The Freedom Factory

This article is dedicated to the growing segment of American society that is awakening to the ideas that we are increasingly overworked and overtaxed. My goal is to determine an effective tax burden on the average middle-class American. I will leave it to the reader to judge relative severity of the burden as measured against associated “benefits” to which he is “entitled” from the system. Continue Reading

Obama continues Bush policy of surveillance secrecy despite campaign promises, tax protests spark conservative insurgency online, submit video footage of your tax woes to CNN and you might be aired nationally, Fed historian and political economist predicts worse inflation than 1970s, consider real estate as an inflation hedge, municipal bond market shows signs of life, older workers 45 years and older face brunt of recession, and flood of government debt crowds out private economy… Continue Reading

One recent frustration of mine is the lack of gratitude that many military members exhibit toward the tax payers of the United States. I know there are many fine men and women serving our nation- especially those fighting in Iraq and Afghanistan. However, I do not feel that many understand or appreciate the lavish benefits that they receive in the military.

Benefits for active duty soldiers, in my opinion, are quite generous- just as good (if not better than) in the private sector. Soldiers receive base pay, and tax-free allowances for food and housing (if housing or a government dining facility is not provided).

For example, base pay for the most junior enlisted troop is $18,000 per year; for college graduates, a junior officer will earn $30,000 a year. Housing allowance is based on rank and location (click here for rates) and the food allowance is around $200 per month. Thus, the gross salaries for soldiers are competitively priced to local wages with base pay roughly equivalent to a soldier’s net pay amount- subject only to taxes. Again, I stress that these are starting salaries, which would increase with each promotion and time in service. (As a reference point, the median household income in the US was $50,233 in 2007.)

In addition to pay and allowances, soldiers and their families also receive low cost, if not free, medical and dental care. Other benefits include tuition assistance for education, 30 days paid vacation, all Federal holidays off, and any commander directed ‘training days’. Training holidays usually coincide with 3-day weekend holidays, giving personnel a 4 day weekend. Pretty sweet, huh?

Perhaps the greatest benefit a soldier receives is rarely discussed- the retirement package. By far, the retirement package for the military rivals that of CEOs and upper management. After 20 years of service, a soldier is eligible to receive 50% of their average pay during their last 3 years of service.

The chart below provides a snapshot of the retirement benefits that a typical military member receives. The middle column is the present value of an annuity similar to what military would receive on their first day of retirement. The far right column is the ‘annual’ payment (or additional compensation) that a military member would need to save or invest to equal the value of their pension. (Note: I tried to be conservative in my assumptions, so these figures would represent the LOW end of the annuity valuations; put another way, this chart is the starting point for the value of military pensions.)

Assumes 25 years of service, 30 year life of annuity, and 3% annuity growth rate.

So let us quickly review. Military receive salaries that, by design, are comparable to prevailing market wages including time off and other benefits. The chart above shows that military members also receive a great retirement plan, which would tack on an additional $10-15,000 in compensation per year. Even with these benefits, I still do not begrudge the military their retirement. They enter into a contract with the government for the retirement, and thus the government should honor these commitments. (Essentially, the military pension could be considered a ‘forced savings’ plan, in which the soldier is never given access to his retirement savings. Many Americans would probably consider this a blessing, rather than a curse!)

Where I do question veterans is on their perceived entitlement to Veterans Administration (VA) benefits when their disabilities are not service related. I do not dispute disabilities resulting from combat or action in the line of duty (ex. parachute training jumps). However, many disabilities that the VA also approves are for ‘disabilities’ caused by aging, pre-existing conditions, and off-duty activities.

For example, many retired military that I work with have been diagnosed with ‘sleep apnea’. The primary causes of sleep apnea are: obesity or excessive weight, large tonsils or adenoids, other physical attributes, nasal congestion or blockage, and relaxed throat or tongue muscles. As a second example, a friend of mine was granted VA benefits for his knee, which he hurt playing flag football. I am baffled how military duty could cause or is related to these conditions? If diagnosed with sleep apnea, veterans can receive up to 50% disability. As a result, the military member could potentially receive up to $1,000 additional compensation per month- tax free! If you’re curious, you can look at the VA disability payment rates here to get a snapshot of these benefits.

Two common defenses I have hear when I question retired military about their abuse of the VA benefits are: “Well, we were government property for 20 years and are thus entitled to these benefits”, and “Don’t blame me… Congress granted us this benefit.” To the first point, the VA administration has provided individuals with machines to help them sleep at night. However, the people I have spoken with do not use them; they’re only interested in the cash compensation. If ‘government property’ can be fixed, should they still receive the cash compensation? To the second point, I seriously doubt that Congress intended to pay these benefits for non-duty related injuries, or a pre-existing condition such as sleep apnea. Where should the line ultimately be drawn?

It infuriates me that benefits Congress passed to benefit legitimately disabled veterans are being abused. Fact: very few veterans ever see combat. The ratio of combat troops to support personnel is still 1 to 9- roughly where it was in World War II and Vietnam. Although support personnel in combat zones are still in harm’s way, their bodies are not being ‘damaged’ in the same way. Perhaps I am naïve, but I would suspect performing a support role in logistics or similar function does not damage the body to the same extent as kicking down doors or throwing yourself to the ground to protect against mortars and small arms fire. Additionally, support personnel are compensated with the same Hostile Fire Pay and tax-exemptions (CZTE) that the combat troops receive.

I apologize for this rant, but it really disappoints me when I see this ‘entitlement’ mentality for several reasons. First, it steals from the many veterans who legitimately deserve these benefits. How many veterans have returned home from World War II, South Korea, Vietnam, or Iraq and failed to receive proper attention because these resources were being inappropriately consumed by these other veterans. If you need proof, Secretary of Defense Robert Gates fired the commanding general of the Walter Reed Medical Center for not addressing deficient facilities and care for wounded troops. The problem is not lack of resources, but of the allocation of those resources. For a quick overview of the size and amount of money spent by the VA, visit their website.

Second, it steals from the American taxpayer. If the median household income is $50,000 and subject to a 25% federal tax rate, roughly $12,500 in tax is collected. If all of that money is used to support the military, it would take at least two households to support one junior enlisted troop, and three households to support one junior officer. Now consider this- there are over 1.4 million troops in all branches of the US military. Thus, approximately 10-15 million households are required just to support our troops- not including veteran benefits. How many of these households that labor day-in and day-out to support the military have (at least) a $700,000 retirement? 5%, maybe?

Third, it precisely shows why socialist systems fail. People are greedy and act in their own interests because they do not feel the repercussions of their actions. Give an entitlement to a small group, and suddenly there is a line of people waiting to receive the same handout. The TARP and similar bailout programs that are being passed are no better.

Ironically most of the veterans I know vote predominantly Republican and seem to favor fiscal conservatism. Frequently I challenge them on this contradiction: the military and its benefit package resemble something more socialistic than the traditional Republican beleifs. There is no pay for performance and the government provides a safety net from cradle to grave. However, when the government seeks to promote a new social program, their response is, “Why should they deserve that benefit? They don’t pay taxes!” In my opinion, that is like complaining about government without voting in any election. Unless you have paid more in taxes than you have received from the government, you have zero right to complain about how your taxes are spent.

My hope is that Barack Obama drastically cuts the defense budget and decreases the size of the armed services. The United States has become trapped in the ‘industrial military complex’ which is draining resources needed to prepare the nation for the next century. Prior to World War II and the Cold War, the United States never had a large standing army. If it were not for conflicts in Europe, it is unlikely that we would have fought any war. If it were not for the fact that we have a million-man standing army, would we have ever been involved in the many foreign conflicts of the past 15 years: Iraq, Bosnia, Somalia, Afghanistan, and Iraq (again)? In spite of conventional wisdom, it seems it IS difficult to build goodwill by continually exerting our military influence.

In summary, if a soldier is receiving food stamps, it’s because of his (her) own poor financial planning, not because he (or she) isn’t being paid enough. Second, there are many veterans who abuse the system, receiving benefits that far surpass those intended by Congress or equivalent to the private sector. Due to the wars in Iraq and Afghanistan, it is unpopular to question these military entitlements. However, I firmly believe that we must examine these benefits because of the strain they (will) put on the system. Could the incident at Walter Reed be precursor for other large, government run entitlement programs such as Social Security, Medicare, or universal health care?

Every gun that is fired, every warship launched, every rocket fired, signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. The world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. – Dwight D. Eisenhower

Many people have trouble determining if they’ve gone over the edge as far as spending goes.  They get used to spending a certain amount and that amount creeps higher with every raise or bit of additional income.  Ultimately, it doesn’t matter at all how much they earn, their spending is tied to their potential to spend not to their need to spend.  After spending yrs in this mindset, it is difficult to determine if you are on the verge of financial turmoil.

Here are a couple easy questions that will help you determine if you’re in trouble. Continue Reading

An often overlooked element to lifetime financial planning is the value of human capital. It can be an ephemeral concept, but if analyzed properly has a discrete value that depends on some basic assumptions. In an interview with CNNMoney.com, retirement expert Moshe A. Milevsky (associate professor at York University’s business school in Toronto) illustrates the importance of considering your future earning power in the labor market in addition to traditional financial assets. We are often better off than we realize, but that’s only if we efficiently translate human capital potential to tangible future value.

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Why is knowing your net worth useful?  It is not so you can brag to your buddies and say “look at me, I am worth one-hundred fifty thousand dollars.”  Your friends probably don’t care and will probably quit being your friend if you start talking like that.  The reason its useful to know your net worth is because it will tell you where you stand as far as your retirement is concerned.  If you think you need $1M and your net worth is $20, then you know you better readjust your goals or start saving like a crazy man (get a second job, live out of your car, eat only ramen, etc). 

The calculation for net worth is:

Net Worth = Assets – Liabilities Continue Reading