Browsing the blog archives for October, 2015.

No Social Security Increase

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The Social Security Administration announced that there would be no annual cost-of-living adjustment (COLA) this year for Social Security recipients because there isn’t any inflation, at least not as calculated by the SSA formula. This is widely presented as a hardship for seniors. As the USA Today put it, “Though prices on paper may have dropped, the cost of living for Social Security beneficiaries is rising, and their quality of life is falling. Social Security recipients have lost nearly a fourth of their buying power over the past 15 years, according to the Senior Citizens League.”

While the formula used to calculate inflation is somewhat arbitrary, it is equally true that the Senior Citizens League is a special interest group whose purpose it is to promote the plight of seniors. Setting these issues aside, I want to make 3 points:

  1. None of the reports I have heard in the mainstream media have mentioned that Social Security is on a trajectory toward insolvency by 2035. Needless to say, raising benefit levels would simply hasten this reality. Recipients can only get an increase if someone else pays for it.
  2. All of the reports assume that Social Security is the sole source of retirement income. Sadly this is true for many, but it was never intended to serve that purpose. Some of you might be thinking that those who rely completely on Social Security simply could not afford to save more prior to retirement. In general, this is not true; saving for retirement is a matter of priority. But if this is the case in some instances, it only underscores the reality that Social Security doesn’t deliver much in return for 12.4% of income during one’s working years.
  3. Completely absent from all of the reports I’ve heard is a major driver of stagnating incomes for seniors. The Fed’s artificially low interest rates have all but destroyed returns on fixed income, leaving seniors with the a choice: Accept a guaranteed return below the inflation rate or invest in stocks and bonds, a risky option for anyone with a modest nest egg. Put another way, our government has robbed seniors of an opportunity to obtain a reasonable, safe, market rate of return for retirees with funds that supplement Social Security. This has been done to stimulate investment and keep the economy going, but its collateral damage has not gone unnoticed. Anyone interested in “helping seniors” should propose an end to the Fed’s near zero rate policy.

Social Security is in distress and its time we take radical steps to fix it, including privatization and opt-out options. Anyone who complains about the lack of a COLA this year should step back and look at the big picture. It’s only going to get worse.

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China & Venezuela

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I just returned from another trip to Asia. I always see some things firsthand when I’m there. I had two interesting encounters this time.

The first was at the national museum in Beijing. The modern history section tells the story from Mao to the present. The shift from Marxism to a mixed approach with some capitalism is officially presented as a natural evolution of socialism, not a departure from it. The term is they use frequently is market socialism, an oxymoron in a literal sense, but not from their perspective. As my Chinese colleague explained, socialism isn’t really about Marxism, but about income equality—nobody having more than anyone else. In other words, capitalism is fine as long as its abundance can be redistributed. In this sense, capitalism becomes the new socialism. This is a novel way of understanding the Chinese economy, but it also provides insight into the neo-socialists in the US. They are happy with capitalism to the extent that they can control most of its bounty through taxation, redistribution, and regulation.

The second encounter was with an engineer from Venezuela I met in the hotel lobby. I asked him how things were going there. He just shook is head and said, “It’s the government.” As he put it, “The government in Venezuela is just for the poor people, but it’s horrible for the professionals. They take everything the professionals and companies produce and give it to the poor, except for what they keep for themselves. Nobody who produces anything can make any money anymore. So many companies have shut down that there isn’t anything left to take from them. There’s no future.” I’ve covered the plight of Venezuela many times in my blog so there’s nothing new here, but it’s interesting to hear it firsthand from someone suffering through it.

Apparently Chavez and Maduro didn’t learn anything from the Chinese, who have figured out that some degree of free enterprise is necessary to generate the cash to finance government largesse. Of course, capitalism cannot coexist with income equality. Entrepreneurs take risks and work hard, and are only willing to do so if they get to keep what they earn. Income inequality comes with the territory. The Chinese, the Venezuelans, and the leftists in the US are all trying to figure out the same thing—how much wealth can confiscated before business leaders and other professionals quit producing.

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