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The following site on YouTube provides my Feb. 28 35 min. presentation to the Progressive Democrats of America on the current status of Social Security and Medicare and the growing threat by the two parties, Republicans and Democrats to institute massive cuts in both as the next phase ‘solution’ to deficit cutting. The presentation is in eight parts, and may also be accessed on Youtube by indicating ‘Jack Rasmus, Bouncing Off the Fiscal Cliff’.

The central theme is that neither social security or medicare are ‘broke’ and that very small adjustments are necessary for another century. Neither are the cause of deficits and the debt.

The following is the YouTube site, also available by indicating on youtube search, ‘jack rasmus, bouncing off the fiscal cliff’.

https://www.google.com/search?q=jack%20rasmus%2C%20bouncing&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a

THE FULL PRESENTATION, IN BOTH AUDIO AND VIDEO, IS NOW ALSO AVAILABLE ON MY WEBSITE AS FOLLOWS:

http://www.kyklosproductions.com/audiocds.html  (audio version)

http://www.kyklosproductions.com/videos.html (video version)

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COMMENTARY: THE FOLLOWING IS THE LATEST DECEMBER 31 UPDATE TO THE TERMS OF THE FISCAL CLIFF PENDING DEAL IN CONGRESS.

In a press conference concluded today, December 31, 2012, just hours ago, President Obama reported a partial agreement on the Fiscal Cliff was very near.  To hold a conference and report such at this stage, means the major sticking points have been settled and just the details are now being worked out.

The agreement, as this writer has been predicting, will be only a partial one. Fiscal cliff (aka ‘Austerity American Style’) negotiations on unresolved matters will continue for the next several months.

According to today’s press conference by the President, the agreement about to happen today will reportedly include the following main elements: first, an extension of the tax cuts for roughly 98% of households. Tax rates on the 2% will apparently rise. So too apparently will payroll taxes rise back to their 6.2% rate. In a concession to Republicans, the tax cuts will now be made permanent instead of having an expiration date, as has been the case since 2001, and the cutoff for the top 2% will be raised from $250k income per year to $450k, thus making the increase on the top 2% in effect a tax hike on the top roughly 1.5% instead of top 2%. Second, the partial deal will include an unspecified extension of unemployment insurance benefits. Not part of the deal, however, are cuts involving the approximate $1.2 trillion in sequestered defense and non-defense spending, agreed to last August 2011, which are scheduled to start taking effect this January 1, 2013. However, there is also talk that the sequestration will be postponed for two months as part of the deal. Nor is there a settlement of the debt ceiling issue as part of the pending deal.

The agreed upon deficit reduction target of $4 trillion over the coming decade is not resolved by the pending agreement. The tax hikes on the 1.5% will provide only $600 billion in additional tax revenue for the coming decade. That amount, by the way, is well below Obama’s previously offer a few weeks ago of tax revenue generation of $1.2 trillion, and Boehner’s earlier December counteroffer of $1 trillion. To get some kind of partial agreement, Obama in effect reduced his tax revenue demand in half, from $1.2 trillion to $.6 trillion, raised the cutoff from $250k to $450k, and agreed to make the tax cuts permanent. Republicans thus get a reduction of $400 billion below their last $1.0 trillion position plus a $200k increase in the cutoff to $450k. Both those points amount to major ‘wins’ for the Republicans. Nonetheless, there is consequently still a long way to go in deficit cutting negotiations, which will occur over the next two months. In short, deficit cutting has not concluded; it has only just begun. And Republicans will be in an even stronger bargaining position going forward.

The focus from this point will be even more heavily on spending cuts and the Republicans will have the upper hand in spending cut negotiations for the following two reasons: the tax issue is largely out of the way and the debt ceiling coming up allows them, the Republicans in the House, to once again engineer a repeat of the debt ceiling debacle of August 2011. We are now headed toward a ‘Debt Ceiling Crisis Redux’, which will peak sometime in late February-early March 2013. The original debt ceiling debacle of August 2011, to recall, resulted in all spending cuts of $1.2 trillion. Version 2.0 will almost certainly result in something similar, with perhaps a couple hundred billion more in token revenue generation, if even that. Expect spending cut proposals approaching twice that $1.2 trillion agreed upon in August 2011.

The August 2011 debt ceiling deal amounted to a ‘trade off’ by Obama and the Democrats of $1.2 trillion in spending only reduction in exchange for an agreement from the House radical Republicans not to play the debt ceiling card until after the November 2012 negotiations. It’s likely another such deal will occur—i.e. Democrats trading spending cuts for a halt to debt ceiling brinkmanship by the Republicans until after the 2014 midterm elections.

In terms of bargaining strategy, Obama and the Democrats are cutting a deal today, December 31, that will prove disastrous for them over the coming months. They have conceded on several major points just to try to get an agreement today—i.e. $600 billion in total revenue, $450k cut off increase, and making cuts permanent.  Republicans will get several more ‘bites at the tax apple’ in coming months to offset the tax hikes on their 1.5% richest friends.  In addition, Democrats are passing their bargaining leverage to the Republicans. Democrats should have allowed the fiscal cliff to happen, then later this week proposed a 98% tax cut for the middle class and tied that to a proposal for no debt ceiling brinksmanship for the next two years. Republicans would have been put in the position of having to vote AGAINST a middle class tax cut to keep their debt ceiling leverage. They no doubt realized this and, as this writer has previously predicted. Republicans conceded little in order to retain their debt ceiling leverage for future negotiations.

To sum up, in today’s pending deal, the House Republicans get a $600 billion concession by Obama in total tax revenue generation, a bigger hammer in the debt ceiling, an increase in the threshold for the top 2%, from $250 to now $450k a year (reducing the top 2% to in effect 1.5%), making the tax cuts permanent, and greater future control of the debate agenda. Obama and the Democrats get a continuation of middle class tax cuts, some kind of unemployment insurance, and a loss of bargaining leverage for the next phase of continuing deficit reduction negotiations.

The second phase of fiscal cliff negotiations will focus on reducing sequestered defense cuts, more emphasis on cutting social security, Medicare, Medicaid and the like, and a return to playing chicken and brinksmanship once again on the debt ceiling. Republicans now have the bargaining agenda where they want it: almost totally focused on spending cuts. And they have their big stick again to whip the Democrats with—i.e. the debt ceiling.

Jack Rasmus

Jack is the author of the April 2012 book, “Obama’s Economy: Recovery for the Few”. Chapter 7 of that book, ‘Deficit Cutting on the Road to Double Dip Recession’, is available for free on his website, http://www.kyklosproductions.com. Visit the website also for Jack’s 7 recent radio interviews on the fiscal cliff negotations, at http://www.kyklosproductions.com/interviews. For updates daily on the fiscal cliff negotiations, follow Jack at twitter, #drjackrasmus.

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FOLLOWING IS MY LATEST UPDATE AND ANALYSIS ON THE FISCAL CLIFF NEGOTIATIONS IN WASHINGTON. MOST RECENT EVENTS CONFIRM ONCE AGAIN MY PREDICTION OF NOVEMBER 20 (‘FISCAL CLIFF’-WHY A DEAL WILL HAPPEN THIS TIME’). OBAMA-BOEHNER ARE IN AGREEMENT ON TAXES, JUST GOING THROUGH THE PUBLIC MOTIONS TRYING TO LOOK TOUGH FOR THEIR AUDIENCES. ONCE TAX ISSUE IS RESOLVED, WATCH FOR BIG CUTS IN SOCIAL PROGRAMS TO SEAL THE DEAL. (Follow me daily on twitter for my updates, #drjackrasmus)

‘Fiscal Cliff–A Well Orchestrated Dance’ by Jack Rasmus, December 18, 2012

As the Democrats and Republicans continued their political theater this past week, coming closer step by step to an agreement on the so-called Fiscal Cliff (aka ‘Austerity American Style’), it has become increasingly clear that the key to a final agreement is how much and how to raise taxes. Given the offers and latest positions of Obama-Boehner in recent days, both are one, possibly two, steps at most away from a final agreement in principle on the tax issue. And once the tax side of the fiscal cliff debate is resolved, the spending cuts issue will quickly fall into place.

Since November 2010 and the publication of the Simpson-Bowles report, both sides have been always in agreement on the target of $4 trillion in deficit cuts. That number was confirmed in Obama’s budgets of the past two years, in Paul Ryan’s House budget proposals, in the aborted ‘grand bargain’ in the summer of 2011 between Boehner and Obama, and is the target once again, in the abrupt return to deficit cutting after the hiatus from deficit cutting during the 2012 election year. The contention has always been, given the $4 trillion target,  over how much tax increases vs. how much spending cuts; and,within the tax side of the equation, how much will the wealthiest 2% pay vs. how much the middle class will have to pay in a ‘broadened tax base’; while on the spending side, how much to cut military spending vs. how much to cut social programs, and social security-medicare-medicaid, in particular.

In a well orchestrated political dance, yesterday, Monday, December 17, Obama took the lead in the fiscal waltz and agreed to reduce the tax revenue mix a second time. After an initial offer of $1.6 trillion in tax revenue generation (tax hikes) two weeks ago, he reduced it to $1.4 trillion last week, and again, most recently, to $1.2 trillion. Boehner raised his offers for tax revenue, from an initial $800 billion to $1 trillion. A compromise at $1.1 trillion is just about what Simpson-Bowles recommended two years ago.

Boehner has also agreed in principle to some kind of increase in the top tax rate, while Obama has signaled he’s willing to give up on his $250,000 threshold, suggesting a $400,000, but indicating even this was not his last offer. Boehner offered $1 million. It’s not unlikely they’ll settle at around $600,000, which is approximately the average annual income of the wealthiest 1% households in the US.

So the parties, Boehner and Obama, are virtually agreed on the tax question. The only issue is how much tax revenue will be realized from tax rate increases vs. tax bracket manipulation. With just one or two offers from an understanding on the tax issue, the parties are already moving on to determining how much spending cuts will accompany the revenue hikes. If the final deficit reduction target is $4-$4.4 trillion over the coming decade, that means another roughly $3 trillion in spending cuts and/or tax hikes on the middle class will be necessary.

Evidence that Obama and the Democrats are about to make a significant offer in spending cuts is indicated by Obama’s meeting yesterday with Democratic House leader, Nancy Pelosi. They’re getting ready to up the ante in cuts in social programs in the next move or two. Since last week the parties’ respective positions, Republican and Democrat, spending cuts was an offer of $340 billion in Medicare-Medicaid cuts by Obama and a $600 billion proposal by Boehner. Watch for around $500 billion in Medicare spending reduction in a final deal—although not in the form of benefits cuts but in hikes in Part B and Part D deductibles and copays by retirees. So that’s a total of about $1.5 trillion in revenue from the wealthiest 1% plus Medicare over the coming decade.

Forget about the $500 billion in defense cuts called for in the sequestration deal of August 2011. That’s no longer an issue, and never was. If readers had listened close to Obama in the second presidential debate, when asked by the moderator what was his position on that issue, he briefly answered ‘that was Congress’ proposal, not mine’. The Congressional Budget Office estimates that even in the sequestration deal, only $24 billion in 2013 is scheduled in defense cuts. Look therefore for about half, or no more than $200 billion over ten years in military spending cuts. That will come from withdrawal from Afghanistan and Iraq and Army personnel downsizing. Military equipment expenditures will likely actually rise, however, after 2014 as the US military redeploys to the western pacific and Navy-Air Force spending takes precedence over Army expenditures. Defense equipment companies know the deal for them is already cut. They reportedly even have no ‘Plan B’, according to the Wall St. Journal, in the event that military spending is reduced per the sequestration agreement, which is now virtually out of the question. Unlike the reduction of the cuts in military spending by half in a Fiscal Cliff agreement, don’t expect the other $500 billion in the 2011 sequestered cuts social programs to be similarly reduced by half.

Adding up the likely amounts in a final Fiscal Cliff deal, there’s the $1 trillion in tax revenue generation, the $500 billion Medicare spending cuts, about $250 billion estimate in military spending reduction (mostly by attrition), and the roughly $500 billion in Education and other cuts scheduled since August 2011. The leaves $1.5-$2 trillion more in tax hikes and spending cuts to achieve the $4 trillion target.

That remaining amount will likely come from a ‘broadening the tax base’—i.e. the code word for cutting tax deductions, credits, exemptions, etc., now enjoyed by the middle class. That means those with annual family incomes ranging from $118,000 to the $400,000 recently offered by Obama. Expect limits on their mortgage deductions, state-local tax deductions, charitable and medical insurance deductions, education credits, etc. over the coming decade. If around $50 billion a year, ‘broadening the tax base’ will produce another $500 billion over the coming decade. Elimination of the 2% payroll tax cut will mean another $900 billion to a $1 trillion over the coming decade.

We’re now at a total of about $3.75 trillion in deficit reduction, and just a step away from the $4 trillion target. Apart from savings from interest on the federal debt as a result of the deficit reduction, and assumed tax revenue from economic recovery (which may not happen), the rest could easily come from social security, in the form of reducing the cost of living formula adjustments, raising the retirement age toward the end of the ten years, and reducing social security disability eligibility—all of which are proposals of the Republicans. If House Democrats won’t agree to the social security cuts, then additional cuts in Medicaid at about $10-20 billion a year closes much of the remaining $250 billion gap. And there’s the $4 trillion.

What we’re witnessing this past week, and the week to come, are the chief negotiators (Obama and Boehner) going through the motions publicly to appear as if they’re driving a hard bargain, in order to placate their respective bases in Congress. However, the deal is already done in principle. The dance is for the audience.

Four weeks ago, immediately following the November 6 elections, this writer publicly predicted a deal would happen. That was because major corporate CEOs were now aligning strongly behind Obama. Their joint pressure, it was predicted, would result in splitting the Republican ranks, with the Republican Senate and major corporate campaign donors putting pressure on the House radicals. All that was needed was a switch in 25 votes in the House to seal a deal. A threat of withholding future corporate campaign donations would likely sufficient to buy 25 votes in the House on the Republican side, it was argued. Obama has been meeting the past two weeks with groups of Corporate CEOs at minimum twice and three times a week. Key CEOs have been playing lobbying middlemen between the White House and the Congress—and especially the House of Representatives—now for several weeks. This Corporate CEO factor and direct involvement is a new element in the equation absent in 2011 deficit debates and reductions.

So why are Corporate CEOs so aligned with Obama this time around? Because a deficit reduction deal is a prerequisite for what they really want—a cut in the corporate tax rate, understandings on non-enforcement of the foreign profits tax, and further incentives—all of which Obama (and Romney) promised in the recent elections. Obama is on record during the elections, and well before, in favor of cutting the top corporate tax rate from 35% to 28%–i.e. where it was during the Reagan period. The idea, in other words, is to raise the rate on the personal income tax a couple percent, and later cut the corporate rate by 7% in the summer 2013 as part of a major revision of the tax code.

But major corporate tax cuts cannot happen in the current negotiations. It would look as if medicare-social security were being cut, and middle class taxes raised, in order to fund big corporate tax cuts. Moreover, cutting the corporate tax rate to 28% cannot be part of the current negotiations and still get the $4 trillion in total deficit reduction. So the corporate tax cuts will come in a subsequent phase later in 2013. And when that second phase happens, one can expect another round of cuts in Medicare and Social Security as part of that subsequent deal as well.

Whether taking place in phase one, between now and March 27, or in a subsequent phase two, in the coming Fiscal Cliff deal both the revenue hikes and spending cuts will be mostly ‘backloaded’. They will not take full effect in 2013 or even equally across the decade. Most will begin to have their greatest impact in 2014 or even in 2015 and beyond.
In terms of time lines, January 1 is not the real deadline date despite all the press hype. Cuts and tax hikes can occur after and made retroactive to January 1, 2013. The real deadline, if any, is March 27, 2013. That’s when the federal government runs out of money. A deal could be reached in key principles, if not in detail, before January 1 and more formally concluded after January 1. However, it will then be followed by a second phase deal later in 2013 in the form of a major tax code revision, which will include further spending cuts.

So sit back and watch Boehner and Obama stumble around the dance floor for another week. Most of the main elements of an agreement are already in place. Negotiations between Boehner and Obama are not the real problem. Not even Congress. The Senate has already agreed and is waiting in the wings to sign off on a deal quickly. Even Senate radicals like Coburn and Corker are fully on board.

Getting the Teapublicans in the House to buy entitlement cuts in exchange for token tax hikes on the wealthy, and getting Pelosi to corral liberal Democrats in the House to agree to Medicare-Medicaid-Social Security cuts are the real remaining negotiations.

The glue is CEOs promising some big election contributions in 2014—or the withdrawal of the same—or the withdrawal of the same. And it probably won’t take much to buy the necessary votes—from either side of the aisle in the House.
Jack Rasmus, December 17, 2012

Jack is the author of book “Obama’s Economy: Recovery for the Few”, 2012, and host of the weekly radio show, ‘Alternative Visions’, on the progressive radio network, PRN.FM. His website is http://www.kyklosproductions.com, his blog, jackrasmus.com, and twitter handle #drjackrasmus.

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While both candidates in the recent election period were busy telling voters about their fictional economic programs, the real economic program that would emerge post-election was being formulated and debated by the elites of both parties and their corporate benefactors. Behind the scenes for months before the election, heads and CEOs of multinational and other large corporations were developing their recommendations. As the election day approached, their voice became louder and then was carried across the media in the week following the national election. Wall St. Journal, New York Times, Barron’s, and all the other pro-corporate media outlets gave preferred coverage, as the real policymakers took increasing control of the policy agenda post election.

Two years ago almost to this date the Obama-appointed Simpson-Bowles Commission released its report calling for $4 trillion in deficit cuts. The midterm 2010 elections disrupted and delayed their implementation, as the right wing injected its ‘all or nothing’ proposals into the national political equation. The next year would bring incremental deficit cutting, culminating in the August 2011 ‘debt ceiling debacle’ deal, for which the House radicals got $2.2 trillion in all spending cuts and Obama and Democrats gave up all their primary proposals in exchange for merely an agreement of no more debt ceiling brinksmanship until after the 2012 elections. As part of the August debt ceiling deal, the notorious ‘Supercommittee’ was established and mandated to deliver its version of an additional $1.5 trillion of deficit cutting by year end 2011. All that was a year ago, November 2011. But like the ‘get me re-elected first’ politicians they are, the Supercommittee House and Senate politicians of both parties agreed to ‘kick the can down the road’ one more year. The US economy moved sideways in terms of recovery for yet another year, 2011-12. Then the recent national election. The election period fantasy economic proposals of both candidates. And now the re-emergence of the real economic program the media calls the ‘Fiscal Cliff’.

Prediction #1:
Unlike in November 2010 and again in November 2011, this time a deal will be concluded over the next 90 days between the Obama administration and the Republican dominated US House, teapublicans and all.

So why this time? The fundamental reason is that Corporate America has aligned itself firmly behind the Obama administration on the matter of the deficit. Together they will force the necessary votes from the US House to close a deal. But the even more fundamental question remains. Why are Corporate CEOs firmly on board this time, and on the side of Obama? As this writer wrote when the Supercommittee kicked the can down the road a year ago, “it’s the tax cuts, stupid”. Corporate CEOs are blocking with Obama because an integral part of the coming ‘fiscal cliff’ deal will include more major tax cuts for big corporations.
For some time now, Obama has been making it clear that he proposes to cut the top corporate tax rate from current 35% to 28%. His position on that issue was virtually the same as Romney’s during the election campaign. Obama’s positions on more largesse for corporate America also include major changes in the foreign profits tax. The media has not emphasized these long standing Obama positions, however, preferring to talk about token tax loophole closings like the oil company tax and use of jet aircraft. But that’s all diversion from the real issue of further big corporate tax cuts coming, especially for the Fortune 500 largest businesses and multinational corporations.

It should be noted that these further corporate tax breaks will come despite corporations now paying the lowest effective tax rates in more than a quarter century. Corporate taxes as a percent of corporate profits in the past two years have averaged about 12.4% of profits. That compares to the annual average of corporate taxes as a percent of profits from 1989 to 2007 of 24.7%. Moreover, large corporations are also currently sitting on more than $2.5 trillion in cash and multinationals more than $1 trillion. With all that excess cash, and record low taxation as a percent of profits, how are still more corporate tax cuts justified? They aren’t, but they will be part of the coming deal—and that’s the fundamental reason why Corporate America is blocking with Obama and they together will wring a deal from the now chastised US House radicals.
The following are additional predictions concerning the coming fiscal cliff deal—i.e. a term that will soon become clear really means ‘Austerity American Style’:

Prediction #2:
The coming deal will include deeper cuts in Medicare, Medicaid, Social Security, Education, Vets benefits, postal services, and social safety net programs like unemployment insurance and food stamps than have been publicly indicated so far.

In the summer of 2011, as Obama attempted to cut a ‘grand bargain’ with House leader Boehner, he offered to cut $700 billion in each, Medicare-Medicaid, and several hundred billion more in social security and other programs. When the deal fell through in July 2011, reference to the proposed cuts was quickly dropped by the press. On the Meet the Press NBC TV show this past November 2012, Washington Post editor Bob Woodward announced he had obtained a memo with the original offer by Obama to Boehner to make such cuts. Woodward was wrong in one aspect, though. It was no secret, even in 2011. Elements of the deal were revealed at the time in July 2011 piecemeal in the press, and were summarized in this writer’s April 2012 published book, “Obama’s Economy”, chapter 7, for those interested.

What form specifically then will the social spending cuts take in the coming ‘deal’? Medicare benefits won’t be reduced, but the out of pocket cost for parts B (doctor services) and D (drugs) will rise significantly. Obama will agree to partially let the states decide on Medicaid spending. Social security benefits will be cut by reducing the cost of living formula, raising the retirement age in steps to 69, and by slashing social security disability eligibility and thus benefit payments.

Prediction #3:
The Tax Base will be ‘broadened’. That coded phrase means cuts in provisions like the mortgage deduction and other exemptions and itemized deductions. The payroll tax cut will almost certainly be phased out. In short, the middle class will thus clearly pay more. The top personal income tax rate will be raised to 39.6% but so too will the threshold, from Obama’s pledge of $250k to $500,000 or even $1 million. Other personal income tax provisions on upper income groups will also be raised, but slowly in steps over decades to come.

Prediction #4:
Defense spending cuts indicated by the sequestered agreement of August 2011—some $500 billion scheduled to take effect starting January 2013—will be suspended. If readers listened closely to Obama during the debates, he clearly indicated the $500 billion in defense cuts was ‘Congress’s proposal, not mine’. So defense spending reduction will be less than half that previously projected, mostly realized by troop pullouts from Afghanistan, veterans benefits cuts, and attrition of old equipment purchase programs.

Prediction #5:
The ‘mix’ of spending cuts to tax hikes will be no less than 6 to 1—i.e. for every dollar in tax hikes there’ll be $6 in spending cuts. Once again, history is the best indication of the parties’ future positions. In June 2011, Vice-President Biden had offered Boehner a ‘mix’ of 87% in spending cuts and a token 13% in tax loophole closings. Obama reportedly offered Boehner the same. Simpson-Bowles called for 4 to 1. The end result will be somewhere between.

Prediction #6:
The deficit cuts will be largely ‘backloaded’, taking effect in 2014 or even starting 2015 and growing in magnitude annually thereafter. Politicians will thus avoid equal annual cuts out of fear the US economy remains fragile and chance of recession in 2013 remains a distinct possibility. The US economy has been growing at a 1.7% annual rate, slightly higher in the 3rd quarter of 2012, and will grow slightly less than the third in the current fourth quarter. Whatever the final ‘deal’ on the fiscal cliff, it will not be a stimulus program in any sense but an austerity program. At first ‘austerity-lite’, then an even more austere in out years. The only question is how austere, and how much austerity ‘up front’ as opposed to back loaded. The ‘loading’, will be in out years.

Prediction #7:
There are three scenarios: A partial deal before year end 2012 to accommodate the need to raise the debt ceiling limits again before year end, followed by another bigger deal within 90 days. It is possible a one-two year deal for 2013-14 will occur by February, followed by a bigger deal focusing on major changes in the US tax code in exchange for bigger cuts in social security, Medicare, Medicaid long term over the next two decades. Alternatively, scenarios 2 and 3 may be combined.

Whatever the case, a final deal will be concluded within 90 days. It will be marked by big corporate tax cuts, higher personal income taxes including middle class taxes, the end of the 2% payroll tax cut, bigger cuts than announced for Medicare-Medicaid-Social Security-Vets-Unemployment and Food Stamp benefits, and so on. The mix will be weighted heavily toward spending cuts, except for Defense spending, and most of the impact will be backloaded beyond 2013.

Whether front or backloaded, however, the impact on the US economy will not prove positive, at a time during which the economy will show further signs of weakening in 2013, and as the global economy continues to slow and the recessions in Europe, Japan, and elsewhere continue to deepen.

Jack Rasmus

Jack is the author of ‘Obama’s Economy: Recovery for the Few’, April 2012. He hosts the radio show, ‘Alternative Visions’, at PRN.FM. His blog is jackrasmus.com. Website: http://www.kyklosproductions.com, and twitters at #drjackrasmus.

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THE FOLLOWING IS THE FIFTH ENTRY IN THE SEQUENCE OF ‘AMERICA’S TEN CRISES’ POSTINGS, ADDRESSING THE TOPIC OF THE BROKEN POST-1945 RETIREMENT SYSTEM IN THE U.S.

The retirement system established in the U.S. in the late 1940s is today in a state of severe collapse—and with it the incomes of most of the more than 45 million Americans presently retired and the 77 million ‘babyboomers’ that will soon do so over the next decade. That system was built upon three elements: Social Security retirement benefits, defined benefit pensions, and personal savings. Each was supposed to provide one-third of the necessary income for the retired after age 65. Each of the three elements have been consciously weakened and undermined since the 1980s.

The first attack was leveled against defined benefit pensions that guaranteed a given income stream for retirees. 401k personal pension plans were introduced in the early 1980s to replace DBPs, and progressively have done so for the past three decades. 401ks remove all liability from companies to provide guaranteed retirement benefits but retain all the tax advantages to corporations. They also allow financial institutions and stock traders to siphon off the retirement funds and speculate with the funds. In the past decade alone more than $4 trillion in value in 401k and pension funding has been ‘lost’ to financial speculation. After three decades of policies aimed at undermining DBPs and promoting 401ks, the average balance in a 401k pension in America today is roughly $18,000; and for those over 55 only $50,000. Once numbering in the hundreds of thousands, defined benefit plans are now barely 20,000 and the majority of those in a condition of growing financial stress.

Meanwhile, as 401ks were being favored and promoted by government policies and spread throughout industry from the 1980s onward, DBPs were either dropped by companies by the tens of thousands or were raided by management for their surplus funds. From the 1990s on, they were undermined further by management manipulating actuarial assumptions in order to avoid paying required pensions fund contributions by law. After 2000, the corporate drive to eliminate DBPs intensified, adding tactics such as corporations declaring bankruptcy and dumping their pensions on public agencies, converting DBPs to hybrid ‘cash balance plans’, and shifting money from the pension funds to cover employers’ rising health care costs.

A most recent corporate attack on DBPs—public and private—is now underway, designed to eliminate the last vestiges of such plans. The latest corporate tactic is to get government to redefine pension rules, such that pension funds appear to have even greater accounting losses than previously. The outcome is the dismantling of more plans, or the combined slashing of pension benefits and/or raising of employee contributions.

The second ‘leg of the retirement stool’ is social security. After having produced a surplus for a quarter century in the trillions of dollars, government has borrowed every dollar from the social security trust fund in order to offset general US budget deficits over the same period—the latter caused primarily by rising defense spending and the Bush tax cuts since 2001. Chronic and deep recessions of the last decade have further undermined the contributions to social security retirement benefits. Having failed to privatize social security in 2005 under G.W. Bush, the focus today is to attack it at its weakest point: the social security disability benefits program which provides early retirement benefits to the disabled. The Obama administration in 2011 has also joined in recently in the effort to undermine social security, pledging in the summer of 2011 to reduce social security benefits by $600 billion as part of a ‘grand bargain’ to cut the federal budget deficit, while simultaneously taking what’s left of the annual social security surplus and distributing it back in the form of payroll tax cuts amounting to more than $224 billion in just the past two years.

The third ‘leg of the retirement system’ in the post-1945 period was envisioned to be personal savings. But like defined benefit pensions and social security, it too has been crumbling. After three decades of stagnation in real weekly earnings for the bottom 80% households, the personal savings rate and levels have fallen progressively from the 15%-20% levels in the 1970s to the 3%-4% range today.

In short, all three ‘legs’ of the retirement stool envisioned in the post-1945 period are now virtually broken or shattered. Defined benefit pensions have been eviscerated by 401ks that provide virtually no retirement, and have been undermined by various measures for decades, and are now under the most intensive further attack across the board. Social Security Trust Fund’s surplus meanwhile is being whittled away, as politicians of both parties compete for who can cut benefits the most after the 2012 upcoming national elections. And personal savings simultaneously continue to decline, as job growth lags, wages stagnate, and real income declines.

The collapse of the retirement system in America means not only severe hardship continuing, and coming, for tens of millions, but also the elimination of a critical income growth base necessary to sustain consumption and therefore economic growth. It has meant the bottom 80% households having to turn toward more debt to maintain standards of living, to working longer hours and more part time jobs, to a greater reliance on credit cards, and ever more dis-saving and spending down of past savings to maintain an increasing precarious standard of living.

A basic overhaul of the entire retirement system in America is a precondition for future economic stability and growth. That means not cutting benefits and thus disposable income further. But instead an increase in social security retirement benefits, a return of the trillions of dollars ‘borrowed’ by the federal government from the Social Security Trust Fund, an increase in the payroll tax for social security paid by those not contributing their fair share to the program, a halt to cuts in payroll taxes, a nationalization of all 401k plans under social security, a business value added tax to fund future contributions to a national 401k pool, and policies to restore defined benefit pensions once again.

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