The "Fiscal Cliff" and the Coming Retirement Crisis of the Middle Class
On January 1, Congress approved a tax and spending bill to avert the so-called “fiscal cliff” combination of tax hikes and spending cuts that would have created deflationary pressure on the United States (though Yglesias questioned the conventional wisdom of whether it would necessarily cause a recession). Let’s take a look at the deal in some detail, then proceed to the gruesome details of what will happen around the Ides of March.
From Think Progress, here are some of the more critical parts of the deal.
1) The Bush tax cuts expire on only about 0.7% of households, those earning more than $400,000 per year as an individual or $450,000 for a couple. This brings in $600 billion over 10 years. Since rich people don’t spend as much of their income as the poor and middle class do, this is less deflationary than a tax increase on the middle class, as I discussed in November.
2) With the expiration of the temporary 2% payroll tax cut, 77% of households will see their taxes go up. Indeed, every single income group will, on average, see their taxes increase, as shown below (via Matt Yglesias):
Since this hits the middle class more directly, the deflationary consequences are larger than they would be for an increase in taxes on the rich. On the other hand, this strengthens the long-run funding of Social Security, an issue I will return to shortly.
3) Unemployment insurance is extended for two million workers. This will get spent and have a definitive stimulative effect on the economy.
However, the second shoe of the fiscal cliff, the automatic cutbacks known as the “sequester” was simply postponed for two months, which is the same time that the Treasury Department will run out of creative ways to keep the country from exceeding the debt ceiling, which it hit on December 31.
Combining these two negotiations, the debt ceiling and the sequester, will be an extremely high-stakes battle where the middle class has a lot to lose. The big problem here is that some Tea Party Republicans really do want to use the debt ceiling to take the economy hostage and force cutbacks in Social Security, Medicare, and Medicaid. Despite the fact that Republicans lost the Presidency as well as both Senate and House seats (with a majority of the votes cast for the House going to Democrats), they see their gerrymandered House majority as giving them license to wreak havoc.
The consensus among most commentators (Krugman, Klein, and Yglesias, for example) is that the fiscal cliff deal will work out okay as long as the President does not cave in to the Republicans’ threats over the debt ceiling. I agree as far as that goes. But, as Yglesias points out, there is nothing great about what Klein says is the most likely scenario, where the President gets $1 trillion in new tax revenue for $1 trillion in cuts over 10 years. That is still $2 trillion in austerity measures at a time when unemployment is barely below 8%!
The looming problem rarely mentioned, even in the context of the Republican campaign against Social Security, is that my children’s generation (Generation X, if you will) faces a retirement crisis that many of my generation will avoid, based on the end of pension plans. According to one Social Security Administration report, the percentage of private-sector workers with a traditional defined-benefit pension plan fell from 38% in 1980 to 20% in 2008. Over the same period, private-sector workers who only received defined contribution plans rose from 8% to 31%. Note that this means that 49% of private-sector workers are not covered by any pension plan at all. Moreover, while governments have more commonly provided defined-benefit plans than private employers have, they are under attack in many states.
Let’s do the math. With 49% of private workers having no pension, and another 31% having an on-average less generous defined contribution pension, how will seniors support themselves if Social Security is cut? Hint: It won’t be pretty.
Get ready for a bumpy March.
Cross-posted from Middle Class Political Economist.
by the tax policy center / credit suisse chart above, one can see those making between 200K and 600K take the smallest hit percentagewise; richard green has a chart that is more illustrative of this…
missing from that are the Pease limitation, which kicks in a $300,000 per household, and the Obamacare surtax, which kicks in at $250,000 of investment income…
the pension plan problem is with us already…major corporations plans are underfunded by $355B, & state and local pension plans are said to be facing a $1.4 trillion underfunding…
I don’t understand this statement from your post: “the percentage of private-sector workers with a traditional defined-benefit pension plan fell from 38% in 1980 to 20% in 2008. Over the same period, private-sector workers who only received defined contribution plans rose from 8% to 31%.”
@Daniel, what I take the report to mean when it says “only” is it does not want to double count people who have both a defined benefit pension and a 401(k)) or 403(b). So it means that more than 31% have a 401(k), but some of them have pensions. I see the point as precisely letting us know how many people have neither.
As much of a liberal as I am, I don’t think retirement is as hard as people make it out to be. My wife and I earn around $90k per year combined, very close to the median for a two-adult household. We save around $15k in 401ks, leaving us an after tax and health care deduction net pay of $4400/month. Saving that 15k (in 2013 dollars) until we retire and assuming 1% real wage growth, we will have someething like a million 2013 dollars when we retire, enough for about a $3000/month withdrawal. Add in SS, which even if cut should get us a minimum of $2000/month, we would have more than enough to retire.
The real problem is that few people are willing to buckle down and save properly like we do, and we can’t just throw them to the wolves.
Chad, I don’t know how far into the future you will go before you hit retirement, but I can tell you, that today, $1 million will just do it for you and your wife with basically zero left if you both hit the nursing home for 10 years. Medicaid will not cover you until you hit zero. However, you each need to only account for 1/2 of the million so as not to leave the other broke.
Pension benefits can get cut the same way Social Security benefits can get cut. The best thing to do is to encourage private savings accounts so at least people know it’s their money.
Bob and Chad
you should start your own comedy show.
private savings and the stock market have been around for at least two hundred years, and until the invention of Social Security old age was a time of deprivation, hunger, suffering, and early death.
there is a reason why it works, but one you are not going to find out because you are not willing to take the time to learn about it.
good luck with those savings plans.
You don’t have to put it in the stock market. But why do you say that I am not willing to take the time to learn about it? That and the crack about starting our own comedy show. I think we should all have open minds.
miscellaneous thoughts:
49% of us arent even making $50K, which makes that savings youre all advocating difficult;
30% of us reported that they had less than $1,000 in savings in 2012;
and half of the delay in the Budget Control Act sequester will be offset by revenue raised by the voluntary transfer of traditional IRAs to Roth IRAs, “which would tax retirement savings when they’re moved over.”
Social Security isn’t magical savings. If you’re not earning a lot your contributions won’t be a lot. That’s a separate issue than whether your savings should be in a private account or controlled by the government.
Bob
don’t take me too seriously. i have become a grouchy old man since i started taking a serious look at social security and realized our government and the elite media lie to us, and the people are fooled.
i don’t know that an “open mind” is a real possibility for humans. we all have stuff shoveled into our brains before we know how to defend ourselves against it. then we spend the rest of our lives comparing “new” information with “what we already know” and so never learn anything.
you and chad no doubt know stuff i do not know. but your confidence in your own ability to provide for your future is not founded on what i regard as a reasonable reading of history or of the present political/economic situation.
Social Security provided the best “if all else fails” insurance against desperate poverty in old age that America has ever seen. Now we have two camps of hyenas growling about it. On the one side are the politicians of both parties and their Big Friends who are trying to kill Social Security one way or the other without getting blamed for it. On the other side are the dear confiding progressives who think the answer to this attack is simple: demand the rich pay for it.
Trying to reform Social Security isn’t the same thing as killing it
Bob…
The drive to change the nature of SS is both well financed and prolonged. And not based on the technical aspects of the program, nor proposals that could address ‘reform’, which you can easily find by searching under Social Security 2012 in Angry Bear.
See the 2010 CBO report on the matter.
The reform appears to be driven by other concerns than efficacy and solvency…hence the sensitivity to ‘reform’ as demonstrated in media.
People would like to reform SS because in 20 years the trust fund will be exhausted, according to its Board of Trustees most recent report
“Social Security isn’t magical savings.”
I don’t think anyone here asserted that SS has magical properties. But as originally conceived, SS is an effective way for every worker to insure that they won’t have to starve under a bridge when they retire. It was supposed to be free of the vississitudes of corporate or state mismanagement of pensions and of the stock market. Not magical, just prudent.
But if you’re not earning a lot then your contributions into SS won’t be meaningful either. That was my point. If you’re making less than $50k then what you get from SS when you retire won’t be enough.
Last summer, the NYTimes ran an interesting piece http://www.nytimes.com/2012/07/22/opinion/sunday/our-ridiculous-approach-to-retirement.html by
Teresa Ghilarducci, a professor of economics at the New School for Social Research. She points to the dismal failure of 401k’s for the average worker, and suggests a managed account on top of Social Security. Personally, I’m not sure if even that would work, considering the casino reality of the stock market and the dismal interest rates for savers for the foreseeable future, but I do agree we need to have a serious discussion nationwide about it, short of bringing back the work house.
Just began reading “Pound Foolish” dealing with the rise of the financial guru industry, AKA the Suze Orman school of retirement planning. Oye!!
Bob
the trust fund is not Social Security. you have been led to believe it is by very talented liars.
the trust fund in its current form will be “exhausted” in twenty years because it will have done what it was intended to do: help pay for the boomer retirement… with money the boomers themselves paid in over and above the normal pay as you go financing.
and yes, the people “trying to reform SS” are trying to kill it. they are clever liars and they know that you don’t know enough about it to protect yourself from the lies.
you try to “think” about it. but your thinking always ends up assuming one lie or another.
i don’t mean to be unkind, certainly not rude. but it is simply a fact that the people have been fooled. and as long as they don’t have the time, or knowledge, to find out the real facts, they will have their SS taken away from them… like taking candy from a baby.
you call for an “open mind” but the fact is… and it’s a basic human fact, not a defect in you particularly… that once people think they know something, they do not change their minds easily if at all.
The trustees say in their report that SS cannot sustain projected program costs and legislative modifications are necessary to avoid disruptive consequences.
“But if you’re not earning a lot then your contributions into SS won’t be meaningful either. That was my point. If you’re making less than $50k then what you get from SS when you retire won’t be enough.”
Enough for what? To retire comfortably at $50K a year. Nope. Enough to be able to have something to eat and a roof over your head somewhere. Quite possibly.
SS is not a pension. SS is not an annuity. SS is insurance.