- Our government spends a lot more money than it makes. We know that already. But I for one did not really understand where the extra money comes from.
- First of all, the deficit is the amount of money the government spends more than it makes in one year. The debt is the total amount the government owes, or all the deficits and interest added up over the years.
- The extra money comes from other countries, mainly Japan and China. We owe them lots of money. Like 9.36 trillion dollars.
- We have to pay interest on the debt. This comes to over $400 billion per year, and is more than we spend on the Iraq war.
- There are three things that the federal government is required to pay for:
---- Social Security
---- Interest on the debt
- All other spending is discretionary. Even really important things, like the military.
- If we keep going with the same levels of taxes and spending we have now, by the year 2042 there will be no money left for anything except Medicare, Social Security, and interest on the debt.
- I suppose we could just borrow even more money from other countries to pay for the rising interest payments, but this cycle is clearly not sustainable. And at some point, if we continue on this path, other countries might start thinking that the US government is not such a reliable investment anymore, and then we can just say goodbye to the stock market. Probably the dollar too.
- It will take big big changes to fix this financial problem. Currently politicians propose to balance the budget by eliminating wasteful spending and raising taxes for the wealthy. This is not enough money to even balance the budget for one year, let alone have a surplus and start paying down the debt.
- They usually talk about tax cuts for the middle class too. Well, 9 out of 10 Americans identify themselves as the middle class. So someone is going to be disappointed there. Either they'll cut too many taxes and we'll continue in this debt hole, or people who think they are middle class are going to find themselves in the supposedly wealthy class, with higher taxes. Hey, just like the AMT.
- No politicians will discuss this problem beyond the "cut government waste, raise taxes on those greedy wealthy people" mantra, because then they will not get elected. Ross Perot tried. Imagine a politician saying they're going to raise your taxes while simultaneously reducing grandma's Medicare and Social Security benefits. Forget it.
- The only way to change it is to raise awareness among the American people. If it's important to the public, it will be important to politicians who would like to get elected.
I could go on. Maybe next time I'll talk about out of control Medicare spending and the pharmaceutical lobby.
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Update: Social Security Privatization
Jenn asked about social security privatization. I don't know the details, but here is how I understand it. Sorry if some of this is basic information. I'm trying to sort it out in my own head by writing. Maybe you know how social security works already.
Working people and their employers pay FICA taxes, and the government in turn gives that money to retired seniors. This is a great idea if there are a lot more people paying than receiving. That has been the case in the past, but it's about to change once the boomers start retiring. It seems the whole problem with the system revolves around the large number of baby boomers relative to other generations. For the past many years, FICA collected more money in payroll taxes than it needed to pay out to retirees. The very responsible thing to do would be to invest the extra money for when the boomers retire, because the ratio of younger people(paying taxes):boomers(receiving $$) is not as favorable as boomers(paying taxes):older people(receiving$$), and there is not going to be enough money from the younger generations' FICA taxes to pay out to the retired boomers. So the government put the extra money in a trust fund, and proceeded to borrow from the trust fund for other federal government programs. Consequently, the social security trust fund is full of IOU's.
This is bad, but not the end of the world. There still will be lots of young people working and paying FICA taxes, and that money will still go to retirees. They just won't get as much money as they are entitled to. I think the estimates are that they will get 70%. Now we can get mad and yell at the federal government for irresponsibly borrowing from the trust fund, but really if they hadn't done that, then they would have had to either cut programs that people like, or they would have to raise taxes. Then everyone would be yelling at them anyway. So they can't win, really. Not that I'm suggesting we don't yell at the government. I'm just saying its kind of complicated.
Ok maybe you knew all that stuff already. Now I'll try to answer the actual question. I think privatization comes in as a solution to this business of the government being a poor custodian of your retirement funds. Under privatization, you would have your own account that you put money into over your working life. The money would be invested in the stock market or some kind of thing that earns interest. I'm sure there will be some options. Then you draw money out when you need the funds for retirement, and the government can't touch it. Sounds like a 401K or IRA. Here are pros and cons, as I understand them.
Pros
1. The government doesn't spend your retirement funds.
2. You can leave it to heirs when you die. (I think)
Cons
1. If the market is down when you retire, you lose.
2. If you are a bad investor, you lose.
3. Transitioning from our current system to a private one will be tricky, since it's hard to save for yourself and pay for current retirees. It will take decades to make the switch.
4. I can't help but wonder what will happen if you unexpectedly live to be 103. What if you run out of money in your oldest days? That is one benefit of our current system, the money doesn't run out if you get too old (just if the government spends it on other things).
Whew, that was long. Check out the wikipedia page on this subject for more. I'm sure I left out some pros and cons. If you think of more, leave a comment. We'll have a comment convo.
7 comments:
So is everyone who *calls themselves* middle class actually, in reality, middle class? And how is it defined? And do any of the candidates have a strategy to combat what seems to be an obvious and terrifying problem?
Also, can you explain the privatization of social security? Like how it would work, who would run it, and why people are pro or anti? I have read things, but still don't really understand.
Ok sorry I'm dominating the comments here... but Matt and I are discussing this and his suggestion is, as a start, reduce military spending so we stop going into more debt. But I think overhauling healthcare is good too. He also cites a Harpers article (which I cannot find) which said if the countries we owe call in our debts, we'll have to do things like sell our assets. Meaning National Parks, the Virgin Islands, etc. Yikes.
Re: Middle class. I don't know, what is middle class? Is there a real definition? My point was just that politicians always talk about how the middle class is getting the shaft, the housing crisis is hurting the middle class, we're going to help the middle class with tax breaks, etc. Well, they might as well replace "middle class" with "American people" because almost everyone thinks they are middle class. But I think maybe they don't say American people because then they can blame our ills on the wealthy and Exxon. I don't know, I just thought it was an interesting statistic. None of the candidates have a viable strategy, as far as I can tell. But again, a viable strategy is not popular and will result in an unsuccessful campaign. So even if they wanted to do something about it, they can't campaign about it because they will not get into office in the first place. Maybe I will do a bonus post on social security privatization. I understand a little, but not all.
Yeah, I think it's weird that the middle class is always the focus. Is that because the rich people are doing fine (being rich) and there are lots of programs for poorer people? It's so odd.
Also, excellent explanation of the privatization, thank you. It makes more sense to me, that it would just be like a version of a 401k. I wonder how to solve problems like people who suck at investing? And I wonder how this would affect the stock markets and such? I'll have to do some reading up, since this massively affects our generation.
I agree somewhat about reducing military spending, but the more I think about it, the more I think the military is really important. If there is anything at all that the federal government should be doing, it is building and maintaining a competent military to defend the country against ill-willed invaders. Bombing foreign nations into oblivion in the name of spreading democracy and stopping "evil" is another matter. But I might be changing my mind about some things. I might be becoming a republican. Don't tell anyone. Except the internet. If I start protesting Planned Parenthood clinics, just take me out, ok? (Unless I'm protesting because they messed up my bill and won't return my phone calls for a year.)
You have mentioned this impending republicanism before, and I'm not worried yet since you only seem to be becoming a fiscal conservative, which I can deal with for now. I mean, even *I* agree that defenses = an important part of the government. And that bombing Iraq for no good reason does not count as defenses, and is in fact indefensible (if I may). But once you start refusing to pay taxes, I'll be a little worried. And if you start becoming *socially* conservative, I promise to take you out.
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