Many people believe that Social Security is going to run out and people will not have the basic necessities to live when they retire. Please remember that Social Security is NOT a retirement plan it is an anti-poverty plan designed during the Great Depression. As of right now the Social Security "Trust Fund" will be just fine until 2037 at the earliest (this estimate comes from the Congressional Budget Office). The reason Social Security is at risk right now is because of the tax codes that were changed. Right now any income over $97,000 is NOT taxed.
-In 1983: 95% of wages paid Social Security tax
-In the 1990's 80% of economic growth went to the top 5%
Today: 85% of wages paid Social Security tax
So the fundamental reason for Social Security being in trouble is that all of the economic growth in the past 3 decades went to the top 5% and the top 5% is not going to pay any extra taxes because SS taxes are only on incomes up to $97,000. If the tax code was the same as it was in 1954 we would have enough money to pay for social security and have much higher benefits.
Don’t Risk Your Retirement
By: Patrick DeCosta
The Social Security system is the most successful piece of legislation to come out of President Franklin Roosevelt’s New Deal program. Social security has provided our older citizens with a stable and consistent form of income for over seventy years and has been a life line for citizens who become disabled and are no longer able to work. The social security system itself is a very stable source of investment and has little trouble generating the money needed to cover retirees. Many people believe that our current system will not be able to support the growing population of the nation and is in trouble. Those who believe that the Social Security system is in trouble propose that we scrap the system in favor of a privatized solution that eliminates the need for the government to take people’s money. Opponents of the current Social Security system would argue that people should control their own money and invest in areas that can provide greater returns, like the stock market. What they fail to understand is that the social security program, if left alone, would be more than capable of supporting the future retirees of the United States with a fraction of the risk that investing in the stock market or other securities would have. Social Security is facing difficult revenue issues and funding needs to be adjusted for the shifting demographics in the United States but privatization is not a better alternative.
The Social Security system in the United States is in trouble because the U.S. government continues to borrow from the Social Security account in order to pay for other expenses. The Social Security system was designed at a time when life expectancy was significantly lower and now more people are living longer which automatically puts a strain on the system. The percentage of people 65 and over will increase from its present level of 21% of the population to 27% in 2020. This essentially means that the Social Security system is more important than ever and it is more expensive than ever. Proponents of privatizing social security would argue that investing in areas with high returns would offset the increased expenses, while growing businesses and thus growing the economy. The supporters of privatization say that the current Social Security system is on shaky ground and will not be able to fund the retirements of those who plan to retire in the relatively near future. It is not the current form of social security that is the problem it is the reckless spending on the part of the U.S. government to finance things that it cannot afford. The system could stabilize if we simply used a fraction of the money we spent on tax cuts, which went disproportionately to the very rich, and spent it on Social Security. The Federal government believed that continued economic growth would make it possible to replace the borrowed money and there would be no issues. If Social Security was left alone and not abused it would be able to fulfill its commitments to the millions of people who hope to retire in the near future. Right now the social security system is in danger because it has not adapted to the changing demographics of the nation and the future surge in elderly dependent population that will come when the generation of “baby boomers” retires. Unless the government adopts serious reforms the current social security program will face major financial imbalances.
Privatization is not a better alternative to the current “pay-as-you-go” social security system because it will not help those who need retirement assistance the most. The rich, who have done very well in the past few decades, are getting money in the form of tax cuts that should be used to support those who have paid into the social security system and expect to have the benefits paid back when they retire. Funding for social security has not decreased it has been used instead as a national bank to pay for other expenses. Wealthy Americans are the ones who support the privatization of the social security system because it will increase choice and give higher returns. Wealthy Americans are also the ones who benefit least from the progressive form of redistribution that gives a larger percentage of benefits to those who paid less. For decades now Social Security has been a dependable arrangement for retirees and has kept millions of older Americans out of poverty and allowed them to live a comfortable retirement. As we have seen in the past few years, the private markets cannot offer that same stability. We need only look at the recent economic collapse in 2008 for an example of the stability of the markets. Privatization also claims to yield higher return on investments because stocks traditionally have a much higher rate of return than the bonds that the current social security system invests in. Higher returns in the stock market usually results from higher risk and high risk is not good for stability. Most people do not know the difference between a stock and a bond and would likely leave themselves exposed to exploitation by companies who would prey on their ignorance. People would be forced to work through investment companies who may or may not have their best interests in mind. Private companies are there to make money not to make sure you have a comfortable retirement.
Proponents of privatization say that increased choice will allow investors to choose the level of risk and reward that they are comfortable with. The lack of information and knowledge that everyday people have cancels out the increased choice offered by privatization. People must also consider the burden of choice that will add a much greater level of anxiety and pressure to their lives. Choosing the appropriate investment portfolio will demand that the person investigate the markets and gather information. Otherwise you end up paying investors to “gamble” your money for you and still have to pay them to do it which would be comparable to paying a tax. Choosing an investment strategy is not like choosing an ice cream flavor because you only get to choose once. Excessive transaction costs from bad decisions will eat away at any gains made. People won’t know if they have invested enough or made the right investments until it is too late and they are facing your own retirement. If those who are wealthy wish to have more choice and make higher returns, let them invest their private portfolios in riskier assets. There is no need to risk the livelihood of millions of people because private business can make boatloads of money off of an ignorant population foolishly investing in them.
Social security is not a high stakes game. People need a stable and reliable system that will ensure they will have the money necessary when they retire. Those who seek to maximize gains and increase risk through privatization either have the money to waste or are not aware of the ramifications of taking away the safety net that is the pay-as-you-go system. Adjustments must be made to offset the changing demographics of the population and the decades of abusing the Social Security system; but it is an essential program that would destroy the lives of millions of people if it were scrapped for a privatized system.
Monday, March 8, 2010
You need to Understand why we had a recession.
Housing Market Collapse and Global Recession
By: Patrick DeCosta
The housing market collapse in late 2006 had worldwide economic consequences for almost all developed countries. After almost five years of unprecedented expansion of mortgage lending and free flowing credit the bubble finally burst and sent a tidal wave through the global financial system. More and more countries have become integrated and heavily dependent on the stability of one another. The housing market collapse in 2006 and subsequent economic recession in 2008 shows the impact that decisions made by U.S. bankers and policy makers echo throughout the world. Bankers and U.S. economic policy makers (Allan Greenspan and the Federal Reserve) caused the housing market collapse of 2006 because they did not understand the precarious predicament they had placed themselves in and over extended the credit market.
The financial market downfall originated when the Federal Reserve began implementing unusual regulatory interventions that distorted interest rates and the value of major assets such as homes. Beginning in 2001 the Federal Reserve began essentially expanding the U.S. money supply while decreasing the Federal Funds interest rate. They decreased the Federal Fund interest rate so much that it dipped below the rate of inflation. In doing so, a person could buy a house and that house would increase in value just based on the inflation rate alone. In 2003 the housing market was booming with low interest rate loans and increasing home values. The monetary policy of the Federal Reserve from 2001 to 2006 saturated the housing market and drastically inflated the value of the assets. The price of houses rose 6 percent from 2002 to 2006. The poor monetary policy of the Federal Reserve coupled with over reaching financial institutions would eventually lead to the massive global recession in 2008.
In 2003 to 2006 people were buying houses at an unprecedented rate and bankers were reluctant to pull back the reigns. The bankers showed little skepticism about the possibility of the huge boom in mortgages declining. The problem was that lenders, primarily the big banks, sold countless subprime mortgages to individuals with very poor credit. The banks believed this was ok because they found ways to package mortgages and sell them off in a way that the risk of the bad loans defaulting was minimized. Or so they thought. The new market for derivatives was unknown in the financial world and no one could know for certain if it could work. The idea could have worked if mortgage rates stayed the same but unfortunately most of the subprime mortgages that were issued were done so as adjustable rate mortgages (ARMs). This meant that the borrower and the banks depended on the interest rates staying low. In 2003 an ARM was much cheaper than a 30 year fixed rate mortgage and borrowers could not wait to take advantage of that situation.
On August 15 2008 shares of Country Wide Financial fell 13% after Merrill Lynch changed its buy rating on the stock. This triggered a panic because investors believed there may be funding difficulties. The Federal Reserve tried to stabilize the panic with a large injection of liquidity into the banks. By this time it was too late and there were massive sell offs in the worldwide markets which sent the U.S. financial markets tumbling out of control. The over extension of credit for the past several years had caught up to the big banks and now credit was frozen. The big banks and hedge fund investors were stuck with huge amounts of defaulted loans and bad assests. None of the big banks had the liquidity to support the massive debt they had incurred. Goldman Sachs, for example, was using $40 billion in equity to support $1.1 trillion of assets and Merrill Lynch had about $30 billion in equity to support its $1 trillion in assets. If the markets are rising it is ok to have balance sheet like that but if they start to fall or in this case drastically decline the bank is in serious trouble. Now interest rates were much high and all of those bad loans that were protected with the leverage of good loans were defaulting. This caused all of the derivatives sold to decrease in value which essentially shut down the banks and big investors. Many big investors had staked retirement accounts and 401k plans on the success of derivatives and those values dropped rapidly, businesses were forced to lay off employees because they could not get loans from banks and those people whose mortgage payments doubles or tripled overnight were foreclosed. The markets tumbled lower and lower as the dominos fell one after another. With a nationwide credit freeze employers could not expand or even finance their current payroll. Unemployment rose dramatically which led to even more loans being defaulted and the economy declining further. Essentially banks could not loan any money which hurt businesses and led to millions of people becoming unemployed. Even though neo-liberal policy dictates that we focus on supply side economics; when unemployment rises that high and demand drops heavily we can see that the effects are catastrophic.
Looking back we can see how the Federal Reserve’s monetary policy led to easy credit for borrowers. That easy credit and huge wave of new borrowers was too good for bankers to resist. The bankers capitalized on the perfect storm and drove the U.S. economy to record levels with little consideration for the consequences of their actions. It is safe to say that neither the economic policy makers at the Federal Reserve nor the leaders of the leading financial institutions knew what they were getting into. The banks saw the opportunity to make massive amounts of money at the expense of the middle class and they threw caution to the wind.
By: Patrick DeCosta
The housing market collapse in late 2006 had worldwide economic consequences for almost all developed countries. After almost five years of unprecedented expansion of mortgage lending and free flowing credit the bubble finally burst and sent a tidal wave through the global financial system. More and more countries have become integrated and heavily dependent on the stability of one another. The housing market collapse in 2006 and subsequent economic recession in 2008 shows the impact that decisions made by U.S. bankers and policy makers echo throughout the world. Bankers and U.S. economic policy makers (Allan Greenspan and the Federal Reserve) caused the housing market collapse of 2006 because they did not understand the precarious predicament they had placed themselves in and over extended the credit market.
The financial market downfall originated when the Federal Reserve began implementing unusual regulatory interventions that distorted interest rates and the value of major assets such as homes. Beginning in 2001 the Federal Reserve began essentially expanding the U.S. money supply while decreasing the Federal Funds interest rate. They decreased the Federal Fund interest rate so much that it dipped below the rate of inflation. In doing so, a person could buy a house and that house would increase in value just based on the inflation rate alone. In 2003 the housing market was booming with low interest rate loans and increasing home values. The monetary policy of the Federal Reserve from 2001 to 2006 saturated the housing market and drastically inflated the value of the assets. The price of houses rose 6 percent from 2002 to 2006. The poor monetary policy of the Federal Reserve coupled with over reaching financial institutions would eventually lead to the massive global recession in 2008.
In 2003 to 2006 people were buying houses at an unprecedented rate and bankers were reluctant to pull back the reigns. The bankers showed little skepticism about the possibility of the huge boom in mortgages declining. The problem was that lenders, primarily the big banks, sold countless subprime mortgages to individuals with very poor credit. The banks believed this was ok because they found ways to package mortgages and sell them off in a way that the risk of the bad loans defaulting was minimized. Or so they thought. The new market for derivatives was unknown in the financial world and no one could know for certain if it could work. The idea could have worked if mortgage rates stayed the same but unfortunately most of the subprime mortgages that were issued were done so as adjustable rate mortgages (ARMs). This meant that the borrower and the banks depended on the interest rates staying low. In 2003 an ARM was much cheaper than a 30 year fixed rate mortgage and borrowers could not wait to take advantage of that situation.
On August 15 2008 shares of Country Wide Financial fell 13% after Merrill Lynch changed its buy rating on the stock. This triggered a panic because investors believed there may be funding difficulties. The Federal Reserve tried to stabilize the panic with a large injection of liquidity into the banks. By this time it was too late and there were massive sell offs in the worldwide markets which sent the U.S. financial markets tumbling out of control. The over extension of credit for the past several years had caught up to the big banks and now credit was frozen. The big banks and hedge fund investors were stuck with huge amounts of defaulted loans and bad assests. None of the big banks had the liquidity to support the massive debt they had incurred. Goldman Sachs, for example, was using $40 billion in equity to support $1.1 trillion of assets and Merrill Lynch had about $30 billion in equity to support its $1 trillion in assets. If the markets are rising it is ok to have balance sheet like that but if they start to fall or in this case drastically decline the bank is in serious trouble. Now interest rates were much high and all of those bad loans that were protected with the leverage of good loans were defaulting. This caused all of the derivatives sold to decrease in value which essentially shut down the banks and big investors. Many big investors had staked retirement accounts and 401k plans on the success of derivatives and those values dropped rapidly, businesses were forced to lay off employees because they could not get loans from banks and those people whose mortgage payments doubles or tripled overnight were foreclosed. The markets tumbled lower and lower as the dominos fell one after another. With a nationwide credit freeze employers could not expand or even finance their current payroll. Unemployment rose dramatically which led to even more loans being defaulted and the economy declining further. Essentially banks could not loan any money which hurt businesses and led to millions of people becoming unemployed. Even though neo-liberal policy dictates that we focus on supply side economics; when unemployment rises that high and demand drops heavily we can see that the effects are catastrophic.
Looking back we can see how the Federal Reserve’s monetary policy led to easy credit for borrowers. That easy credit and huge wave of new borrowers was too good for bankers to resist. The bankers capitalized on the perfect storm and drove the U.S. economy to record levels with little consideration for the consequences of their actions. It is safe to say that neither the economic policy makers at the Federal Reserve nor the leaders of the leading financial institutions knew what they were getting into. The banks saw the opportunity to make massive amounts of money at the expense of the middle class and they threw caution to the wind.
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