Respectfully submitted by Lawrence E. Rafferty (rafflaw)- Guest Blogger
We have all heard the cries that so-called entitlement programs like Social Security need to be cut in order to “save” them from extinction. Now that I am 62 years of age, I have become more interested in the issue of Social Security’s solvency.
CEO’s have gotten involved in the process through the now infamous Fix the Debt campaign initiated and funded by Billionaire Pete Peterson and the parallel campaign started by the Business Roundtable. Both of these campaigns are supported by big business and CEO’s of large corporations with no concern where their retirement funds are going to come from.
“In the current budget debate, the loudest calls for Social Security cuts are coming from two lobby groups led by CEOs who will never have to worry about their own retirement security.
The report, titled Platinum-Plated Pensions: The Retirement Fortunes of CEOs Who Want to Cut Your Social Security,
points out that two organizations, Fix the Debt, a PR and lobby machine launched in 2012 and led by more than 135 CEOs of major corporations, and the Business Roundtable, a 40-year-old association made up of about 200 CEOs of Americas largest corporations, are involved in a protracted campaign aimed at cutting, and ultimately, gutting Social Security.
Platinum-Plated Pensions, written by Sarah Anderson, the Director of the Global Economy Project at the Institute for Policy Studies, and Scott Klinger, Director of Revenue and Spending Policies at the Center for Effective Government, found that the CEOs belonging to Fix the Debt and Business Roundtable are sitting on massive nest eggs of their own.” Bill Berkowitz
Maybe I am an exception, but I was amazed to read the report linked above to see just who is claiming that the only way that Social Security can be saved for us mere peons is by raising the retirement age and reducing benefits. Many of the CEO’s making this claim have millions in their own pension or retirement accounts.
“According to Platinum-Plated Pensions, The average Business Roundtable CEO has $14.5 million in his gilded nest egg, more than 1,200 times as much as the $12,000 median retirement savings of U.S. workers who are within 10 years of retirement.
Ten CEO members of the Business Roundtable (four of whom are also members of Fix the Debt) have corporate retirement plans valued at more than $50 million. Of these, three have retirement assets of more than $100 million.” Bill Berkowitz
Now, in all fairness, just because someone has no need for their Social Security benefits, it doesn’t automatically disqualify their opinions on the subject of improving Social Security for all of us. However, these CEO’s do not have a real stake in what happens to Social Security because if it exploded tomorrow, they still have millions in their own accounts.
The ideas that Fix the Debt and the Business Roundtable have offered do nothing to make it more equitable or make Social Security work better for all retirees. Their idea of a “fix” is to delay benefits and force poor and middle class workers to stay in the work force even longer.
They even claim that raising the minimum retirement age to 67 is necessary because we are all living longer. Even that claim is suspect. One economic expert has brought some sunlight to the living longer claim.
“Before I get there, however, let me briefly take on two bad arguments for cutting Social Security that you still hear a lot.
One is that we should raise the retirement age — currently 66, and scheduled to rise to 67 — because people are living longer. This sounds plausible until you look at exactly who is living longer. The rise in life expectancy, it turns out, is overwhelmingly a story about affluent, well-educated Americans. Those with lower incomes and less education have, at best, seen hardly any rise in life expectancy at age 65; in fact, those with less education have seen their life expectancy decline.
So this common argument amounts, in effect, to the notion that we can’t let janitors retire because lawyers are living longer. And lower-income Americans, in case you haven’t noticed, are the people who need Social Security most.” Paul Krugman
While I am hoping Mr. Krugman is correct that lawyers are living longer, his evidence seems to suggest that the Fix the Debt and Business Roundtable people are all wet. Could those millionaire and Billionaire CEO’s have some ulterior motive? Could the CEO’s efforts and money spent pushing their Fix actually be an attempt to prevent the country from taxing the wealthy on all of their income or reducing or eliminating many of their tax benefits that harm the economy and fatten their wallets?
I have often wondered why millionaires don’t have to pay Social Security taxes on all of their income like the rest of us who make less than the $113,700 maximum for 2013. When a CEO makes $20 million a year, that CEO pays Social Security taxes on the first $113,700. When someone makes $60,000 a year, they pay Social Security taxes on their entire income. Why shouldn’t Social Security taxes be paid on all income, no matter what the sources? Wouldn’t that be more equitable?
Mr. Krugman also suggests that part of the problem seniors are facing is that the 401k accounts that many of their employers intitiated have not earned what was necessary to retire on due to the market crash and employer greed and employees making poor financial decisions.
“Today, however, workers who have any retirement plan at all generally have defined-contribution plans — basically, 401(k)’s — in which employers put money into a tax-sheltered account that’s supposed to end up big enough to retire on. The trouble is that at this point it’s clear that the shift to 401(k)’s was a gigantic failure. Employers took advantage of the switch to surreptitiously cut benefits; investment returns have been far lower than workers were told to expect; and, to be fair, many people haven’t managed their money wisely.” New York Times
What do you think is needed to strengthen Social Security for all workers? Paul Krugman and many Senators like Sen. Elizabeth Warren agree that we should be talking about strengthening Social Security and not cutting it. Some of the CEO’s mentioned above who have millions in their own retirement accounts have actually run up deficits in their own employees retirement accounts, but yet they still claim cutting benefits and extending the minimum retirement age are the way to go.
“While gilding their personal pensions, many Roundtable CEOs have allowed massive deficits to grow in their employee retirement funds:
- Of the Business Roundtable CEOs whose firms provide pension funds for their workers, 10 have deficits in these funds of between $4.9 billion and $22.6 billion.
- The Roundtable CEO with the largest deficit in his companys worker pension fund is Jeffrey Immelt of General Electric, with $22.6 billion. Immelts personal retirement fund is worth more than $59 million, the sixth-largest among Roundtable CEOs.” Bill Berkowitz
Are these CEO’s merely doing an end run in an attempt to steer Social Security funds into the private sector? Are they trying to steer the discussion away from taxing more income to strengthen Social Security? What do you think and who do you believe?
Tony, thanks for another lesson.
thanks Bettykath/Tony C
Bron (or friend, I can’ tell) says: This situation has been hurt drastically by the new rules that force companies to expense options at the time they are granted (a literally insane policy). With no options to give good employees, incentives for employers to utilize an employee-ownership model have reversed drastically. Thanks, Dodd-Frank!
More bullshit. If you want to incentivize good employees, give them cash bonuses, give them recognition that comes with valuable prizes, hold efficiency or productivity contests (that are fair), etc.
The vast majority of employees that receive stock options do not appreciate them as any sort of cash, because for them the value of the option is near zero and doesn’t vest for several years. I know this personally, I have been the recipient of such options, in a tech company and in an insurance company. So have various friends and relatives, common employees do not see them as much real, and most are surprised if they turn into any serious money.
Stock options have been abused as a back-door to over-compensation in Mahogany Row; and illegally back-dated to price them beneath market value to ensure the officers do not have to wait for their money. And vested immediately, with no future job-performance conditions. That is why they have been cracked down upon. They are just a way to legally rob the shareholders. It is not an “insane” policy, it is there to stop what should be a crime.
The standard employee ownership model does not apply. An employee stock option is a right to buy a certain amount of stock at a given price, the company can write such options for free if that price is at or above the current market price: The option has no value whatsoever; it is a wash. It has the same economic value as selling the option to the employee (and employees know that). Typically such options are “vested” over time; like 20% per year for five years. “Vesting” is the right to exercise the option and buy stock at the stated price. Once options are vested you do not HAVE to exercise, you just can. But vesting also means that for a year, you can’t exercise anything. So, if you have an option on 1000 shares, and in a year the stock price goes from $15 to $18 per share (a healthy 20% increase), then your entire option has a net value of $3000; typically the company can pretend (legally) they sold you stock at $15 per share as promised then immediately bought it back at market value of $18 per share, leaving you the $3 per share difference.) But you are only vested in 20% of that $3000, so you could sell enough to clear $600, and then pay income tax on that.
The theory of stock options is that by your work you can increase the value of the company and make the stock price go up, so in that sense they are an “incentive.” But typically that is just bullshit; the typical worker cannot influence the profit or direction of a company selling in the tens or hundreds of millions of dollars worth of revenue. The ESOP (Employee Stock Ownership Program) or stock options are a bonus system, that is all, that give corporations a way to hand out bonuses “off the books,” that really only deplete stockholder equity instead of cash flow or reserves. (Shareholders are the owners of any shares in itself that a company owns; and in the past were typically not valued at market prices or tracked well as an asset.)
Until the sociopaths figured out how to abuse them (for insider C-level officers and Board members) by secretly back-dating options, making the exercise price less than the market price, and removing vesting requirements, and turning them into a give-away at the expense of shareholders.
So, wrong again. Your friend is an apologist for thieves. Large corporations are not like people at all, and their finances are not similar at all. An engineer for Boeing going to his daily grind of a job does not have any opportunities to open a new office, staff it, and sell more engineering to Boeing; he has no legitimate way to use his revenue (salary) within the context of his job to expand his revenue or sell more of a product.
He is supposed to be working at capacity, for a salary, and all of his work belongs to Boeing in return for his fixed salary and benefits; if he sells any on the side, he is violating his employment contract. His market is already “saturated.” For him, he is like a mature company, with nowhere left to expand.
An employee is also not like a company in that the employee cannot wait until the end of the year to pay taxes; their taxes are withheld from their paycheck (with a little wiggle room, but not much). So even if their employment contract would allow it, they cannot use such revenue for business investment or revenue, they have no access to it. A company does have access to their entire revenue stream all year, even those portions that might be considered income taxes at the end of the year. The employees allowable deductions are fixed; the corporations are far more flexible and optional throughout the year.
Micro businesses are started with after-tax savings; businesses like a restaurant or single-store retail idea with (typically) under 10 employees and under 5 owners, with capital under $500K or so. Such businesses have very little credit (as a business, I am not talking about their personal credit backed by their personal assets and guarantee). They cannot borrow to expand. They can do some expansion on excess revenue; a restaurant can buy, for example, new equipment and expense it; or even build out to a second dining room or bigger kitchen or a catering operation and expense all that; or plow a bunch of excess revenue into marketing, events, and TV advertising with local celebrity endorsements, but serious expansion (opening more stores, building out a $250K kitchen) might still require after-tax dollars to accomplish.
Once a business grows to the point that is has a market-value of millions, and has access to a healthy line of relatively low-interest credit (not credit cards or owner-finance), as almost all multi-million dollar (in sales) corporations do, the analogy ends. Once a company is public, the analogy ends. They have many ways to expand on investor money, with loans or stock or bond sales, and ways to deploy their excess pre-tax revenue toward expensible investment in growth that makes it un-taxed as income; often for a “cost” less than a tenth of what the income tax would be.
Bron’s Friend says: Big things, in other words. In business, the “profits” are the business’s “savings.” Businesses use these savings
No, they aren’t. Your friend does not know what he is talking about or a damn thing about corporate finance. Large companies (remember we are talking about companies earning millions in profit per year) do NOT “save up” to buy capital equipment; because that would require paying income tax on their “savings” which would reduce it by 30% or so.
The sensible thing to do is borrow the money from a bank. Where do they get the money? Who cares; but mostly savings and checking accounts, CDs, whatever. It does not matter to the business.
By borrowing the money, the business can pay all their excess revenue out as a down payment on the equipment, borrow several million more (because a company earning millions has that kind of credit), build their factory and start generating new revenue, and excess revenue immediately.
Plus they now have a loan, and something to depreciate over 5 or 10 years. So the interest on the loan is a deductible expense, and the depreciation (which more than exceeds the principle on the loan) is a deductible expense, and … voila! Excess revenue is shielded from income tax.
Your “friend” is an idiot, or amateur, or fraud. You cannot compare an individual and their finances to the finances of a business earning tens of millions a year. Most of the equipment they might need, they buy outright before declaring any profit. Or they will borrow, or there are more esoteric but legitimate ways to commit money as a business expense before declaring it a profit.
No business EVER expands with after-tax money if they can possibly avoid it; it is stupid. And they CAN avoid it, if there are plausible routes to expansion.
Only mature companies declare profits and pay dividends and build up cash reserves, because when growth plateaus or a market is saturated, THEN it becomes worth paying the income tax, versus losing the money chasing growth that isn’t going to happen.
Sorry, you chose the wrong friend. Businesses aren’t idiots, they don’t pay tax on money they intend to spend on legitimate business expenses.
Bron,
We’ve tried the low tax rate system now for several years. The result has been billions of dollars stashed in off shore accounts, companies not paying taxes b/c they have moved much of their “official” business off shore. Some businesses, e.g. GE, don’t pay taxes but get huge rebates!! While business owners and CEOS have seen their wealth growth exponentially, worker wages are extremely low with many forced to food stamps and other forms of living assistance. The wealth gap is greater than it’s been in several decades.
Since company owners and CEOs game the system, the system needs to change so that they have money-based incentives in order to treat their workers better. One way is to see the profit as also belonging to the workers in the form of better pay, working conditions, and benefits. When workers make enough to take care of their own needs and even have some discretionary funds left over, they buy more and provide the demand for company products. The current trend is creating a feudal society.
Companies frequently borrow money for capital expenditures b/c the interest is tax deductible. While it’s more money going out, it’s subsequent years; money which isn’t worth as much as today’s money. With our current tax structure, it allows the owners to take more of the profit out now.
I think that a much greater tax rate for the huge profits will also force company owners to think more long term, 5-10 years, rather than the short term, this quarter, which is the current view.
Tony C/Bettykath:
I was discussing your posts with a friend of mine and he responded as follows:
“A business’s profits are what’s remaining after costs are subtracted from revenues. What is the equivalent concept when dealing with individuals? If you make $50K a year and spend $45K on living expenses in that year (ignoring taxes for now), what is the remainder called? Savings. What is savings used for? Generally, for future expenditures, for emergencies, for sending kids to college, or retirement, or that big screen TV you wanted. Big things, in other words. In business, the “profits” are the business’s “savings.” Businesses use these savings in equivalent ways, but they are primarily used to buy capital equipment for future projects. The capital equipment is intended to make future profits possible. It is also, incidentally, the only thing that allows increases in labor productivity. A shovel allows one to dig one moderate segment of a trench per day; a backhoe allows one to dig lots of trenches per day. The increase in capital goods greatly expands labor productivity, leading directly to higher real wages. (Note that not all of the benefits in productivity goes to the laborer, much of it goes, justly, to the owner of the capital good).
But, you say, companies don’t usually buy capital goods with profits, they borrow the money! Of course, but now where did the money come from that they borrowed? From other individual’s savings and other businesses’ profits! We get a virtuous circle: profits and savings allow the purchase of more sophisticated capital goods which lead to greater productivity which leads to greater real wages and greater returns on investment which leads to more profits.
Now some businesses use profits in other ways, such as returning them to investors as dividends. This just transfers nominal ownership of the profits from the business to the business’s owners. It’s still in the pool of money used for lending, so dividends do not change the principle.
Now if you were going to design a system that would hurt workers by keeping their wages depressed, what system would you devise? Well, first, you’d have to prevent increases in productivity, because that’s a sure-fire way to raise wages. To do that you’d have to stop all investment in new more sophisticated capital equipment–keep everyone using shovels rather than shiny new backhoes. But businesses desperately want to improve efficiency, so to physically prevent them from doing so, you better confiscate their profits (and while you are at it, confiscate savings from individuals, too). In other words, the sure-fire, number one, guaranteed-not-to-fail way to depress wages, especially for those “most vulnerable”, is to….you guessed it….institute an income tax. All taxes are bad, but the income tax, by taxing away the capital of business and the savings of individuals, goes with scalpel-like precision into destroying the mechanism for raising productivity and thus real wages. Man, those people who invented the income tax must have really, really hated workers, right?
Now to your specific questions, what about the owner of a business “pocketing” the $20M in profits when employees lack health insurance? Many people think of bosses as the guy from the Monopoly game, surrounded by money bags rolling around in cash. That’s the Hollywood movie version. In reality, he is thinking carefully what to do with his $20M. His company, everything he has built, could go away tomorrow if he does not keep up with the competition by making needed investments. What good would using his $20M in profits as a relief fund for his employees do him if because of that in three years’ time his company is out of business and all his employees are out of work? Certainly employers help out their employees all the time in times of actual hardship, as long as they are not forced into an adversarial relationship with their employees. But a policy of using substantial profits to provide relief to employees will doom the business to failure.
My former employer, in fact, shared its profits with its employees, including me, as a matter of policy. This company was an “employee-owned” company, and grew on this model from 12 employees in 1969 to 40,000 employees in 1999. So that model *can* work. But the profits were not distributed in cash (much) but in stock and options. Employee-owners are much more careful with their newly gained wealth, and diligent in their work, than people given large cash bonuses. This model can only work in “services” industries, however, where large land or capital equipment expenses are not normal part of business. Many small businesses work this way, with much success.
Why don’t large, service-based, businesses work this way? A few do, but many are public companies and simply can’t because Wall Street won’t let them. People think that public companies are owned by the shareholding public, but that is only partially true. Most stock is owned through ETFs and mutual funds, and most funds are controlled by a very, very few fund managers on Wall Street. The fund managers get to vote all the shares in their funds, which is almost always a controlling amount of the shares. So while the investors in the funds hold the beneficiary interest in the companies, the fund managers hold the decision-making interest in the companies. And for philosophical reasons beyond the scope of this note, the fund managers are almost always focused only on the short term stock performance, and not on the long term. Some companies, where strong founders control most of the stock, are not like this, (I’m thinking of Amazon, in particular, but also Microsoft, Apple, Oracle, Berkshire Hathaway), but these are rare. Fund managers understand the necessity of capital investment, but many believe employees are simply interchangeable widgets. This situation has been hurt drastically by the new rules that force companies to expense options at the time they are granted (a literally insane policy). With no options to give good employees, incentives for employers to utilize an employee-ownership model have reversed drastically. Thanks, Dodd-Frank!”
Would you please comment and I will pass them on and ask him if he would come over here and discuss this with you.
Thanks, Bartleby.
Davidm2575 responded thusly: Bartleby wrote: “You’re confusing and conflating two separate financial products; insurance and annuities. … insurance does not automatically imply or include an annuity mechanism.”
“I never said it did.”
You most certainly did, and I quoted you at the very beginning of my post. Here it is again:
davidm2575: “But from the perspective of a business ensuring you an income for retiring, there must be a mechanism in place, and that mechanism is an investment that will pay an annuity.”
Once again, that’s incorrect.
“Tony said Social Security was about insuring an income to people when they retire. I replied to that comment with the idea that when a business tackles this retirement problem, they usually do so by providing an investment that will eventually result in some kind of annuity begin paid out.”
If you’re talking about employers when you say “business,” you’re incorrect. In every case I have ever seen — including my own employer — there are two *separate* mechanisms; the savings portion and the annuity or payout portion. It doesn’t surprise me that you don’t know this, but the two portions are almost always *separate* financial products and often are not even managed by the same servicer. The fact that an employer offers a savings plan and a retirement annuity does not in any way mean that the two are connected at all. Since both programs simply operate under the aegis of the employer, most employees make the mistaken assumption that the two programs are actually one.
But even farther; you’re legally permitted to *remove* your retirement savings and place it with an *entirely different servicer* if you please upon your retirement. If the savings and payout mechanisms were part of the selfsame financial product, as you suggest, then that would be impossible.
And if you’re talking about financial services firms when you say “business,” you’re incorrect there, too. Again, as I indicated in my post, businesses usually *don’t* do that, and in many cases are prohibited by law from doing so. Insurance and annuities are two separate financial products, your attempt to conflate the two notwithstanding.
Again, you can certainly *purchase* annuities with either immediate or delayed payout periods (depending on whether or not the specific product you purchase includes an accumulation and investment phase or not), but for the most part, annuities are not a particularly good buy. IMO, annuities tend to be a much better deal for the seller than for the purchaser.
“That is usually through a interest bearing savings account or a pension.”
An interest-bearing savings account is not a financial product that’s intended for or marketed as a retirement plan. And pensions aren’t traditionally financial products at all, considering that they are (at least in the US) usually only available via an employer or via state or federal government (in the case of state & federal employees). As an individual, you would have a very hard time approaching a financial services firm and obtaining a “pension” product that was actually labeled as such. But again, your point is poorly taken because you seem to focusing only on payout mechanisms and claiming that both savings and payout mechanisms have to be present for something to be considered a retirement product. That’s simply not so.
“The Social Security Administration is causing the confusion, not me, by making Social Security look like a savings account or pension that pays an annuity and calling it insurance when in fact it is not a pension and only quasi-insurance.”
I see several errors, misconceptions and misstatements of fact in that sentence. Let’s tackle them all in turn.
Firstly, if there’s “confusion,” as you say, there’s certainly nothing preventing you from contacting the SSA directly for an explanation, Furthermore, there’s certainly nothing preventing you from sitting down with a financial professional and getting the explanation you seek.
If you believe that the SSA is “making Social Security look like a savings account or pension that pays an annuity,” then my advice for you is the same as I offer any other prospective investor or purchaser of financial products — *know where your money is and what it’s doing.* That advice is as applicable to someone who routinely trades in equities as it is to someone who invests only in ETFs or index funds, and it’s just as applicable to the saver of little means who probably won’t have much *other* than SS to maintain themselves in their old age. You need to know where you money is and what it’s doing. If someone is confused on that score, then they need to educate themselves.
“and calling it insurance when in fact it is not a pension and only quasi-insurance.”
I’m sorry you don’t agree, but SS does, in fact, work very much like insurance, insofar as the insurance is for income, not for a capital asset like a home or car. The funding mechanisms and payout methods clearly are in line with those functions. The fact that you’re clearly not comfortable with that arrangement is beside the point.
“In other words, on the surface, Social Security looks like the normal pension plans of businesses, but the way it actually works is very different. It is a quasi-Ponzi Scheme, a pay-as-you-go type of system, and payouts are not guaranteed to the person who thinks he is investing in his retirement. He is not investing anything. He is paying for the retirees and disabled people receiving the benefit at the time he makes his payment. Even funds that go into the Social Security Trust Fund are not paid real interest, even though it often is called interest. I posted on that up thread somewhere. The more one looks at Social Security, the more smoke and mirrors are used to make it look like something that it is not. This is what causes all the confusion when it is talked about using the real facts about Social Security.
I recognize and acknowledge your discomfort with and dislike of SS; you’re certainly entitled to your opinion of it. That said, much of your other discussion of financial products is patently incorrect and misleading. So what, then, is your purpose? To persuade others to your way of thinking? IMO you’d be more persuasive if you had a better grasp of financial matters.
“The most common definition of insurance is the following from the OED:
Insurance: “A practice or arrangement by which a company or government agency provides a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a premium.”
You know, David, I’ve worked in the financial industry for nearly 30 years, and I’ve found that in discussions of finance and related topics, the person who has to fall back on dictionary definitions is generally doing so because he’s got no real-world
understanding of how finance works. And, in fact, those dictionary quotations sometimes even come before the quoter-in-question goes looking for an attorney to take his frivolous case (that winds up getting dismissed with prejudice by the court) So you go right ahead and quote the OED to your heart’s content; I’ll rely on my many years of work and education in the field instead. That work for you?
“People never make an insurance claim for Social Security benefits. They APPLY for Social Security benefits.”
Hairsplitting and sophistry on your part, David. An individual *applies* for unemployment benefits, which are *also* structured as insurance. Again, your discomfort with the arrangement does not change things.
“For these various reasons, I call Social Security a quasi-insurance program while you and the government continue to call it insurance.”
You may call it whatever you wish; I am reminded of the adage, often misattributed to Abraham Lincoln, that calling a dog’s tail a leg does not mean that a dog has five legs.
Bartleby wrote: “it appears that you are mistakenly presuming that any financial product aimed at retirement has to provide some sort of predictable and regular income.”
“No, I make no such assumption.”
Of course you have. You’ve explicitly claimed so at least three times in your reply to me.
DavidM wrote: “Social Security does not have this kind of investment in place.”
Bartleby wrote: “Irrelevant. Neither do IRAs or Roths.”
“Yes they do.”
No, they do not, David; you are quite simply wrong on that point. There is absolutely *no* payout mechanism whatsoever in either IRAs or Roths. Individual account owners are obliged to make their own withdrawals from those accounts. Furthermore, they are also obliged to meet annual RMD requirements or else face significant penalties from the IRS.
If you still believe that IRAs and Roths incorporate some sort of annuity-style payout mechanism, then I’d love to see you point to the applicable sections of the laws authorizing that. And then I’d like to see you show me examples of both products whereby both investment/accumulation and payout phases are explicitly included in the marketing literature. Considering that what you propound is actually *illegal,* I’m really looking forward to your reply.
“IRA’s are special interest bearing savings accounts”
Incorrect. IRAs are investment vehicles and are regulated as such.
Bartleby wrote: “… insurance itself is a pay-as-you-go system. Insurers must retain minimum statutory reserves, but at its core, commercial insurance products operate in much the same manner as OASDI.”
“Retaining minimum reserves is not the same thing as a pay-as-you-go system.”
And I didn’t claim that they were. I simply pointed out that “insurance itself is a pay-as-you-go system” in that a participant must continue making regular payments in order to participate in such a program. The same’s true of SS. However, the same is *not* necessarily true of investment programs. An investor *may* make regular contributions over time if he pleases, but an investor may also invest lump sums periodically and over irregular periods. And in the case of many annuities, an investor can make only *one single* lump-sum investment.
“To my knowledge, most insurance is NOT pay-as-you-go. Please provide some links to major insurance products that are setup as pay-as-you-go systems like Social Security. Please do not give me examples of usage based insurance. I’m talking about a true pay-as-you-go system. Most businesses who have setup models like this, from Charles Ponzi to Bernie Madoff, have been shut down.”
Your confusion regarding my mention of minimum reserves is understandable, given your demonstrated ignorance regarding most of the financial programs and products you’re discussing. I mentioned the retention of minimum reserves as being one of the few substantive *differences* between OASDI and traditional insurance products. Reread the passage you quoted in that light; my meaning and intent may thereby become more clear to you.
tony, spoil sport. 🙂
Bron: tax laws force people to behave differently than they might have if the tax law was not on the books.
They don’t force anybody; they actually operate using the same free-market principles you espouse. Tax laws increase the price of some behaviors over others. Higher prices mean fewer “sales,” which in this case means less of the behavior. Tax laws do not “force” anybody, any more than a $75,000 price tag on a car you want very badly “forces” you to buy a $10,000 used car instead. Just because some luxury is priced out of your affordable range does not mean you have been coerced.
To be used properly (in my view) tax law should be used to correct failures of the free market to actually capture the true and nonassignable cost to all of society of certain acts, choices, and behaviors.
For example, I cannot figure out exactly who is harmed by an owner spewing heavy metals into the atmosphere from their refinery; and I cannot point to any specific cases of autism (or other illnesses) I can definitively trace back to some atomic mercury or lead emitted by that plant, but statistically, scientifically and logically I can show that those are dangerous and significantly increasing the incidence of disease and cost of health care within at least a 75 mile radius of the plant.
Thus the refinery is making a profit by harm, and by taxing the crap out of its emissions we can incorporate that full, true, hidden cost into their business model so even if they don’t give a crap about other people or how much they hurt them, they will give a crap about an expense that reduces profit, and will find a way to reduce their emissions. Rightfully the taxes we collect should go to the relief and care of those we know were harmed.
The alternative is to make such emissions illegal, or segregate them to remote areas, but if either of those is not possible, a high tax on harmful behavior is something that can work.
bettykath: Well, not all personal items (like a yacht) get to count… There is a difference between a legitimate business expense and a back door to compensation, which the IRS recognizes, and I think should recognize (and deny as a business expense) more often. To me the same goes for the gold-plated offices, solid-gold trashcans, and $10M, 12,000 sf penthouse apartments masquerading as CEO “private offices.” To me a business expense must be a plausible investment, even if it is high-risk. I fail to see how an office with a private Olympic sized swimming pool is an investment in the company; to me it is just an indulgence of a CEO wasting shareholder dollars that should have been spent on marketing or R&D. So is a $2M birthday party; inviting some business friends to it does not (in my view) automatically make it a business expense.
You could buy a private aircraft for your business use, and cars, etc. Or a yacht, claiming you want to hold business meetings or retreats there. But if those toys are not actually used 100% as claimed, the percentage of time they are NOT used as claimed, the expense proportionate to that time should not be deductible at all.
But now we would get into corporate governance, another sore spot of mine (having seen a plethora of fraud and abuse of stockholder money, which I think is a rampant rip-off, but usually only revealed to the public when companies actually go bankrupt or get indicted for some unrelated fraud, or somebody goes so far they get fired and make the news).
Suffice to say, I think the spending must be on legitimate business expenses; not self-indulgence masquerading as a business expense.
I’ve thought about the $10M consulting. I have to renege. There is no way I can come up with enough ideas on how to spend that much money on personal items. It might be a come-down for you to spend “only” that much on yourself, but my imagine just screams “obscene!!!”
Bron, the sneaky part of this is that you have very cleverly increased employee productivity (happy, stress-free people do more and better work) and passed the tax burden on to your employees. You spend the money on your business, your employees pay more taxes b/c you pay them more, and you don’t have to pay taxes on that excess that put back in the business. Clever loophole, yes?
Bron, I’m not advocating that you buy a yacht for your business, just suggesting that which other companies did when they had to pay high tax rates. It was a way of having an expensive toy available rather than paying more taxes.
We’ve seen what happens with the low tax rates. Owners get the airplanes and yachts and more houses and more cars and more, more, more. They pay as little as possible to their employees in order to maximize their own take home that they then put in off-shore accounts. In the meantime, their poorly paid employees need government assistance to keep a roof over their heads and food on their table using middle class taxes. This is not hyperbole.
It’s encouraging that you won’t run out and add a yacht to your business assets. Since you are an enlightened business owner, I assume that all your employees make a living wage of at least $15/hour and have full medical, dental and eye coverage for them and their families with no deductible and no co-pay.
There is no swing shift, a literal killer, and no third shift. If you have a second shift, it comes with a 50% shift premium. If you have the swing shift or you don’t like the 50% premium for second shift, you have work to transfer to that new factory and you just created several more jobs. Good for you! Another option to eliminating the shift premium is to use two 6 hour shifts/day without a cut in the weekly paycheck. One option is 6-12 and 12-6.
All employees have access to the company cafeteria which serves lunch from 11-1. 11-12 for the early shift and 12-1 for the later shift. Breakfast and/or dinner service would depend on employee demand. New business for dish washer, refrigeration units, stoves, pots and pans and more vendors. New jobs for dish washers, chef, counter help.
You provide at least 4 weeks paid vacation every year, paid parental leave for up to six months, at least 2 months for mother and 2 months for father and 2 months for either. Neither parent gets all six months. Now that both parents are back to work, of course they use the company day care, a state of the art facility that relieves parents of being concerned about child care. More new jobs! This facility is primarily for all ages of pre-school children but flexible enough to handle school age children when they are out of school. School teachers on summer leave would be excellent workers during the summer months.
Bron, you’re a job maker!! Not only that, your company will be responsible for stimulating the economy within a great radius of the hometown. Everyone’s standard of living will increase. More money would be available for the local schools. More will be paid into the social security trust fund. Don’t know if taxes overall will increase or decrease. You will be paying less taxes but your employees, because they are probably making more, may be paying more. In any case, with a living wage, full medical and dental coverage, and a less stressful work environment, none of them will need government help with their housing or food or medical needs.
Since this isn’t what I promised for the $10M consulting fee, you don’t owe it.
bettykath:
tax laws force people to behave differently than they might have if the tax law was not on the books.
You want to sell some yachts, make a law eliminating sales tax and giving a tax rebate for buying the yacht. That isnt necessarily force but it is a form of coercion. By the way, I would not be in favor of tax breaks and rebates for yacht/boat owners either.
The tax law on yachts distort the price signals from the market place, in my opinion this takes advantage of people. A small investor might try and get into the yacht building business, or workers might see an increase in pay that isnt sustainable and make long term decisions on faulty information.
did it again. Government is NOT forcing you to do anything.
Bron, “shouldnt a good business owner already be on top of those things? Why should government force a business to do those things?”
Absolutely, a good business owner should be on top those things but the government is forcing you to do anything. Why would any responsible business owner invest in an idle factory without a plan to make it productive? If that’s the only option, if your customers, vendors, employees, and you are happy with the way things are and your business doesn’t need a new headquarters or another yacht or another airplane, then pay the damn tax. If you can’t live on the $10 million in profit (minus some income tax), you have a really big problem than I can deal with only by showing you. Hire me as your $10 M consultant and I’ll show you how to live on less. I’d keep $50T and give the rest to charity and live a whole lot better than I’m living now.
tony c:
you make some interesting points.
Bron: By your own philosophy, a business owner should act in their own selfish interest. That may be their short-term selfish interest, or long-term selfish interest, but either way it does NOT include acting in the best interest of society and the economy in general. The only way to accumulate any significant, liquid wealth is to NOT spend your profits. If somebody thinks cash wealth is in their selfish best interest (as is usually the case), they are not risking it by buying stuff in the economy (labor, equipment, R&D, advertising, etc) that may or may not pay off.
Investment is a crap shoot, but one that history shows pays off, on average. But the average is not what is experienced by all players; and some prefer a bird in the hand to two in the bush. The government shouldn’t force a business to choose risk over security, but should charge them the approximate cost to society when they choose excessive personal security (hoarding more money than they will ever plausibly need) over the risk of economic expansion for the rest of us.
bettykath:
shouldnt a good business owner already be on top of those things? Why should government force a business to do those things?