Wednesday, December 17, 2008

Lower Treasury Rates - Affect on Social Security

We all like lower financing rates. It allows us to buy more for less, or keep more of our money. However, with lower Treasury rates comes a price few think about. Social Security’s surplus cash which only amounts to about $60 billion in 2009, possibly less with higher unemployment, will see this new money earning the market rate of 0 to 0.5%. This means the trust fund as it rolls over higher treasury notes, those 10 year notes earning 8 to 9% will now be earning less than 1%. The result is the unfunded liability of SS-OASI just went through the roof. The longer the treasury rate is low, the larger the unfunded liability will grow.

With a 5% treasury rate, the present value of liabilities was about $19 Trillion. With the yield dropping, and about $200 Billion in treasury notes maturing each year, we could see a slight impact of several years on the ability to scheduled benefits in full. The impact is really smaller than many realize. The yearly cash surplus from Social Security OASI is small and decreasing. It will go negative in about seven years.

I guess what is good for the country, low interest rates, is bad for Social Security and Medicare. This should make many rethink the purpose of placing over 80% of one’s potential retirement savings in one single entity that they have no control over.

Tuesday, December 16, 2008

Question - What is a pyramid Scheme?

Today on WOWO Charlie was describing the latest $50 Billion swindle on Wallstreet as a ponzi scheme. With billions of dollars invested from charities, retirees, pensions and others, he said this was like sentencing people to poverty or something to that affect. He came across as being totally disgusted that this occured and could happen. Well guess what, even though $50 billion is a lot of money it is a far cry from the single largest ponzi schem that is still in operation. So what is a ponzi scheme? The name comes from Mr. Ponzi who tried to give investors great returns.

The definition I have heard and use goes something like this:
A person, whom I will call the seller, asks another person, whom I call the investor, to invest in a scheme. The seller of the scheme asks for a lump sum or a periodic payment into an investment proposal from the investor. In return the seller promises a return to the investor. Normally the return is far greater than can be obtained by the seller. It is not based on any actuarial basis and the risks have not been fully disclosed nor identified.

The seller normally provides a statement showing how well the fund is doing. This statement shows the buyers investment is paying off as stated. This can be in dark contrast to a reality. The seller will show new prospective investors the statement as proof the investment is sound.
What normally happens is the first investors are being paid their promised returns from two sources. One source is real returns and the other is from the contributions of later investors. The seller was unable to earn the stated return on the original investors money. The seller is forced to use some of the money received, for investment, from new investors, and show it as a return on the original investors money. It is a game of moving money around to show investors good returns, keep them happy and unaware there is a problem.

When the seller can no longer enroll new investors, they have a problem. They can not indefinitely continue to pay unreasonable returns. Without new investors, the sellers cash flow is insufficient to pay promised returns to all the investors. When this happens, the investors tend to become angry with the seller. Those who were the last ones enrolled normally loose the most.
Old Age Survivors Insurance began with a low tax rate of 2% and promised to pay a return in the form of a benefit equal to 42% of ones average wage. Was this sound? Based on the investment vehicle (US Treasury notes), United States Wage Growth and Inflation at the time, the tax rate was over five times too low. It should have been 11.83% and this does not count the original unfunded liability based on some paying only a few years before benefits were paid.
Just as a pyramid scheme requires ever more participants to keep its current participants happy, Social Security ran into the same problem in the early 1950's. OASI ran into difficulty when the benefit expense began to grow faster than revenues. The US Treasuries were being redeemed thirty years before they should have been. This Trust fund should not have been tapped until well after all the original participants had retired. To keep the system afloat, they redeemed the treasuries masking the real problem. But some smart people finally realized the trust fund would be exhausted in a few years and the game would be up.

To keep the original participants happy (continue the payments of benefits) and make it appear Social Security was a great idea, they increased the OASI tax by 50% to 3% and then increased the Base by 50%. At the same time they enrolled more non covered workers into Social Security. This is exactly what a pyramid scheme needs to do in order to continue to survive. It needs new investors. The new participants contributed revenue but by and large would not retire for decades.

In the 1960's the problem became acute when once again Social Security began to run deficits and the trust fund was being redeemed much earlier than it should have. They then increased taxes, the base and enrolled all those workers who were not covered by Social Security. Again social security increased its revenues to pay current participants and keep them happy (buy votes and PR) while also increasing the tax and base.

By the 1970's the problem was really becoming acute. Almost every worker was covered. There were no more non-covered participants (suckers). The seller could not admit benefits would have to be cut to continue Social Security. The seller would loose the senior vote for sure. The only thing left to do was raise the tax and base even more. But even raising the tax and base proved insufficient and now the seller had to raise the retirement age.
Social Security is the "standard" for what a pyramid scheme is. I do not think there is any other pyramid scheme which has existed as long as Social Security, which has suckered as many people and which will destitute more families in the history of the world.

You can define pyramid scheme in two words "Social Security."

How much has Social Security Old Age Survivors Insurance promised to pay in currnent dollars? Well by my calculations it is just a tad over $19 trillion. How much does it have in the trust fund to pay these benefits? The SS-OASI trust fund has about $2.2 Trillion. In other words it is 90% unfunded.

Mayor Henry - dumbing down

Mayor Henry signed the light ordinance yesterday saying that is was not that weak of an ordinance, yet wanted small changes to exclude sporting events and holiday lights. We hear about dumbing down of America. We seek perfection in schools. Is this signing not a good example of mediocrity? If the bill was not that weak, but needed only small changes why not veto the bill and have the city council make the small changes and resubmit the ordinance? Why allow mediocrity at this low level?

However, on a more important note, if light is a nuisance, why then define sporting events with lots of lights as not a nuisance? Why exclude any particular light from the ordinance? Do the wishes of the many our weight the wishes of the few? Should the state be excluded from abiding by its own ordinance?

We also see mediocrity in the bailout, lifeline or rescue plans floating around. All agree that they need to protect the taxpayer, yet there are no provisions. All agree that this will not save the auto industry, but it is a start. If the consensus is, it will not save the auto industry by itself, what will? Why travel into the unknown without at a least a contingency plan? All agree that the cost in building a car is too great and that buyers choose based on cost and quality. Unless the cost comes down, the big three will not be able to compete on a level sufficient to survive. Therefore, they must agree to cut costs that allow a sustainable business plan that can work.

We do not throw good money after bad. If you want taxpayers help, then you need to sacrifice more than those you are asking the help from.

Bad or known legislation that needs to be fixed later, should never be passed to begin with. There is no assurance that the required changes will ever be made after it passes.

Monday, December 15, 2008

Congressman Souder Does not get it.

Congressman Souder voted for the "lifeline" for the auto industry. He said the GM plant was the largest contributor to the United Way, property tax revenue would drop, socail services would suffer and they employ workers with disabilities. Guess what Mark, as a percent of the total work force they are small. Sure they are the single largest, but that still does not make a case for giving them our money. We are all suffering and to single them out over everyone else or to place more burden on those already struggling is wrong.

If you want to be a humanitarian, then use your own money, but do not use taxpayers money for humanitarian works. Each taxpayer has the choice to decide their own humanitarian priorities, not the government.

Wind Power Update

Who believes wind power cannot deliver as much as nuclear power?

Today “National Wind Solutions, Inc. (PinkSheets:NWND) announced today a Letter of Intent to lease 210 acres of land in Central Texas for a major new wind power project. The Agreement gives the Company access to land for the development of a 30 Mwh wind farm. Once completed the wind farm is expected to generate over $60 million in revenue over ten years.”

The company plans installing twenty 1.5 Mwh wind turbines. GE announced this year it has shipped its 10,000th 1.5 Mwh wind turbine. This is 15,000 Mwh or the equivalent of seven nuclear power plants without producing ANY radioactive waste! GE has been selling wind turbines for five years. Seven Nuclear power plants would have cost at least $5 billion each and during the past five years not one would have been placed in service even if it had been approved and construction started.

Friday, December 12, 2008

Bailout, rescue plan or lifeline?

The term given to the Auto Industry debacle is not bailout nor is it rescue plan, but a lifeline. I guess this is more palatable. The hard cold fact and truth is that for every $1 billion in government aid, it burdens each American Family $10. That $10's is your family’s share of the burden. This burden of course will not be paid this year or next year, but even worse is that you and your family will pay forever the yearly interest cost. It may not be much, 50 cents per year, but over time compounded, those 50 cents add up. After 20 years, your family will now be paying $26.53 a year in interest for the $10 congress borrowed this year and that will not include paying anything towards the principle.

Our elected representatives have had this same method since 1958 to the tune of $9.3 Trillion. Borrow money, pass the cost on to the next year and let someone else figure out how to pay it. As a result, the U.S. Dollar fell in value, resulting in record oil prices shoving us into the worst recession in decades if not worse.

Borrow, borrow and borrow more. A borrowing we shall go is the tune our representatives have been singing. The problem is borrowing is what got us into this mess to begin with.

  • Loans to people who could not afford them
  • Credit loans so people can buy now instead of saving to pay for it when they could truly afford the item.
  • Washington borrowing $9.3 Trillion over 51 years to satisfy special interests, everything from tax credits/exemptions for mortgage, charity, children, elderly, medical, taxes, IRA, 401K, Roth IRA, ethanol to spending projects such as bridges to no where, methane gas from cows, to buildings to house private collections such as the Kruse museum.

We wanted it now, did not want to pay for it, did not hold our representatives accountable for their actions and now we are basically broke. Now these same representatives want to borrow trillions in the hopes it will fix the economy, when it is this very borrowing that put us into the worse recession in decades.

The UAW who knows the company they work for cannot afford their wage and benefits, yet will not renegotiate new contracts that fit within a business plan that can produce cars that people can afford and want to buy. If there is no demand for a product, then that product dies out. That is why there are very few companies making the slide rule. That is why there are few people plowing fields with horses. It is why roman gallies have disappeared. If there is no demand for the product, it ceases to exist except in collections. The auto industry is no different. If you fail to change and adapt, then you will be left behind.

A failure on your part to change, adapt and help yourself does not constitute a need for me to give the UAW a handout.

Thanks to the U.S. Senate, the taxpayers have a reprieve.

Thursday, December 11, 2008

Congressman Souder votes to take money from YOUR FAMILY!!

On November 4, 2008 the voters of Indiana’s 3rd congressional district had a choice between Souder, Montagano and Larsen. Souder voted for the bank bailout of $810 Billion. Montagano stated had he been in office it would have been a different bill, but still voted for one. Larsen said the bailout was wrong and would have voted no. The auto industry has requested $14 billion in loans. A bill referred is not called a bailout or rescue, but a lifeline to the auto industry has passed the house of representatives with our congressman Souder voting for it.

Mark Souder stated in the debate that he could not just sit by and let America go down the tubes. For every $1 billion in bailout, it costs each American Family $10. The bank bailout has cost you $8,100. The lifeline to the auto industry is another $150. The recently passed Term Asset-Backed Securities Loan Facility (TALF) for student, auto, credit card loans totaling $800 Billion or another $8,000 to each American family.

Yes, Souder has had no difficulty voting to TAKE over $16,250 from your family in order to help less fortunates who mismanaged their own finances. What do you think of this?

Wednesday, December 10, 2008

No Bank would loan, why us?

Our elected representatives are criticizing Fanny Mae and Freddie Mac for having such loose loan requirements. They are grilling the past four CEO’s of these companies over mismanagement. Yet these very same representatives are turning around and formulating loans to the auto industry that no bank in the world would make. The taxpayer is not in the business of making loans. Congress has not been able to manage the taxpayer’s money for decades. Need some proof? The last budget surplus was in 1957!

If no bank in the world would loan the big three a single penny, why on earth are our elected representatives even contemplating a loan?

Tuesday, December 09, 2008

The Auto Bailout - Again

The proposed bailout for the auto industry is still not a done deal. This is good. It maybe that our elected representatives have decided to take more time and not react to emotion, but instead use common sense to look at the issue (we can only hope).

Can the auto industry under its current business plan survive with $34 billion from the taxpayers? I say categorically no! The basis for this is to look at the past ten years. What has been the trend in auto sales, jobs and profits during this period of time? The root cause of the auto industry demise is its business plan. The unions have negotiated very good benefits and wages for is members. The Auto Companies instead of accruing the cost for these good benefits each year they were earned decided to pay future liabilities out of future company revenues. By doing this, they made the earlier years look better than what they actually were.

For example if the contract calls for paying 95% of a worker’s wage for one year for each laid off worker, then the company needs to plan for this circumstance. What would the cost be to a company if 100% of the work force were laid off? This is an extreme case, but it now looks like it could very well be a reality. The sum total of workers at GM if they number 1000,000 workers making $50,000 a year would require $5 billion just to pay this contractural contingency. Did they set these funds aside, no? Did the auto industry routinely set aside the cost of healthcare and pensions, as they came due, no? Did they make up delayed payments when missed, no? Had they, they would not be in this mess.

In simple terms their business model for running a car company does not work. The only way business model that will work competing with other car companies for market share is to build a car with equal or better quality, selling at the same price or cheaper and making a profit. From what I have read and heard, the Big three Auto Companies healthcare costs, benefits and wages are so high, that they cannot cover these costs with the cars they sell. This means their business models will not work and any taxpayer funding of their current business model is a waste of money and a very bad deal for taxpayers. No matter how many other industries are affected, a bad business plan only deceives the taxpayer, consumes valuable capital and over the long run is worse for the country.

The best thing that can happen is for the unions to renegotiate contracts, which make a long-term business plan successful. First off, the unions do not have time to renegotiate these contracts before the company’s burn through their cash. Second, retirees are unlikely to renegotiate their benefits. Since neither of these two conditions can be met voluntarily, the only way for them to be met is for the companies to file chapter 11. This will void all contracts and create a clean slate from which companies to negotiate, keeping in mind the market price of cars, the quality premium if any for their product and the material cost. Labor costs have a ceiling above which the company cannot survive.

Inevitably, these auto companies will eventually file chapter 11. The sooner they do so; the sooner workers will have more secure jobs.

NWAC - Planning

I heard on WOWO at about 7:30 am that a vehicle on Carroll Road struck a pedestrian. I have had to take my daughter to Carroll a couple of times this school year. The traffic in the area of Bethel and Carroll Road is just terrible. The construction at Carroll High School has made the drop off students and residents attempting to get to work a nightmare.

I met with the demographer and superitendent of NWAC concerning the demographic studies a couple of years ago. It was my opinion a second high school should be built instead of one large school. This would have eliminated the congestion we now see with construction as well as reduced the traffic in this residential neighborhood in the future. I can only imagine when the school reaches its capacity of 2,800 students just what the traffic will be like. I certainly would not want to live in this area and have to deal with this every morning.

How much money would NWAC schools have saved by constructing a second high school located several miles away in terms of fuel, transportation time, maintenance on busses, congestion, and redundancy? What will NWAC do when the capacity is exceeded? Will they add on again or build a new high school, thus having one super sized and one small high school? Have they even thought this far a head? I know that it is too late to turn back the clock, but we should keep in mind who made the decision to renovate Carroll instead of constructing another school when it is time to vote for our school board.

Friday, December 05, 2008

Proposed Two Month Tax Holiday

On WOWO and also on Leo’s Blog there was/is discussion on a plan to create a two money tax holiday. This tax holiday would be composed of both Federal Income and Payroll taxes. For two months workers would have none of these taxes withheld from their paychecks. The thought is this would stimulate the economy. The question is, is this a good or bad idea?

The basic facts are:

  • Less than 40% of all workers pay any federal income tax.
    • Though many workers have federal income tax withheld, many get 100% of what was withheld back come April 15 at tax filing time.
  • 100% of all wage earners have payroll taxes withheld up to $102,000
      • 1.45% for Medicare
      • 0.9% for Social Security Disability
      • 5.3% for Social Security Old Age Survivors Insurance

Total Payroll tax is 7.65% for each employee and employer

WOWO's Pat White stated if this were to be implemented, then the taxpayer (you and I) would finally see how much tax was being withheld and this would cause a tax revolt.

What would such a holiday do for the economy? The Federal Income tax would have little affect on middle income workers. The amount they pay is small if any. However, the payroll tax would have a huge affect. This would amount to a 7.65% increase in take home pay. Considering the savings rate of the US is near zero, this would be a tremendous boost in discretionary income. Many families struggle to pay for health care, college, save for retirement and save to buy a home.

The problem is this would dramatically increase the deficit this year if Federal Income taxes were abated for two months. It would also increase the Unified Budget Deficit as well.

Pat White believes two months of a payroll holiday would not be bad, but extending the holiday on payroll taxes indefinitely is bad. The reason is seniors and soon to be boomer seniors would not stand for this, they want their entitlements. What became clear is that Pat White has the misconception that both Seniors and Boomers out number all other potential voters in theUntied States. He disagreed that the children of the boomers out number those over 46 by 20%. What are the actual numbers?

18-46 121,062,403
47-61 61,411,573
>62 46,195,866

>46 121,062,403 13%
<47 107,607,439

This two month tax holiday is not much different from what I have been proposing for decades. The only difference is that I would repeal the broken Social Security program pertaining to SS-OASI and allow the worker to keep both portions of the payroll tax for a total of 10.6%. We would use the SS-OASI trust fund to pay a means tested benefit to those found to be in need based on assets, not income.

What would my plan do?
  • It would finally recognize what we all know, Social Security cannot pay future benefits in full.
  • Social Security OASI is a bad deal for all workers today.
  • It would stimulate the economy by making families self sufficient and less dependent on government (we the taxpayers, US).
  • It would provide the needed capital for college, health care, retirement, buying a home and more. It would restore the American dream where in a land of opportunity, a person can work hard and prosper.

Tuesday, December 02, 2008

Automakers' relief efforts show lack of commitment to U.S.?

The News Sentinel printed a letter from Becky Severe of Hudson. She identifies the contributions made by auto makers after 9/11.

"You might want to give more consideration to a car manufactured by an American-owned and/or American-based company. Apart from Hyundai and Volkswagen, the foreign car companies contributed nothing at all to the citizens of the United States."

I guess I take issue with anyone who believes companies need to be charitable. As a shareholder in many companies, the purpose for which I invest money in them is to make a profit. It is not for them to be charitable. Their purpose is to make money without breaking the laws. Those who own shares were not asked if the company (the owners) wanted to contribute. The purpose of human beings is to be charitable based on their ability and their conscious. It is this disconnect that is choking America.

Too many people look at companies as evil, greedy, but in reality they are the sum total of many people of different beliefs. The feeling one gets from helping others is great. The problem is this feeling does not exist when a company gives money or the government agency steps in with aid on YOUR BEHALF. It creates a disassociation between the giver and the receiver.

Davy Crocket had the correct idea.

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Good and Bad News

Good news from bad news is that the recession officially started in December 2007. This means we are 13 months closer to this recession’s end. The bad news is no one knows how bad this recession is. I myself think this is the worst one in my 52 years.

Black Friday

Black Friday is reported to have seen increased sales of 7.2% over 2007 over the four-day weekend. I know my wife says she has completed most of her purchases and has several to return. What she found as the day went by, were ever better deals for the same identical item. She separated the things to keep from those to return. Depending on how many other buyers did the same thing, this 7.2% increase could evaporate. On top of this, the discounts that were offered to entice so many may be the only way for stores to “unload” their inventory by January ‘09. This means many stores will make very little or actually lose money for the year. It is my understanding that department stores actually run a loss nearly all year and that Christmas sales are what creates the profits necessary to stay in business.

I normally do not partake of the mad buying on Friday, but this year I did. I ventured out or should say my son did with his friends Thursday night as proxies to secure a spot in line to obtain those limited quantity, highly reduced items. My son while he was there was able to secure for me my purchase, which I picked up when I arrived at 5:00 am. Within a half hour I was back in my car driving home. One secured a coveted blue ray player of which there were only four units to begin with. What I found unusual was that Wal-Mart did not have the MP3 players in the electronics department, but were in the auto department. When I arrived and had paid for my purchase, these highly sought after MP3 players were still available because nearly everyone thought they were sold out because they could not be found in the Electronics department.

Apple Cider

I like apple cider and made a purchase of four one gallon jugs from Meijer’s a few weeks ago. I thought they would go well with our Turkey Dinner. We had no problem with the first three. But a day or two prior to the expiration date, I saw a jug had ballooned out considerably. I decided to take it back the next day and get a refund. The next day came and I found only about one inch in the jug. It had exploded sending its contents across the counter and onto the floor. The container had been placed in a box with a lid, which likely saved us from a much larger mess. The moral is, if you think the apple juice has turned to apple jack, drink it or take it back, don’t wait.

Monday, December 01, 2008

Identity verfication - is this a joke?

I came across this this morning. It is touted as being one of the most secure. It uses public information from county and city records. Information includes Name, Address, City, State, zip code, SSN and Date of birth. It then will asks a series of questions based on your credit file. Do you have to get them all correct, no? How many do you need to get correct is confidential.

I have had to deal with security issues in the past. The basis is on a need to know. When dealing with public information as stated above, none of this is secure. Credit reports are easily obtained. If this is one of the most secure means of identifying an individual, then we are all in deep do-do.

An important update about ePayroll
The next time you log in to ePayroll (powered by TALX) to view your paystub online, you may be prompted to reset your password. If so you may be required to verify your identity by answering a short series of questions when re-setting your password. The questions are designed to properly identify you and to protect your privacy.
What is important to know about this security upgrade?
This security methodology is validated by TALX to be one of the most secure on the market.

  1. The types of questions you will be asked are a matter of public record and are similar to what you might find on a standard credit application.
  2. TALX uses public records and an identity verification service to generate the questions. Your responses are completely confidential and none of the responses are stored for use for any purpose.
  3. Your new PIN must be a minimum of 4 numeric characters.
  4. The frequency of the authentication questions will vary and may not be required every time you reset your password.
  5. This new security feature applies to both ePayroll and W-2 eXpress services.

Please note that employers are not involved in this security verification process. Any information communicated to Talx in the process of verifying your identity is strictly between you and Talx to ensure your complete privacy.

NBC-33 Debate poll results from 2002