Social Security and the Middle-Class Squeeze: Fact and Fiction about Americas Entitlement Programs

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A bulge is just that; after the bulge passes through, expenditures are reduced. I could not help but conclude that the concern expressed on the podcast are less financial and more based on a philosophical concern that government-run programs are inherently bad. But Social Security is not inevitable that everyone is entitled to it, rich and poor.

I see no reason why the relationship between phase-out rates and work incentives would differ between Social Security and other antipoverty programs.

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At the beginning of this podcast, Russ talks about the failure of governments ever to use budgetary surpluses to reduce taxes. I have a counterexample which illustrates an important point. When I was living in Switzerland a few years back, a previously private commodities firm Evercore went public. Like many towns and cantons the Swiss equivalent of states , the town had a small wealth tax. Although the percentage was small, the increase in taxable assets from the IPO was so large that it still meant that there would be a large increase in the tax collected.

What did the Swiss town do with the windfall? It immediately cut taxes for everyone.

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All the lower levels of government, cities and cantons, are therefore actively competing for businesses, employees and the tax dollars they provide. Like any good business, the local town saw the windfall as an opportunity to steal a march on its competitors by reducing its prices ie. This is also the strongest argument for federalism. It allows citizens to use the only truly effective vote they have: the one that uses their feet.

I think the problem with the argument that baby boomers paid into these programs is that they already spent the money and then some.

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So he asks his parents for an advance on this allowance and his parents agree since he did such a good job the first week. At dinner the child asks his parents to sit down and talk. His patents look at each other sagely, certain that their child is about to apologize for his profligacy. The parents are understanding… knowing their child has learned a hard lesson. John Cogan argues that the high amount of the social security benefit to married couples creates a disincentive to work. Contrarian view: Govt purposefully is trying to incentivize older workers to retire to make room for the next generations of workers.

Private firms such as accounting firms and law firms require partners to retire to make room for the next generation of talent. This discussion seemed more like a critique of Social Security and Medicare than a history. There are experts who say that Social Security and Medicare are doing okay and would be fine in the future with a few tweaks.

There are experts who disagree. I would like to see substantive discussions between experts on both sides. In another comment, Jeremy asks a good question about entitlements in countries like Canada, UK, and Australia. Social Security funds are invested in US bonds. The federal government offers many kinds of bonds to investors.

Yes, of course, the money invested in government bonds is being used in various ways. If the US government was using all of the money invested in bonds in order to indulge in ice cream and other delights, how do you explain the willingness of investors, both domestic and foreign, to invest in US bonds? How can you claim that the US bonds invested in the Social Security fund are spent and therefore useless without also pointing out that ALL US bonds are spent and therefore useless? Dan Mitchell has a video on Saving Social Security with Personal Retirement Accounts in which he points out 28 Nations With Personal Accounts that give much better returns to people based on defined contribution, investment, and personal ownership it really is your money , including Hong Kong, Singapore, the U.

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If the government were to have a sustainable mandatory retirement program, replacing Social Security with something like what these other nations are doing would give great results. But what if the mandatory choice of a retirement program were removed and we returned to the original intent of insurance for those who outlived their savings? That would avoid the welfare trap that penalizes work and income and promotes dependency.

Why have a separate system for Social Security? Russ criticizes those that complain about reducing social security benefits stating that they paid in and they want what is owed to them.

Russ argues that taxpayers are viewing it through a fictional lens and that what they paid was tax and funded the government and they do not have an account with their money it. While it is true that payroll tax is just a flat tax and is used to fund the government just as the income tax. The government continues to hoodwink taxpayers and sell them on the view that they are paying into an annuity. Its terrible governance to allow the government to continue to lie to its citizens like that.

My view is that as long as the government continues to con citizens into thinking that the payroll tax and social security are akin to an annuity, the government is obligated to treat it as such. While discerning taxpayers understand that it is not akin to annuity, it is clear that from the beginning the government is trying to make taxpayers believe that it is an annuity system. A second point.


Russ advocates for only paying social security to those that need it. The day it is viewed as just welfare for the poor is the day its public support erodes and is lumped in with other poverty reduction programs, which are under constant attack. I am of the view that limiting eligibility to those that truly need and reducing the amounts paid out is a good idea and hopefully will allow civil society and programs to support the elderly to flourish. However, I also think that there are many people who want there to be wide and deep support for the social security system which they think will ensure its long term success.

By paying everyone social security there is wide and deep support for social security from most types of voters.

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The extent to which people are winners or losers in this scheme is obviously driven by the balance between their payments in through additional tax of some type and out, and is a function of their age;. It is accommodated by accounting rules that allow the economic reality of the promises made by such programmes — lifetime annuities — to be hidden;.

Normally this would be enough to cause a Ponzi scheme to crash as the members in the know seek to get their money out. However this is not possible with these programs as members can only get a payout through their regular payment from the scheme after they pass the retirement age. There is consequently an increasing incentive, as workers age, to keep quiet about the problems and hope that they get their pensions before it collapses. I am in this position myself in the UK — paid in for more than 40 years, and 2 years away from any pay out.

Excellent podcast. The comments and discussion above obscure the most important lesson from all this: All entitlements grow in size; they grow faster than the original sponsoring and advocating politicians claimed; they even grow faster than opposing politicians warned; once enacted, they give rise to powerful interest groups, and become permanent; and the truth about their costs is obscured via deceitful accounting and any other means neccessary. Social security, disability, unemployment, and other programs provide a safety net for people who are not working.

Or would the collapse originate from a government refusal to pay promised entitlements? Human nature being what it is, any retirement system involves mandatory inputs. Some countries, such as the U. Some people like Eric in his comment above say that the pension systems in the U. But about three-quarters of retirees in the U. To me it seems like six of one and half dozen of another. Like Kevin I am from the UK. The UK system is described as National Insurance and was originally sold as insurance. Contributions premiums provide entitlement. Premiums were capped, as it was expected that payments would have a natural limit.

Blood on the streets type trouble. I recall blood on the streets type trouble in the UK over a tax change. Let us be clear, in the UK people have not just been taxed but in some cases paid additional money in the belief that those who dictate the law will abide by their contract. There is a srong argument that we do need to roll back and reduce the costs. At times I have been skeptical of things Roberts said, particular on public funding of k schools.

While all workers pay the payroll tax, many get as much or more back as an earned income credit. Of course for some it is less. While it is true that the accounting is on a govt balance sheet instead of by marketable bonds, that makes no difference that I can see. Are the marketable bonds any more real?

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Is the govt more obligated to pay off marketable bonds than the trust fund?