May 27, 2024 

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GOVERNMENT PURCHASES DETERMINANTS: Ceteris paribus factors, other than aggregate income or production, that are held constant when the government purchases line is constructed and which cause the government purchases line to shift when they change. Some of the more important government purchases determinants are fiscal policy and politics.

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This may be the greatest day of my life. The musical group to top all musical groups -- The Strollers -- has just released its latest CD with a song that's certain to be a foot-tapping classical. Of course, you know the song of which I speak -- "Sidewalking." Let's stop into the Musical Sound CD Emporium in the Shady Valley Central Town Sprawling Hills Shopping Mall and fulfill my dreams. Everyone in Shady Valley, however, does not share my joy. As the seventeen year old Emporium clerk, Alicia Hyfield, completes my transaction, she confesses more than a bit of disgruntlement over here just-issued paycheck. A little investigation reveals some displeasure with the size of the FICA deduction. Her disgruntlement isn't lessened to know that this is for the government's social security program that's suppose to provide a source of income in her golden years. She seems more than a bit skeptical of ever seeing any returns. Maybe we can alleviate her concerns (and mine) with a quick run through social security.

A Safety Net

Our social security system was established, along with several other social programs, during the Great Depression of the 1930s. This was a time of exceptionally high unemployment and suffering by millions of people with little or no income. In a rare move of siding with the workers and consumers of the third estate, government instituted a number of programs to protect the citizenry against economic hardships. Our current social security system that provides a source of income for the elderly, disabled, and their dependents is one. Another program for the poor was also started in the 1930s.

Here's how our social security system works:

  • Collecting the bucks. The social security system gets its money from taxes collected on wage and salary income. This is somewhat important, because unlike the income tax system which taxes income, only wage and salary income is taxed for social security. Income not taxed includes interest, rent, and profit. Employees pay about 7 percent of any wages up to a given amount (currently over 50,000) into the social security program (this is the FICA paycheck deduction). Employers pay an equal amount. I'm being a little fuzzy on these numbers, because they're subject to change -- that is, increase. Anyone who pays into the system for several years is then eligible for benefits.

  • Paying out the bucks. You get a check from the social security system if you're elderly and retired, disabled, or a dependent of someone who is disabled (like an orphaned child). In that the social security system was designed as a safety net for people who couldn't work, recipients get fewer benefits if they are able to work and earn extra income. However (and this is an important "however"), social security benefits are unaffected by any non-working income, like retirement income from private pension plans, divides from Fortune 500 companies, or rent on oil-rich farmland.
A Net with Big Holes

You might have noticed a few second estate versus third estate problems:

  • First, while the system was intended as a safety net to help poor disadvantaged workers, you don't need the money to get it. There's nothing to prevent that bastion of the second estate, Winston Smythe Kennsington I (our friend Winnie's grandfather), from collecting a monthly social security check. Winnie I is officially retired, but has gobs and gobs of income from stock dividends. The irony in this situation is that someone like Lewis Langley, a retired shoe store clerk from right here in Shady Valley, will have difficulty paying his monthly bills with his meager social security check. While he can work part time at the shoe store for a little extra income, if he earns too much, he'll lose his social security benefits. Not so for Winnie I. There's no limit to non-wage income.

  • Second, because the FICA tax is collected only on wages salaries up to about 50,000, but excludes everything else, it hits workers of the third estate hardest. Most card-carrying members of the third estate have little or no rent, interest, or profit income. The second estate, however, gets a bunch of income from rent, interest, and profit. Moreover, the darn tax is paid only on the first $50,000 of wage income (depending on the current limit set by Congress). Someone who earns $10,000,000 in wages each year pays exactly the same FICA tax as someone who earns $60,000. This is what we call a regressive tax.
Is This Any Way to Run a Retirement System?

Let's take this opportunity to dispel a myth -- the social security system is NOT a retirement program. The social security system collects taxes from people who are currently employed and gives that money to people who are currently retired or disabled. Unlike most private pension plans, there are no dollars set aside with your name on it. The amount you will eventually collect has NO relationship to the amount you pay.

With many private retirement programs, if you pay in bunches of money, then you stand to pull out bunches of money. The dollars paid in are typically invested in stocks, bonds, or other similar assets. Upon retirement you can cash in those suckers and start spending the money.

Under the social security system, the amount of your retirement benefits depends on the length of time you paid into the system, but not on the amount paid in. Most importantly, it depends on the amount of taxes workers are currently paying into the system. You collect big bucks when you retire, if our economy has a bunch of young, healthy, productive workers who earn a lot and pay a lot of FICA taxes. If you don't have that pool of productive workers, then you don't get the bucks.

Enter the Baby Boomers

The current and future of the social security system depends heavily on a group of people that have achieved the distinctive title "Baby Boomers." This generation, born between 1946 and 1960 (in no small part because the long-hungry soldiers returning from the war), is extremely large, well-educated, and productive. There were many more babies born in the Baby Boomer years from 1946 to 1960 than directly before (1931 to 1945) or after (1961 to 1975). This is good and bad.

  • First, the good. Because there are a lot of Baby Boomers who began entering the labor force in the 1970s and are real close to their peak of productive lives, they're contributing tons of money into the social security system. This has been a gold mine for those who retired in the 1980s and earlier. Many current social security recipients have been able to get back several times what they paid in. (However, least we seem too critical of these elderly, retired folk for living off of the hard work of the Baby Boomers, keep in mind that investments in 1950s and 1960s by these elderly, retired folk made it possible for the Baby Boomers to be well-educated and productive.)

  • Second, the bad. In the year 2011, the first of the Baby Boomers will hit their 65th birthday, with aspirations of many golden retirement years ahead. By the year 2025 most of the Baby Boomers will be in retirement. If this large, productive group is no longer working, who's going to pay into the social security system and supply the big, big, BIG bucks needed to pay for the Baby Boomers golden retirement years? Remember, we didn't have very many babies born between 1961 and 1975 (often termed Generation X). Each member of this smaller group will have to pay a lot more into social security system to keep Baby Boomers up to their accustomed lifestyles.

Let's consider a few of the options when those Baby Boomers reach retirement age:

  • Don't retire. One way to reduce the payments to retired Baby Boomers is to keep them from retiring. By the year 2011 the retirement age for full social security benefits will probably be 70 rather than 65. It's already on it's way up to 67. People weren't expected to live much past 65 when the social security system was established in the 1930s. Now that life expectancy is approaching 80, later retirement makes a lot of sense whether we have a bunch of Baby Boomers or not.

  • Boomers get less. A second option is that baby boomers will be forced to divide up their retirement pie among a larger number, with each Boomer getting a smaller share. A word of warning. The Baby Boomers represent a large group, as in voters. Throughout their lives the Boomers have gotten what they've wanted in terms of politics, culture, etc. And noting that older people tend to be more politically active and vote more, its hard to image a politician doing too much that would upset these elderly Boomers.

  • Others pay more. That leaves us with the third option, those in Generation X and the rest, will be forced to pay more into the social security system. The big question is whether they can afford to pay more. If the Boomers demand more and but the economic pie isn't big enough to accommodate them, we're going to be in a heap of trouble. The solution, of course, is a bigger pie. All of those Generation X workers need to be very, very well-educated; very, very productive; and earn gobs and gobs of income.
Getting the Most from the X Generation

The path to a larger economic pie is investment and economic growth. If Generation X is going to be part of an expanded our pie, then our economy needs to improve the quantity and quality of their resources before the Boomers retire. That means foregoing current consumption for investments in capital, education, and technology -- to name the three most important ones.

Now for the bad news. We don't seem to be making these needed investments. If we don't make them now, it will be too late. Let's have a roll call of bad decisions made over the last few decades that could spell a pretty dreary retirement for the Boomers.

  • Government consumption. Our government, that well-meaning group in Washington D. C. and the assorted state capitals through out the land, has tended to spend more tax dollars on consumption goods and fewer on public investments. Examples of government consumption include national defense, fire protection, law enactment and enforcement, bureaucratic paper shuffling, and encouraged or subsidizing private consumption. I'm not saying this stuff is totally unneeded, it just won't help future growth.

  • Government investment. There hasn't been an overwhelming move by government to invest in assorted public goods, like transportation systems, education, and scientific research in recent decades. Sure we had that NASA moon shot back in the 1960s, but other than the interstate highways system of the 1950s and 1960s, the government hasn't gotten really fired up about public investment. An occasional billion will be thrown at this project or that, but nothing to rival expenditures on defense or other consumption programs.

  • Business investment. The 1980s stand out as a decade of intense business investment. But not in newly produced, economic growth enhancing, capital. It was "investment" in mergers, buying out this company or that company. A lot or our nation's resources were used to trade assets rather than create new ones. Bad move for the Boomers.

  • Household consumption and saving. Over the years you, me, the Boomers, and everyone else has gotten heavily involved in consuming stuff. That's fine in that it satisfies our wants and needs. However, in the process, the share of income we save has dropped. It is this saved income, we should note, that's used by business for investment. With less saved, it becomes more difficult for businesses to produce new capital. We can top off this problem by noting the big runup in the federal deficit in the 1980s absconding with an increasing larger share of oiur dwindling pool of saving.

With these tidbits of information in mind, the prospects of a big increase in the economic pie in the near future doesn't seem bright. In spite of the likely political power to be had by the retired Boomers, I don't think they should count on a golden retirement from the social security system.

So, what can we do about social security? Here are a few tips:

Social Security Tips

  • First, don't count on much of anything from the social security system. If you're a Boomer, then you had better get yourself into private retirement programs. Even those programs may face similar problems if the economic pie doesn't grow enough. Remember, whatever the source of you income, it all comes from the same economic pie.

  • It's not be too late to get the government off of it's short-sighted fanny and pursue the pie-augmenting investments we need. But, it will be for the Boomers when the year 2020 rolls around.

  • If you're currently working, you had better plan on continuing until your 70. The 65 year old retirement age will probably be locked away in the same museum as the pony express and black and white televisions.

  • If you're currently retired, enjoy it while you can. You also might want to be a little careful about squeezing too many benefits from the current system. If the Boomers reach a point where they decide to flex their collective political muscles, it's bad news for you.

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Today, you are likely to spend a great deal of time flipping through mail order catalogs hoping to buy either a remote controlled ceiling fan or a how-to book on home decorating. Be on the lookout for telephone calls from former employers.
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