The (Cuisan)art of fiscal policy (Paul Daggett)

Puréeing: Flawed ideas and denial

result in mush that no one can swallow.

StarTribune
July 24, 2011
By: Paul Daggett

The continuing stalemate over whether to raise the debt ceiling and how to control the nation's budget deficits is revealing. Politicians are unable or unwilling to acknowledge the seriousness of the U.S. fiscal position.

Consider the central disagreement between the parties: taxes. The Republican Party opposes increases of any kind, saying that taxes on "job creators" are exactly the wrong policy at a time of high unemployment. To reduce budget deficits without raising taxes, Republicans propose major cuts in government spending.

Democrats contend the huge cuts required to reduce deficits without "revenue increases" would decimate the lower and middle classes, which are more dependent than ever on government's safety-net programs. They argue that higher taxes on the wealthy are a fair way to balance government budgets.

Unfortunately, both parties' positions are fundamentally flawed.

The Republican position that tax increases would destroy jobs fails to acknowledge that spending cuts would also destroy jobs. Cutting government spending destroys the jobs of government employees as well as the jobs of those who sell goods and services to the government and to the recipients of government benefits.

Many Democrats insist that everything was fine with the budget under President Bill Clinton -- the federal government ran a budget surplus in the final three years of Clinton's second term. Undo the Bush tax cuts for the wealthy and end his expensive wars, and everything should be fine, they say.

Clinton's surpluses, however, were the result of a temporary surge in tax revenue as the Internet bubble inflated, not fiscal responsibility.

More important, these arguments both miss the larger point -- the financial/housing crisis and the Great Recession have changed everything.

The crisis has had enormous impact on the federal budget. The various stimulus plans, bailouts, tax incentives, etc., passed in response to the Great Recession cost far more than the Afghanistan and Iraq wars combined. And while federal spending surged at an unprecedented rate, government revenue was collapsing. Federal tax revenues plunged $400 billion from 2008 to 2009 and failed to recover, remaining level in 2010. Federal government revenues were lower in 2010 than they were in 2000!

Prior to the Great Recession, maybe the government's debt problem could have been solved with some reductions in the major entitlement programs, cuts in war spending and tax increases on the wealthy. But now, even the most "austere" proposals for dealing with the budget crisis (such as those from Rep. Paul Ryan or Obama's deficit commission) do not come close to balancing the budget. They simply slow the pace at which the nation hurtles into debt.

It seems unlikely, in the current political climate, that the United States will take the necessary steps to restrain its profligate ways voluntarily, but at least the country still has the time and resources to do so. Greece, Ireland, Portugal (and now likely Italy) failed to get their budgets under control fast enough and effectively went bankrupt. Now the budget decisions for those countries are dictated by their financial patrons, the European Union and the International Monetary Fund.

So while parties wrangle over whether the wealthy should endure a small tax increase or federal spending should actually be reduced for the first time in most Americans' lifetimes, soon enough the topics of debate will be far more serious:

Should Social Security and Medicare be drastically reformed or eliminated? Should taxes be raised significantly -- and on everyone? How should the United States adapt, geopolitically, to a dramatically downsized military?

The nation's debt will require real sacrifice and tough decisions. America can make those decisions itself or, like Greece, Ireland, and Portugal, leave them to foreign creditors.

Isn't it time the nation's politicians

started taking this seriously?

Paul Daggett is an investment analyst in Minneapolis.

The Extinction of Retirement (Michael Pento)

As of this writing, the S and P 500 is now no higher than

it was in January of 1999. For over 12 years the major averages

 have gone nowhere in nominal terms and have declined significantly

in real (inflation adjusted) terms. The dreams of becoming rich from

 investments have crashed along with Pets.com and Bernie Madoff.

Euro Pacific Capital
Michael Pento
June 15, 2011

For the better part of a century the foundations for a semi-comfortable retirement for many Americans have rested on the financial pillars of rising real estate and equity prices, positive real interest rates on savings, the continued solvency of public and private pension plans, and the reliability of national entitlement programs (Social Security, Medicaid). But in the last few years, the economic sands have fundamentally shifted and these pillars are no longer sturdy, some have cracked completely. For many Americans, the traditional idea of a comfortable retirement, filled with golf carts, cruises, and fishing trips, is going the way of the dodo bird.

Over the last decade incomes and job growth have stagnated, causing savings rates to drop. According to Jim Quinn author of the Burning Platform, 60% of retirees have less than $50,000 in savings. Such sums won’t last very long, especially when consumer prices are up 3.6%, import prices are up 12.5% and commodity prices are up 35% year over year. What’s worse, any savings placed in a bank will pay next to zero interest and will likely not even pay for the fees associated with the account. With cash savings essentially non-existent, the other pillars of income take on paramount importance. But these former bastions of financial security are being washed away by a torrent of red ink.

For years the essential Ponzi-like structures of Social Security and Medicare were concealed behind positive demographics. But once taxes collected from current payers fall short of the required distribution owed to current recipients, the ruse will be laid bare. That day is now in the foreseeable future. With insolvency a real and present danger, at least a consensus is now forming that Social Security must be structurally altered if it is to survive.

According to the Social Security Administration, in 2008, Social Security provided 50% of all income for 64% of recipients and 90% of all income for 34% of all beneficiaries. With these numbers, it’s not hard to see how even small cuts will spark big protests. Now try cutting the $20 trillion prescription drug program and the $79 trillion Medicare entitlements and watch the political sparks fly! However, given the realities, it’s hard to see how the program can escape deep cuts.

In the past many retirees could count on accumulated stock market wealth to help fund retirement. Not so much anymore. As of this writing, the S and P 500 is now no higher than it was in January of 1999. For over 12 years the major averages have gone nowhere in nominal terms and have declined significantly in real (inflation adjusted) terms. The dreams of becoming rich from investments have crashed along with Pets.com and Bernie Madoff. Then there is always the supposedly safest asset of all—a retiree’s home.

Despite a misguided faith that real estate prices could never fall, they have done just that…with a vengeance. According to S and P/Case-Shiller, the National Home Price Index has declined some 30% to levels not seen since the middle of 2002. And prices are still falling, with the rate of decline accelerating. The National Index dropped 4.2% in Q1 of 2011, after dropping 3.6% during Q4 2010. This means that only those retirees who have owned their homes for at least 10 years have any hope of selling at a profit. Ownership of significantly longer periods may be needed to have built up significant equity.

That leaves public and private pension plans. But here again there are serious issues. Let’s just look at state public pension shortfalls. According to the American Enterprise Institute for Public Policy Research, “States report that their public-employee pensions are underfunded by a total of $438 billion, but a more accurate accounting demonstrates that they are actually underfunded by over $3 trillion. The accounting methods that states currently use to measure their liabilities assumes plans can earn high investment returns without risk.” Huge returns without risk? Bond yields are the lowest they have been in nearly a century! What world are these states living in? With few options, the states will undoubtedly look to the Federal government (taxpayers) for a bailout. Failing that, cuts are inevitable.

The sad facts are; Americans are broke, the real estate market is still in secular decline, stock prices are in a decade’s long morass, real incomes are falling, public pension plans are insolvent and our entitlement programs are structurally unsound. If the pillars that seniors have relied on in the past fail to miraculously regenerate (and there is certainly no reason to believe they will), all that most retirees will have will be freshly printed greenbacks that come from a never ending policy of federal deficits and an obliging Federal Reserve. Unfortunately, the inflation that will result from such a policy will sap most of the purchasing power that those notes possess. In other words, for most people retirement is now an illusion, and many Americans will find themselves working far longer, for far less real compensation, then they ever imagined. The quicker we realize this, and plan accordingly, the better off we will be.



Social Security Projected to Run Dry In 2036 and Other U.S. Misplaced Priorities

Social Security trust funds are

projected to be drained in 2036

United States Misplaced Priorities

$1 Trillion and Counting

 

$138 Billion and Counting

 

$2 Billion in Tax Breaks Annually

Billions in Corporate Tax Breaks.

Bank of America makes $4.4 billion profit yet

recieves a $1.9 billion tax refund and

received almost $1 Trillion bailout from TARP.

Capital Hill Blue
By: Stephen Ohlemacher and
Ricardo Alonzo-Zaldivar
May 14, 2011

The bad economy is worsening the already-shaky finances of Medicare and Social Security, draining the trust funds supporting them faster than expected and intensifying the need for Congress to shore up the massive benefit programs, the government said Friday.

Both Medicare and Social Security are being hit by a double whammy: the long-anticipated wave of retiring baby boomers and weaker-than-expected tax receipts, according to the annual report by the trustees who oversee the programs.

The Medicare hospital insurance fund for seniors is now projected to run out of money in 2024, five years earlier than last year’s estimate. The Social Security trust funds are projected to be drained in 2036, one year earlier than the last estimate. Once the trust funds are exhausted, both programs can only collect enough money in payroll taxes to pay partial benefits, the report said.

More immediate bad news for seniors: After they’ve gone two years with no cost-of-living increase in Social Security payments, the trustees project a 0.7 percent increase for next year, a raise so small that it will probably be wiped out by higher Medicare Part B premiums for most beneficiaries.

“There can no longer be any doubt or denial: Our nation’s Medicare and Social Security programs are unsustainable and will run out of money sooner than expected,” said Senate Republican Leader Mitch McConnell of Kentucky.

Congress and the Obama administration are negotiating possible changes to Medicare and other benefit programs as part of a deal to increase the government’s ability to borrow. The $14.3 trillion debt ceiling will be hit Monday, though Treasury officials are taking measures to put off an unprecedented default on government bonds until August, Treasury Secretary Timothy Geithner said.

Congress is putting off changes to Social Security, but Medicare, the government health insurance program for older Americans, is still on the table.

The longer Congress waits to fix the programs, the more likely it is that lawmakers will be forced to impose tax increases, deep benefit cuts, or both, to save them, the report said. By acting sooner, the trustees said Congress can impose gradual changes that reduce the impact on current beneficiaries and give future retirees time to prepare.

Fixing Social Security would require an increase in the payroll tax of 2.15 percentage points, or an immediate and permanent 14 percent cut in benefits, the report said. Fixing the Medicare hospital fund would require an increase in the payroll tax of nearly 1 percentage point, or a 17 percent cut in benefits.

Nearly 55 million retirees, disabled people and children who have lost parents receive Social Security benefits, which average $1,077 monthly. More than 46 million people are covered by Medicare. Complete Article

Deficit Commission Plan, Cut: Soc. Security, Medicare, Farm Subsidies and consider cutting OUT mortgage % deduction

It's a very provocative proposal,"

said GOP Rep. Jeb Hensarling of Texas.

"Some of it I like. Some of it disturbs me.

And some of it I've got to study."

(JEB! YOU ARE ONE OF THE COMMISSIONERS!)

WASHINGTON (AP) — Leaders of President Barack Obama's bipartisan deficit commission on Wednesday proposed reducing the annual cost-of-living increases in Social Security, part of a bold plan to control $1 trillion-plus budget deficits.

The proposal also would set a tough target for curbing the growth of Medicare and recommends looking at eliminating popular tax breaks, such as mortgage interest deduction.

As proposed, the plan by Chairman Erskine Bowles and former Sen. Alan Simpson, R-Wyo., doesn't look like it can win support from 14 of the commission's 18 members to force a debate in Congress. Bowles is a Democrat and was former President Bill Clinton's White House chief of staff.

Cuts to Social Security and Medicare are making some liberals on the panel recoil. And conservative Republicans are having difficulty with options on how to raise tax revenue. The plan also calls for cuts in farm subsidies, foreign aid and the Pentagon's budget.

"This is not a proposal I could support," said Rep. Jan Schakowsky, D-Ill. "On Medicare and Social Security in particular, there are proposals that I could not support."

The Social Security proposal would change the inflation measurement used to calculate cost of living adjustments for program benefits, reducing annual cost-of-living increases. It will almost certainly draw opposition from advocates for seniors, who are already upset that there will be no increase for 2011, the second straight year without a raise.

The plan released by Bowles is only a proposal put forth by him and Simpson. Members of the commission will resume debate on it later Wednesday and next week in a long-shot bid to reach a compromise.

The release of the proposal comes just a week after midterm elections that gave Republicans the House majority and increased their numbers in the Senate. During the campaign, neither political party talked of spending cuts of the magnitude proposed by Bowles, with Republicans simply proposing $100 million in cuts to domestic programs passed each year by Congress.

"It's a very provocative proposal," said GOP Rep. Jeb Hensarling of Texas. "Some of it I like. Some of it disturbs me. And some of it I've got to study."

Senior citizens brace for Social Security freeze..Nice hack job on the U.S. Dollar Bernanke

It is absolutely appauling that our senior citizens are once again kicked to the curb. Bernanke's monetary policies have crushed and continue to crush the U.S. Dollar and each new U. S. Government administration strategically designs new manipulation tools when calculating real inflation and somehow they actually sleep at night knowing the impact this has on our senior citizens.

It is a disgrace that the generations who built this country, saved money, did not pass along a gargantuan debt burden to their grandchildren and paid off their mortgages are treated with less respect and caring than caged animals in a zoo.


By Matt Sedensky
Associated Press
10/11/10

BOCA RATON, Fla. – Seniors prepared to cut back on everything from food to charitable donations to whiskey as word spread Monday that they will have to wait until at least 2012 to see their Social Security checks increase.

The government is expected to announce this week that more than 58 million Social Security recipients will go through a second straight year without an increase in monthly benefits. This year was the first without an increase since automatic adjustments for inflation started in 1975.

"I think it's disgusting," said Paul McNeil, 69, a retired state worker from Warwick, R.I., who said his food and utility costs have gone up, but his income has not. He lamented decisions by lawmakers that he said do not favor seniors.

"They've got this idea that they've got to save money and basically they want to take it out of the people that will give them the least resistance," he said.

Cost-of-living adjustments are automatically set by a measure adopted by Congress in the 1970s that orders raises based on the Consumer Price Index, which measures inflation. If inflation is negative, as in 2009 and 2010, payments remain unchanged.

Still, seniors like McNeil said they'll be thinking about the issue when they go to vote, and experts said the news comes at a bad time for Democrats already facing potentially big losses in November. Seniors are the most loyal of voters, and their support is especially important during midterm elections, when turnout is generally lower.

"If you're the ruling party, this is not the sort of thing you want to have happening two weeks before an election," said Andrew Biggs, a former deputy commissioner at the Social Security Administration and now a resident scholar at the American Enterprise Institute.

At St. Andrews Estates North, a Boca Raton retirement community, seniors largely took the news in stride, saying they don't blame Washington for the lack of an increase. Most are also collecting pensions or other income, but even so, they prepared to tighten their belts.

Bette Baldwin won't be able to travel or help her children as much. Dorcas Eppright will give less to charity. Jack Dawson will buy cheap whiskey instead of his beloved Canadian Club.

"For people who have worked their whole life and tried to scrimp and save and try to provide for themselves," said Baldwin, a 63-year-old retired teacher, "it's difficult to see that support system might not sustain you."

Baldwin and her husband mapped out their retirements, carefully calculating their income based on their pensions and Social Security checks. Trouble is, they expected an annual cost-of-living increase.

"When we cut back, we're cutting back on niceties," Baldwin said. "But there are other people that don't have anything to cut back on. They're cutting back on food and shelter."

Many at St. Andrews said the cost-of-living decision won't affect who they vote for next month. But seniors tied the Social Security issue to what they see as a larger societal problem with debt, entitlements and hopefulness for the future.

"I'm kind of glad in a way," Stella Wehrly, an 86-year-old retired secretary, said of the freeze. "One thing depends on the other and when people aren't working there's not enough people feeding into the Social Security system."

Wehrly and her husband, Hank, said curtailing government spending is necessary to maintain the Social Security system.

"We have a generation now that we're not going to leave a very good legacy for," she said.

Jack Dawson, 77, said the freeze is the right move considering the state of the government and the American economy.

"Who would be surprised what's happened?" he asked. "I feel this is the right decision in light of the malaise."

More than 58.7 million people rely on Social Security checks that average $1,072 monthly. It was the primary source of income for 64 percent of retirees who got benefits in 2008; one-third relied on Social Security for at least 90 percent of their income.

At the Phoenix Knits yarn shop in Phoenix, 73-year-old owner Pat McCartney said she already worries about paying for utilities, groceries and gas. Not having the increase makes her worry even more.

"If I have any major expense, I don't know what I'll do," McCartney said while helping customers with their knitting. "I live on Social Security."

In Kansas City, Mo., Georgia Hollman, 80, said Social Security is her sole source of income. She would have liked a bigger check, but said she's grateful for what she gets.

"There isn't nothing I can do about it but live with it," she said. "Whatever they give us is what we have to take. I'm thankful we get that little bit."

Advocates for seniors argue the Consumer Price Index doesn't adequately weigh the costs that most affect older adults, particularly medical care and housing.

"The existing COLA formula does not account for the economic reality of the true costs that most seniors faced," said Fernando Torres-Gil, director of UCLA's Center for Policy Research on Aging and the first person appointed to the governmental post of assistant secretary for aging, during the Clinton administration.

Still, Torres-Gil said the political reality is different, and many feel seniors are lucky to have their checks determined by the CPI, instead of some new formula that might make it even harder to secure a raise.

"We may just lucky to keep the current index," he said.

Obama: Social Security 'is not in crisis'

By Jordan Fabian
TheHill.com

President Obama said Social Security is not in crisis and only modest changes are needed to keep it solvent.

The president acknowledged at a small town hall gathering in Columbus, Ohio, Wednesday that the pension fund "has to be tweaked because the population is getting older" but said Republicans' plans to drastically overhaul the program are wrong.

"Social Security is not in crisis," Obama said. "We're going to have to make some modest adjustments in order to strengthen it."

Social Security has become a significant campaign issue during the August recess — Democrats have attacked the GOP, accusing them of wanting to privatize the Great Depression-era program. They cite Rep. Paul Ryan's (R-Wis.) budget roadmap, which proposes raising the retirement age to 70 and cutting benefits for wealthy retirees.

In the past, the GOP has proposed putting some Social Security benefits in private accounts. But many Republicans have said they do not support the plan.

Still, some economists worry the program will soon become insolvent because there are more retirees and, thus, fewer workers paying into the system. Recent polling also shows that most people believe they will not receive their benefits upon retirement.

But the president said these problems can be solved so everyone can receive benefits.

"There are some fairly modest changes that could be made without resorting to any newfangled schemes that would continue Social Security for another 75 years, where everybody would get the benefits they deserve," he said.

"I have been adamant that Social Security should not be privatized, and it will not be privatized as long as I am president," he added.

Obama also said his bipartisan fiscal commission could come up with proposals to extend the life of the program.

"I am absolutely convinced it can be done," he said.