Posts Tagged ‘Social Security’

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 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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