August 26, 2012

The Great Social Security, Medicare, Medicaid And The Health Care Debate

Let’s Talk Dollars And Cents/Sense!
By Melvin J. Howard

In the U.S. the main redistribution function and associated safety nets is a bit more like a type of "insurance" against personal economic disasters, whereby the risks of such events are spread across the society as a whole. For example, the risks of no longer having access to money due to retirement or disability - which is what Social Security covers - are borne by society as a whole, which has a much larger capacity to bear that risk, than do the individuals likely to experience such events. The drastic consequences of placing these risks on just individuals became very apparent during the Great Depression, that lead to the establishment of the Social Security system. The purpose of any insurance is to pool risks so that each individual in the pool lowers their own risk of some crippling disaster for a small annual fee paid to the pool. Therefore any insurance mechanism is necessarily re-distributive. "Insurance like" i.e. federal taxes such as Social Security are more re-distributive than any private sector insurance because those with the highest ability to bear the related risks (those with high incomes) get the lowest expected return on their contributions to the system.

In addition what is really happening, as we shall see, is that current workers contributions are always paying for current retirees in the system and there really isn't any "saving for the future" going on, as is so often presented to the public. Such a progressive risk sharing mechanism could not work in the private sector, which is why it was founded in the public system in the first place.

The following is a quote from Keynes' book "A Tract on Monetary Reform", written in the roaring 20's at a time of a roaring increase in income and wealth gaps globally, that covers both the government's role in market existence and in redistribution: "Nothing can preserve the integrity of contracts between individuals except a discretionary authority in the State to revise what has become intolerable.

The powers of uninterrupted usury are too great. If the accretions of vested interest were to grow without mitigation for many generations, half the population would be no better than slaves to the other half. Those who insist that the State is in exactly the same position as the individual, will, if they have their way, render impossible the continuance of an individualist society, which depends for its existence on moderation.

"Normally the largest and most debated government spending items in any country at any time is related to Military Spending, Social Spending, and Interest on Government Debt. Let’s discuss the very much forgotten, ignored and taken for granted relationship between money and tax.

Most residents of any country today will be charged taxes by their government on any income they make in their private activities. Tax is the most common liability all people must meet and therefore people like to earn all or some of their income, and accept payments in, a medium of exchange, or form of money, that can be used to meet tax liabilities. It is also in the government's best interest that people get paid in a medium of exchange that it accepts for tax payments, as well as in banks' best interests that checks drawn on bank deposits are suitable to the State as a form of payment to meet tax liabilities.

Therefore, to the extent that people are agreeable to a system of government taxation, everyone's best interests are served by a significant proportion of money in circulation being that which is acceptable to the State to meet tax liabilities.This is why our major medium of exchange today, is the U.S. Dollar, it is created through what is really a joint venture between the Treasury Department of the U.S. Government, and the private banking industry through their bank deposits, and the Federal Reserve's role in creating "high-powered money". Federal Reserve Notes created by the Federal Reserve System and blessed by the US Treasury as being legal tender for all debts Public and Private can be used to pay taxes, but most people use drawings on bank balances to pay tax bills instead. The State, through its role in issuing banking licenses, regulating banks and being the ultimate risk-bearer in the case of bank failure, blesses payments using bank-created money, which are just electronic records, as being good and well for meeting tax liabilities.

The mature development of this system of State-blessed, bank-created money really came about with the founding of the Federal Reserve System in 1913 and the re-introduction of the Federal Income Tax in this same year. These events both played a significant role in financing America's involvement in World War I. Today's U.S. Dollar money system, and the links between the State and the private banking industry, were further strengthened by State action, such as Federal Depository Insurance, after various learning experiences such as the '29 Crash and the Great Depression.

Today, many years later, many people don't think about these interesting ties between what the State accepts as payment for taxes, the money that banks create, and the money we get paid in for our work. Instead we just take it for granted that it's all the same "stuff". But it took many years and learning from financial collapses to get it to its present state and, indeed, part of its success and stability is the fact that most people never stop to think about it. So stable, so unquestioned even with the recent down-grade by S&P and so unchallenged is the US dollar system today, that the U.S. dollar and promises to pay U.S. dollars in the future by the U.S. Treasury are without doubt the safest of all financial assets in the world. Hence the U.S. dollar and U.S. Treasury bonds (promises by the U.S. Government to pay U.S. dollars in the future) are known as the "risk-free" set of financial assets. Risks of all other financial assets are higher and are measured against this "risk-free" benchmark. Of course there is a caveat that there are some risks - basically, that Washington D.C. will continue with grid lock negotiations on the federal budget. But right now there is no expectation of this in the market so the $USD retains its "risk-free" status especially compared with the global credit markets.

When you think about saving for future retirement it is this status of the $USD that is critical to thinking about funding Social Security, Medicare, Medicaid and Health Care. The understanding of State-sanctioned, bank-created money at such a fundamental level lies at the heart of this debate and helps us understand the reasons that a publicly funded U.S. pension system CANNOT be pre-funded by an investment trust in financial securities. This basic understanding of money is achievable for anyone, whether you have studied finance theory or not.