This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

A Modest Proposal to Tackle the Deficit

NEW YORK ( TheStreet) -- Politics in the U.S. is getting uglier by the day, which is a shame, because our problems aren't going away. In fact, any problem that involves interest will grow worse as long as we fail to address it. Such is the case with our national debt -- an " unprecedented" issue that is actually quite precedented: Powerful empires that overspent have historically collapsed and "American Exceptionalism" won't save us from the laws of mathematics.

Consider the debate surrounding the "Buffett rule."

Buffett
The debate surrounding the Buffett rule has cost the U.S. 75 times more in borrowing than the law would generate in taxes (in comparable periods).

The U.S. has borrowed $956 billion while Democrats and Republicans have debated the Buffett rule -- if the rule is enacted into law, it would generate roughly $16 billion of tax revenue per year (under the rosiest assumptions). Without passing judgment on the rule (or the outcome), the process is clearly broken.

It's hard to watch all of this electioneering and remain positive about America's future, but pessimism isn't going to solve the problem. Nor will unfettered optimism.

Some people, when confronted with the topic of deficit spending, happily (and condescendingly) proclaim that the world hasn't ended yet. This reminds me of an old smoker cackling that he never got cancer. A person may die before his bad habits catch up with him, but a country has the ability to live indefinitely, provided that we keep it in good shape.

To that end, I'd like to put forth some ideas on how to tackle debt, deficits and democratic demagoguery. Some of you may see through these ideas like cellophane. If so, good! Please amend or improve however you see fit. The goal isn't necessarily to create workable policy (if such a thing still exists), but to start thinking of new ways to solve old problems. Maybe one day we'll get a Congress willing to listen to constituents.

End Student Loans

America's biggest " budget busters" are essentially tied to an aging population in failing health. This is a tough pill to swallow for the nation's youth: The income divide between young and old is growing appreciably wider. And while millennials are struggling to get their own life started -- paying off student loans, getting a decent job, getting married, buying a house and starting a family -- the elder generations are making greater demands on their kids and grandkids.

Some call this generational warfare -- others might call it a Ponzi scheme of sorts. But if we're committed to having a social safety net, then America needs its working generations (youth) to be equipped with the best skills and education possible to compete in a global marketplace. Only then can we generate the tax revenue to keep the system in place.

At first blush, it may seem that the government should invest more in education. I think this is misguided, at least, if we do more of the same. If you look at the history of educational costs, the price of undergraduate tuition went completely off-the-rails when the availability of federal student loans increased (overtaking grants as the primary source of aid).

A 1988 CBO report demonstrates that the expansion of student loans coincides with inflation-adjusted tuition increases.

Part of the problem here is supply and demand imbalances -- as the government steered more students toward higher education, prices would naturally increase. But the prevalence of loans worsened the situation by providing a non-collateralized (bottomless) pool of debt, oftentimes granted to unqualified borrowers (if this sounds familiar, that's because a similar phenomenon created the housing bubble).

Make Social Security a Pass-Through

Vocational educations -- which may or may not require a college degree -- have a real economic value, and are difficult to cultivate with a top-down (federal) approach. In my eyes, the best way to provide a practical education to America's younger workers is to align the financial interests of young and old. This can be achieved by revamping the Social Security system.

It's tough to call the current iteration of Social Security a trust fund or an insurance program -- after all, the trust comprises non-marketable U.S. Treasury debt (imagine a private insurance company whose only assets were its own bonds). Really, Social Security is a tax -- and a damn good one -- so let's just call it that.

Treated as a tax, or, more specifically, a "pass through," a fixed percentage of payrolls would be used to fund current Social Security benefits (this plan assumes that the taxable "ceiling" of $110,100 would be eliminated). Let's say the figure is 15% -- a worker earning $100,000 would contribute $15,000 toward a pool of benefits (with the U.S. Treasury serving as an escrow agent and clearinghouse). Collectively, 15% of total payrolls would be used to fund the current year benefits, paid in proportion to the beneficiaries.

If incomes increase, so do the benefits (retirees share in the fruits of their knowledge-transfer); if incomes decline, benefits decline, thereby leveling the generational playing field. Under this system, cost-of living-adjustments are no longer necessary because the system is self-correcting.

End Medicare and Medicaid

By removing the taxable-ceiling from Social Security, the amount of tax revenue collected would likely increase (in fact, this might be the simplest way to fund the existing system) -- but the example above also raises the Social Security "tax rate." This increase would only be necessary if it eliminated other government expenditures: For the sake of argument, let's say Medicare and Medicaid (the real "budget busters").

Tucked into a 1991 CBO report on healthcare is an interesting statement: " S pending on health care as a share of GDP has increased dramatically since 1965." Medicare and Medicaid were created in 1965.

We all know the perils of marrying correlation with causation, but when you see the same pattern repeating over and over: Prices exploding after the government intervenes in a market -- you start to draw conclusions. But health care is particularly interesting because we know that Medicare fraud is rampant, expensive and expensive to police. Or, looked at another way, if government health care requires heavily armed strike teams, do we really want government health care?

This brings us back to Social Security. With a substantially larger benefit check, retirees would be able to purchase their own health insurance, or not, if that's the perilous course they wish to take. Assuming that we keep the "pre-existing conditions" rider in the Affordable Care Act, this system mitigates the fear that some bureaucratic panel will mete out benefits as they see fit (though the cost of coverage remains a concern). The increased benefits that are not used on health care would translate into consumption and capital investment, and would help to increase the flow of liquidity throughout the entire economy -- not a few concentrated areas (currently, paid out by the government).

Lastly, if we really wanted to keep some kind subsidized health care in place, why not insure those in the first 18 years of life as opposed to the last 18 years of life? Statistically, children require less-costly services (and it would be much harder to game the system with unnecessary or cosmetic procedures).

An Unreasonable Plan

You may be quick to dismiss all of this as an unreasonable plan. Fair enough.

But there is nothing reasonable about the current state of political affairs. Maybe if Congress gets its act together, it will vote on a bipartisan plan like Bowles-Simpson. But if we keep kicking the can, there will (someday) be a point of no return -- and if the system collapses as a result, we better have some ideas in place for the "redo."

-- Written by John DeFeo in New York City

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,805.41 +127.51 0.76%
S&P 500 1,964.58 +13.76 0.71%
NASDAQ 4,483.7150 +30.9230 0.69%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs