SIGNIFICANTLY REDUCE THE FEDERAL DEBT/CUMULATIVE POTENTIAL DEFICIT;
REDUCE FEDERAL EXPENDITURES $750 BILLION OVER THE NEXT TEN YEARS; AND PERMANENTLY "FIX" THE OLD AGE, SURVIVORS AND DISABILITY INSURANCE PROGRAM ("SOCIAL SECURITY" OR THE "PROGRAM")
SIX STEPS TO:
ENCOURAGE AMERICAN JOB CREATION AND RETENTION;
SIGNIFICANTLY REDUCE THE FEDERAL DEBT/CUMULATIVE POTENTIAL DEFICIT;
REDUCE FEDERAL EXPENDITURES $750 BILLION OVER THE NEXT TEN YEARS; AND
PERMANENTLY "FIX" THE OLD AGE, SURVIVORS AND DISABILITY INSURANCE PROGRAM
("SOCIAL SECURITY" or the "PROGRAM")
Copyright © 2013 by James J. Darby
Enactment of this proposal will (1) encourage business investment and job creation here in America by permanently eliminating a counterproductive employer penalty; (2) permanently “fix” Social Security, our largest governmental social program, to operate smoothly given the inevitable ebb and flow in the composition of our economy; (3) encourage American job retention by equalizing to some extent the production cost of American products with the production cost of foreign products; (4) not compromise the American work ethic in that there will be little change in the FICA deduction on a pay stub; (5) relieve the wage earner from being the sole supporter of the Federal government’s largest annual expenditure, Social Security benefit payments to our fellow American retirees, widows and disabled; (6) not favor or discourage any investment vehicle or type of business over another; (7) be inflation/deflation neutral; (8) provide payroll budgetary relief to the Federal government and its agencies and State and municipal governments; (9) reduce Federal expenditures $750 billion over the next ten years; (10) significantly reduce ($2.7 trillion) the Federal debt/cumulative potential deficit; and (11) serve to avoid future instability or worse when the Social Security Trust Fund with its ever increasing amount of Treasury Bonds inevitably comes under scrutiny during an inopportune time in our Country’s future.
PROPOSAL:
Many believe that any tax on an employer is counterproductive. The elimination of the FICA employer matching share that an employer considers part of an employee’s compensation will at least remove a penalty on American Employers that directly affects the hiring, firing and retention of employees in America. A recent Harvard Business School survey found that seventy percent (70%) of respondents who had decided to move operations out of the United States in the past year cited lower worker’s compensation as the main reason they chose a new location[1]. Furthermore, a cursory examination of the non-financial companies that make up the Dow Jones Index indicates they have more factories, research and development facilities and employees outside the United States than in. Our largest companies are exporting products but they’re not exporting from America. They are exporting from foreign countries to other foreign countries and as an additional irony they’re adding to their foreign cash profits by exporting back to America[2]. Insofar as it is the responsibility of management to maximize profits for their shareholders it is the foremost responsibility of our elected representatives to set the framework for our Country to prosper. Reducing the cost of American workers by eliminating the matching share will serve to make American workers more desirable when compared to foreign workers and is a reasonable way to encourage the retention and creation of employment opportunities here in America. The elimination of the matching share will initially reduce employer payrolls in the United States by a little less than 6.2% or approximately $350 billion[3]. Business investment will also benefit from the reduced payroll requirement and business plans can be formulated or revisited.
Social security systems are instituted by civilized societies to insure the integrity of that society by financially supporting its retirees, widows and disabled. Since its inception Social Security has operated as an ad-hoc pay-as-you-go system with earned income (wages, salary, tips and self-employed income) being the exclusive source for the funding of the Program[4]. Globalization, illegal immigration and the heretofore mentioned employer FICA matching contribution have all contributed and continue to contribute to reducing the employment opportunities and earning power of many Americans. Total annual wages and salaries (virtually the entire current source of Program support as heretofore mentioned) of Americans have been relatively stagnant and, in fact, decreased in 2009 from 2008[5]. In the meantime, the 2011 Annual Social Security Trustee’s Annual Report indicates that the required annual payout to Social Security beneficiaries will continue to rise and will exceed $1.0 trillion in the year 2017 which is a thirty-three percent (33%) increase from the payout for 2011. If the present system of funding Social Security is not changed, the required increases to the employer matching share will intensify the decline in employment opportunities, enhance the attractiveness of offshoring jobs, promote the transplanting of production facilities and increase our reliance on imports. To counteract the concomitant weakening of our economy and to offset the loss of the employer matching share it is necessary to subject All Annual Income to SSIP. This will broaden the funding base for the Federal Government's largest expenditure, Social Security. Every American will be paying the same percentage of income, from all sources, toward the financial support of our fellow American retirees, widows and disabled individuals.
This will effectively bring the cost of American products and services more in line with competing foreign products and services. Applying SSAPR to imports for the benefit of a governmental social program will not jeopardize international agreements such as NAFTA, GATT, the WTO, etc. Furthermore, imported goods and services will not be competitively disadvantaged because (1) the elimination of the employer matching share for all Americans involved in the assembly and/or distribution of the imported products will generally offset the SSIP on those products and (2) the payment of SSIP by every American that is involved in producing similar goods and services here in America already affects the cost of such competing goods and services. A good portion of our imports originate from foreign affiliates and subsidiaries of American Employers. In fact, the U.S. Census reports that 48.3% of the total imports to the United States in 2011 were Related Party (as defined herein) imports. This related party activity outside the United States with its intra-subsidiary transactions and recording of profits to facilitate favorable tax treatment not only displaces American workers but makes it more difficult for tax paying companies within the United States to achieve sustainable profit margins for competing products. These activities are not restricted to our large international companies. Numerous American companies have joined the parade.
This will, of course, compensate for the lost support for our Social Security Program from the off-shoring of jobs and also promote a revaluation of business plans. The pay scale formulae used by the Federal government for Federal employees will be the basis for determining the appropriate Adjusted Compensation amounts. American Employers will also be subject to SSIP on Adjusted Compensation for Foreign Employees (legal or illegal) on American soil. Unskilled and illegal immigrants, often required by circumstance and need, accept low paying positions putting additional pressure on the employment opportunities and earning power of American citizens[6]. Insofar as illegal immigrants are not entitled to receive benefits, they have little incentive to be carried on the “books” of their employer and, in such circumstances, under the present system nothing is contributed to the support of the Program.
The amount collected each year will be the amount needed to pay that same year’s benefits which will make the Program a true pay-as-you-go system. The SSAPR, which will change each year, will be calculated by the Congressional Budget Office (CBO) and published each October 15. Social Security benefits will be calculated and recorded almost the same (contributions and time as opposed to earnings and time) as at present with the exception that a maximum benefit payment will be instituted and notations/credits that modify benefits will not be applied after retirement age is reached. The Agency will contract with the Internal Revenue Service for collection services. Most of the income categories and other items that will be subject to SSIP can be readily be adapted to accommodate the withholding and remitting of the SSIP payments.
Adopting the proposed funding changes to the Social Security Program will afford the Country the opportunity to withdraw from the ill-advised routine of collecting more (in some years as high as 20% more) each year from Social Security enrollees and their employers than was necessary to pay out that year’s benefits. This practice, in effect for the last thirty years, magnified our wage earners’ competitive disadvantage with their foreign counterparts while millions of jobs were being transferred or created overseas. Furthermore, the debt/cumulative potential deficit[8] of the United States increased dramatically because full faith and credit interest bearing U.S. securities were deposited in the Social Security Trust Fund to account for those excess collected funds that were (notwithstanding the appropriate accounting entries that were made) co-mingled with other Federal revenues and spent for various purposes. In 1984 Congress established the system whereby the excess Social Security contributions that were collected and spent each year would be converted into Special Obligation Full Faith and Credit Interest Bearing Bonds in a Social Security Trust Fund. The interest annually earned on the Special Obligation Bonds in the Trust Fund is credited to the Trust Fund in the form of more Special Obligation Bonds. There are now roughly $2.7 trillion of those Special Obligation Bonds in the Trust Fund which represent, except for the interest income, all the excess money collected from that one segment of our populace, the wage earner. The Special Obligation Bonds in the Trust Fund are slightly different than U.S. Government Bonds and Notes sold publicly. The Trust cannot, by statute, sell the Special Obligation Bonds on the open market for cash. This slight difference, some would argue, essentially invalidates the classification of the Social Security Trust Fund as a bona fide trust. The Trust, however, does have the option to redeem Bonds at face value if cash is needed to pay benefits because of a shortfall in FICA contributions. Otherwise the Special Obligation Bonds are the same as the Bonds sold to the public. They are full faith and credit obligations of the United States of America and are included in the $17.2 trillion debt that is subject to the current $17.6 trillion statutory debt ceiling of the United States. When a U.S. Treasury Bond held by the public matures or is redeemable it is submitted to the U.S. Treasury for payment. The Treasury has three options available to provide for the payment: (a) use budgeted tax revenues to pay the principal of the Bonds; (b) use surplus funds, if available; or (c) issue and sell new debt to the public to raise sufficient funds to pay the maturing or redeemed principal of the Bonds. The Special Obligation Bonds operate in the same fashion as public debt. Insofar as the Bonds in the Trust Fund can only be funded by (a), (b) or (c) above, it is the same American citizens who “own” the Trust Fund Bonds that will be burdened with the payment for the Bonds. The cancellation of the Treasury securities will have no adverse effect on American citizens or the Program because, upon enactment of the proposed six steps, the new Program will be funded in full (no more – no less) each year. Consequently, the cancellation of the Treasury securities in the Trust Fund will immediately reduce the Federal debt/cumulative potential deficit of the United States approximately $2.7 trillion. Social Security expenditures exceeded the Program’s contributions in 2010 for the first time since 1983. There was a $49 billion shortfall in 2010 and (taking out of consideration the FICA temporary 2% reduction) a $59 billion in 2011. The 2012 Annual Social Security Trustee’s Report projects a $53 billion shortfall for 2012 and continuing shortfalls totaling $650 billion for the next ten years. Insofar as it will be necessary to redeem, by methods explained above that will add to the Federal public debt/cumulative deficit, Trust Fund Bonds to raise the cash in the amount of the projected shortfalls to pay beneficiaries, the establishment of the new Program and the cancellation of the Bonds will reduce Federal expenditures in the amount of $650 billion over the next ten years. The $650 billion in projected shortfalls will effectively be transferred to the new Program and will be satisfied through a combination of automatic increases in the SSAPR and increased economic activity here at home.
DEFINITIONS:
(a) "Adjusted Compensation" shall mean all compensation (adjusted to equal comparable American compensation which shall include normal benefits for a similar position) paid by American Employers to Foreign Employees for providing goods and/or services to American citizens.
(b) "All Annual Income" shall mean all personal income annually received , without limitation and regardless of taxability, by an American citizen (regardless of domicile) and shall include, but not be limited to, wages, salary, tips, net business income, dividend income, interest income (taxable and tax-exempt), pension income, Social Security income (after a one-time adjustment)[9], IRA distributions, jury awards, life insurance payments, net capital gains, carried interest, inheritances (inheritor), gifts (recipient), lottery winnings and foreign gifts of currency/marketable assets including foreign charitable currency/marketable contributions.
(c) "American Employers" shall mean all American and alien (chartered in a foreign country) companies (i.e. sole-proprietorships, partnerships, corporations, subsidiaries, etc.) operating within the United States of America.
(d) "Foreign Employees" shall mean documented and undocumented foreign workers within the United States and alien companies and/or foreign individuals located outside the Unites States serving Americans within the Unites States.
(e) "Foreign Goods and Services" shall include, but not be limited to, the value of raw materials, finished goods, software (including replications), component parts and medicine imported by American Employers for ultimate use by American citizens.
(f) “Related Party” shall mean an entity operating outside the United States with a minimum 10% American company ownership.
(g) "Social Security Annual Percentage Rate" ("SSAPR") shall mean the percentage rate that will be calculated by the Congressional Budget Office, published each October 15, and applied in the succeeding calendar year to All Annual Income, all Adjusted Compensation and all Foreign Goods and Services.
(h) “Social Security Insurance Premium” ("SSIP") shall mean the amount calculated by applying the SSAPR to All Annual Income of all American citizens and the Adjusted Compensation and/or Foreign Goods and Services of all American Employers.
[1] Source: Harvard Business School Survey on U.S. Competitiveness, March 2012 (Available on the Internet)
[2] At the present time many of our largest companies have booked and reported profits from foreign operations, including profits made from exporting back to America, and realized the benefits of those profits in the company’s share price and management’s performance reviews but have not repatriated the cash to America. The companies claim they would like to repatriate the profits but cite the onerous income tax rate that will be applied if the funds are repatriated notwithstanding that the rules have not changed since the foreign activity commenced but do not mention, for example, the slowing global economy or heightened awareness of having our intellectual property at risk as possible reasons to curtail foreign expansion and repatriate the profits. However corporate management’s goal of reducing the tax burden on repatriated profits for the sake of shareholder value conflicts with what’s best for America. In light of our Country’s debt and deficit problems and the detrimental effect that these international activities have on those established or potential American enterprises that would like to produce competing products here at home, the best course of action would be for our Government to at least stand fast on the applicable corporate tax rate on foreign profits.
[3] The $350 billion payroll reduction is anticipated in the first year that the proposed Six Steps are in effect. The annual payroll savings will increase by the avoidance of paying 50% of future Social Security benefits (i.e. $500 billion - 50% of the $1 trillion required benefit payments in the year 2017 as projected in the 2011 Social Security Trustee’s Annual Report). Approximately 95% of the payroll reduction will apply to American Employers and 5% to the self-employed. The stimulus will favor production rather than consumption.
[4] For those who are unaware, don’t pay attention to details or who need reminding; only wages, salaries, tips and self-employed income are subject to mandatory FICA contributions under the present system of funding Social Security. All other types and sources of income are exempt from supporting Social Security. For example, under the present system, many Americans who receive dividends and realize capital gains from awarded stock in the companies that they are affiliated with contribute nothing to Social Security on that income. In addition, asset appreciation, a major and growing component of our economy is entirely overlooked as a source of support.
[5] The total salary, wages and tips estimated for the years 2006-2010 by the Internal Revenue Service and published in the SOI of Individual Returns are as follows (in thousands of dollars):
2006 $5,468,370,119
2007 $5,842,269,820
2008 $5,950,634,829
2009 $5,707,088,487
2010 $5,837,350,365
[6] In addition to reducing employment opportunities for American workers and putting downward pressure on their earning power, the low paid worker contributes little to Social Security. Under the present system, it takes 7.9 workers earning minimum wage ($7.25 per hour) to provide the funds necessary to pay one average Social Security monthly benefit check of $1,230.
[7] Social Security enrollees have no legal right to their benefits and, by extension, to the assets in the Trust Fund. The cancellation, provided the Six Steps are enacted, will have no effect on the Program.
[8] The term “debt/cumulative potential deficit” has been coined for this Proposal because despite the fact that the $2.7 trillion U.S. Treasury Bonds in the Social Security Trust Fund are part of the $16.279 trillion debt of the United States and charged against the $16.394 trillion statutory debt limit of the United States, for technical reasons neither the Bonds nor the interest thereon are included in the calculation of the annual or overall budget deficit of the United States. However, the Bonds are included in the Program solvency projections made by the Social Security trustees and, furthermore, when redeemed for cash they will, if not paid for with budgeted tax revenues or surplus funds, become a deficit in the form of debt held by the public.
[9] Social Security beneficiaries and the records of all enrollees will receive a one-time adjustment equal to the first year’s SSAPR to compensate them for their previous excess payments and to avoid financial strain on recipients and any negative effect on the economy. They will, however, not get relief from any future increases in the annual SSAPR over and above the initial adjustment rate.
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