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Home / Articles / Views / Danish Plan /  Funding social security without raising taxes
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Thursday, October 6,2011

Funding social security without raising taxes

By Paul Danish

This year’s budget battles have at least produced two points of clarity:

1) The federal government will go broke unless it cuts Social Security and Medicare or finds more revenue to pay for them.

2) Taxes aren’t going to be raised to pay for Social Security, Medicare, or anything else anytime soon, and “anytime soon” means between now and the next ice age (which, thanks to global warming, has been indefinitely delayed).

Fortunately, there is another way the feds can get the trillions of dollars necessary to keep Social Security and Medicare sustainable for the rest of the century. The feds need to do just two things:

1) Go into the oil and gas business.

2) Put the profits into a sovereign wealth fund whose earnings are earmarked for entitlements.

There are tens of billions of barrels of oil and hundreds of trillions of cubic feet of natural gas on the outer continental shelf and on public lands in the western U.S. and Alaska. To the extent that the resources on these lands have been exploited at all — most have been locked up for (mostly lame) environmental reasons — it has been through a process of federal lease sales, with the federal government getting up-front fees for the leases, plus relatively modest royalty payments on any oil or gas produced.

“Relatively modest” in this case means royalties of 16.67 percent on oil and gas produced on-shore and 12.5 percent on off-shore production. Although these royalties generate several billion dollars a year, compared to the value of the resources or compared to the royalty rates charged by most foreign governments, they are little more than a pittance.

But it doesn’t have to be this way. Since the oil and gas on public lands and the outer continental shelf is owned by the federal government, the federal government could produce at least some of it itself and keep all of the revenues from that production for use on behalf of the American people.

It could do this by setting up a national oil company — most major oil-producing countries have them — and giving it exclusive rights to explore for oil on selected tracts of federal lands. Only a minority of federal leases would need to be retained; most oil exploration could still be left to the private sector.

The revenues from the national oil company’s activities would then be put into a sovereign wealth fund dedicated to funding entitlements.

A sovereign wealth fund is a state-owned investment fund. The money sovereign wealth funds invest can come from any number of sources, but oil is the single most common source. According to Wikipedia, the world’s three largest sovereign wealth funds — Abu Dhabi’s ($627 billion), Norway’s ($556.8 billion) and Saudi Arabia’s ($439.1 billion) — are all oil-based. While the funds’ initial capital originate with oil revenues, they can invest those funds in anything — stocks, bonds, precious metals, real estate, foreign currency, etc. — that any investment fund might put in its portfolio. The profits from the funds can be used for general government expenses or for earmarked purposes — like pensions and health insurance.

Could an oil-based American sovereign wealth fund generate enough revenue to cover the expected shortfalls in Social Security and Medicare revenues? According to CNN, Social Security will need an additional $6.5 trillion if it is to pay 100 percent of its promised benefits for the next 75 years. Medicare’s shortfalls are expected to be even higher than Social Security’s.

However, the government would not have to produce outlandish amounts of oil to generate the sort of revenues that would make a big difference.

The U.S. currently uses more than six billion barrels of oil a year (about 19 million barrels a day).

Say the feds were to produce one mil lion barrels a day from ANWR, which is thought to contain 10 billion barrels of oil, and two million barrels a day from the outer continental shelf. That works out to 1.1 billion barrels a year worth about $100 billion at today’s prices, or $2 trillion over 20 years. If the fund’s managers could double or triple its value in that time, there would be $4 trillion to $6 trillion in the fund. That’s getting close to what it would take to cover Social Security’s shortfall.

But wouldn’t such a scheme contribute to climate change?

No. Americans are going to keep using oil regardless of who produces it. The relevant questions are where does that oil come from, who produces it, who gets the revenue, and what is it used for.

But wouldn’t such a scheme be un-American and socialist?

Sovereign wealth funds wouldn’t be un-American. Three U.S. states already have their own oil-based sovereign wealth funds (albeit not their own oil companies): Alaska ($39.7 billion), New Mexico ($13.8 billion), and Wyoming ($4.7 billion). Alaska’s is the world’s 18th largest.

As for the scheme being socialist, well, I suppose you could call it that. I prefer to call it using assets that the American people already own for the benefit of the American people. If that’s socialism, make the most of it.

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Bob

Is this another of Danish's "modest proposals"? Sometimes it's hard to tell if he's being ignorant or ironic.

 

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The federal health law, which will expand coverage to 30 million currently uninsured Americans, will have little effect on the nation's rising health spending in the next decade. Health spending will grow by an average of 5.8% a year through 2020. In 2014, when the major coverage expansions of the health law begin to take effect, national health spending is expected to grow 8.3%. The Congressional Budget Office estimates that, by the end of the decade, 3 million fewer people will get health insurance from their employer (http://eng.am/nE0nnN).

Currently Social Security and Medicare use 8.5% of nonentitlement revenues (federal revenues dedicated to all other programs besides the two). By 2020, the deficits will grow to almost 25%. This means that within 9 years, in order to pay projected benefits to retirees and the disabled, the federal government will have to stop doing about one out of every five things it does today (http://eng.am/poetWU).

All of the following solutions will substantially eliminate these problems: Reducing benefit payments by 5% AND increase the retirement age to 70 over time; increasing both the employee and employer contribution immediately by 1.1% for income up to $106,800 (its current limit); reducing benefit payments by 5% AND increase both the employee and employer contribution immediately by 0.05% each year for the next 20 years for income up to $106,800 (its current limit); removing the $106,800 limit and count all income towards the SS tax; decreasing the cost of living adjustment by 1% per year AND raise the retirement age to 67; or taxing income over $106,800 at 3%, index the retirement age to longevity AND decrease cost of living adjustment by 0.5% (http://eng.am/oTlck2)/

 

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Social Security is healthy for 25 years, and raising the current cutoff so that people who earn more than $106k a year pay more into it would make it healthy for 75 years.

Otherwise, I'd like to see the oil (and sequestered CO2) stay under the Arctic -- but since it seems to be likely it will be extracted in and burned, so yes, in that case, we may as well put the profits directly into government coffers.

 

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yes,lets do it!why should we allow a bunch of towelheads dictate world oil prices when we got enough of our own in the western hemisphere?how about creating our own cartel,be easy when we wouldnt import any more!!let them eat sand!

 

 
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