Taxed Enough Already (TEA) Party Protests & My Idea for Personal Retirement Accounts
Wednesday, April 15, 2009 1:45 PM
One of the headlines on my news feed came across about anti-tax ‘tea parties’ being held across the U.S. These demonstrations are a form of protest to wasteful government spending. I was quite disappointed that the article included a blurb that in my opinion threatened the neutrality of the article. The paragraph stated that this event “[has] been co-opted by the Republican Party.” It then goes on to try to discredit the official Tax Day Tea Party website by accusing the website owner of being a conservative, as if somehow that is a bad thing.
Deficit Spending and the National Debt
The protests and the demonstrations aside, I do think it's maybe not so much about taxes but more about Government spending and entitlement programs. People in the forum were quick to note that the 2008 tax year is a President Bush legacy. Former President Bush really ran up a deficit so he is not guilt free.
Nearly all of the states in the US are prevented from deficit spending by their state constitutions and that means that while states have to make some very difficult decisions in years like 2008 & 2009, they can be very efficient in the recovery years and hopefully build up a reserve of cash for next time.
The Federal Government, on the other hand, can pretty much incur as much debt as it wants. This is not a good idea and I maintain that the constitution should be amended to prohibit deficit spending. Think of it this way; lets say that we spend $100 billion deficit for healthcare. That is a $100 billion loan, right? Okay, lets be conservative here and say that the US Government gets the amazing rate of 1.5% on that loan. Lets also assume that it’s going to take us 10 years to pay that loan back, which is very optimistic as we have to stop borrowing before we pay anything back.
This means that for the $100 billion we borrowed to pay that bill we will be paying $897,914,997.95 / month or $10.77 billion / year for the next ten years. I actually had to write a special calculator to amortize that amount – no online calculator could handle it! If we continue deficit spending we will in effect be paying more for less as all of the tax revenue has to be applied toward the debt first and social programs last. Debt is a lot like barnacles on a ship, the more of them you have the more drag you have and it takes more “wind” to move you places. Get too many and you might as well have stayed on the doc because your not really going anywhere.
Of course we know that our current proposed deficit is $1.7 trillion which works out to be $15 Billion / month or $183 Billion / year. Remember, this is just to pay for one year of deficit spending. Our current national debt is ~$11.17 trillion dollars, as of 4/15/09. That means that we are now paying $100 billion / month or $1.2 trillion / year to make payments on the national debt! That is $3.2 billion / day, $137 million / hour, $2.2 million / min, and $38 thousand per second! In 2008 the national debt climbed to 73% of GDP (source: Wikipedia). The $100 Billion we borrowed for our experiment here may seem like a drop in the bucket compared to the national debt but every little bit counts.
This country is literally putting bills on the credit card and it’s only a matter of time before we run out of money. The longer we wait to fix the problem the more money we end up borrowing and the more painful it is going to be. Imagine if we had to cut out Medicare, Medicaid, and Social Security AND raise taxes? This is not impossible and could happen. The bottom line is that you can not borrow yourself into prosperity! It is completely irresponsible to borrow money to create social entitlement programs!
Personal Retirement Accounts
I don't want Social Security, but I have no choice but to pay it and there is little chance that there will be anything for me to collect when I reach retirement age. Any personal retirement I do save for is taxed so heavily it can't even keep up with inflation! That is absurd! I would really like to opt out of Social Security and put that money in my retirement account tax-free, but even if I have to pay it, I still need to be able to save for my retirement tax-free. Just to keep pace with inflation.
If I were to reform retirement, I would create something called a Personal Retirement Account (PRA). This would be an alternative to the current Social Security program and would allow people to save for their own retirements tax-free.
The basis would be a function as such:
( (Inflation Base * 100,000) / (Age / Retirement Age) = Maximum Annual Contribution )
Inflation Base is the percentage of inflation since the bill passed. If the bill passed in 2009 and inflation for that year was 3.0% then in 2010 the number is 3.0%, then in 2010 if it rose by 2%, the rate is then 5%.
The idea behind my PRA idea are these simple axioms:
- The closer to retirement you are the more money you should be allowed to save for retirement. Conversely, the younger you are the less you need to put away as the money should grow over time and is tax free.
- Taxes should not be levied on the sums of money being put into these accounts.
- Taxes should not be levied on the sums of money being withdrawn from these accounts if done so within the bounds of the rules of the accounts.
- The current rate of $100k / year is a comfortable amount of money to live on.
- The amount you are allowed to contribute should be adjusted annually for inflation.
- If you would like to save more money than the maximum annual contribution amount, then taxes should be paid up front (much like an Roth IRA).
- There needs to be some rules to limit risk to accounts of individuals that are closer to retirement.
- Participation in a retirement program becomes mandatory once a worker turns 30. They may either opt for traditional Social Security or Personal Retirement Accounts. The minimum amount for the Personal Retirement Accounts plan is the current social security withholding amount.
- You should be able to switch between the two programs. If you are switching from Social Security then the amount contributed should be put toward the Personal Retirement Account Plan – no interest accrued. If you switch to Social Security then your account is transferred but you do not get additional benefits and must pay if the value of your account is less than the cumulative Social Security contribution amount.
- Because these retirement accounts are tax-free, the money should be invested more conservatively to mitigate risk.
- Retirement Age should be between 55 and 65 years old.
- It’s in the best interest of our society to have people financially prepared for retirement. This is why the accounts should always remain tax-free.
The problem with entitlement programs, such as Social Security, Medicare, Medicaid, etc. is that they are never run efficiently and the completely eliminate peoples ability to choose something that works better for them. They take away from people the ability to dictate our own futures and supplant it with a poor-at-best replacement.
I lived in the UK for two years where medical care is fully socialized. I can vouch first hand that while they do not have the same problems as Americans they do envy the quality of American Health Care. Indeed, I believe that the level of health care provided in America is the envy of the world. Rather than fixing problems like ER wait time, cost, etc. nationalization will add to the national deficit and would lower the quality of health care across the board.
Once we socialize medical care we will never be able to get rid of it, and I don't think most people are going to like what they are going to get. President Obama may not completely nationalize the health care system this go around but he's going to get enough of a foot in the door that the only option for future presidents is going to be full nationalization.
We need to seek to find answers to social problems that are efficient, accountable, optional, sustainable, and above all, responsible.