No "Means Testing" for Social Security

The social security system is broken. Pretty much everyone agrees on that much. In fact, even the Social Security Administration is upfront about its current fiscal prospects. From my own social security statement from earlier this year:

"Social Security is a compact between generations. Since 1935, America has kept the promise of security for its workers and their families. Now, however, the Social Security system is facing serious financial problems, and action is needed soon to make sure the system will be sound when today's younger workers are ready for retirement.

In 2016 we will begin paying more in benefits than we collect in taxes. Without changes, by 2037 the Social Security Trust Fund will be exhausted and there will be enough money to pay only about 76 cents for each dollar of scheduled benefits...."

Well there you have it. There's simply not enough money in the bank to pay for all the obligations. A solution must be found, and whatever proposal goes on the table is likely to raise serious objections from those whose financial interests will be harmed by the proposed solution.

Clearly, sacrifices need to be made, and a number of sound options have been put on the table, including raising the retirement age, indexing benefits to inflation rather than to salary increases and so forth. However, there has been one proposed solution that is really upsetting to me - the idea that Social Security benefits should be means tested.

My wife and I consistently pay the maximum annual amount in Social Security taxes - currently 6.2% of our salary, each. We make a decent living, and I am not going to apologize for it. It is already pretty clear that we can expect to receive far less in benefits than we pay out in taxes, and you know what, I am OK with that. I make more money, I will pay my fair share. This is part of the social contract - we should take care of those less fortunate in our society. However, I think that it is completely unfair to charge us hundreds of thousands of dollars over our working lives, claiming that this money will be used to guarantee us regular income in retirement, only to later take the money and run.

Alpaca and I work hard. We take take sizable chunks of our paychecks and save them - setting money aside for a rainy day and ultimately to give us the lifestyle that we want in retirement. And, yes, we also want to leave something to our kids when we are gone. The money which we save will become income generating assets. Under the means testing proposal, our hard work and propensity to save could be used to revoke or reduce our right for Social Security income. Income which we rightfully earned and paid for with our hard-earned, maxed-out taxes. We don't have to save. We could take the money and just spend it, but that would be irresponsible, wouldn't it?

Means testing is a pernicious approach that penalizes the saver compared to the spender. If instead of saving our money today we spent it all, leaving nothing for retirement, we would have no "means" that could be used as justification to reduce or eliminate our Social Security income. This policy would perversely encourage people to spend rather than save their extra income. Great for the economy today, horrible for our economic prospects as a nation.

I am willing to work a few more years before I am entitled to receive Social Security payments. I also think it's justifiable to index Social Security to inflation rather than to salary increases. I think that taking away our hard earned Social Security benefits for which we are paying over a lifetime of hard work is nothing short of robbery.

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Is It OK to Walk Away from Your Mortgage?

Absolutely.

I came across this article in the NY Times yesterday, which seemed to imply that there was something wrong with walking away from a mortgage. A complete bunch of crock, as far as I am concerned. I know this position will likely draw some fire from those who believe that there is some sort of moral obligation involved here, but that's nonsense. Just like any other business transaction, a mortgage does not carry any moral obligation with it - it is merely an agreement between two parties in which they allocate the risks and the rewards of a  given business transaction.

The two sides enter into this transaction in a very deliberate way, each knowing exactly what risks they are accepting and each hoping to get as much out of the deal as they can. The written contract between them is all that binds them, and the types of re-course they agreed upon in it are all that they have a right to expect.

In a typical non-recourse mortgage agreement, the bank is fully aware that at most they will be able to take possession of the house. No one is forcing them to enter into this relationship, they are doing so of their own volition. If they so chose, they could protect themselves by insisting that the borrower put more of his own money into the transaction to make sure that the asset is worth more than the loan amount. If they underestimated the risk, or chose to enter into a losing transaction, it is their own bad choice.

The borrower can choose to continue to pay his mortgage even though the asset securing the loan is worth less than the loan amount, but that is not a rational economic choice. The government and the banks are running a morally bankrupt campaign to portray strategic mortgage defaulters as immoral. What's immoral is trying to get people to act against their own financial best interest, and grant the banks protection from what is nothing more than a bad business decision.

Defaulting strategically is simply the exercise of a contractual right negotiated by borrowers in non-recourse loans. Indeed that is the whole point of a non-recourse loan. Your exposure is limited to the capital you put into the deal. The lender willingly accepts the remaining risk. This is why the lender gets  his own appraisal of the asset value as part of the deal.

Moreover, in mounting their campaign to discourage strategic defaulters the government and lenders are protecting the more powerful side in the deal. The banks are the sophisticated party in the financial transaction. It is they who practically dictated the deal terms to their borrowers, who are in a vast majority of cases simple homeowners. They deserve no protection from their own economic choices.

There is no shame in walking away from a mortgage. No sense in protecting a sophisticated bank from their poor business decisions, at the expense of your family's financial security. There may be reasons to avoid walking away - the most important being the credit score hit - but there is certainly no moral obligation to keep throwing money down the drain.

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Unemployment Benefits & the Economy: A Polemic

Earlier this evening, I read this post on Weakonmics - one of my favorite personal finance blogs. In this post, The Weakonomist makes a case against unemployment benefit extensions, against the stimulus package and against Nobel Prize winning economist Paul Krugman, calling him "as crazy as Glenn Beck". I am not here to defend Krugman's honor - he doesn't need the likes of me to do so - but I disagreed with The Weakonomist's post so badly that I decided to publish a polemic against it, and let the readers make their own call about who's right.

I have many issues with the Weakonists' post, but I will focus my criticism on only a few of them - or else I will be here all night, and tomorrow is a work day, after all.

First point: in the post The Weakonomist criticizes the stimulus bill saying that "...the Obama stimulus was a bomb..." - that's opinion not fact. The stimulus bill was far from perfect, but it averted  the worst effects of the economic catastrophe. Don't take my word for it, check out this report from the Congressional Budget Office (which is a non-partisan body) about the effect of the stimulus bill. To save you some reading, here is a brief excerpt from this long and detailed document:

"[The stimulus] Raised the level of real (inflation-adjusted) gross domestic product (GDP) by between 1.7 percent and 4.2 percent,

Lowered the unemployment rate by between 0.7 percentage points and 1.5 percentage points,

Increased the number of people employed by between 1.2 million and 2.8 million, and

Increased the number of full-time-equivalent (FTE) jobs by 1.8 million to 4.1 million compared with what those amounts would have been otherwise. (Increases in FTE jobs include shifts from part-time to full-time work or overtime and are thus generally larger than increases in the number of employed workers.)"

Still think that the stimulus bombed?

But forget government studies. Let's talk personal experience. I work in the wireless industry, where I have seen first hand the impact of the $7.2B allocated as part of the stimulus to increase broadband penetration in unserved and under-served areas of the country. Without these funds, many companies in my industry would have gone under.

My own company hired another person to coordinate our response to this stimulus bill, and we didn't receive a dime of government money. We also hired consultants, lawyers and took trips to visit customers applying for these funds. Just like us, hundreds of other companies around the country increased their spending in response to the stimulus. That created jobs, economic activity and brought us all back from the brink of even worse economic disaster.

The stimulus was an unqualified success! Yes, there were some inefficiencies, but ANY large project, especially one attacked with such urgency will have some of those. That's the price of action.

Second Point - The Weakonomist says "First of all, extending benefits won’t do much for demand.  People still have to pay off their demand from a few years ago, via credit cards, HELOCs, and mortgages."

This is plain wrong.

I know very talented, hard working and qualified people who have been out of work for over a year in spite of aggressive job hunts. These people have exhausted their savings, and necessarily have to reduce spending. Any unemployment benefits that they receive will be used to pay for food, rent, fuel - you know, keeping their families clothed and fed. This money will not go into savings accounts. The unemployed will spend their unemployment benefits not because they want to, but because they have no other choice. Therefore, by necessity, unemployment payments will stimulate demand.

Third Point - The Weakonomist is concerned about the deficit. Well, so am I. But stopping unemployment benefits is an asinine way to try to fix it. The US Government's debt is so large (over $13 trillion dollars), that the cost of unemployment benefit extension, a mere $33B, would add a negligible - truly negligible - fraction to it.

The Weakonomist is giving props to the imbecile Republicans and Democrats in Congress who are the very ones responsible for the deficit fiasco. These are the same idiots that authorized two wars without paying for them - the cost so far, over a TRILLION dollars. These are also the same imbeciles that have only a few years ago cut taxes repeatedly without cutting spending, leading to - hold your breath - DEFICITS.

NOW, they are thinking about deficits, when it's time to extend the benefits for unemployed Americans who are unable to find a job?! How morally bankrupt can they get?

This is not only bad for the economy, it also shows a severe lack of compassion.

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Financial Incentives & the Weather

In honor of Blog Action Day, whose topic this year is climate change, this post is dedicated to the impact of financial incentives on the weather. Yes, financial incentives can and do effect the weather. Granted this effect is subtle and is only noticeable over a period of decades, but it’s real and it’s happening.

Over the past 150 years or so the world has been rapidly industrializing. This industrialization has been an exceptionally good thing, vastly improving standards of living, dramatically lengthening average life spans and giving a huge number of us a comfortable way of life. Of course, while making this great progress we have been enjoying an unfair advantage. We have been using the atmosphere as our own personal dump. The reason for this is simple. It costs nothing to pollute and since industry is about maximizing profits, industry’s economic incentive was to ignore the cost to society that such pollution causes.

Because of its sheer size, our emissions have take over a century to make a noticeable impact on the atmosphere, but scientific consensus now tells us that our actions are changing the atmosphere in a way that could lead to catastrophic results. The good news is that the financial incentives that brought us to this point, can also take us in the opposite direction and help clean up the planet.

Congress is considering several ways to cut global warming causing emissions, cap and trade being one of those proposals. Under such a system, government would cap the amount of green-house gas emissions, give “pollution permits” to certain industries, and allow firms to buy and sell those permits according to their needs. The thinking is that the “cap” would be reduced over time. While this is a good fall-back plan, it is complex and somewhat circuitous. A simpler way: carbon tax.

A carbon tax would be very easy to administer. Set a price per pound of CO2, and tax every activity according to the amount of CO2 it generates. You buy gas? The cost of CO2 would be added to your bill. You buy a computer? Same deal. You buy transportation services? Pay for the CO2 you emit into the atmosphere. The cost would be very transparent and immediate to the buyer, and when strong financial incentives exist, behavior changes.

What would we do with the funds generated by a carbon tax? We could do several things. One possibility: return it to consumers in the form of lower income tax rates – this way the net impact on the economy will probably be close to zero. Another possibility: use the money to subsidize alternative energy and energy efficiency projects. Or, here’s a thought, how about we reduce the federal deficit so that each of us owes less money to the rest of the world?

Economics got us into this climate change mess, but the good thing is that it can also go a long way towards getting us out. Hooray for carbon tax!

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Lemming Americans

Yes, people. There are Native Americans, African Americans, Jewish Americans and apparently we can add to our national diversity one more group: Lemming Americans. Those Lemming Americans are the ones that follow the herd. They hear something and they repeat it as loudly as they can, and truth or facts be damned!

It looks like a common sense reform to our health care system is going to be derailed by simple lies repeated often and loudly enough, by so called leaders and opinion makers. Apparently all it takes these days to make sure reform is derailed is someone to whisper conspiratorially "Death Panels". From that point forward the truth goes out the window. The lie gets repeated and magnified. The interested parties smile broadly and stand aside while the imbecile masses fight a battle contrary to their own self interests.

Let me comment on this one more time:

The Moral Argument - it is simply wrong that tens of millions of Americans do not have health insurance. All of us deserve to lead a healthy life and to receive decent treatment if we get sick. For crying out loud, we provide health services to our felons in prison, but not to our hard working poor. If there is injustice in the world, this is a clear example.

The Economic Argument - our system is broken beyond repair. My family of 5 - all completely healthy - WITH health insurance, spent more on health care last year than we spent on anything except for daycare and rent. This is without even counting the $12K or so in insurance premiums paid by my employer. The system is simply hemorrhaging money through waste and bureaucracy. Costs must be controlled or (i) our economy will collapse; or (ii) half of us will be uninsured.

The Fear Factor - the fear mongers would have us believe that government will pull the plug on granny. Complete and utter lie. Hate to break it to you idiots, granny already has socialized medicine. She's on Medicare! Or that government bureaucrats will come between us and our doctors. They don't tell you that right now there is an insurance company coming between you and your doctor, and that your insurance company makes money by denying you care. Why should they care? The fear mongers know that gullible Lemming Americans will buy anything they sell.

Here are some real things to worry about: today if you lose your job, you lose your health care insurance. If your employer decides to stop offering health care, you're out of luck. If you or a family member get seriously sick, your insurance will probably not be sufficient to keep you from financial ruin. If you exceed your lifetime insurance cap, as far as your insurance company cares you can just curl up and die. If you are not afraid, you don't understand the true nature of your predicament.

The Personal Experience Angle - I was born and raised in a country where so-called socialized medicine exists. You know what? If I had the unfortunate choice between getting sick in the US or getting sick in Israel, I would much rather get sick in Israel. The US has the best health care system in the world you say? Bullsh** I say. Base your claims on facts and on reality. Here's one easy comparison - life expectancy. Life expectancy in France, Canada and Israel - all countries with socialized medicine - is higher than in the US. Best health care system in the world my left foot. Lemming Americans.

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Cash for Clunkers: I Don't Buy It

The cash for clunkers program has been wildly successful if you judge by the fact that the first billion dollars in the plan has run out in a matter of days. This money was expected to last well into the fall. The program has apparently done a lot to get people to buy new cars, and getting people to spend money is the whole point of a stimulus program, right? Well, I don't buy it.

Let me start by saying that the program is clearly doing some good. Yes, it did get folks to open their wallets, and clearly some ol' gas guzzlers are going to get scrapped, but is that enough? As far as I am concerned, this stimulus program was pretty much a give away to American car companies. Those very same companies to which the government has already given billions of our dollars.

If the goal of the plan was to get gas guzzling cars and trucks off the road, why did the program pay consumers $3,500 for a minute increase in gas mileage? Folks who traded-in an SUV or light truck could get away with an increase of only a couple of miles in gas mileage and still participate in the program. I can't prove this, but I am willing to bet that in many cases the CO2 emissions required to produce and deliver a new car greatly exceeded the energy that would be saved by the small MPG increase. If the reason for the program is environmental, why not require buyers to replace their vehicles with hybrid cars that would get at least 40 MPG? The answer is simple: such fuel efficient cars are made by foreign manufacturers, and we can't be giving money away to foreigners... even if those cars are produced by Japanese companies here in the US... nah, we can talk about the environment, but giving money to foreigners?! Unthinkable.

Second, how does destroying our assets improve our situation? Cars traded-in under the cash for clunkers program are destroyed. Yes, that's right, they are taken off the road and shredded. How does that help our national economy? Should we boost our construction industry by bulldozing old houses? Would we be better off as a nation if we destroyed our bridges so we could build new ones? We are taking assets that could be re-used and we are dumping them. How can that possibly make us richer as a nation? Is there some alchemy involved here?

Finally, this program is no doubt inflicting severe collateral damage on charities who would otherwise receive many of the vehicles being traded-in as donations. Here is some anecdotal evidence for that happening.

The only sound reasoning for such a program, in my opinion, is the environmental rationale, however those are clearly secondary and minor in the way the program is designed, as far as I can tell.

After I finished writing this post, I read this article which suggests that folks are buying cars with better fuel economy than is required by the Cash for Clunkers rules. If that is indeed the case, my objections on environmental reasons may be over stated (even though the combined gas mileage average is clearly far lower than it could be). We'll see.

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Demand Health Care Reform!

A monumental battle is playing out in Washington, between those who strive for health care reform, and those who are doing everything in their power to maintain the staus-quo. The American people must stand-up and tell Congress that we do not only demand reform, but that we demand meaningful and sustainable reform that will guarantee health coverage to all Americans.

I call on my readers to take action to make sure that the first chance for real reform in over a decade is not wasted. We must make our voices heard.

Visit HealthReform to understand where we are, what we need to change and how we can get there. Join the fight!

Here is some data from that site which tells a very clear and well substantiated story for why health care reform is required for California. You can get similar information about the state where you live:

• Roughly 19.7 million people in California get health insurance on the job¹, where family premiums average $13,297, about the annual earning of a full-time minimum wage job. ²
• Since 2000 alone, average family premiums have increased by 114 percent in California.³
• Household budgets are strained by high costs: 19 percent of middle-income California families spend more than 10 percent of their income on health care.⁴
• High costs block access to care: 13 percent of people in California report not visiting a doctor due to high costs.⁵
• California businesses and families shoulder a hidden health tax of roughly $1,400 per year on premiums as a direct result of subsidizing the costs of the uninsured.⁶

AFFORDABLE HEALTH COVERAGE IS INCREASINGLY OUT OF REACH IN CALIFORNIA

• 19 percent of people in California are uninsured, and 71 percent of them are in families with at least one full-time worker.⁷
• The percent of Californians with employer coverage is declining: from 58 to 54 percent between 2000 and 2007.⁸
• While small businesses make up 77 percent of California businesses,⁹ only 46 percent of them offered health coverage benefits in 2006.¹⁰
• Choice of health insurance is limited in California. Kaiser Permanente alone constitutes 24 percent of the health insurance market share in California, with the top two insurance providers accounting for 44 percent.¹¹
• Choice is even more limited for people with pre-existing conditions. In California, premiums can vary based on demographic factors and health status, and coverage can exclude pre-existing conditions or even be denied completely in some cases.

To read the citations and end notes cited above, follow this link.

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Health Care: The Dirty War

The battle over the President's health care initiative is gaining momentum. I have previously aligned myself with the forces calling for a drastic reform of the US health care system, and if anything, I think that the bills currently making their way through Congress don't go nearly far enough. However, those who profit from the status quo are clearly mounting a counter-offensive in an effort to kill health care reform yet again.

Last week, a colleague sent me this link, purportedly an official Congressional chart showing the structure of the health care organization after the proposed reform. If you open the link you'll be shocked and amazed at what appears to be a byzantine maze of bureaucracy. Perfect. This is exactly what the powers behind this document want you to think. However if you look carefully, you will see that this is not an unbiased document, it is, in fact, a biased piece of propaganda, a weapon, if you will, in the dirty war for the future of health care in this country.

This document, while apparently stored on a legitimate Congressional server, was prepared by the Republican Staff of the Joint Economic Committee (see lower left hand corner of the document) and was submitted by Kevin Brady , Republican Congressman of Texas who, according to the Washington Post, has voted with his party 94.5% of the time in the current Congress.

Well, some of my colleagues took this document - which is intentionally designed to look confusing and intimidating - to be the actual proposal put before Congress. If the chart is so confusing, goes the rhetoric, how can the actual plan be any better?

Here is my take. I am not versed in the full details of the bills that are now circulating through Congress, but what I do know is that if you resort of misinformation or misdirection to drive your point home, something is truly wrong here. It may very well be that Congressman Brady has some productive points to contribute to the discussion. Hell, he may even have the holy grail of health care which he can deliver to Congress to the sound of grand applause by the American people. If so, let him be constructive. However, from reading the papers and watching the talk shows, it seems to me that Republicans are simply doing their utmost to scuttle the President's health care reform, regardless of the consequences to the American people. Forget about being constructive. Forget about finding a solution to a critical problem effecting all of our lives. All that seems to matter to them is the chance to deliver what they think will be a critical blow to the President's political standing.

I think enough is enough. Health care must be reformed. We all know it. Even those moneyed interests who stand to gain from maintaining the status quo (only they are cynically pushing for their short term financial interest, rather than for the long term betterment of society). If you have valid points to make, make them. Come to the table and argue for the type of change you would like to see, but enough with the scare tactics, misdirection and politics already. We need leadership, not idiocy.

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