“Patients should not drive or operate heavy equipment until understanding how INTUNIV affects them”

…and every time I see the ad I think that if my 11-year-old could drive and operate heavy machinery I might suggest giving the other kids ADHD so they, too, could grow up and have a valuable skill of their own one day.

As we discussed “above the fold”, the Strengthen Social Security folks are doing a nationwide Senate call-in Tuesday and Wednesday to drum up support for passage of S.AMDT.207, the Sanders-Reid Social Security Protection Amendment, and they’ve created a process to painlessly put you directly in touch with both of your Senators, even if you have no idea who they might be.

I tried it out myself, just to see what would happen, and here’s how it works:

You call the phone number (1-866-251-4044) and the friendly automated phone voice automatically determines your location and then informs you that you “are represented by Senators [insert names here]”—and all of this without your having to navigate a menu or push a button.

The friendly phone voice then tells you to choose a Senator (“…push one or two…”), and you’re then directly connected to that office. Before you go, you’re encouraged to call back and leave a message with your other Senator as well…and you’re also offered “the commercial”: a fairly precise (roughly) 10-second script for a message that you might choose to leave, suggesting that your Senator vote for that Sanders-Reid Amendment.

I have a plan to make nuclear reactors in this country safer, and to do it fast: every Member of the Nuclear Regulatory Commission, everyone who votes on granting or renewing plant licenses, every nuclear power plant inspector, and the top executives of any nuclear licensee…should all be required to move into on-site housing at the nuclear power plants they’re in charge of within one year.

(This idea might also be adapted to improve the lives of nursing home residents, and it’s the same kind of “enforced safety” thinking that led to the old rule that Army paratroopers had to pack their own parachutes.)

We’ve made other calls like this recently, and just like before, the goal here is to keep the pressure on, and to remind all 100 Senators that they all have voters who absolutely do not want cuts in Social Security, and that this is not the time to be trying to sneak something in under cover of “Continuing Resolution” darkness.

So there you go: on Tuesday and Wednesday call the handy number (1-866-251-4044), let the automated voice guide you to your Senators, tell them you want them to vote for the Sanders-Reid Amendment…and while you have them on the phone, don’t be afraid to suggest that nuclear power plant on-site housing idea either.

Fighting for want you want is a process, not something that happens all in one day, and you should expect more messages like this one as we go along, asking you to make your voice heard—but you should also keep in mind that we’ve been doing pretty well so far, and when we speak, we’re being heard.

So make those calls, apply that pressure…and let’s win this thing.

FULL DISCLOSURE: This post was written with the support of the CAF State Blogger’s Network Project.

 

Social Security: If The Rich Paid Taxes Like You And Me…Problem Solved November 16, 2010

Over the course of the past couple of weeks we’ve been talking about how the War On Social Security was about to get under way and what happens when countries choose to privatize their systems.

Today we take on another bite-sized chunk of economic analysis: how can you get to a situation where Social Security is financially stable for the next 75 years?

We’ll describe some proposals that are out there—but the big focus of this conversation will be to look at one change that, all by itself, could not only solve the entire funding problem, but could actually allow us to lower the Social Security tax rate, immediately, and still achieve fiscal balance.

“Well, if that’s such a bright idea” you might ask, “why haven’t we adopted it already?”

That’s a great question—and after you hear the proposal, you may well have explanations of your own.

The possibility of victory can be a heavy millstone around the neck of any political candidate who might prefer, in his heart, to spend his main energies on a series of terrifying, whiplash assaults on everything the voters hold dear. There are harsh echoes of the Magic Christian in this technique: The candidate first creates an impossible psychic maze, then he drags the voters into it and flails them constantly with gibberish and rude shocks…

–From the Rolling Stone magazine article Freak Power in the Rockies: The Battle of Aspen, by Hunter S. Thompson

It was just this week that the Presidential Debt Commission (officially the National Commission on Fiscal Responsibility and Reform) “pre-released” some proposals for how they would resolve the various fiscal problems our country is facing these days, and among those were recommendations that the Social Security retirement age eventually be raised to 69 and that the amount paid in Social Security benefits should no longer increase as fast as inflation; both proposals, ultimately, represent cutting your benefits.

Far too many people are instinctively OK with these ideas because they assume they’ll never see a single dollar of the Social Security benefits they were promised anyway…which means far too many people believe in a giant urban legend.

Here’s the reality: no matter what, even if no financing changes are made, Social Security can pay 100% of anticipated benefits out through 2037. Even after that, if no changes are made, enough money will still be coming in to pay about 75% of anticipated benefits for roughly 50 more years after 2037. (We can’t speak to what will happen after that because the Social Security actuaries only look 75 years into the future when they make estimates.)

Here’s another reality: the total amount of wages that are subject to Social Security tax (also known as the “wage pool”) does not equal 100% of the total amount of wages paid to workers in the United States. That’s because income above a certain amount (at the moment, $106,800) is exempt from Social Security taxes.

During the 1980s and early 1990s, the wage pool represented about 90% of all wages…but because wage income has become more and more concentrated in the hands of the highest wage earners, 15 years later the wage pool now represents only about 83% of all wages.

In fact:

…due to high levels of earnings inequality, roughly 1% of the population earn 10% of all the earnings.

We know all this because of the fine work of Debra B. Whitman and Janemarie Mulvarney, both of the Congressional Research Service (CRS), who prepared the CRS report Social Security: Raising or Eliminating the Taxable Earnings Base, released in September of 2010. (Unless you see a link associated with a particular fact, from here on out what you’re reading is based on their work.)

So if we’re looking to achieve stability in Social Security financing, the question really becomes: how do we get back to a point where the size of the wage pool remains at least stable, or even grows larger over time?

In the 1980s, facing the same problem, the Reagan Administration negotiated an increase in the tax rate for taxable income, causing the wage pool to grow to that 90% number we talked about earlier…but today, we’re going to look in a different direction.

And that’s because, as it turns out, removing that $106,800 cap and making all wage income taxable for Social Security purposes, all by itself, will either solve the funding problem entirely or get you to 95% of where you need to be, depending on the choices you make.

Here’s how it works out:

Today, the amount of Social Security benefits you’ll collect depends on how much you pay into the system; the current maximum benefit is $2346.

What you could do is “break the link” between “paid in” and “paid out” by establishing a maximum benefit, no matter how much you pay in. If you kept the maximum where it is today, and that amount rose to equal inflation over time, the CRS tells us we would actually have 115% of the money we need to get to Social Security fiscal stability. As a result, we could afford to lower the payroll tax rate by .3% and we’d still be at fiscal stability.

Those who oppose this approach will tell you it will create political trouble for Social Security going forward because Americans will no longer see it as an investment program, but instead as a “welfare” program, which is presumably more politically vulnerable.

I would disagree, for a few reasons: for one, there’s the fact that Social Security is not, and has never been, an “investment” program, for another, not many people actually make more than the maximum, anyway (94% of workers earned less than the maximum in 2007). Beyond that, those that do make more than the maximum tend to be, shall we say, geographically concentrated, mostly in the suburbs of New York City and Washington, DC:

…focusing on the nationwide average hides the diversity among the states and the District of Columbia. The share of the population above the base ranges from a high in New Jersey where nearly 12% of covered workers earn above the base, to a low in South Dakota, where 2% of workers earn above this amount…

There’s another reason this kind of change wouldn’t be as politically problematic as some might think:

CRS estimated the potential impact of eliminating the taxable wage base on future benefits and taxes. If the base were removed in 2013, CRS estimates that by 2035, 21% of beneficiaries would have paid some additional payroll taxes over the course of their lifetimes. However, the average change in taxes and benefits would be small. Looking only at individuals who would pay any additional taxes over the course of their lifetimes, at the median, total lifetime tax payments would rise by 3% and benefits would increase by 2% relative to current law. In general, those in the highest income groups would have the largest changes in both tax payments and in benefits relative to current law.

(Emphasis is original)

You should also know that, in the 1990s, the income cap on the Medicare portion of payroll tax collections was lifted; this does not seem to have caused great damage to that program, politically speaking.

So the other way this change could be made would be to continue to base maximum benefits on what’s paid in, and still remove the cap on taxable earnings.

The Social Security Administration estimates that such an approach would raise 95% of the amount you need to achieve Social Security fiscal stability, so you’d still need to raise a bit of money, but you would be awfully close to fiscally stable, and far better off, financially, then we are today. (A payroll tax rate increase of .1% could raise the amount needed.)

That said, I think this approach actually creates more political vulnerability for the Social Security “concept” than uncapping taxes while capping benefits, and here’s why:

If you cap benefits, you immediately get to reduce the tax rate for everyone, which is going to be very popular; an unlimited benefit still requires you to raise taxes, even after the tax cap is lifted. One of those choices is going to be a lot better received than the other, I’m thinking, especially as “no new taxes” is such a popular political mantra these days.

However, it’s also true that a substantial number of beneficiaries would see benefit increases, even if the vast majority of those folks wouldn’t actually benefit all that much:

CRS estimates that 23% of beneficiaries in 2035 would have higher benefits than under current law. This share of beneficiaries who receive higher benefits is greater than the share of individuals who pay higher taxes because some low earners receive benefits based on their spouses’ higher earnings. Most of the affected beneficiaries (20%) would see their benefits increase by less than 10% relative to current law. Only 3% of beneficiaries would see their benefits increase by 10% or more.

But if you ask me (and if you’ve read this far, you are asking me) the real political problem from an approach that allows for unlimited benefits, is that it allows for…unlimited benefits:

Annual Social Security benefit payments would be much higher than today’s maximum of $25,440. A worker who paid taxes on earnings of $400,000 each year would get a benefit of approximately $6,000 a month or $72,000 a year…while someone with lifetime earnings of $1 million a year would get a monthly Social Security benefit of approximately $13,500 a month or $162,000 a year…

Imagine, if you will, just how easy it would be to launch a political attack on a government program that pays $162,000 a year to rich people…and if you can imagine that, you can probably imagine just how much political trouble this approach could cause.

Both options, just for the sake of the discussion, raise the wage base from today’s 83% to about 92%; a 2008 estimate suggested this would raise an additional $680 billion over 10 years. (An intermediate option, raising the tax cap to something like $190,000 of wage income, would have raised about $600 billion over the same period.)

So there you go: removing the cap on how much of your earnings are taxed for Social Security purposes, all by itself, could not only solve the funding problem faced by the system going forward, but you could even lower taxes slightly while doing it; another variation of the same approach would get you to 95% of where you need to be, but would still require a tax increase to get us to fiscal balance.

One approach keeps a lid on maximum benefits, the other doesn’t; in my opinion, the plan that keeps a cap on benefits is the one with less political peril going forward.

Either way, there would be no need to “adjust the inflation index downward”, which is a fancy way of saying “we’re cutting your benefits”, and you wouldn’t have to change the retirement age, either, which is a less fancy way of saying “we’re cutting your benefits”; both are among the Debt Commission’s “pre-release” proposals.

So what do you think, America? Given the choice, would you prefer that Social Security benefits be cut, now and in the future, or would you prefer to see the wealthiest among us pay their fair share of Social Security taxes, just as every other wage earner does—and cut the tax rate, both at the same time?

This would be exactly the time to make your feelings about that choice known, and if I were you I’d be on the phone to my member of Congress now, today—and when January comes around, and a new Congress begins…I’d be on the phone again.

It’s your Social Security, and if you want it funded in a more rational way this would be the time to say so…and if you’re reaching for the phone right about now, I’ve done my job.

FULL DISCLOSURE: This post was written with the support of the CAF State Blogger’s Network Project.

 

Social Security: The War Begins Tuesday, And You Better Say…Oh, No! November 7, 2010

It is my job to bring to you not just the news that took place, but the news that has yet to happen.

Today, that’s exactly what we have.

There is a war coming to try to change Social Security from a social safety net to a “revenue stream” for certain corporate interests, and that war is set to begin Tuesday morning, according to information that was provided to me yesterday afternoon.

Follow along, and you’ll be both forewarned and forearmed.

BIG MISTAKE
MANY MAKE
RELY ON HORN
INSTEAD OF
BRAKE

BURMA SHAVE

–Actual “Burma Shave” Message, 1945, from Verse By The Side of the Road, Frank Rowsome, Jr.

So here’s the dish: a limited partnership corporation called The Blackstone Group, through years of trading in real estate, operating hedge funds, giving financial advice to other companies and governments, and buying and selling companies (Hilton Hotels is one of theirs, the company that makes Corexit, the oil dispersant, is another), made its co-founder and former Chairman Peter G. Peterson a more-than-billionaire; a billion of that went to endow a Foundation that bears his name.

The Foundation has a particular interest in things budgetary and governmental, and they are seen as one of the groups most looking to change the way Social Security works today.

(Change, you say? Indeed, and if you’ve been following this series of stories, you already have an idea of what that might entail.)

The next thing you need to know is that there is a Great Big Deal Presidential Commission currently at work who is charged with identifying…

“…policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run. Specifically, the Commission shall propose recommendations designed to balance the budget, excluding interest payments on the debt, by 2015. This result is projected to stabilize the debt-to-GDP ratio at an acceptable level once the economy recovers. The magnitude and timing of the policy measures necessary to achieve this goal are subject to considerable uncertainty and will depend on the evolution of the economy. In addition, the Commission shall propose recommendations that meaningfully improve the long-run fiscal outlook, including changes to address the growth of entitlement spending and the gap between the projected revenues and expenditures of the Federal Government.”

…and that the Commission is going to deliver a report with its suggestions December 1st.

It would be fair to say that there are those who are concerned that “the fix is in”, so to speak, and that the report will be the beginning of an effort to privatize Social Security…and guess what?

Managing the Federal Government’s Social Security money, for a handsome fee, would be a spectacular business opportunity for Pete Peterson and The Blackstone Group, and to help create the environment where that can happen, the Peterson Foundation is dropping $20 million on a TV ad campaign to try to convince you to get interested in privatizing Social Security, too.

This Tuesday morning, November 9th, Peterson will appear at Washington, DC’s Newseum to unveil the advertising campaign, presumably to the delight of the assembled throng and the sipping of the coffee of the assembled media; this according to a Peterson Foundation press release that came across my desk yesterday.

There’s even a catchy name for the reform program: “OweNo”…and if you’ve already written your own “Oh, No!” Social Security joke, you’re apparently a bit faster on your feet than the guy who tried to sell Chevy Novas in Spanish-speaking countries…or the folks who came up with this catch phrase.

So that’s the story: come Tuesday, Pete Peterson, with a presonal fortune that comes from a Big Fat Wall Street Firm That Would Love To Manage Your Money For Big Fat Fees, is dropping $20 million to tell you that it’s time to “get a Chilean”…and I’m here to tell you that such a procedure is going to hurt your wallet, a lot—and when it’s all over, you’re the one who’s going to be saying “Oh, No!”

FULL DISCLOSURE: This post was written with the support of the CAF State Blogger’s Network Project.

 

On Social Security Investment, Or, What About Chile? November 3, 2010

With the election over, it’s time to move on to new things, and the folks at the Campaign for America’s Future have asked me to do some writing about Social Security, which sounds like some big fun, so here we are.

We’re going to start with some reasonably simple stuff today, just to get your feet wet; by the time we get a few stories down the road there will be some complicated economic analysis to work through—but let’s begin today by looking a bit south.

Those who support privatizing Social Security in this country often point to Chile as an example we could follow, and that seems like a good place to get the conversation going…so set your personal WayBack Machine to Santiago, May, 1981, and let’s see what we can learn.

“Of what avail are any laws, where money rules
alone,
Where Poverty can never win its cases?
Detractors of the times, who bear the Cynic’s scrip,
are known
To often sell the truth, and keep their faces!”

–Ascyltus, from Petronius’ The Satyricon

In 1981, Chile adopted a privatized Social Security-like (pension) program that requires most workers to contribute 10% of their income to a private investment account. They may contribute up to 20%. These accounts are maintained by a number of private companies (known as Administradoras de Fondos de Pensiones, or AFPs) that compete for the business by advertising directly to the investing public.

These providers charge commissions and fees for certain services which are paid on top of the contributions.

An additional 3% is collected from most workers for Disability Insurance; 7% more is deducted from wages for health care.

At retirement, the money is either used to purchase an annuity from a private provider to provide a steady source of income or it’s withdrawn at a set rate over time directly from the account.

Those who are self-employed do not have to pay into the system, but they have the option to do so if they’re so inclined.

If you don’t have enough in your private account to purchase an annuity or to withdraw steady amounts over time, but you’ve been contributing for more than 20 years, you will receive a minimum pension from the Chilean Government…but you will also lose any contributions you made to your private account.

AFPs are regulated as to how they may invest; if, through investment losses, they do not have enough money to capitalize the accounts they carry they must provide the money out of their own cash reserves. If they follow the rules, and still lose so many assets they can’t continue to operate, a government bailout is in order.

At the same time, a second “welfare” program (PASIS) was established to create a “safety net” that would provide a benefit of 75% of the poverty level or 25% of your last 10 years’ earnings, whichever is higher.

You can’t collect from both programs, but it is possible to collect from neither. More about that later.

Employers do not contribute to funding the system, however, all employers were forced to give 17% pay raises to their workers to come up with the money for the workers to make their contributions. (Chile was a military dictatorship at the time, making the “forcing” process much easier than it would be in the US today.)

The system is just turning 30 years old, and we’re now seeing the first big wave of workers who are eligible to retire.

So how has all this been working out for Chileans?

The first thing we learn is that the poorest workers probably won’t do well enough to qualify for “top tier” pensions, even though it’s projected that they’ll tend to pay for the benefit over their working lives…which will reduce their income over their working lives. (It’s also projected that workers with higher incomes should do reasonably well.)

Since most workers are poor (Chile has some of the most unequal income distribution on Earth), in the end it’s starting to look like the problems of finding enough money to support the social safety net are actually getting worse, and not better.

Additionally, other problems have come to light:

–You have to find money to “transition” from one system to another, and transition costs have been quite expensive indeed: 6.1% of Gross Domestic Product (GDP; that’s a measure of the total output of an economy) in the 1980s, 4.8% in the 1990s, and 4.3% until 2037. If we were to duplicate the Chilean experience in the US economy, 6% of the 2008 GDP (about $15 trillion) means about $900 billion annually in transition costs for the first ten years, and something north of $600 billion annually for the last 37 years of the exercise.

(Keep in mind that Chile only provides 2/3 of their population with either PASIC or a pension; since we cover a higher number than that in the US, expect those numbers to come in higher than we’re guessing here.)

Why are so many not covered? Lots of workers are working outside the “official” economy to avoid making contributions that they won’t get back later (in 1994, it was estimated that only 52% of workers regularly contribute to their accounts); additionally, many women have never participated in the labor force.

–Because the service providers are competing for the business, administrative costs (read: advertising and sales commissions) have been far higher than in the US Social Security system, where administrative costs have been at .07% of distributions, or lower, since 1990. To put this another way, during the 1990s the US Social Security Administration was paying $18.70 per year to administer a claim; at the same time Chile’s various providers were paying an average of $89.10 to do the same thing.

–All that competition, some say, has lead to lots of changing of providers, which tends to make any investment program less efficient over time. (In 1996, half of Chilean workers switched providers; it’s estimated that reduced pension accumulations across the entire system by about 20%.) The Chilean Government made changes in 1997 to try to work through this problem, and they seem to have had some considerable effect.

Evidence suggests most of the switching not related to consolidation in the AFP business is being done by a small percentage of account holders, with some switching as much as eight times in a year; today the average Chilean seems to change AFPs about once every five years. Unemployment also seems to be related to switching; this because the unemployed can establish a new account with a lower set of fees if they move to a new provider.

–Many Chileans, despite living in a system that has, for almost 30 years, required them to manage their own money, actually know very little about that money.

Less than half know that the contribution rate is 10%, only 1/3 know how much (within 20%) is in their accounts, and, according to work done at the University of Chile, “few” actually know what they pay in fees and commissions.

–Those who end up in the welfare program are guaranteed 75% of the poverty level; that suggests that if you’re elderly and on welfare, you’re living in poverty. Because of limited funding, there are qualified elderly poor in Chile who do not receive any benefit.

Today, in the US, about 12% of the elderly live in poverty. Without the current Social Security system in place, it’s estimated that 49.9% of the elderly would have been living in poverty in 2002.

–In Chile, taxes to cover the transition costs tend to rise faster than the “assets under management” for most workers, leaving them less well-off than before—an effect that is most common among the “financially illiterate”…meaning, of course, most Americans. In other words, reform, in Chile, tends to help the wealthiest and best educated at the expense of those who are less of either.

That’s a whole lot of detail, so let’s pull pack and look at the “macro” picture:

Chile has operated a version of a privatized system since 1981, and for the most part the working poor will never see any benefit from the transition. Since Chile doesn’t have much of a middle class, it’s hard to see how the Chilean experience would affect our middle class.

The US Social Security system has reduced the estimated rate of elderly poverty from nearly 50% to roughly 10%; such a reduction in poverty did not occur in Chile with their privatization.

The costs of moving to the same system here, if our experience were the same as Chile’s, would run anywhere from $600-900 billion annually for at least 50 years. Of course, since we provide a Social Security safety net to almost all of our citizens, as opposed to 2/3 of the population, as Chile does, it’s reasonable to assume our costs would be more or less 1/3 higher.

Chile forced its private-sector employers to raise wages to cover the workers’ costs of transition; I’m aware of no proposals that would, or could, impose such a cost on employers in the US.

It appears that Chilean-style privatization encouraged about half the population to engage in “under the table” work, making the funding problem for the system even worse that it would be otherwise.

Frequent switching of account providers is great for the providers, as it creates lots of chances to collect fees for opening and closing accounts and the like—but it’s not so great for the account holders, who are losing up to 20% of their potential earnings more or less because maintaining a sales force and running lots of ads are effective business practices.

It is unknown what happens when a shock like the recent recession hits the system, and we are awaiting research that will help us understand what happens when and if the State is required to refund losses incurred by the AFP if they “follow the rules” but still lose so much money that they lack sufficient capital to operate.

The costs of operating the PASIS program go up even as the cost of operating the retirement accounts are also still high, and the question of whether Chile can continue to expend “safety net” coverage to the 30% of the elderly poor who are not covered remains unknown.

So there you go: there are going to be lots of proposals to privatize Social Security this year, “getting a Chilean” may well be one of the options you hear Conservatives promote—and hopefully by now you have some idea why this doesn’t look like nearly as good an idea as some folks would tell you it is.

Next time, we’ll talk about proposals to invest Social Security money in Treasury debt, and whether such an effort is actually an investment at all.

It’ll be at least medium geeky…and hey, who doesn’t love that?