A Modest Proposal

This proposal is for a new retirement system. This is not a reform of the current Social Security system, but rather a complete replacement of it.

How would it work?

The basic idea is this: At birth every child who is a natural born citizen citizen¹ would have the government put $8,000 into a retirement fund. The money in that fund would be invested in an index fund such as an S&P 500 or Russell 3000 index fund (I would prefer a Russell 3000 fund). This takes advantage of both the high rate of return of these index funds and the power of compounding when started at the earliest possible age. For example, if the future average real annual growth in the fund is 6%, then for every $1,000 invested there would be, in inflation adjusted terms, ~$44,000 65 years later.

What would be the amount of the annual benefit?

The amount of the annual benefit would be determined by the fund administrators. The administrators would set the amount based of the total amount in the fund relative to the number of recipients. That would make this system a cross-breed between a traditional company pension fund, which would be called a defined benefit plan, and a retirement system based on IRAs and 401ks, which would be called a defined contribution plan. The plan administrators should be somewhat conservative in setting the amount of the annual benefit so as to allow for downturns in the economy when the total principal amount in the fund would decrease. At regular intervals the plan administrators would review the health of the fund and increase amount of the payments as appropriate.

Why an index fund?

A 2010 study showed that an S&P 500 index fund outperformed 99.4 % of all mutual funds. Historically the Russell 3000 index has modestly outperformed the S&P 500 index. So it stands to reason that a Russell 3000 index fund would outperform a slightly larger percentage of all mutual funds.

What would be the expected future annual growth rate?

Good question. The Russell 3000 index went from 888.89 on January 3, 1995 to 6792.93 on January 3, 2017. Inflation for the same period was 61.57%. This results in an annual real growth rate 6.19%. Since January 1, 2013 the index has  increased by more than 65%, more than twice the average previous rate, with no significant change in the economy to justify such a large increase. Now, if you include the period since 2013 in the long term average you get an annual growth rate of over 8%. If you don’t include 2013 you get the annual rate of 6.19% referenced above. 6.19% seems a little low while 8% is definitely too high, especially when you consider that the average PE ratio for S&P 500 is more 24. Since the long term average for the S&P 500 PE ration is around 16 it would seem the the stock market is currently overpriced. So I will make an educated guess and say 6.5%, a little above 6.19% and well below 8%. The reality is that there is so much uncertainty about the future that any such estimate would have a huge error bar associated with it.

Why a fund and not an individual account?

It seems reasonable to assume that even smaller a percentage of individuals who are not financial managers would be able to outperform an S&P 500 index fund. An individual account which would allow trading would simply be an excuse for the banks and/or Wall Street to syphon off 1% of the principal in the fund annually. I did consider individual account without a trading option which would pay benefits based on the principal amount in the account, but I realized there was a problem with that idea. Consider two children. One is born on December 9, 2007, the day the stock market peaked just before the housing bubble broke. The other is born on March 9, 2009, the day the market bottomed-out following the bubble. At that point the first child’s principal amount would have declined to $4,292.37. From that point on they would have exactly the same growth in their accounts, but the first child would end up with only 43% of the annual benefit of the second child. In fact, it would be even worse since, if they both retire at the same age, the second child would benefit from an additional 15 months of growth in the fund. It would be very unfair to have such a large difference in the benefit received based solely a person’s date of birth. The only way I can see that would allow for people retiring at the same age receiving the same benefit is for all of the initial money to go into a fund.

Inheritability

One of the key features of this proposed system is that the benefit would be inheritable. But instead of inheriting the annual payments, the heirs would inherit the amount of principal necessary to pay that benefit. I would propose that the benefit would only be inheritable by the children of the person receiving the benefit. That would mean that not only would everyone covered by this plan would have a decent income in retirement, buy also that the second generation of people covered by this plan would inherit a reasonable amount of money from their parents.

Funding of the new system

In the long term the funding of this proposed system would be much easier than the current system, requiring an employee payroll tax between .6 and .8 per cent with no employer contribution needed. Now, when I say long term, I mean long term – 65 to 70 years. This is because of the need to continue funding the current system until the last group of people eligible for the current system reach retirement age. At that point the payroll tax can be gradually reduced for employees and gradually eliminated for employers. But that is for the long term. For the short term there is a very real funding problem since the first people entering the new system will not enter the work force, and thus start paying the payroll tax, for some number of years.

I can think of a number of ways of solving this initial funding problem.

One is to have the Treasury loan the money to the new trust fund, to be repaid as the people in the new system start paying the payroll tax. This has the advantage of requiring no money other than that coming from the employee payroll tax. It has the disadvantage of diverting money away from the current OASI trust fund, which already has funding problems to resolve.

Another is to increase the payroll tax by .5%, .a .25% increase for both the employee and employer. This is probably not a good idea in a sluggish economy and is also probably a political non-starter.

The third way is to initially fund the system from general revenue. This is the option which I would prefer. This would divert no money away from the current OASI trust fund, which would mean that any funding problems with that trust fund are problems they would have anyway. The obvious problem is that this would be a new spending program. What would be unusual about this spending program is that there would be a fairly definite date in the future, albeit 65 years in the future, when the spending would end.

Transition from the current Social Security to the new one

There are actually two transitions required.

The first is a bureaucratic transition, new forms, procedures, etc. While a non-trivial problem, it is readily resolved. Bureaucrats know how to do this sort of thing and it should not be a significant problem.

The second is the financial transition. If the public funding option mentioned above is implemented, then the financial transition is trivial. The funding problems for the current OASI trust fund would be no greater than they already are. If any funding option for my proposed new system is implemented which diverts any payroll tax money away from the current system, then the funding problems for the current OASI trust fund would be greater, probably significantly greater. So while there would be no legal linkage between the new and old systems, there would be financial and political linkages.

What about other savings for retirement?

The only other retirement savings program I would keep would be the 401K program and then only to the extent that there is a company matching amount. All of the rest of the current retirement programs, including the 401K contributions beyond the amount matched by the company are really primarily beneficial to people who have sufficient income that they should not need any government assistance in their savings effort. I would encourage people to save for retirement beyond what this program would provide, it’s just that I don’t think the government should be involved in since such involvement has a strong tendency to end up benefiting the financially better off portion of the population.

Note: I have another proposal coming up which would interact with and almost certainly cause changes to this proposal. I will discuss those interactions and changes when I post the other item.

  1. The Supreme Court has never ruled on what is meant by the phrase ‘natural born citizen’. I think it is obvious, a natural born citizen is anyone who is a citizen of the United States by reason of their birth, that is, either their father or mother is a U.S. citizen or they are born in the United States.

Puerto Rico

I am amazed that I have not read a single article/blog post explaining why Donald Trump has displayed such a disgusting attitude towards the humanitarian disaster unfolding in Puerto Rico namely that he is a racist. Look at the names most frequently referenced. The name of the territory is Puerto Rico. The capital is San Juan. The mayor of San Juan is Carmen Yulín Cruz. The Governor of Puerto Rico is Ricardo A. Rosselló. Those are all Hispanic names. During the presidential campaign Donald Trump virtually promised to be a racist vis-a-vis Hispanics, he is now fulfilling that promise.

Secession Procedure

Article IV Section 3  of the U.S. Constitution states:

New States may be admitted by the Congress into this Union; but no new State shall be formed or erected within the Jurisdiction of any other State; nor any State be formed by the Junction of two or more States, or Parts of States, without the Consent of the Legislatures of the States concerned as well as of the Congress.

Note that the criteria for admitting a new state to the Union is strictly up to Congress unless it involves an existing state at which point  the state legislatures become involved. Note also that the Constitution is silent on the issue of seceding from the Union.¹ This proposal would create a formal procedure for a state to peacefully secede from the Union. The steps in this proposal are as follows:

  1. Only those states which border on another country or have a coast line on the Pacific Ocean, Atlantic Ocean or the Gulf of Mexico would be eligible to secede. The purpose of this restriction is to avoid a state seceding and creating a new country which is completely surrounded by the the remaining United States. As such the states initially eligible to secede would be: Maine, New Hampshire, Massachusetts, Rhode Island, Connecticut, New York, Delaware, New Jersey, Maryland, Virginia, North Carolina, South Carolina, Georgia, Florida, Alabama, Mississippi, Louisiana, Texas, New Mexico, Arizona, California, Oregon, Washington, Idaho, Montana, North Dakota, Minnesota, Michigan, Vermont, Alaska, and Hawaii (31 states). Those states not initially eligible to secede would be Nevada, Utah, Wyoming, Colorado, South Dakota, Nebraska, Kansas, Oklahoma, Iowa, Missouri, Arkansas, Wisconsin, Illinois, Indiana, Ohio, Pennsylvania, West Virginia, Tennessee, and Kentucky (19 states). If a state were to secede that would change the above lists. For example, if Texas were to secede that would make Oklahoma and Arkansas eligible to secede.
  2.  The state wanting to secede would hold a referendum on the issue. The votes in favor of secession must be at least 55% of the votes cast. (the exact per cent required is less important than that it be a significant super majority; you’re not going to break up the union on a fifty per cent plus one basis). There must be at least three months notification of the date of the referendum.
  3. No voter suppression is allowed. Any U.S. citizen who is a resident of the state in question would be allowed to vote. There would be federal monitors at all precincts to observe only. If their observations result in a finding that the was any significant voter suppression then the results would be thrown out.
  4. If the referendum fails, or the results are thrown out due to voter suppression or any other irregularities a new referendum could not be scheduled for at least one year.
  5. If the referendum succeeds then Congress must also approve of the secession by the same super majority as the referendum. The reality is, however, that I cannot imagine the Congress rejecting the secession if the referendum passes with a super majority.
  6. If the referendum passes and Congress approves then the secession process would proceed over a three year period.

Consequences of secession:

  • All federal offices in the seceding state would close. This would include all military bases, Coast Guard bases, VA facilities, and border posts. All aircraft, vehicles, ships, etc. would be removed to the U.S. but all federal facilities would remain intact including any infrastructure such as radar units, network cabling etc.
  • There would be no dual citizenship. Anyone who becomes a citizen of the seceding state would forfeit his/her U.S. citizenship. If you dislike the Union so much that you want to secede then it makes no sense to allow you to continue to remain a U.S. citizen. Any U.S. citizen who is a resident of the seceding state who does not become a citizen of that state would remain a U.S. citizen but would obviously have to obtain a U.S. passport some time in the three year period if they did not already have one.
  • The seceding state would have to agree in advance to pay half of the moving expenses of any resident of the state who would not want to be a resident after secession. If any of the red states were to secede I cannot think of a good reason why any member of a minority group would want to remain a resident of that state after the three year transition period.
  • There are two programs in particular that anyone voting in a secession referendum should be aware of.
    • Social Security – You can receive social security if you are living outside of the U.S. but I don’t know if you can have the payments direct deposited in a foreign bank account. In any case that is an issue which could be negotiated during the three year transition period. The real problem is that as soon as you stop paying into the social security fund the amount would receive when you retire starts to decline and someone who is middle aged or a young adult would not get very much when they reach retirement age.
    • Medicare – This is a bigger problem since Medicare will not pay for any treatment outside of the United States. This means that even if you are already enrolled in Medicare and you are a resident of a state that secedes you would have to travel back to the U.S. for treatment or pay for it yourself.
  • There are many other issues involved in a secession such as where do you draw the offshore boundaries for a state such as North Carolina. Most of these would be settled as part of a negotiating process during the three year transition period.

While I am completely serious about creating a formal procedure for a state to secede from the Union I will admit to having an ulterior motive for establishing such a procedure. Current Governor Abbot and his predecessor Gov. Perry have both said they would consider having Texas secede from the Union. I want to call their bluff because I think they are both modern Texas cowboys – all hat and no cattle.² Implementing a formal procedure would send a message to Gov. Abbott to either put up or shut up. Unfortunately I don’t think he would either put up or shut up.³

  1. It is important to note that at the beginning of the secession process which started the Civil War the seceding states made no attempt to secede peacefully. They started the process by shelling Fort Sumter and killing Union soldiers. In short, they wanted a civil war, not simply to secede.
  2. It would be interesting to find out how many people in Texas wear cowboy hats compared to the number of Texans who are actually cowboys. The ration has to 1000 to 1 at least.
  3. The fact is that most of the red states are moocher states. I am using Mitt Romney’s definition of a moocher which is anyone who receives more in Federal benefits than they pay in Federal taxes. Most red states, Texas in particular, receive more in Federal spending than the residents pay in Federal taxes. In the case of Texas, consider San Antonio which has five military base in the area. If Texas were to secede those five bases would all close and San Antonio would dry up and blow away.

 

 

 

 

 

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War Tax

My proposed war tax would consist of up to a five percentage point increase of the income tax rate for the second highest tax bracket and up to a ten percentage point increase for the highest tax bracket in the event of the United States going to war with another country or becoming involved in a war within another country.

The United States would be considered at war with or within another country if either of the following conditions are met:

  1. Three or more American military personnel or mercenary forces are killed within that country for three consecutive months.
  2. Ten or more people are killed by American military personnel or by American mercenary forces or by any group at war within that country to which the U.S. Government is supplying weapons or by U.S. drones for three consecutive months.

The exact amount of the tax increase would depend on the cost of the war. The current drone war is not costing nearly as much as either the Iraq or Afghanistan wars so the tax increase needed to pay for that drone war would not be anywhere near the five or ten percentage points. If the five and ten percentage point increases are not enough to pay for the war then the increases would remain in place until the war is completely paid for.

Now, why the definition of a war? Think back to the beginning of the Iraq war. George Bush would never have agreed to a tax increase on the rich under any conditions so he would have come up with some explanation, no matter how ridiculous, as to why our invasion and subsequent occupation of Iraq was not a war. Even with a definition of a war you still would have to depend on honest accounting by whatever administration is in power of the cost of the war both in terms of casualties and dollars.

The poor and middle class of the United States are already paying for our wars with the blood and lives of their children, fathers, mothers, etc. The rich are the ones pushing the most to get us into these wars, so let the rich pay for these wars with their gold.

One more thing, I think you can make a case for applying such a tax increase for as long as necessary to pay for the Iraq and Afghanistan wars, the entire cost both of which were put on the good old U.S. credit card without a peep out of those folks who love to complain about government deficits.

Next up: Secession Procedure

 

Living in a Remote Area

Living in a remote area is not nearly as much of a problem as it was twenty or thirty years ago. Vehicles are much better and more reliable that they used to be, although rough roads will still beat up the suspension. Communications have improved even more. The cell network in that part of Mozambique was well developed to the point that there were three cellphone providers in Massinger, the nearest town. In addition, I had satellite internet, so I could also communicate via email. Finally, I had a solar power supply consisting of solar panels, a set of batteries, and an inverter. The net result is that I was living quite comfortably.

What all of that means is that these days living in an area like it is more of a hassle than anything else. So, how much hassle would you be willing to put up with to have the experience of driving around a curve on a single lane dirt road and coming to a stop fifteen meters in front of a giraffe standing in the middle of the road looking right at you. So you sit there in the vehicle for 30 seconds to a minute watching the giraffe watch you and then you get out of the vehicle and stand behind the open door. Now that is a very different experience than sitting in the vehicle. You are no longer surrounded by the vehicle and you are no longer looking thru the windshield and across the hood at the giraffe. So you and the giraffe watch each other for another thirty seconds to a minute until finally the giraffe turns and walks off into the bush.

One thing you must understand is that an experience like this was not an everyday occurrence. You would see wildlife practically every day, but not as close as this. But the inside of the curve had some dense foliage, so the giraffe could hear me coming but not see me coming. That is why he was looking my direction when I came around the curve. Plus, I managed to stop quickly enough to avoid spooking him. Even the, most of the time the giraffe would have run away immediately, but this one stood his ground. So this was an unusual set of circumstances.

Earlier I asked how much hassle you would be willing to put up with to have such an experience. It should be obvious that I was willing to tolerate quite a bit of hassle and, in retrospect, I think it was well worth it.

The Racism of Donald Trump

I have an unusual background to comment on the racism of Donald Trump. I worked in Mexico City for a year and a half as a database consultant. I came away from that experience with the knowledge that Mexicans are, on the whole, honest, hard-working, intelligent people. Later, when I first retired, I moved to live in Xonghile Game Park, a private game park in Mozambique. I came away from that experience with the knowledge that Africans are, on the whole, honest, hard-working, intelligent people.

Note that I say ‘on the whole’ because any country or ethnic group will contain people who are dishonest, lazy, or unintelligent. Which is the same thing as saying they are comprised of human beings in all their glorious, and inglorious, variations.

What the racists do is to point out that some blacks are unintelligent and proclaim that all blacks are dumb, or that some Mexicans are violent and say that all Mexicans are violent, all the while ignoring the unintelligent, lazy, violent whites in their midst.

Neoliberals

I read a number of articles recently to the effect that liberalism has failed. I whole heartedly disagree. How can liberalism have failed when there has not been a liberal congress or president in nearly forty  years, and then only if you consider Jimmy Carter to have been a liberal, which he sort of kind of was. What has failed is neoliberalism.

Now you may think that Bill Clinton was a liberal. If you do then answer this question. What did Bill Clinton fight for in his two terms as President? He started out with health care reform, but he didn’t really fight for it and threw in the towel fairly quickly. He did fight for five things that I can remember.

  1. Welfare reform, which moved 800 to 900 thousand children into deep poverty, hardly a liberal thing.
  2. NAFTA, which has been devastating to working class people.
  3. The Anti-Crime Act of 1994, which greatly expanded the prison population.
  4. A tax increase on the rich. Now you may think that that was a liberal thing, but what did he use the money for? He used it to reduce the deficit, a conservative fetish, as long as a Democrat is President, once a Republican takes office they forget all about it.
  5. The repeal of Taft-Hartley. He didn’t really have to fight for that one since the Republicans fully supported it, but it contributed greatly to the 2008 financial crisis.¹

All in all a much more conservative than liberal list of accomplishments, which would be typical of the neoliberals. I don’t know what the accepted definition of a neoliberal is, or even if there is such a definition. I think of them as compulsive centrists in that they are always wanting to pivot to the center. That may work well as a campaign strategy but as a governing strategy it leaves a lot to be desired. With the Republicans moving ever farther to the right to the point that the party as a whole is borderline fascist the most the working class can expect from a compulsive centrist is a holding action. To make matters worse I recently read that the DCCC was recruiting blue dog Democrats to run against incumbent Republicans in 2018. So the DCCC thinks the best way to respond to the Republican moving ever farther right is for the Democrats to move to the right themselves.

Now there are signs that the Democrats in Congress are starting to take seriously some parts of the Democratic platform which would appeal to working class folks, such as the $15 minimum wage and free college. This is good, very good, but I don’t think it is enough. Besides, if the Democrats regain control of Congress by moving to the right it would still result in a Congress not particularly interested in helping the working class, and you would still have a Democratic establishment which is equally uninterested in helping the working class.

So, what to do? I think we need a new political party whose primary focus is the well being of the working class. Now I don’t know a whole lot about organizing a political party, especially about building a new party from the ground up. Notice what I just said ‘building a new party from the ground up’. The problem with new political parties in the recent past is that they have all tried to build their parties from the top down and that simply won’t work. If you really want a new political party you have to start by fielding state and local candidates to include mayors, governors, and state legislators plus congressional candidates. Once you have some people in place at the lower level people can see what you really stand for and who you are really trying to benefit. If they like what they see then your new party will grow and prosper. If they don’t like what they see then you will deservedly fade away.

Now, as I said, I don’t know much of anything about starting a new political party so what I am going to do is create my own hypothetical party, the Progressive Working Class Party or PWCP. Starting next Monday, the 21st, and each Monday for a few weeks thereafter I will propose a new plank for the PWCP platform ( one nice thing about having your own political party is that the party platform will be exactly what I want it to be).

Here is a list of my proposed planks:

  1. New SS system
  2. War tax
  3. Secession procedure
  4. Tax Reform
  5. End the war on drugs
  6. Replace NAFTA
  7. Medicaid
  8. Libel Reform
  9. School funding
  10. Gun control
  11. High school curriculum
  12. Short term corporate thinking
  13. National ID
  14. Worker’s rights
  15. Guaranteed minimum income

As I post them I will create a link in the list. Note that this list is not necessarily the order in which I will post them, nor is the list indicative of which I consider most important.

  1. Paul Krugman and others maintain that the repeal of Taft-Hartley was not the cause of the crisis but rather the collapse of the shadow banking industry that caused the crisis. I agree that the collapse of the shadow banking industry precipitated the crisis but it was the subsequent collapse of the big banks that caused the real problems. To put it another way, if Taft-Hartley had still been in effect would we have spent several hundred billion dollars bailing out the big banks? I don’t think so.

The Problem in Politics Today

The biggest problem in politics today is obviously money. The Citizens United Supreme Court decision basically put Congress up for sale to the highest bidder. The result is that the establishments of both parties are controlled by billionaires or near billionaires.

This does not mean that the parties are the same. The billionaires controlling the Democratic establishment are mainly from Wall Street or Silicon Valley and are center, center right, or even center left. The billionaires controlling the Republican party are from the energy sector (which are dominantly Republican) as well as Wall Street and Silicon Valley and are right, far right, or very far right.

The problem for working class people is that neither party is particularly interested in doing any thing on their behalf. Again, this does not mean the two parties are the same. The Democratic attitude towards the working class is akin to Richard Nixon’s stated attitude towards civil rights, name one of benign neglect. The problem with that attitude is that Nixon’s benign neglect of civil rights was counter-balanced by a Democratic party that was still pushing for civil rights while the Democratic attitude of benign neglect towards the working class has in the opposition Republicans a party which is downright hostile towards to the working class.

The result of this has been a slow but sure decline of the economic well-being of the working class. The Democrats will often actively oppose the attempts by the Republicans to tear down the working class, but the Democrats have done virtually nothing to boost their economic well-being. So as long as the attitudes of the party establishments stays as is the working class can expect to suffer a continued slow economic decline.