Pensions, Careers, And Retirement

Pensions and careers have changed.  Ramesh Ponnuru thinks the retirement changes are for the better and we heartily agree.  We will give an example and explain why it matters.  Ramesh thinks Americans should stop mourning the loss of traditional (defined benefit) pensions concludes:

These are changes that would build on, rather than attempt to reverse, the last few decades of developments in the American retirement system. Those developments, especially the rise of the 401(k), have largely been for the better.

Sidebar One: Pensions can be divided into defined benefit and defined contribution.  In a defined benefit plan you typically get a pension equal to then number of years worked * highest salary over three years * a percentage.  So if you work 30 years and your percentage is 1.8 then you get 54 percent of your highest salary.  A 401 (k) is an example of a defined contribution plan where a defined amount is invested and you get the result at retirement.  We often think that the worker takes the risk in a defined contribution plan and the company takes the risk in a defined benefit plan.  That is only true if the worker retires from that employer.  We will show details later.  End Sidebar One.

Sidebar Two: Risk is both upside and downside.  If a worker spends his entire career with one employer then a defined contribution plan is more risky because he might get much more or much less than a defined benefit plan.  End Sidebar Two.

The big reason for changing pensions is that the nature of careers have changed.  Years ago it was bad to have a resume that indicated you were a job hopper.  Now career advice is:

If you are changing jobs less than every three years, you are in the minority.
You may need to have a well-prepared explanation when you front up to your next job interview.

It also true that employers come and go.  Both of these are reasons why we should cheer at the increasing number of defined contribution plans.

MWG has a defined benefit pension plan.  It worked very well for us although it limited our opportunities, as it was intended to do, in the time close to retirement.  It worked very well for us because we spent nearly 40 years with one employer.  Thus, our paltry year salaries in the seventies and eighties were irrelevant and only the years mattered in the computation of benefits.  If we had of switched employers it would have been bad for us because our salary was so low. Another benefit was sick days.  In our case sick days accumulate and can be used to pay for medical insurance after retirement.  The sick day benefit is based on your highest salary but you must retire in order to get it.  Thus, because of both sick days and defined benefit, as retirement approached it was financial suicide for us to leave before retiring.  When we became eligible for retirement, the sick days became a powerful incentive towards retirement because workers had to pay for part of the cost of health insurance but retirees, like us, with lots of sick days did not.

For us and our employer, the defined benefit plan worked.  We got a nice retirement and they got us to work for less than market prices late in our career.  We are not sure if the intent of the pension was to get us to retire.  It was effective at that too.  We retired because the tax on working was over 100 percent.  That is, we had more disposable income in the first year of retirement then we would have had if we worked that year.

Defined contribution was a fair deal for us in another era.  Even then we were a minority in staying with one organization so long.  Now we would be a micro-minority.  Defined contribution is the way to go in the new environment.  We need to find incentives to increase them.  We have three suggestions:

First make health insurance benefits taxable to the recipient.
Second, increase social security benefits for the needy by means testing benefits for high income individuals.
Third, increase the tax benefits of Roth IRAs.  Make the contribution tax deductible and keep the returns not taxable.

The first would help by producing a bit of government revenue and focusing both employer and employee on the retirement issue.  The second would provide a safety net to the really needy.  The third would reduce complexity at retirement because everyone would go Roth and there wouldn’t be any taxes having an impact on decision making.

As Ramesh says, let us build on the success of 401 (k) plans.  Folks are looking for freedom.  The right incentives will help them make good choices.

 

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Income Inequality And Policy

We find income inequality a completely silly issue to be concerned about.   Economic growth, poverty rates, various measures of unemployment and employment and several others are interesting because if we find policies to ameliorate these problems then we can help people.  With income inequality there are three problems: First, changing income inequality won’t necessarily help anyone.  Second, we don’t have a goal.  What is the perfect Gini coefficient?  Third, we don’t know how to change income inequality.

We found evidence on the third issue recently.  A MWG double hat tip to Simon Constable and Instapundit.  They led us to Ugo Traiano’s [his first name drives spell-check crazy] working paper on the impact of taxes on income inequality.  Ugo is at the University of Michigan.  It is only a working paper which means that it hasn’t been fully peer reviewed.  Almost all working papers have some peer review and this one, like most, thanks a few folks so it is mildly reliable.  We are not suggesting that the paper is definitive.  Rather, we are suggesting if you really want to change income inequality you need a bucket-load of evidence to convince folks that some set of policies will lead to an outcome.

Ugo finds that increasing tax revenues leads to more income inequality.  He finds that the results are robust to measures of income inequality and econometrics.  Notice that Ugo did not use increasing tax rates but increasing tax revenues so it leaves some opportunity to argue that increased tax rates might have the opposite effect on income inequality.  After all, at some point, increasing tax rates leads to less tax revenue.

We don’t find income inequality an interesting statistic.  We don’t think that government policy should be looking to change it.  If you do then you need to have evidence that your policies will lead to the outcome and what the outcome is.  In addition we would like to know the impact of said policies on serious measures like economic growth.

If you support lower tax rates and not raising the minimum wage to reduce income inequality then we are all with you.  But it has nothing to do with income inequality.

Budget Math

We oppose a balance budget amendment (BBA) because of the accounting problems, the big impact, and the bad decisions that will flow from trying to balance the budget in the short term.  We recognize that we have an enormous problem but we don’t see BBA as a solution.

After we wrote that there would be a budget shortfall of a trillion dollars or so in fiscal 2019 we remembered the problem of budget math.  Our state has a biennial or two-year budget. It was always took some work to understand what the annual impact was.  Switching to the federal budget somebody might reply that we could fix the trillion dollar shortfall by eliminating the $1.51 trillion cost of tax reform.  The problem is that the tax reform score is over a ten-year period.  Eliminating tax reform would get you somewhere between a sixth and an eighth of the way there.

We need to work on entitlements. Other areas could help but that is where the money is.  The changes need to be gradual.  For example, we can start means testing on Social Security now but full implementation might come in 20 years. It also gives us time to fine-tune means testing because means testing is very tricky.

Say no to the BBA and always ask about the time frame on budget proposals.

Tax Cut Complaints

The WSJ is good about bringing in opposing views on its opinion page.  Recently Alan Blinder had a headline of: Almost Everything Is Wrong With The New Tax Law.  We were curious as we have supported it.  We first checked to see his background: Professor of economics at Princeton and former vice chairman of the Federal Reserve.  The first qualification makes us nervous about his seriousness but it is probably worth reading.

If you are trying to convince the unconvinced then you start with your best shot.  Here is how Alan starts with specifics after saying it offers mere crumbs to the middle class:

Further, once the phase-outs occur at the end of 2025, even most of the crumbs disappear. The Tax Policy Center estimates that the share of tax cuts accruing to the top 0.1% of taxpayers will rise from 8% in 2018 to an astounding 60% in 2027 if Congress doesn’t extend the expiring cuts. [Emphasis added]

So, Alan is telling us they should extend the tax cuts.  We agree.  In addition he slays his “mere crumbs” argument.  The top 0.1% of tax payers get 8% of the benefits in 2018.  We can’t find an exact figure for the percentage of tax paid by the top 0.1% but we estimate it at 19%.

Sidebar: The top 1% paid 38.1% of income taxes in 2012.  Comparing the top 0.1% taxable income versus the top 1% in table 3 shows it to be about half.   Another table shows that the tax rates for the top 0.1% are slightly lower than the top 1%.  So 38 percent multiplied by a half is a reasonable approximation.  End Sidebar.

So folks the super-rich folks paying 18% of taxes get 8% of the benefits.  We would have liked to see the tax cut be more pro growth but Alan winning the argument against himself.  Next he goes for the trickle down slur and then he complains about process.  In between he brings up a real issue: The deficit.  We agree.  It needs to be fixed.  Part of the fix is increasing economic growth through tax policy and regulation reductions.  Another part is reforming entitlements.  We expect Alan’s support as entitlements will come up soon.

Alan convinces that we should continue to support the new tax bill and the provisions should be extended.  It is not perfect but it is a good start.

 

 

 

 

Facebook Irony

One of our friends reposted a Facebook item recently.  One of the reasons we started this blog was to be able to respond to foolish things on Facebook because it is too cluttered with political stuff.  We are sure there have been more foolish things but it is hard to imagine something more ironic.  Here it is:

Imagine instead of $1.5 Trillion Tax Bill, they had produced a $1.5 Trillion infrastructure bill.  Take about creating jobs!

Of course The Donald’s Immediate Predecessor (TDIP) did sign a $1.8 Trillion spending bill.  A supporter said:

“This is a bill that protects America, rebuilds it and invests in the future,” she said. “I think it’s a great bill; it’s a result of bipartisan effort [imagine that]. Let’s vote for it, and may the Force be with us.”

The result for TDIP:

With unemployment hovering near 10 percent nearly two years after President Obama signed his economic stimulus package, Mr. Obama is acknowledging that, despite his campaign promises, “there’s no such thing as shovel-ready projects.”

If TDIP can recognize it then everyone should.  Now we will wait for two years as the press gives the president the benefit of the doubt before starting to evaluate the tax cut.  That’s more irony in case you weren’t sure.

Marginal Tax Rates

Yea! Tax reform has passed.  It is mostly about the business side but the GOP has ended up with a reasonable bill on the personal side as well.  Of course the problem is that all the Democrats voted against reducing individual and business taxes so they need to try to explain their position. Jibran Khan (spell check does not like his first name!) has a useful summary over at NRO.

But is is easy to mess up.  Jim Geraghty’s Morning Jolt has this:

Looking at this chart, if you’re married and your joint taxable income is between $400,000 and $416,000 [actually $416,700], your tax rate is changing from 33 percent to 35 percent. (Quick, get your taxable income down to $399,000! Your tax rate will drop to 32 percent!)

Perhaps Jim is being sarcastic but the table isn’t really very useful unless you have an arithmetic addiction like your humble scribe.  Tax rates are marginal so the couple in Jim’s example would pay two percent more on $16,000 of their income or $320 but they would save money on almost every other dollar of taxable income except for the first $18,650.  Situations will vary because the new law changes the computation of taxable income but in the situation that Jim described the couple’s tax would be lowered by $15,558 under the new law.  Remember, tax rates are always marginal.

Essentially ever individual will pay lower taxes under tax reform.  Here is a CATO study that gussies up the results to allocate corporate tax benefits to individuals.  Because there are changes to rates and deductions there might be a few exceptions.  There won’t be many and anybody who says otherwise is misinformed.  And folks will continue to be confused about marginal rates and average rates.

What’s Happened To Democrats?

It now appears that the tax bill is going to pass on a strict party line vote.  The Democrats have provided a few minor parliamentary issues but it appears it will pass shortly.  The Editors of WSJ asks what has happened to the pro-growth Democrats over the past decades?  Here is a brief tidbit:

How has the party of the [John F.] Kennedy tax cuts of the 1960s and the co-writers of the Reagan reform in the 1980s become implacably opposed to pro-growth tax policy?

 It is a really good question.  Their answer is that it is part ideology and they connect that to their obsession with income inequality.  Another part is that there aren’t any pro-business Democrats. A third part is that they want to work in a future Democratic administration and they need to support the party.  Related to that they see the Democrats as all in on fighting the Congressional election in 2018 and the presidential on in 2020.  The Editors point out that the Democrats could have negotiated something like a carbon tax that MWG supports.
One minor comment on the Editors: there are lots of pro-business Democrats but there are few or no pro-market Democrats.  Democratic support of the Import-Export bank is evidence of that.
Two important questions that we have is how do the Democrats intend to fight income inequality and what is the appropriate Gini coefficient or some other measure of the goal.  Will that use higher corporate taxes?  Will they use higher individual taxes.  Will they increase the estate tax?  Will their motto be: A falling tide keeps all boats in the harbor?
We would like to see the Democrats of our youth and middle age return.  Has the party gone to far to come back?