December 14, 2012

Help Resolve the Fiscal Crisis: "Sock It to Me"

Taxes are what we pay for civilized society.
-- Justice Oliver Wendell Holmes, Jr
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And I am not paying my fair share.

The AARP and other lobbyists have convinced our politicians that all seniors are greedy old geezers who will vote them out of office if they dare touch our Social Security and Medicare benefits or increase our taxes. People over 65 vote at much higher rates than younger people and, as a result, we have become a protected political class.

I agree that low and lower-middle income seniors should not have their benefits reduced or their taxes raised. But upper income seniors, like me, should be paying more and getting less. 

For at least 25 years, seniors have been doing much better economically than younger workers. The median net worth of households headed by adults 65 or older rose 42 percent in real terms between 1984 and 2009. During the same period, the median net worth of a household headed by adults younger than 35 shrank 68 percent, according to the Pew Charitable Trust. 

From the beginning, it's been axiomatic that each American generation should live more comfortably than the last. For the first time in our history, that's no longer true. Today's economy and our tax-and-benefit structure make it increasingly difficult for my children and grandchildren to enjoy the standard of living attained by my generation. 

I've called my generation "The Lucky Generation". Newsweek  recently referred to today's Millennials as "the screwed generation."

Many Seniors, Like Me, Can and Should Pay More and Get Less
When I look back, I'm amazed at the major role serendipity has played in my life. Probably my biggest lucky break was being born in 1929. It wasn't a lucky year for my father, who was unemployed for a time after the stock market crash of October 1929.

But being born then meant that I was too young to fight in World War II. (I graduated from high school in 1945, just as the war was ending.) I benefited from going to college with the returning military veterans, most of whom were able to attend only because of the GI Bill. Since they were usually the first in their families to afford college, they worked hard to succeed in school. 

As I wrote in a prior post, the GI Bill was the biggest and most successful government give-away program ever. Returning WWII vets could go to any college (the famous columnist Art Buchwald used it to attend the Sorbonne in Paris) and not only have their tuition paid, but also get a subsistence allowance for wives and children. Some 2.2 million vets attended college or graduate school, and 5.6 million prepared for vocations in auto mechanics, electrical wiring, and construction.

Vocational training led to jobs with middle-class incomes and benefits. Millions took low-interest loans to start businesses. Nearly three in ten veterans used low-interest mortgages to buy homes, farms or businesses.
The GI Bill, more than anything else, created the strong vibrant middle class that led to the Golden Age in the American economy from 1947 to 1977.

Again, thanks to my lucky birth date, the early years of my career coincided with this postwar boom economy. Most of us expected raises every year and promotions every few years, because our employers were thriving. 

I was luckier than most, because I was hired by one of the country's few 100% employee-owned firms, and one covered by a union contract. Employee ownership was rare, but many companies were unionized in those days. And many non-union shops would give their employees wages and benefits similar to those being won by unions to avoid being unionized. 

As a result, most workers, union or not, were given paid vacations and holidays, pension benefits upon retirement, increasingly broad health insurance, and other fringe benefits. My job involved reporting on these changes in union-negotiated benefits. Each year, a group of us traveled around the country briefing employers and union reps on the latest in new-and-improved wages and benefits.

The pattern-setting union gains made in the 1950s and '60s were second only to the GI Bill in creating our strong, vibrant middle class. 

The companies that employed us were relatively stable, unlike many firms today that are going in and out of business, merging, moving overseas, and downsizing. As a result, it wasn't unusual for an employee to do what I did -- remain with same company for 40 years.

In addition to being protected with defined benefit pension plans, many workers (me included) signed up for deferred compensation arrangements which, in 1978, became "401(k) plans," named after the section in the IRS code that authorized them. Under these arrangements, we could put part of our wages (with limits periodically revised upward) into tax-deferred retirement accounts.

So, most of my generation of workers ended up with our retirements supported by the three-legged financial stool of (1) a defined benefit plans, (2) our own savings, which for most of us was in 401(k) accounts, and (3) social security.

I rarely saved any more than was automatically deducted for my 401(k) plan and, particularly in my later working years, I signed up for the maximum-permitted contribution. Again, serendipity came into play because I was able to invest all my 401(k) money in my company's stock. During the postwar boom years, that stock gave a return close to 20% per year, 3-5% of which was in stock dividends.

I was unusually lucky to have such a good investment. But the three-legged stool was not unusual for workers of my generation and older employees. In another stroke of luck when I retired, I decided not to opt for the regular monthly retirement benefits, but instead took the option (since removed) of taking a single lump sum representing the actuarially determined equivalent of the monthly benefit. Again, I lucked out. I retired at the end  of 1994, took my lump sum, and invested it in the stock market just as the dot-com boom was taking off. 

Then, as if all this good fortune weren't enough, President Bush took office and got Congress to pass widespread tax cuts. The one that benefited me most was cutting the capital gains tax from 20 percent to 15 percent, and applying the same 15 percent to dividends which had been taxed as ordinary income. My retirement income was coming primarily from dividends on my company's stock and withdrawals from my IRA (which replaced my 401(k). My tax accountant told me that George Bush had essentially given me an extra $10k a year, a fact that didn't buy my vote.

Younger workers today face a much more uncertain future. Pension plans are on the verge of extinction. Employees no longer benefit from the gains won by strong unions. Working for one company for 40 years is virtually unheard of. Young people now consider themselves very fortunate to be hired as regular employees with health insurance coverage, rather than as a independent contractors without benefits.

Lacking the compensation and benefits we received, these younger workers face a growing burden: supporting the elderly. The ratio of workers to retirees was 5 to 1 in 1960. It fell to 3 to 1 in 2010. It is projected to fall to nearly 2 to 1 by 2025.

And this is only one of the many factors leading to the growing inequality in our society, which today is greater than in any other developed country

TAXES ARE GOOD FOR US
I put particular emphasis here because virtually everything we've heard about taxes for the past 30 years is about cutting the "nasty things." It's easier for us to see what we pay than what we get. As a result, Grover Norquist and other conservatives have had a field day with their threats to destroy any politician who votes for a tax increase.

Progressives have fallen down on the job of making the case for taxation. Moreover, the anti-tax campaign hasn't stopped the government from growing as Bush II decisively proved. It certainly won't stop the population from growing, the baby boomers from aging, our infrastructure from crumbling, or healthcare costs from rising.

The case for taxes was nicely stated by Jill Lepore, a professor of American History at Harvard, in a recent "Tax Time" piece in the New Yorker:
Taxes are what we pay for civilized society, for modernity, and for prosperity. The wealthy pay more because they have benefited more. Taxes, well laid and well spent, insure domestic tranquility, provide for the common defense, and promote the general welfare. Taxes protect property and the environment; taxes make business possible. Taxes pay for roads and schools and bridges and police and teachers. Taxes pay for doctors and nursing homes and medicine.  During an emergency, like an earthquake or a hurricane, taxes pay for rescue workers, shelters, and services. For people whose lives are devastated by other kinds of disaster, like the disaster of poverty, taxes pay, even, for food....
Taxes are a pact. That pact needs renewing.
So sock it to me! Raise the tax on capital gains at least back to 20 percent, from the Bush 15 percent. Reduce Social Security and Medicare benefits, delay eligibility, and charge more based on income.
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