News How will the looming fiscal cliff impact the US economy and job market?

[BobG]

"What should those negotiating the fiscal cliff do?" Hubbard wrote. "The first step is to raise average (not marginal) tax rates on upper-income taxpayers. Revenue increases should first come from these individuals. This means closing loopholes ... Republicans cannot argue for low tax rates without being clear about where [spending] cuts must come from."

This isn't actually a contradiction. It does raise questions.

The average tax rate is more important than the marginal tax rate when it comes to raising revenue. So is raising average tax rates on the rich by closing loopholes, while leaving marginal rates the same, a way to weasel out of promises to never raise tax rates? Or is it a way to raise average tax rates on everyone while keeping their promise not to raise tax rates on anyone? If the result is the same, what's the advantage of closing loopholes instead of just raising the marginal tax rates?

And, most importantly, if a compromise is to be reached, who should Obama be negotiating with - John Boehner or Grover Norquist? Which one controls Republicans in the House? Or does anyone control the Tea Party wing of House Republicans?

It has to be frustrating to be House Majority Leader, but not actually control a majority in the House.

 

[mheslep]

This would seem to indicate a systemic weakness in the US economy, a weakness that has been developing for some time - like two or three decades.

The cliff refers to taxes rates that rise on a given day, Jan 1, and spending cuts below plan that begin on the same day. How is that event characterized as systemic, or developed over decades?

 

[mheslep]

Dems: Hey Reps, compromise with us.
Reps: Sure, no problem. However, no tax increase.
Dems: What are you talking about? That's the issue you need to compromise on.
Reps: No can do, we signed a pledge.
Dems: No compromise, fiscal cliff. Fiscal cliff, tax increase. Your move.

Interestingly, the problem of the pledge goes away if taxes go up across the board. After January 1, the only income tax rate move on either side is a reduction, the details being to whom and how much.

Unfortunately I suspect many of the lawyers and lobbyists will be for going over the cliff, as then they have advantage to gain on behalf of their clients by cutting out selective breaks.

 

[Alfi]

who should Obama be negotiating with - John Boehner or Grover Norquist?

The current House Majority Leader is Republican Eric Cantor, while the current House Minority Leader is Democrat Nancy Pelosi.

Since 1995, the only Majority Leader to become Speaker is John Boehner,I'm lost here. ... what?

Who is this lobbyist Norquist? I don't understand why this person has any say in anything.

 

[russ_watters]

Well the way the Republicans talk, it seems to go like this: "We need to make sizeable spending cuts, but we promise we are NOT going to cut people's Social Security and Medicare.

You misunderstand: Repubs promise not to make changes for CURRENT SENIORS. Dems want to make no changes at all.

 

[russ_watters]

The cliff refers to taxes rates that rise on a given day, Jan 1, and spending cuts below plan that begin on the same day. How is that event characterized as systemic, or developed over decades?

The decisions that created the 'cliff' were all made in the past 4 years, but the motive behind them is mostly debt reduction, a problem decades old.

Still, IIRC, by the time Obama leaves office, he'll have most of the debt too.

 

[russ_watters]

I'm lost here. ... what?

Who is this lobbyist Norquist? I don't understand why this person has any say in anything.

He solicited a pledge from most Republicans that they will never raise taxes and he publicizes it loudly.

 

[Bobbywhy]

The decisions that created the 'cliff' were all made in the past 4 years, but the motive behind them is mostly debt reduction, a problem decades old.

Still, IIRC, by the time Obama leaves office, he'll have most of the debt too.

Will you please say what does "IIRC" mean? Thank you.

Cheers,
Bobbywhy

 

[russ_watters]

If I remember correctly

 

[Jimmy Snyder]

How about TBD? Has anyone determined what that's going to mean yet?

 

[Bobbywhy]

If I remember correctly

Thank you for the translation. That answer could have been found had I only searched for it here: http://www.netlingo.com/acronyms.php

I did, however, search our PF Rules and found this:
“General Posting Guidelines
All posts must be in English. Posts in other languages will be deleted. Pay reasonable attention to written English communication standards. This includes the use of proper grammatical structure, punctuation, capitalization, and spelling. SMS messaging shorthand ("text-message-speak"), such as using "u" for "you", and "please" for "please", is not acceptable.”

The SMS messaging shorthand described above as “not acceptable” in our PF rules is discussed in detail here: http://en.wikipedia.org/wiki/SMS_language

Cheers,
Bobbywhy

 

[russ_watters]

How about TBD? Has anyone determined what that's going to mean yet?

What I meant was "if I remember the latest projections correctly..."

When Obama entered office, it was $6.3 Trillion and today it is $11.4 Trillion.
http://www.treasurydirect.gov/NP/NPGateway

Here's an August 2012 CBO projection that it will pass $12.6 Trillion in 2015: http://www.cbo.gov/sites/default/files/cbofiles/attachments/08-22-2012-Update_to_Outlook.pdf

Of course, such projections tend to be overly optimistic: http://mercatus.org/publication/projections-us-public-debt-continue-accelerate

The main source of optimism in the CBO's projection is it is based on current law. In other words, it assumes the fiscal cliff happens. If it doesn't, we'll probably have that doubling point reached next year.

And this does not, of course, include the big elephant in the room: underfunded entitlements such as Social Security and Medicare.

 

[BobG]

How about TBD? Has anyone determined what that's going to mean yet?

No, that's still to be determined.

 

[Alfi]

At this point ... 50 trillion doesn't mean anything.

 

[CAC1001]

You misunderstand: Repubs promise not to make changes for CURRENT SENIORS. Dems want to make no changes at all.

Even for future retirees though, I don't see how we can really cut people's benefits by a sizeable amount.

 

[Jimmy Snyder]

Even for future retirees though, I don't see how we can really cut people's benefits by a sizeable amount.

I don't think a cut in benefits is on the table. What I heard was that for those 54 and younger, the age at which they can take benefits would rise. In my opinion, SS faces a demographic problem and only a demographic solution will work.

 

[russ_watters]

Even for future retirees though, I don't see how we can really cut people's benefits by a sizeable amount.

Since the money to pay them does not exist, I don't see how we can keep the benefits the same without a massive tax increase. Something has to change.

 

[CAC1001]

Since the money to pay them does not exist, I don't see how we can keep the benefits the same without a massive tax increase. Something has to change.

Right, that's why I proposed something like removing the cap on the payroll tax and turning the program into a straight up form of welfare program.

 

[russ_watters]

Welfare for everyone except the top 5%? That's a lot of welfare. Sounds risky to me.

 

[CAC1001]

Well the way I'm thinking is that the program would pretty much function the same as it does now, but that would be one way to shore it up a lot more. It would be turned into a form of welfare program though because if the cap on incomes taxed is removed or increased at least, the benefits would need to be capped.

 

[russ_watters]

I have several problems with that:
1. Calling it a "welfare" program when for 90+% of people it is not means-tested doesn't seem accurate to me.
2. Having the program work differently for 5-10%% of population doesn't seem fair to me.
3. I don't think there is enough money to be gotten that way to "fix" the program under the typical goal of maintaining the current benefit structure.
4. People tend to view maintaining the benefits output as "fixing" the program, but I look at the input to output ratio and view the program as already badly broken. If the ratio for me is going to be something like 1/5 what it was for people who retired a generation ago, or what a reasonable private retirement account could achieve, then my standard of living today is being lowered by this program.

 

[CAC1001]

I have several problems with that:
1. Calling it a "welfare" program when for 90+% of people it is not means-tested doesn't seem accurate to me.

We could means-test it.

2. Having the program work differently for 5-10%% of population doesn't seem fair to me.

If it's supposed to be a "receive what you paid in" type of program, then no it wouldn't be fair, that is why the amount of income that is subject to the payrol tax is capped. Raising the cap and capping the benefits isn't so much to make it "fair," just to make it where we have a form of old-age social insurance program if you will, that provides people who need it with a minimum form of income in old age. I am all for private retirement accounts, however sometimes those can have a blowup, for example people who saved and invested prudently for years, then lost it all in the crash, or fell for one of the Bernie Madoffs of the world, and so forth.

3. I don't think there is enough money to be gotten that way to "fix" the program under the typical goal of maintaining the current benefit structure.

Yes, I don't myself know how much revenue raising the cap would bring in.

4. People tend to view maintaining the benefits output as "fixing" the program, but I look at the input to output ratio and view the program as already badly broken. If the ratio for me is going to be something like 1/5 what it was for people who retired a generation ago, or what a reasonable private retirement account could achieve, then my standard of living today is being lowered by this program.

When you say "ratio," do you mean the amount of people paying into it for each beneficiary today versus decades ago?

 

[BobG]

I don't think a cut in benefits is on the table. What I heard was that for those 54 and younger, the age at which they can take benefits would rise. In my opinion, SS faces a demographic problem and only a demographic solution will work.

This is true. 65 was a pretty high age to retire during the era when Social Security started. You retired because you were too old to work.

But the idea of retirement has also changed as people's lives get longer. Retiring while you're still in good enough condition to enjoy it seems pretty attractive - hence the resistance to raising retirement age for Social Security.

Nobody's owed an early retirement, though, which is what retirement at 65 has become.

If a person wants to quit working even though they're perfectly capable of working, then let them pay for their life of leisure themselves.

 

[ImaLooser]

This is true. 65 was a pretty high age to retire during the era when Social Security started. You retired because you were too old to work.

But the idea of retirement has also changed as people's lives get longer. Retiring while you're still in good enough condition to enjoy it seems pretty attractive - hence the resistance to raising retirement age for Social Security.

Nobody's owed an early retirement, though, which is what retirement at 65 has become.

If a person wants to quit working even though they're perfectly capable of working, then let them pay for their life of leisure themselves.

The age was raised decades ago. I get nothing until age 67.

I think the "resistance" is that I was forced to pay into it on that basis. They spent all the SS surplus, and don't want to pay it back.

Many companies force retirement at age 65.

 

[jim mcnamara]

ImaLooser said:

Many companies force retirement at age 65.

Really?

In the US, so my HR people tell me, there are very stringent legal requirements around forcing people to retire after a certain age. Can you please cite a source for this?

What is often done is to enforce some medical examination requirements starting from day one of employment. But the employee knows he/she cannot develop some medical conditions and still be a licensed commerical airline pilot, for example. That does not seem to be what you implied.

 

[BobG]

Many is an ambiguous term. If there's many, many, many companies, then what does many companies mean?

Until 1978, the minimum mandatory retirement age was 65, per federal law (with many exceptions for occupations such as firefighter, law enforcement, etc).

In 1978, the minimum mandatory retirement age was raised to 70 (with many exceptions for occupations).

In 1986, minimum mandatory retirement ages were abolished completely (with many exceptions for occupations).

Because of the exceptions, many occupations do have mandatory retirement ages and many are lower than 65. For example, air traffic controllers have to retire at age 56. FIFA referees have to retire at 45 (at least from FIFA level competitions, such as the World Cup, and the highest professional leagues - they can still referee lower levels, so it's more a mandatory demotion age).

Culturally, many people do still envision 65 being the retirement age (regardless of the fact that SSA has already raised the minimum age to receive full benefits - a person can still receive reduced benefits earlier).

 

[russ_watters]

We could means-test it.

How far would you go with that? That's a vastly different concept than what we have now. For a lot of people, it would mean paying them a lot more than they are otherwise due under the current structure and for a lot of people, paying them a lot less. It is a complete change in the nature of the program.

If it's supposed to be a "receive what you paid in" type of program...

It is supposed to be a "receive 5x what you paid in"(roughly) type of program -- like a 401k.

...that is why the amount of income that is subject to the payrol tax is capped.

Not really -- it would be just as easy to not cap either the tax or the benefits. The only logic I can think of for the cap is at the cap, it provides a pretty decent retirement lifestyle. Anything above that doesn't really require government to force you to save for.

Raising the cap and capping the benefits isn't so much to make it "fair," just to make it where we have a form of old-age social insurance program if you will, that provides people who need it with a minimum form of income in old age.

Well, fine, but I think that because most people thought that they were saving through this program for their entire lives for an income in retirement that was well above sustenance, it would be a huge shaft to suddenly slash their benefits like that. I strongly disagree with cutting people off at the knee like that.

I am all for private retirement accounts, however sometimes those can have a blowup, for example people who saved and invested prudently for years, then lost it all in the crash... [emphasis added]

That statement is self-contradictory. It isn't possible to "lose it all" if you are investing prudently. The most popular moderately safe growth investment is the S&P 500 Index Fund, which if all of your money was invested in (not prudent), would have lost half its value in the recent crash. This, of course, was temporary, recovering all but about 12% of it in two years. That's as bad as it ever gets and if you broaden your time horizon, you'll see that since 1995, investors have realized gains of 310%, even if we include the crash. So unless someone did something really, really stupid, the typical investment has paid off like a gold mine.

..or fell for one of the Bernie Madoffs of the world, and so forth.

Most of the investors of Madoff:
1. Started off rich.
2. Should have known better.

So that is not a typical situation.

When you say "ratio," do you mean the amount of people paying into it for each beneficiary today versus decades ago?

No, I mean the amount of money I'm going to get from Social Security versus the amount of money I paid in. Right now, even if the program survives unchanged, I won't get back what I paid in. That represents an 80% loss when compared to a moderately successful private retirement account. That's an enormous failure.

 

[BobG]

It isn't possible to "lose it all" if you are investing prudently. The most popular moderately safe growth investment is the S&P 500 Index Fund, which if all of your money was invested in (not prudent), would have lost half its value. This, of course, was temporary, recovering all but about 12% of it in two years. That's as bad as it ever gets and if you broaden your time horizon, you'll see that since 1995, investors have realized gains of 310%, even if we include the crash. So unless someone did something really, really stupid, the typical investment has paid off like a gold mine.

Just one caveat. As long as you haven't retired yet and are still investing money instead of pulling it out, then what you say is true (in fact, the crash is great because, for a period of time, the new money you were putting in was sure to get a fantastic return).

If you're already retired, the crash is devestating, since your living expenses don't go down temporarily. You're pulling out the same amount of money, but it's now a bigger percentage of your total investment.

Of course, if your life expetancy means you'll be relying on your investments for a long period of time, you ought to expect that stocks will be down during at least a portion of that time - but it'd be hard to plan for a few years where your investments lost half their value.

That's called risk. With a capital R.

 

[russ_watters]

Just one caveat. As long as you haven't retired yet and are still investing money instead of pulling it out, then what you say is true (in fact, the crash is great because, for a period of time, the new money you were putting in was sure to get a fantastic return).

If you're already retired, the crash is devestating, since your living expenses don't go down temporarily. You're pulling out the same amount of money, but it's now a bigger percentage of your total investment.

"Devistating" is awfully strong: we're talking about two years of double the drawdown on a 30 year expected lifespan. Even if there is no accompanying excessive growth (and there was, of course) and the person took all of their money out at once, at the worst possible time, that would only cause a 7% drop in retirement income if the loss was spread over the whole retirement.

Heck, the effect of taking the money out and missing out on the next 30 years of gains would be much worse than the crash itself!

Of course, if your life expetancy means you'll be relying on your investments for a long period of time, you ought to expect that stocks will be down during at least a portion of that time - but it'd be hard to plan for a few years where your investments lost half their value.

What? No its not! if you're investing for 30 years, the best way to plan for the time your investment loses half of its value is via a pre-determined stock to fixed income ratio and completely ignoring the movement of the market. Over that much time, the crash will fix itself if you don't do anything to make it worse. That's like rule #2 of investing: Ride it out, don't touch it; you'll just make it worse if you try to outsmart the market.

Or, more realistically: before the crash, as long as you didn't start buying extra Corvettes because your nest-egg was double what you expected it to be, the crash just brought it back down to where you expected it to be.

 

[CAC1001]

How far would you go with that? That's a vastly different concept than what we have now. For a lot of people, it would mean paying them a lot more than they are otherwise due under the current structure and for a lot of people, paying them a lot less. It is a complete change in the nature of the program.

Well not all of a sudden, but we could implement it gradually. Or, gradually fade out regular social Security, then replace it with something new that functions in the way I described.

It is supposed to be a "receive 5x what you paid in"(roughly) type of program -- like a 401k.

My understanding was that it is supposed to be a program where you get paid out what you paid in.

Not really -- it would be just as easy to not cap either the tax or the benefits. The only logic I can think of for the cap is at the cap, it provides a pretty decent retirement lifestyle. Anything above that doesn't really require government to force you to save for.

Well functionally, having no cap on the tax or benefits would work fine, but then you'd get rich people getting massive payouts made to them, which wouldn't go over too well with many of the lower earners in the population who don't understand how the program is supposed to work.

Well, fine, but I think that because most people thought that they were saving through this program for their entire lives for an income in retirement that was well above sustenance, it would be a huge shaft to suddenly slash their benefits like that. I strongly disagree with cutting people off at the knee like that.

Yes, I understand that. That's why I'd be for implementing it gradually. Also, maybe there could be a way to shore it up but make it where it provides more than enough for just basic sustenance for most people?

That statement is self-contradictory. It isn't possible to "lose it all" if you are investing prudently. The most popular moderately safe growth investment is the S&P 500 Index Fund, which if all of your money was invested in (not prudent), would have lost half its value in the recent crash. This, of course, was temporary, recovering all but about 12% of it in two years. That's as bad as it ever gets and if you broaden your time horizon, you'll see that since 1995, investors have realized gains of 310%, even if we include the crash. So unless someone did something really, really stupid, the typical investment has paid off like a gold mine. Most of the investors of Madoff:

1. Started off rich.
2. Should have known better.

So that is not a typical situation.

True, but unfortunately, a lot of people don't know all of this. The average person is pretty clueless regarding the subject of investing.