Friday, February 18, 2005

Center/Right Types Need to Move Over

A prominent nationally syndicated radio host is fond of describing himself and his audience as Center/Right. To him Center/Right means including pols like Arnold Schwartznegger and Arlen Specter in a broad Republican coalition that could wield tremendous power if it could satisfy the factions enough to effectively pursue policy interests. Not surprisingly this host has been extremely supportive of George W. Bush.

Bush's domestic policy embodies the principles of Center/Right. While a Right Winger would cut taxes and spending, a Center/Right Bush cuts taxes but doesn't do the hard work of slowing the spending. He's strong on national defense while rolling out a massive entitlement program for the elderly. And now he's off to put his Center/Right touch on Social Security.

Bush rightly wants to allow citizens to have the choice of foregoing the government sponsored miniscule rate of return for about 1/6 of their contribution and allow them to invest it in personal accounts. Historically, over 20+ year investment horizons, the broad-based stock market has beaten the pants off of the tiny return secured by the Social Security Administration for its clients. Although these clients still received a positive return, the results were rather meager, barely better than if they had stuffed their contributions into a mattress. Thus anyone under the age of 40 with a basic understanding of finance should strongly support private accounts.

What is Bush's Center/Right touch? According to the February 17 Wall Street Journal, the Bush Administration is considering "increasing the amount of income subject to Social Security payroll taxes beyond the current limit of $90,000." The reasoning is that Social Security is poised to run out of money in 30-40 years. Diverting some funds into private accounts would hasten the troubles. So in layman's terms, Bush is considering an enormous tax increase on the wealthy as one option for "saving" Social Security and passing his private account program.

Allow me illustrate my point by using a hypothetical. John Doe is such a cliched name. Maybe I'll use John H. Instead. Suppose John H. Is a partner at his law firm, a would-be celebrity who makes occasional appearances for fees and a part-time blogger as well. Let's suppose his take home income each year is $500,000. Since he is essentially self-employed, his FICA tax rate is 12.4% on his first $90,000 of income or$11,160.

When President Bush first took office, John H. Paid $9,970 per year in FICA taxes. His projected lifetime benefits were not likely to give him more than a small return on his money for this forced transaction. If he died before reaching the benefits age (unlikely, as our hypothetical case is in his late 50's, yet it's possible he could drown in an attempt to walk on water), his return would be -100%. Clearly this transaction is a raw deal for him. It's a good thing the government is only forcing him to do this with 2% of his income.

Now, George Bush has hinted that he wants to move the cap upward and speculation centers around the $150,000 level. If he moved the cap to $150,000, John would have to pay $18,600, almost double the amount he paid at the start of George Bush's first term.

If Bush removed the cap, John would have to pay $62,000 annually! That's a 450% increase over what he's paying today. Sounds to me like John's getting ripped off, especially since he could annually draw on a fraction of that amount each year he lives past the retirement age. Of course, he would get to keep the $10,000 a year (of the $62,000 taken under FICA) that Bush lets him invest in private accounts no matter how long he lives. So he would give up an extra$50,840 in order to keep $10,000 of it.

Yet this prominent syndicated talk radio host on February 17 called the last plan a good deal for John, showing that Center/Right is a label not to be confused with conservative, libertarian or classical liberal.


Blogger LearnedFoot said...

"If he died before reaching the benefits age (unlikely, as our hypothetical case is in his late 50's, yet it's possible he could drown in an attempt to walk on water)"

That line made beer shoot out my nose.


2:02 PM  
Anonymous Anonymous said...

Thanks for the post. I thought that I was the only one in Mn. that disagrees with HH on a ton of issues.
ps. the walk on water line cost me a new keyboard.I usually wrap it in plastic when I read the KAR maybe I'll just make in permanent.

5:50 PM  

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