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The ‘Fiscal Cliff’ Fix—Good, Bad, and Ugly

There’s a lot of good news in the deal negotiated by the White House and Congress that resulted in the passage of the American Taxpayer Relief Act, signed yesterday by the President.

First, we should mention as really good news, the bad stuff that is not in the deal. There is no increase in the Medicare eligibility age or a cut in the Social Security cost of living adjustment (COLA) based on an inaccurate inflation index for the elderly, the chained CPI. In other words, this deal did not target the basic programs that retirees and many of the disabled, including disabled veterans, rely on. These benefits have not been cut. This is good news because so many Americans, especially older women, who are the majority of the elderly, rely on these programs for the vast majority of their income. This is a huge victory for the large coalitions of organizations working to protect these programs from cuts and to improve their benefits. Although many pundits, CEOs, and newspaper editorial boards assume that cuts in these programs are needed to reduce the deficit, that is simply not so. Without more effective cost controls on health care in general, cutting Medicare benefits would simply shift costs from a government program paid for by workers’ life-long contributions to other retirement resources they may have and increase health care costs overall. Similarly, cutting Social Security benefits would force retirees to rely more on other retirement income or assets, which—for most retirees—have been shrinking due to the Great Recession and the slow recovery. Many retirees would simply see their standard of living fall—some would fall into poverty. The solution is not cuts to these programs, but controlling health care costs and raising more revenues. For example, removing the cap on earnings so that all workers pay the same tax rate for Social Security (the cap for 2013 is $113,700—dollars earned above that amount are not assessed any Social Security tax) would solve all of Social Security’s long-term funding shortfall (a shortfall not expected to occur for another 20 years anyway).

More good news: Important Obama tax credits for low and middle income families, such as the expanded child tax credit, the expanded Earned Income Tax Credit, the American Opportunity Credit–a tuition tax credit—are renewed for five years. And the Bush tax cuts for the rich, which President Obama had previously agreed to extend for two years through the end of 2012, have now been eliminated for individuals making more than $400,000 per year and married couples making more than $450,000 per year. The ending of this cut for the rich, in place since the early years of the Bush administration, amounts to the first significant increase in income tax rates in many years. In addition some cuts in allowable exemptions will affect those earning above $250,000. Compared with policy current as of December 31, tax rates on dividends and capital gains are also higher than they were for higher income filers (increased from 15 percent to 20 percent).  The tax rate on estates valued at $5 million and up ($10 million for married couples) has increased from 35 percent to 40 percent. These higher rates, along with the lower income taxes for everyone earning less than $250,000, have been described as “permanent,” which should provide some sense of security going forward. (Of course, Congress could change these rates at any time—but they don’t have a sunset date as the original Bush tax cuts did.)

Another important positive is the extension of federal unemployment benefits for those looking for work for more than 26 weeks, preventing cutting off benefits for 2 million unemployed and giving them a lifeline for another 12 months.

Some of these provisions are also the bad news: had the fiscal cliff not been negotiated away, we would have fallen over the cliff, and tax rates on estates, dividends, and capital gains would be higher yet, and the income level for the elimination of the tax rate cuts would have corresponded to the level the President campaigned on ($200,000 for individuals, $250,000 for married couples), so some critics may feel the White House lost tax revenues here that it should have held onto. After all, reducing a deficit can be done either by cutting spending or by increasing revenues, and, for women, who depend so much on government programs (Title X family planning funds, for example, or services for domestic violence victims) any loss in potential revenue and failure to harvest new revenues likely means bigger future cuts to programs they rely on.

Other bad news: the payroll tax cut was not extended.  For the past two years, most workers paid a contribution deducted from their paychecks of 4.2 percent of their earnings for Social Security instead of the normal 6.2 percent. This reduction, always seen as temporary and originally passed for one year, and then extended for a second, helped to stimulate the economy during the weak recovery of 2011 and 2012, by adding about $120 billion to consumer demand each year (not counting multiplier effects). What this means is that many low and middle earners will actually see their taxes increase—they will still get the income tax rate cuts that are now permanent and the Obama tax credit expansions but those will be more than offset by the payroll tax increase that supports Social Security. This is bad news for millions of families and for the overall economy, which still needs more stimulus, not less.

The ugly is what remains to be negotiated: the sequester and increasing the U.S. Government’s borrowing authority. The sequester is a nine-year planned cut in expenditures of approximately $110 billion per year, including both defense spending (50 percent) and discretionary non-defense spending (50 percent) that would have gone into effect automatically on January 1, 2013, had this fix, which extends that deadline 2 months, not gone through. A two-month delay is good because those are huge cuts in spending that could trigger an economy-wide downturn, but the delay may not be long enough to allow the crafting of good alternatives.  In fact, the just-inked deal includes $12 billion in spending cuts that are a down payment on future anticipated cuts.

At the same time, Treasury Secretary Timothy Geithner has announced that the U.S. Government has now reached its borrowing limit and is using extraordinary measures to make sure we can pay all our bills. While many of the pundits and CEOs mentioned above, as well as some centrist members of Congress from both parties, are arguing for cuts in spending rather than more revenues as a way to downsize our deficits, it is the Republican members of Congress aligned with the Tea Party who are demanding significant cuts in federal spending, particularly in Social Security, Medicare, and Medicare, in exchange for raising the debt ceiling. Perhaps they have not seen the survey research that shows that adults of all political parties (including the Tea Party) oppose cuts in benefits provided by these programs.

In the next two months we are certain to see some more really big battles to protect critical programs for all Americans, programs which are even more essential for women.

Heidi Hartmann is the President of the Institute for Women’s Policy Research.

An Unbalanced Debt Deal: Cutting Vital Programs Does Not Address the Deficit

The deal to raise the debt ceiling that may or may not have been reached between President Obama and Speaker of the House John Boehner should be rejected by members of the House and Senate if it is as unbalanced as is being reported in the press. Supposedly it includes no tax increases and that makes it unbalanced on its face. Rather it includes a promise of future tax reform in exchange for immediate cuts to vital programs.

In general, the White House has been trying to get agreement with Republicans in Congress to balance budget cuts with tax increases as a way to tame annual deficits and contribute to bringing the accumulated debt down as a share of Gross Domestic Product (GDP). The White House was asking for $4 trillion in cuts and revenue increases over 12 years, but numbers discussed recently are somewhat more modest and talk of cuts, not tax increases, has dominated.

While the Republicans have refused to accept tax increases, the President has been willing to put large cuts on the table, even suggesting significant cuts in well-loved programs such as Social Security and Medicare. This inclination exists despite the White House’s insistence that Social Security does not contribute to the budget deficit and its Trustees projection that the program will have sufficient funds to pay benefits in full through 2036, even if no changes are made. While Medicare’s future shortfalls are expected to contribute to future budget deficits—if health care costs are not brought under better control—the Trustees of the two plans project that Medicare can pay all benefits through 2024, and an Actuary Office within DHHS moved their estimate from 2017 to 2029 due to the passage of health care reform, even if no further changes are made on the benefit or revenue side.

Any deal that makes significant cuts to the benefits provided by these programs should be rejected. Women are the majority of those receiving benefits from both Medicare and Social Security, primarily because they live longer than men and these programs primarily serve those in their 60s and beyond. IWPR research shows how much women rely on Social Security. More than two-thirds of all women aged 65 and older rely on Social Security for half or more of their income. For men that age, the share is more than half.

Among the cuts to Social Security that may be included in the deal, as reported in the media, is a shift in the cost of living adjustment (COLA) to a smaller measure of inflation which is less accurate than the current price index used to adjust Social Security benefits. Health and aging experts agree that elders face higher than average price inflation because they consume so much health care, yet the proposed switch to the “chained CPI” would reduce benefits.  According to the National Women’s Law Center (NWLC), at age 65 the chained CPI would reduce benefits by 1 percent and, by age 95, it would result in a 10 percent reduction of benefits. Women are twice as likely as men to live to age 95, meaning a benefit cut that accumulates over time, as the chained CPI does, would especially hurt women.

Raising the eligibility age for either Social Security or Medicare amounts to a disastrous cut to seniors and future retirees, who have paid for these benefits throughout their lives. Every one year increase in the eligibility age for Social Security amounts to a seven percent cut in benefits across the board. Lack of health insurance is an enormous problem for older adults. Rates of employer-sponsered health insurance coverage decline beginning at age 50—and continue to decline until the Medicare eligibility age (65) is reached. Raising the eligibility age for Medicare would prolong the period without insurance coverage that many experience just as their health care needs are increasing.

The debt ceiling needs to be raised to enable the federal government to meet obligations it has already incurred. Congress has already approved the budget expenditures that require the ceiling to be raised and they should lift the debt ceiling to allow the budget they voted for to be fully implemented.

Cutting essential programs that do not contribute to the deficit now and will not for at least a decade is a completely unnecessary part of any deal on the debt ceiling. There are many ways of bringing the nation’s debt under control without attacking programs that Americans rely on for survival. Moreover, Americans strongly support these programs and would be willing to pay more in taxes if necessary to preserve current levels of benefits.

Members of Congress who vote for cuts such as these may well find that voters do not agree with their actions.

Heidi Hartmann, Ph.D., is the President of the Institute for Women’s Policy Research. he has published numerous articles in journals and books and her work has been translated into more than a dozen languages. She lectures widely on women, economics, and public policy, frequently testifies before the U.S. Congress, and is often cited as an authority in various media outlets.

Back to the Future: Young Voters Support Social Security, But Fear for its Preservation

This blog is also posted on the Social Security Media Watch Project.

By Leah Josephson

As an undergraduate student readying myself to enter the workforce in a struggling economy, I was interested in the panel discussion, “Engaging Younger Voters on Social Security,” hosted by the Economic Policy Institute (EPI) on Wednesday, July 20. With Social Security possibly on the table as a target for budget cuts, I wondered if I would be protected by the program in retirement, more than 45 years from now.

Panelists described how to best explain the importance of retirement security programs to young people and explored polling results regarding young peoples’ feelings about the Social Security program.

Showing Young Voters a Future for the Program

EPI Research Assistant Kathryn Edwards, who co-authored “A Young Person’s Guide to Social Security,” spoke to the struggles young people face in understanding the current nature and the future Social Security. Younger generations sometimes see the program as something they won’t need—or that simply won’t be available by the time they reach retirement age.

Edwards has seen success in framing Social Security as a type of insurance. Just like car owners and homeowners buy insurance, Social Security offers protection in the event someone is unable to work, and the investment remains as workers shift between jobs. Social Security also serves as risk insurance for individuals unable to work due to disabilities and for the children of deceased parents. “Because you are an actor in this economy, you are at risk,” said Edwards. “The answer to risk is to protect yourself against it.”

Edwards also addressed the widespread myth that Social Security is “running out.” Social Security currently costs around four percent of GDP and will rise to a little less than six percent by 2035. This increase in cost is not a crippling adjustment, and similar increases have been absorbed by the economy in the past. Defense spending increased by 1.5 percent from 2001–2007, a much shorter period of time, and the economy was able to support it.

“This isn’t a problem with the program, it’s a problem with the politics,” said Edwards. She said the framing of Social Security as a problem is a political strategy rather than an economic reality.

Younger Generations Don’t Need Convincing on the Importance of Social Security

There was also some myth busting on young people’s understanding of Social Security. An accurate portrayal of my generation’s feelings about the program: we care. Most young people understand the importance of government retirement insurance, but fear for its preservation.

Celinda Lake, a political strategist, advisor, and pollster, presented the results of her study of around 5,000 voters’ attitudes toward the Social Security program. Nation- and state-wide phone surveys were conducted in May 2010 and March 2011. Focus groups and dial tests were held in March and April 2010.

While many advocates believe young people have little interest in retirement insurance, Lake’s research showed that younger voters have surprisingly strong, positive feelings about Social Security. In fact, the younger the voter, the more likely she or he is to oppose raising the retirement age.

Support for Lifting the Cap on Payroll Tax Strong Among Young Voters

Voters under 30 also strongly supported eliminating the cap on payroll tax  that exempts Americans making more than $106,800 (just six percent of the population) from paying Social Security taxes on wages above that threshold. Seventy-two percent of younger voters surveyed said they would support a candidate who supported lifting the cap.

Younger voters see Social Security as a promise, a government covenant made to all generations to provide a basic and reliable retirement. Before Social Security was passed in 1934, many lower income Americans had to either work until they died or live their final years in poverty. Social Security instilled in Americans a basic belief in older individuals’ right to a modest guaranteed income after lifelong employment.

Lake speculated that stability is an important value to young voters because of difficult experiences navigating the job market during and after the recession. She was confident policymakers could sell younger voters on the importance of Social Security because her survey findings showed they already strongly value the program. “We’re not convincing young people,” she said. “We’re tapping into existing attitudes. We’re mobilizing them.”

Cuts made to Social Security now will not directly affect Americans who already receive benefits or those who will receive benefits in the next few decades – they’ll affect the younger generations. Edwards summed up the program’s relevance to younger voters: “If you’re a young person, Social Security is yours to lose.”

Leah Josephson is the Communications Intern with the Institute for Women’s Policy Research.

Young Women Need Paid Sick Days (Too)

by Claudia Williams

While some workers lacking paid sick leave can take time off without losing pay, many lose pay when they are out sick and cannot afford to take a single day off. This is particularly the case for young women. At an early stage in their careers, many younger women workers are living day to day and others juggle multiple jobs to make ends meet.  With limited wealth and savings, a large debt from college or even a steady income, younger women often find themselves between a rock and a hard place when illness strikes. Younger women are often not in a position to take lower pay when sick, especially when medical expenses are involved.

While part-time and low-income workers’ concerns are widely discussed, the needs of younger workers are almost unheard of, as it is usually assumed that their health status—without the burdens of chronic health conditions and age—is excellent, and that they don’t yet have care giving responsibilities.

Data from the National Health Interview Survey (NHIS), however, shows that young workers need paid sick days just like everyone else. In fact, of those private sector workers that reported having fair or poor health, 30 percent were 35 years or younger and a larger portion were young women (18 percent compared to 12 percent for young men). The same data show that a majority of young workers lack paid sick days; only 37 percent have paid sick days, compared to 58 percent of all workers.

Across the board, younger workers have limited access to paid sick days, no matter what they do for living, what their schedule looks like, or the size of the business they work for. For instance, whether young workers are employed in high-end jobs like legal occupations or in lower paying occupations like  health support, data from the NHIS show that only one out of five workers with paid sick days in those occupations are  between 18 and 35 years old.

For younger workers concentrated in traditionally low-income occupations or small businesses, the picture is even grimmer. Along with part-timers, these workers are most often afflicted, and women are overrepresented in this type of work arrangement. The outlook is especially challenging for young women with care giving responsibilities on top of lower earnings: paid sick days are even more essential for them to to stay afloat. For single mothers, usually with limited resources and often living in poverty, having paid sick days can make a big difference when medical problems arise.

Paid sick days are essential to all workers, but even more so to those with limited resources, including younger workers who are more vulnerable and have fewer resources than many of their older counterparts.

Claudia Williams is a Research Analyst with the Institute for Women’s Policy Research.

New Cop on the Beat: The Consumer Financial Protection Bureau

It has been a year since the passage of the Credit Cardholders Bill of Rights, also known as the Credit Card Act. Along with Wall Street reform and the creation of the new Consumer Financial Protection Bureau, it just might now be easier to avoid financial traps.

By Robert Drago

I’ll admit it: I know more about the ingredients in the food I eat than the fine print governing my credit card. I sincerely doubt that I am alone, and most of the time, this is not a problem. Until financial disaster struck the United States in 2007, I shared with many Americans a presumption that the system is fair and reasonable, and that I did not need to read the fine print.  But it seems that things were getting out of hand.  I’m happy to say that help is on the way.

Prior to passage of the Credit Cardholders’ Bill of Rights and the Dodd-Frank Wall Street Reform and Consumer Protection Act, lenders were increasingly using mountains of fine print to increase charges to credit card holders and other borrowers. If you went over your credit card limit, the bank could simply pay the amount, charge you special fees for having gone over, raise the interest rate on your existing balances, and downgrade your credit score.

Debit cards once seemed like a solution to these problems, since you can only spend what is in a bank account. But in fact banks often allowed cardholders to run overdrafts and then charged extra  fees. Even such apparently transparent words as “fixed rate” or “prime rate” did not necessarily have their common sense definitions, because they could be redefined in any way the bank or mortgage lender pleased – in the fine print.

Lower down the economic ladder, things were often not fair or reasonable. Twenty-nine percent of Americans do not even have a credit card. Some of those individuals are financially solvent, but many are not (not that all credit cardholders are either) and, surprisingly, they have lots of credit options.

Targeting Low-Income Groups Subprime and Subpar Mortgages

Check out a payday lending site, and you will discover how to sign over your car for cash, obtain a debit card that provides cash advances (huh?), get a check cashed the same day, get a payday loan or, if that’s not enough, get an installment loan. If these all sound like such bad ideas, since the consumer ends up paying steep fees and high interest rates, that no one would use them, think again: millions of Americans are living hand-to-mouth and are relying on these services and often going deeper and deeper into debt as a result.

And sometimes unscrupulous marketers target unsuspecting people for higher interest loans when they could have qualified for lower cost loans.  Studies show that in 2006, 61% of subprime home loans went to people who could have qualified for loans with better terms.  Women and people of color had more subprime mortgages at all income levels than white men.

A Better Ally for Consumers

As we go forward from this financial crisis, we need to know what we are and will be paying in interest and fees for any type of loan. And that is where the Consumer Financial Protection Bureau (CFPB) comes in. Under the leadership of Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard University who long advocated for its creation, CFPB is gearing up for full-scale operations in July of this year. The new CFPB will emphasize the value of transparency, of letting the sun shine in, and this will help all of us.

Financial reform is not about making lenders pay for past misdeeds and shenanigans, although some of that perhaps should occur. It is instead the promise of the public knowing what they are getting into when they sign up for a credit card, take out a mortgage, or get one of those debit cards with cash advances.  Individuals and families will have a far better idea of whether they should or should not take on such debt. Those who should not be taking on debt will be more likely to avoid it, and those who should will be more likely to be able to do so with a clear understanding of the costs. Our economy will not recover until consumers feel secure, until they feel like the rules of the financial game are clear and not subject to change without notice. The Consumer Financial Protection Bureau holds the promise of helping to do just that.

The CFPB is one important piece of the puzzle involved in rebuilding our economy, and an extremely important one for women, who have often been a disproportionate share of the victims of poor practices in the industry and of outright scams.

Robert Drago is the Director of Research with the Institute for Women’s Policy Research.

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