Tag Archives: economics

President Obama’s Fiscal Cliff and 401(k)s

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Are our 401(k)s at risk from the Obama Fiscal Cliff?  To the extent that they are (and I don’t know that they are), consider some ramifications.  Here’s one way such a risk might unroll:

The Bipartisan Policy Center’s Debt Reduction Task Force has one way to help fix the deficit: reduce 401(k) contributions by 64% using a 20/20 Cap.  Under the 20/20 Cap, contributions would be limited to the lesser of 20% of pay or $20,000 a year.  All those pretax dollars designated for retirement will now be taxable income and Treasury will fill with additional tax revenues.

I’ll leave aside BPC‘s cynical assumption that our money actually belongs to the government, that they’re somehow entitled to it (now there’s an entitlement program…).  Here are a couple of those ramifications.

A single employee who earns $60,000 per year can contribute $17,500 to a 401(k) in 2013.

After taking the personal exemption and the standard deduction, the single employee would be in the 15% federal tax bracket. Under the 20/20 Cap, assuming the 401(k) has a 4% match, the same single employee earning $60,000 per year would be limited to a $9,600 401(k) contribution and will now be in the 25% federal tax bracket paying $1,700 more in taxes.

It’s true that those $17.5k represent 29% of his income, but with disciplined budgeting (he’s single, recall) it’s not so far-fetched.  He will be stretched, but getting hit with an additional $1,700 in taxes will hurt—possibly to the point of blowing up his retirement plans.

With a 64% reduction in contributions, many small businesses may terminate their plans–forcing employees to save money on their own.  After all, why pay plan fees and other administrative costs if the amount of income that can be deferred is reduced to basically the amount of an IRA contribution?

Indeed.  I was chairman of my employer’s 401(k) Plan Board of Trustees a number of years ago.  For our 25-employee company, the typical fee for that sized plan ran to $20,000.  Which is why we had a Board of Trustees and ran our own Plan.  Have the fees changed all that much since?

There’s one more, though, with serious long-range implications.  Reduced contributions to our (private) 401(k) plans while we’re working means a smaller nest egg when we retire.  Which means greater dependence on a Social Security System that will be bankrupt by that day.  Which means both we’re being a greater burden on our fellows in our retirement and we’re living much more poorly than we would have had we been able to accumulate a larger nest egg.

Here’s an example, of just 10 years’ duration.  My wife, being older than 50, is able to contribute, presently, $23,000 per year beginning in 2013.  With the 20/20 cap, that would drop to $20,000 per year.  Note that I’m assuming no changes over the 10 years—including in tax treatment and limit increases.  I’m also assuming a 4% real (after inflation) return on 401(k) investments.

After 10 years, that higher contribution rate will have produced a nest egg of a bit over $276,000, while the limited contribution rate will have grown only to a skosh (that’s the technical term) over $240,000.  That’s a 13% reduction in the value of our nest eggs from such a cap.  Blow that up over 20 years—yes, this contribution rate is possible; you’re in your mid-40s and entering your peak earning years at 20 years prior to retirement.  That nearly 13% annual shortfall only expands the deficiency of the capped 401(k)’s outcome—now it’s nearly $89,500, some 150% greater, short by more than four years’ worth of capped contributions.

Some Outcomes of the Obama Fiscal Cliff

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Sudeep Reddy described, in a recent Wall Street Journal op-ed, a few that will occur in the coming year.

  • Jan 1: New provisions take effect including higher payroll taxes, income taxes and investment taxes.

In truth, the payroll tax “holiday” was an act of monumental stupidity by both parties—but then I repeat myself.  With Social Security already nearing bankruptcy (the timing works out to just a Presidential election cycle or two from today), reduce the funding for it by nearly a sixth.  Yeah.

The payroll tax cut also points up the dishonesty of the Progressives in Congress and in the White House.  President Barack Obama, for instance, is on record as saying that such a cut in Americans’ taxes is good for all Americans.  Indeed, he’s gone so far as to propose boosting it to 3% and including businesses by proposing a 3% cut in their side of the payroll taxes.  Yet he, and his fellow Progressives, refuse to consider making those 3% an income tax cut and making the reduction permanent.

  • Jan 2: $110 billion in spending cuts scheduled to begin, hitting domestic and military spending.

This is as inevitable as Obama can make it.  Enormous defense cuts have been a Progressive dream for 50 years.

  • Late February, early March: the US is expected to reach its congressionally mandated borrowing limit.
  • March 27: A deal to fund the federal government expires.
  • Mid-2013: If Congress crafts a two-step deal to avert the fiscal cliff, this could be the deadline for tackling part two, including any unresolved tax and entitlement issues.

The tax and entitlement “issues” are already settled.  Senator Chuck Schumer (D, NY), et al., has already said that there are no entitlement issues; entitlements are not to be cut; they’re not even to be discussed.  Period.  Moreover, Obama has already said he’ll veto any bill that doesn’t include tax rate increases (his latest “flexibility” on that item is just eye-wash for the chattering classes.  That’s clear from his “stopgap” proposal: let taxes rise for those above his originally demand demanded threshold—$200k/$250k.)  The tax question already has been resolved in another way, too: Obama gets his tax rate increases in the absence of a deal.

Progressive Cooperation and the Fiscal Cliff

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In last weekend’s interview with NBC‘s “Meet the Press,” President Barack Obama said this with a straight face, according to The Wall Street Journal:

Singling out the two GOP legislative leaders, House Speaker John Boehner of Ohio and Mr [Mitch] McConnell of Kentucky, the president added that “Congress has not been able to get this stuff done.” The reason, he said, is “not because Democrats in Congress don’t want to go ahead and cooperate, but because I think it’s been very hard for Speaker Boehner and Republican leader McConnell to accept the fact that taxes on the wealthiest Americans should go up a little bit, as part of an overall deficit reduction package.”

Really?  Based on what theory must “taxes on the wealthiest Americans…go up a little bit?”  The revenues collected won’t amount to walking around money compared to your budget deficits.

Democrats want to cooperate?  What was the Senate vote on the fiscal cliff spending solution (albeit for only six months) which the House passed last September?

What were the vote outcomes on the Federal budgets the House passed each of the last two years?

What were the Senate votes on any of the 40, or so, jobs-related bills passed by the House and sent up to the Senate in this Congressional session?

What were the deficits contained in your own budget proposals which you sent to Congress in each of the last three years?  Oh, wait—most of the Democrats (yourself, only, excluded) did cooperate on these: you couldn’t even get a single vote, Democrat or Republican, on any of those “budgets.”

Where are your Democrats on entitlement reform or on spending cuts—real ones, now, not reductions in growth rates that you masquerade as cuts, to occur some time in a nebulous future?

What was it you threatened to do in your 2013 inaugural and State of the Union speeches if you don’t get your way on taxes?  Oh, yeah.  You said

[you] would use [your] inaugural address and [your] State of the Union speech to tell the country the Republicans were at fault.

You berate Republicans for acting against 98% of Americans by holding out for no tax increase on the remaining 2%.  Yet you’re ready—anxious—to blow up our economy and gravely harm honest, hard-working Americans because, having already gotten 98% of what you claim you want, You’re greedy and want more.  Where’s your cooperation?

Where is any Democrat’s cooperation, Mr Obama?  You’ve offered no evidence to support your assertion.

Another Fiscal Cliff

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From Fox News:

[A] potential strike by thousands of dock workers from Boston to Houston threatens to shock the economy as early as this weekend.  …it could cost billions, citing estimates that a 10-day port lockout in 2002 cost $1 billion a day—and caused a major backlog in shipments.

[The present] port strike would affect more than the East and Gulf coasts, where all these ports are located.  It could choke supply chains across the country.  Groups ranging from the automobile industry to the National Retail Federation to the US Chamber of Commerce to the Cheese Importers Association of America are warning of dire consequences.

The primary beef?  Management wants to cap the current container fee royalties, rather than letting them continue to rise according to International Longshoremen’s Association schedules.

It’s important to note that those royalty fees are little more than featherbedding on the docks.  As The United States Maritime Alliance, Ltd (USMX), notes,

[C]ontainer royalties were established in 1960 as a way to protect members of the International Longshoremen’s Association, AFL-CIO (ILA) in New York from job losses created by containerization and its introduction of automated cargo.

Because shippers are job welfare programs for the ILA, after all.  Keep those buggy whip workers employed, no matter the costs to Americans.  Never mind that there aren’t any buggy whip workers anymore, anyway.

[O]nly 136 of the 3,281 ILA workers at the Port of New York and New Jersey today were working at the port in 1968….

The Port of New York and New Jersey was the original and only port at which the ILA was active during the transition to container shipping.  The rest of the ports up and down the east and Gulf coasts through Florida began life with containerized cargo.

Moreover, containerization has been beneficial to labor.  ILA workers at ports like Savannah, Charleston, and the rest saw their job opportunities grow specifically because of containerization.

On top of this, the royalty payments don’t all make it into the pockets of the ones being featherbedded.  Ten per cent—which ran to $21 million in 2011—were raked off the top by the workers’ union management, as the union’s vig.

In the end, the union doesn’t care about the economic damage done by the strike they’re threatening, nor do they care that their strike has so little economic purpose.  This isn’t even about protecting a featherbedding perk—USMX is willing to keep paying the “royalty;” they just want an upper bound on a payment that has nothing to do with the work being done.

No, this is about union power and the unions’ decision to use extortionate-type actions to maintain/increase it.  It’s a legal version of the violence they threatened in Wisconsin and Michigan, and of the dishonesty shown by the Wisconsin Teachers’ Union a year ago.

Update: Michelle Malkin provides one:

A deal has been struck that for now averts a strike by 14,500 longshoremen at major ports on the East Coast and Gulf of Mexico, including PortMiami and Port Everglades.

A federal mediator announced Friday that an expired contract for workers in the International Association of Longshoremen would be extended for another 30 days while negotiations continue.

The Obama Fiscal Cliff

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Here is a table of the effects of the Obama tax increases that will follow from President Barack Obama’s drive to put us all over the fiscal cliff.  The data are compiled from a recent Wall Street Journal article.

Category

Income

Post-Cliff Tax Rate

Tax Rate Increase from Pre-Cliff

Tax Dollar Increase from Pre-Cliff

Remarks
Unemployed Person Under $10,000 8.4% 55% $159
College Student $10,000-$20,000 7.5% 38% $308
Lower-Income Working Couple $20,000 – $30,000 5.5% 9,809% $1,423 From $15 refund to $1,423 tax payment—loss of Bush tax cut 10% bracket
Retiree Household $30,000 – $40,000 5.1% 42% $540
Higher-Income Professional $150,000 25% 25% $6,662 This also represents just under 25% of the total increase from the Obama tax hike
High-Income Couple $350,000 29% 20% $13,847 Loss of the AMT and higher dividend and cap gains taxes
Very High Income Households $1,000,000+ 39.7% 24% $254,637 Total share income taxes paid by these earners actually goes down due to the disparate impact of the Obama tax increase on the lower incomes

Obama’s Plan B desire for going over the fiscal cliff is going to hurt the least among us—the antithesis of our country’s Judeo-Christian imperative—and it makes his Evil Rich relatively better off.