With most of the 99% ers being uprooted from their occupations by police throughout major cities, the movement continues with somewhat dubious goals and ideology. The fundamental argument of income inequality in America is, however, undeniable. And things are getting worse. The concentration of income has actually grown far more severe over the past three years of the Obama administration, although to be fair it's hard to see how the Administration's policies have at least directly fostered this outcome.
The Federal Reserve, however, is fairly open about their role in pushing inequality to new limits, although they wouldn't state it quite so candidly. Bernanke is on record before Congress testifying that Fed policy is designed to inflate the value of risk assets. Bernanke's argument is that by making (safer) assets like bank deposits and Treasury bonds so utterly painful to own (due to negative inflation adjusted returns) Americans are in effect forced into investment in higher yielding and riskier assets. The greater the demand for risk assets, the higher the values. These risk assets, however, including stocks, corporate bonds and high yield bonds are disproportionately held by the most wealthy of Americans.
As these assets generously appreciate due to increasing investment, Americans - albeit already wealthy Americans - realize a greater wealth effect, thereby promoting more consumption of the stuff we already own way too much of. This conspicuous consumption promotes economic growth and in the long run (perhaps the very long run) employment gains.
Democrats used to scoff at this age old economic argument, applying the term "trickle down economics" to deride the notion that the rich get richer and then, eventually, everyone else will benefit as the crumbs trickle down to the masses. Hard to swing this argument too aggressively now, though, with a liberal Democrat in the White House.
Be this as it may, our thoughts center around this 1% and the growing chorus of concern about income inequality. For the most part, this topic of inequality is seldom raised without the parallel discussion of raising marginal tax rates, in an effort to make the progressive tax system so much more progressive. Truth be told, raising the top tax bracket to 100% will do little to address the issue of income inequality in America.
Higher tax rates, of course, will only impact after-tax incomes and have no impact on the fundamental issue of what people earn. We raise this point, not facetiously, but rather to address a more profound conundrum in contemporary American society: why is there such great income inequality?
To begin with, let's look at the most wealthy of income earners in America. And we need not look any further than the Entertainment Industry. Lady Gaga, earning $70 million last year, will dwarf by six or seven-fold the income of Lloyd Blankfein, CEO of Goldman Sachs, or Jamie Dimon of J. P. Morgan. Perhaps the occupy movement should have started out as Occupy Hollywood? To be far more relevant, though, the movement should of course be an Occupy Washington effort, for this is where the rules are made by which income inequality is allowed to exist. Hardly reasonable to blame Gaga or Blankfein for simply playing the game so well.
But why do such income disparities exist? For the answer, we need to understand the economics of the labor markets. According to Sports Illustrated, Eli Manning of the New York Giants, at #50 on the list of highest paid athletes in 2010, made $15 million. The top paid athlete that year was Tiger Woods, who together with endorsements earned a staggering $128 million. By comparison, according to Forbes magazine, James Gorman, CEO of Morgan Stanley made a paltry $6.5 million - chump change for a top paid athlete.
Moving beyond Tiger, film, TV and music celebrities are at the very top of the 1%, leaving their sports celebrity counterparts to park their cars. Again, per Forbes, the top 10 actors in Hollywood took down a combined $350 million in income in 2010. Talk about income inequality!
It might be interesting for us to ponder the forces that create such income disparity and what could be done to address it. It's far easier though, for the American public to bite down hard on the idea of a system to ameliorate after-tax income inequality through higher tax rates. After all, Americans have a secret love affair with taxes - that is of course, as long as they're paid by someone else. Call it rightful vengeance. It simply feels good to see others pay their "fair" share of taxes, almost primal.
This is why most of us are happy to raise taxes on cigarettes (because most of us don't smoke) and why taxes to support schools are overwhelming more popular with renters than with homeowners (because in most states, schools are supported by property taxes on owned residences). As Huey Long said, "Don't tax you, don't tax me, tax the man behind the tree".
But the real question of income inequality is worth considering. Why is it that Mel Gibson has earned so much money that he can afford to pay his ex-wife a divorce settlement of $450 million? Is his value to society so infinitely greater than that of a school teacher teaching your children, a doctor who treats them when they're sick or the police who protect them?
Two reasons. The first one is plainly societal. If we turn back the clock 100 years, actors were broke. They acted in small, underfunded acting companies where the actors worked for pennies. Babe Ruth, the undisputed greatest athlete of his day, died with barely a dime in the bank. Somewhere along the road, though, these dynamics changed and boy did they ever.
Today the fact is, the simple reason the studios can pay Johnny Depp $50 million per movie is because they expect they will earn this back and far more at the box office. So, it's really us - those of us who go to see his films that are offering Depp a seat at the front of the 1% bus. This is, of course, equally true of Derek Jeeter, Kobe Bryant, Lebron James and so on.
The interesting question to ask then, is why isn't this equally true of your family doctor, dentist or kids' school teacher. And the reason is that we as a society don't place the same value on their contributions, because we aren't willing to transfer the same economics to these sectors that we gladly shell out for our own entertainment. And we're willing to voice our support not with our votes or our words, but with our wallets! It's like bemoaning how awful it is that celebrities are hounded by the paparrazi as we scoop up tabloid magazines at the supermarket that, of course, create the opportunities for the paparrazi to sell their photos.
The second reason for this great income inequality is that those whose nests aren't feathered by Americans' tastes for consumption are deftly aided by their friends in Washington. You may think, "no way Blankfein is worth $10 million". The guy can't act his way out of a paper bag (as we saw in the Senate hearings) and he doesn't look nearly as good as Gaga in a leotard. Points well taken. But what Lloyd and execs on Wall Street, along with big Pharma, Oil, Defense, Aerospace and many other industries have long since realized is that they can tip the scales of profitability strongly in their company's favor by cozying up to those on the hill who regulate, purchase products and services and provide funding incentives for their businesses. As long as elections cost increasing amounts of cash to fund, politicians will increasingly listen and listen hard to whomever hands it out to them.
So there you have it. Income inequality. Look no further than Washington and your living room to get a better understanding of it.
Friday, January 6, 2012
Thursday, October 27, 2011
US GDP Growth and the Budget Deficit
According to the US Department of Commerce, GDP in the quarter ended Sept 30, 2011 grew at a 2.5% annual rate or by $185.8 billion in the quarter. A few weeks earlier, the US Department of Treasury reported that for the fiscal year ended Sept 30, 2011, the budget deficit grew by $1.3 trillion, or roughly $325 billion for the quarter. So the government spent a total of $325 billion more than it received in tax revenue in the third quarter so the economy as a whole, government, corporate and private sectors could generate a total of $185.8 billion in incremental sales of goods and services. Why didn't somebody think of this before?
Deficit spending comes at a price, of course, otherwise Latin America would long since have ruled the global economy. But we in America have the luxury of being the world reserve currency and other advantages that blur the importance and even significance of fiscal discipline.
Nonetheless, the US budget deficit for the most recent fiscal year equaled 8.7% of GDP, down from the 9.1% recorded for the prior fiscal year, but all the same, a near record high. It's also important to note that this slight improvement in the debt ratio was actually driven by higher tax revenue as outlays also increased, but at a slower rate than revenue.
According to the US Debt Clock http://www.usdebtclock.org/, total US debt is now $14.8 trillion and counting. And at an annual budget deficit of $1.3 trillion, we're counting pretty fast - at a rate of roughly $3.6 billion per day, every day, weekends and holidays included.
Now what's even more stunning about this, is that for the 2007 fiscal year, the year prior to the advent of the credit crisis, total US debt stood at $9 trillion. And if we run the clock back to 2000 that number drops to $5.6 trillion. Were we go all the way back to 1980, before the great expansion, total US debt falls to a mere $900 billion.
What's astounding to us, though, is the scale of the budget deficits that we are now sustaining. To provide some perspective, it might be worth pointing out that with deficits now in excess of $1.3 trillion for each of the past three years (2008-2011) the largest deficit the country ever recorded prior to this period was $467 billion in 2008 (each of these in inflation adjusted dollars). We might also add to this astounding borrowing binge, the $2 trillion that the Federal Reserve Bank has added to its balance sheet through QE I and II.
So let's stop and think about this for a minute. We're now roughly four years into the credit crisis. We've had zero interest rates for most of that time, impoverishing savers, we've increased the national debt by roughly $5.8 trillion (or by 64%) and we've added $2 trillion to the Fed. Meanwhile, unemployment continues to run in excess of 9%, we've had sub 1% GDP growth for the first six months of the year and now we're wildly celebrating preliminary GDP growth of a mere $2.5% in Q3.
Deficit spending comes at a price, of course, otherwise Latin America would long since have ruled the global economy. But we in America have the luxury of being the world reserve currency and other advantages that blur the importance and even significance of fiscal discipline.
Nonetheless, the US budget deficit for the most recent fiscal year equaled 8.7% of GDP, down from the 9.1% recorded for the prior fiscal year, but all the same, a near record high. It's also important to note that this slight improvement in the debt ratio was actually driven by higher tax revenue as outlays also increased, but at a slower rate than revenue.
According to the US Debt Clock http://www.usdebtclock.org/, total US debt is now $14.8 trillion and counting. And at an annual budget deficit of $1.3 trillion, we're counting pretty fast - at a rate of roughly $3.6 billion per day, every day, weekends and holidays included.
Now what's even more stunning about this, is that for the 2007 fiscal year, the year prior to the advent of the credit crisis, total US debt stood at $9 trillion. And if we run the clock back to 2000 that number drops to $5.6 trillion. Were we go all the way back to 1980, before the great expansion, total US debt falls to a mere $900 billion.
What's astounding to us, though, is the scale of the budget deficits that we are now sustaining. To provide some perspective, it might be worth pointing out that with deficits now in excess of $1.3 trillion for each of the past three years (2008-2011) the largest deficit the country ever recorded prior to this period was $467 billion in 2008 (each of these in inflation adjusted dollars). We might also add to this astounding borrowing binge, the $2 trillion that the Federal Reserve Bank has added to its balance sheet through QE I and II.
So let's stop and think about this for a minute. We're now roughly four years into the credit crisis. We've had zero interest rates for most of that time, impoverishing savers, we've increased the national debt by roughly $5.8 trillion (or by 64%) and we've added $2 trillion to the Fed. Meanwhile, unemployment continues to run in excess of 9%, we've had sub 1% GDP growth for the first six months of the year and now we're wildly celebrating preliminary GDP growth of a mere $2.5% in Q3.
Monday, September 26, 2011
The Witch Hunt for S&P
It's hardly news to anyone these days that S&P erred, substantially perhaps, in their rating of sub-prime mortgage bonds, CMOs and related products. Tranches rated AAA ultimately resulted in downgrades to sub-investment grade and even default. In the aftermath of the credit crisis, investors lost substantial value on these downgrades.
All this, now common knowledge in retrospect, was far less evident to the folks at S&P at the time the ratings were instituted. This point is corroborated by the fact that largely identical ratings were assigned by Moody's and Fitch on the very same securities now in question. Mistakes were clearly made and this is why to great degree all rating agencies refer to their ratings as rating "opinions". Ratings are not designed to be a definitive, official views or to be guarantees or insurance policies.
Be that as it may, as a matter of practice, financial professionals and investors alike had grown accustomed to relying on ratings as a basis of their investment decision, with the markets setting trading levels based upon credit spreads, or the degree to which the given rating departed from the US "AAA". Whether such reliance is appropriate or prudent, however, is a question that the SEC has chosen to dismiss in its issuance of a Wells Notice to S&P.
With the SEC plan to investigate the rating practices of S&P, the SEC will be arguing that S&P willfully or negligently mislead the market with their ratings on CDOs. This raises several questions, none of which are particularly sensible. Moreover, following the highly publicized downgrade of US Government debt by S&P, and the obvious political embarrassment to the Obama administration, the action also raises a far more troubling question about the depth and breadth of Federal agencies in prosecuting for political, rather than public good.
First, we have to ask, "Why S&P"? The vast majority of sub-prime mortgage bonds, CDOs and related securities carried in each case more than one rating. It has long become accepted practice of the bond market to require a minimum of two ratings on each new issue. So if Moody's and S&P both rated the very same issue "AAA" how is it reasonable that the SEC only finds alleged fraud in the rating of S&P?
Second, if the ratings are credit opinions, and irrespective of whether you accept the rating agencies claim of protection under the first amendment, how is it that the SEC can allege fraud? No one was forced or coerced to accept or rely under their opinion and, in fact, prudent investors conducted their own in-house, independent credit analysis of the securities.
This now raises the far more dark and terrifying question of whether our government is capable of the sort of witch hunts, slander and politically motivated prosecutions of a truly oppressive, totalitarian regime. Despite the best attempts of our current congress to degrade public sentiment toward our government, few Americans truly believe this to be possible. This is America and we are a democracy, ruled by officials chosen in fair and open elections.
But to argue that today's SEC action against S&P is purely coincidental and not retaliatory is simply far too unreasonable for us to believe. The SEC, clearly asleep at the switch throughout the extended market events leading up to the credit crisis, has now further tarnished its reputation by playing the role of bad cop for the Obama administration.
All this, now common knowledge in retrospect, was far less evident to the folks at S&P at the time the ratings were instituted. This point is corroborated by the fact that largely identical ratings were assigned by Moody's and Fitch on the very same securities now in question. Mistakes were clearly made and this is why to great degree all rating agencies refer to their ratings as rating "opinions". Ratings are not designed to be a definitive, official views or to be guarantees or insurance policies.
Be that as it may, as a matter of practice, financial professionals and investors alike had grown accustomed to relying on ratings as a basis of their investment decision, with the markets setting trading levels based upon credit spreads, or the degree to which the given rating departed from the US "AAA". Whether such reliance is appropriate or prudent, however, is a question that the SEC has chosen to dismiss in its issuance of a Wells Notice to S&P.
With the SEC plan to investigate the rating practices of S&P, the SEC will be arguing that S&P willfully or negligently mislead the market with their ratings on CDOs. This raises several questions, none of which are particularly sensible. Moreover, following the highly publicized downgrade of US Government debt by S&P, and the obvious political embarrassment to the Obama administration, the action also raises a far more troubling question about the depth and breadth of Federal agencies in prosecuting for political, rather than public good.
First, we have to ask, "Why S&P"? The vast majority of sub-prime mortgage bonds, CDOs and related securities carried in each case more than one rating. It has long become accepted practice of the bond market to require a minimum of two ratings on each new issue. So if Moody's and S&P both rated the very same issue "AAA" how is it reasonable that the SEC only finds alleged fraud in the rating of S&P?
Second, if the ratings are credit opinions, and irrespective of whether you accept the rating agencies claim of protection under the first amendment, how is it that the SEC can allege fraud? No one was forced or coerced to accept or rely under their opinion and, in fact, prudent investors conducted their own in-house, independent credit analysis of the securities.
This now raises the far more dark and terrifying question of whether our government is capable of the sort of witch hunts, slander and politically motivated prosecutions of a truly oppressive, totalitarian regime. Despite the best attempts of our current congress to degrade public sentiment toward our government, few Americans truly believe this to be possible. This is America and we are a democracy, ruled by officials chosen in fair and open elections.
But to argue that today's SEC action against S&P is purely coincidental and not retaliatory is simply far too unreasonable for us to believe. The SEC, clearly asleep at the switch throughout the extended market events leading up to the credit crisis, has now further tarnished its reputation by playing the role of bad cop for the Obama administration.
Tuesday, September 20, 2011
Buffet Rule
Warren Buffet's selfless and noble request of the President, "Please, Mr. Obama, raise my taxes because it's just not fair that us billionaires pay so little...I feel terrible about the whole thing, really I do", was carried forth with lightening speed by the Obama administration, always ready to help, in their quick pronouncement of the "Buffet Rule". Leave it now to us nagging skeptics to point out the convenience of this plan, just days after Mr. Obama's prime time spending proposal. The Obama proposal, hastily criticized for its "funding plan to come later language" now springs forth the Buffet Rule, a timely salvo for the proposal's shortcomings.
Mr. Buffet's argument lies in the fact, so he testifies, that he pays a far lower tax rate than his nanny, er, secretary. It's just so damn unjust, so un-patriotic and so utterly annoying.
Ol' Warren, the sly potato that he is, cleverly fails to point out that his secretary's income is taxed at ordinary tax rates, while the Oracle of Omaha takes no salary from Berkshire Hathaway, preferring his recompense entirely in the form of long-term capital gains. This small crime of omission, might leave the great huddled masses to mistakenly conclude that rich people don't pay taxes, but so be it. He's just stating the facts. Let people draw whatever conclusions they like. One can only be left to guess if Obbie, too, falls into this class of the unschooled, or if he is just tying to pull a fast one on the American public in an election year.
Call it politics if you like, but it's fundamentally dishonest. If Buffet was above-board about this whole matter he would have simply, plainly and clearly made the case that what America needs to do to generate additional revenue is raise the capital gains tax rate and, if you agree, thereby make the tax system more fair. But what Buffet and Obama both knew, of course, is that this kind of frankness would have set off a heated debate about the impact of higher capital gains rates on the already abysmally low rate of investment in America. And who wants that sort of aggravation?
By couching the argument in the vague premise that he, as the biggest of all fat cats, is making out like a bandit, Mr. Obama can catch the quick shovel pass and, hopefully, carry it unimpeded into the endzone. After all, who wants to see rich people not pay their fair share?
This media circus follows closely on the heels of Buffet's prior cameo appearance when he rode his white horse in to see Brian Moynihan at Bank of America. Coming to Warren as an apparition, while he cleansed his sagging privates in the bath, he thought, "Gee, maybe I can lend the Bank $5 billion at preferred rates...not that they need the capital, or anything but just, well, because". This revelation too, coming within days of his prior visit to the While House. We can only wait to see what happens next.
Think what you'd like, but I'm thinking that Warren may not be the first fundamentally dishonest billionaire, but he is certainly becoming the most visible.
Mr. Buffet's argument lies in the fact, so he testifies, that he pays a far lower tax rate than his nanny, er, secretary. It's just so damn unjust, so un-patriotic and so utterly annoying.
Ol' Warren, the sly potato that he is, cleverly fails to point out that his secretary's income is taxed at ordinary tax rates, while the Oracle of Omaha takes no salary from Berkshire Hathaway, preferring his recompense entirely in the form of long-term capital gains. This small crime of omission, might leave the great huddled masses to mistakenly conclude that rich people don't pay taxes, but so be it. He's just stating the facts. Let people draw whatever conclusions they like. One can only be left to guess if Obbie, too, falls into this class of the unschooled, or if he is just tying to pull a fast one on the American public in an election year.
Call it politics if you like, but it's fundamentally dishonest. If Buffet was above-board about this whole matter he would have simply, plainly and clearly made the case that what America needs to do to generate additional revenue is raise the capital gains tax rate and, if you agree, thereby make the tax system more fair. But what Buffet and Obama both knew, of course, is that this kind of frankness would have set off a heated debate about the impact of higher capital gains rates on the already abysmally low rate of investment in America. And who wants that sort of aggravation?
By couching the argument in the vague premise that he, as the biggest of all fat cats, is making out like a bandit, Mr. Obama can catch the quick shovel pass and, hopefully, carry it unimpeded into the endzone. After all, who wants to see rich people not pay their fair share?
This media circus follows closely on the heels of Buffet's prior cameo appearance when he rode his white horse in to see Brian Moynihan at Bank of America. Coming to Warren as an apparition, while he cleansed his sagging privates in the bath, he thought, "Gee, maybe I can lend the Bank $5 billion at preferred rates...not that they need the capital, or anything but just, well, because". This revelation too, coming within days of his prior visit to the While House. We can only wait to see what happens next.
Think what you'd like, but I'm thinking that Warren may not be the first fundamentally dishonest billionaire, but he is certainly becoming the most visible.
Wednesday, August 24, 2011
Are We Turning Japanese?
Earlier today I heard Richard Yamarone, Chief Economist of Bloomberg speak on Bloomberg radio. I have much respect for his insights and will paraphrase what I believe to be a critical observation of the US economy. In comparing the US today with the lost decades of GDP growth in the Japanese economy, Richard said "If we're following the same prescription for the same ailment, how can we possibly expect the progrnosis for recovery to be any different?"
I highlight his comment for several reasons, both in respect of forecasting the damage to US growth brought on by the deleveraging of excessive debt and also in understanding the role that demographic factors will play in shaping the recovery. Economists have written at length about the impact of an aging population on the savings rate and on shifting investment objectives. The theory being as aging boomers retire, they become net savers withdrawing invested funds from stock and bond markets, much as investors have done in Japan. The net savings outflow exerts downward pressure on prices in financial markets. But, unlike Japan, net savings in the US will worsen a problem that already exists of low net investment in the economy.
As these factors continue to play out in America, again, much as they have in Japan, sluggish growth and lowering GDP forecasts into 2012 will almost guarantee that our 9.1% rate of unemployment will continue to hold, if not rise. There has also been much written about U-6, the rate of unemployment and underemployment, now at 16%. We also now understand that the absolute rate of unemployment has been strangely biased downwards by a plunge in the participation rate. With a weak labor market, not surprisingly we're seeing stagnant personal income and, limited consumption demand.
Taken together the factors of adverse deleveraging, adverse demographics, weak GDP forecasts and stubbornly high unemployment argue for dramatic action on the fiscal and monetary side. Make no mistake, we have already seen dramatic response in four years of near zero interest rates, fiscal stimulus, buyer incentive programs, reduced tax witholding and the like. Unfortunately, as we are seeing, with the economy much as it was in 2009, but now with $4 trillion of additional US indebtedness, it isn't working. None of these programs will solve the combination of headwinds to the economy mentioned above.
What is necessary is a solution for accelerating the movement of the baby boomers into retirement and out of the labor force in an effort to create renewed labor demand and, with it, greater consumption for housing, goods and services. This of course, presents its own unique problems as, with limited exception in the governmental sector, auto and airline industries, defined contribution plans in America are grossly underfunded. The ERISA act of 1974 all but guaranteed that the problem of funding worker retirement would be neatly shifted from the corporate sector to the individual retiree.
And the outcome could not be worse. Fidelity Investments, one of the largest holders of 401k plans assets, estimates that the average investor balance in 401k assets is $75,000, up significantly from the depths of 2009, but hardly enough for most families to fund a comfortable retirement.
So where does this leave us? A desperately weak economy, with chronically high unemployment and underfunded pensions for those seeking to leave the labor force! Before we all start lining up for greeter positions at WalMart, perhaps there is something that can be done.
As the President returns from Martha's Vineyard and formulates a jobs program to jump start employment, he and Congress should consider allowing retirees to withdraw funds from IRAs and 401k plans on a fully tax-exempt basis providing, however, that they evidence no earned income. Allowing families to access their retirement accounts on a tax free basis will change the economics of the retirement decision for millions of Americans. To the extent that it promotes earlier retirement it will not only address the conundrum of underfunded retirement savings, but will create new vacancies and renewed demand in the labor force.
While this plan would diminish personal tax receipts on those withdrawals, to the extent that new jobs are created in the economy, personal tax revenues would also be boosted, while at the same time reducing the aggregate level of unemployment insurance and other transfer payments.
Let's hope the President's new plan incorporates this or other new ideas for addressing the multi-faceted problems of our economy, rather than relying upon the next shovel ready bridge to nowhere.
I highlight his comment for several reasons, both in respect of forecasting the damage to US growth brought on by the deleveraging of excessive debt and also in understanding the role that demographic factors will play in shaping the recovery. Economists have written at length about the impact of an aging population on the savings rate and on shifting investment objectives. The theory being as aging boomers retire, they become net savers withdrawing invested funds from stock and bond markets, much as investors have done in Japan. The net savings outflow exerts downward pressure on prices in financial markets. But, unlike Japan, net savings in the US will worsen a problem that already exists of low net investment in the economy.
As these factors continue to play out in America, again, much as they have in Japan, sluggish growth and lowering GDP forecasts into 2012 will almost guarantee that our 9.1% rate of unemployment will continue to hold, if not rise. There has also been much written about U-6, the rate of unemployment and underemployment, now at 16%. We also now understand that the absolute rate of unemployment has been strangely biased downwards by a plunge in the participation rate. With a weak labor market, not surprisingly we're seeing stagnant personal income and, limited consumption demand.
Taken together the factors of adverse deleveraging, adverse demographics, weak GDP forecasts and stubbornly high unemployment argue for dramatic action on the fiscal and monetary side. Make no mistake, we have already seen dramatic response in four years of near zero interest rates, fiscal stimulus, buyer incentive programs, reduced tax witholding and the like. Unfortunately, as we are seeing, with the economy much as it was in 2009, but now with $4 trillion of additional US indebtedness, it isn't working. None of these programs will solve the combination of headwinds to the economy mentioned above.
What is necessary is a solution for accelerating the movement of the baby boomers into retirement and out of the labor force in an effort to create renewed labor demand and, with it, greater consumption for housing, goods and services. This of course, presents its own unique problems as, with limited exception in the governmental sector, auto and airline industries, defined contribution plans in America are grossly underfunded. The ERISA act of 1974 all but guaranteed that the problem of funding worker retirement would be neatly shifted from the corporate sector to the individual retiree.
And the outcome could not be worse. Fidelity Investments, one of the largest holders of 401k plans assets, estimates that the average investor balance in 401k assets is $75,000, up significantly from the depths of 2009, but hardly enough for most families to fund a comfortable retirement.
So where does this leave us? A desperately weak economy, with chronically high unemployment and underfunded pensions for those seeking to leave the labor force! Before we all start lining up for greeter positions at WalMart, perhaps there is something that can be done.
As the President returns from Martha's Vineyard and formulates a jobs program to jump start employment, he and Congress should consider allowing retirees to withdraw funds from IRAs and 401k plans on a fully tax-exempt basis providing, however, that they evidence no earned income. Allowing families to access their retirement accounts on a tax free basis will change the economics of the retirement decision for millions of Americans. To the extent that it promotes earlier retirement it will not only address the conundrum of underfunded retirement savings, but will create new vacancies and renewed demand in the labor force.
While this plan would diminish personal tax receipts on those withdrawals, to the extent that new jobs are created in the economy, personal tax revenues would also be boosted, while at the same time reducing the aggregate level of unemployment insurance and other transfer payments.
Let's hope the President's new plan incorporates this or other new ideas for addressing the multi-faceted problems of our economy, rather than relying upon the next shovel ready bridge to nowhere.
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