Tuesday, January 29, 2013

Billions for Job Piracy Despite State Budget Cuts

According to Center on Budget and Policy Priority data cited by Louise Story, in 2011 the states enacted $156 billion of austerity measures, between budget cuts and tax hikes. Despite their budgetary woes, however, this did not stop them from throwing billions of dollars a year into the worst kind of corporate subsidy, relocation incentives that move existing facilities from one state to another without creating any new jobs. A new report from Good Jobs First documents their widespread use, which is far more common than most people would imagine.

One great aspect of this report is that it goes beyond the two examples of interstate border wars we hear the most about, New York-New Jersey-Connecticut and Kansas-Missouri. We learn about Texas and Georgia vs. the world, North Carolina-South Carolina (especially in the Charlotte metro area), Tennessee-Mississippi (particularly with Memphis as target), and Rhode Island-Massachusetts. In addition, we learn more about the flip side of job piracy, retention subsidies, of which Sears' two in Illinois are the most egregious.

For example, Continental Tire moved its North American headquarters and 320 jobs from Charlotte to Lancaster County, South Carolina, in 2009. Georgia gave Ohio-based NCR Corp. (formerly National Cash Register) $109 million to relocate that same year. In 2010, Hamilton Beach received at least $2 million to move from Memphis to Olive Branch, Mississippi, while in 2009 McKesson received $4 million from Mississippi in addition to local incentives to move from Memphis to neighboring DeSoto County. Rhode Island, in a widely publicized move, gave Boston Red Sox pitcher Curt Schilling's video game company 38 Studios a $75 million loan to move from Massachusetts in 2009, only to see the  firm go bankrupt in 2012. There are many more examples in the report, but you get the idea.

The existence of relocation subsidies makes it possible for companies to demand incentives to stay in a particular state, i.e., retention subsidies. Two of the three largest ones went to Sears in Illinois, $168 million in 1989 and another $275 million in 2012 when the 1989 deal expired. The second largest was $250 million to Prudential Insurance from New Jersey in 2011. But many more states have had to shell out retention subsidies on a regular basis.

The report notes that at least 40 states know how to write no-raiding language into their subsidy programs, because they already have such language banning intra-state relocations from receiving subsidies under various programs. However, as far as I know, far fewer states prevent their cities from giving relocation subsidies to in-state firms, though the report shows that Maine's Employment Tax Increment Financing rules do provide that.

What is necessary, the report argues and I wholeheartedly agree, is that states need to tweak their program language to stop rewarding interstate job relocation as well. They need to stop efforts to directly poach existing firms, something Texas is heavily engaged in. The report says there is a "possible" federal role here, to withhold some Department of Commerce monies from states that engaged in job piracy. I, on the other hand, think that federal action is the only way it will happen. As I've written before, voluntary state efforts in the 1980s and 1990s to end job piracy have been utter failures, and the states clearly need an outside enforcement mechanism, which can only be provided by the federal government.

With such extensive documentation of how widespread relocation and retention subsidies are, hopefully more people can be mobilized to get the federal action we need.

Cross-posted at Angry Bear.

Friday, January 25, 2013

News of Note: Job Piracy, Tax Havens, Filibuster Reform

A lot has happened during my busy first week of classes, so I want to flag a couple of the most important pieces of news from the week.

1.  Good Jobs First has a blockbuster report on relocation subsidies. I will have a full post on this report as soon as I have time to digest it.

2. Tax Justice Network's January Taxcast is out, with reports on Dell in Spain, an EU threat to blacklist Switzerland, and a look at "Google Capitalism."

Hear it here.

3. Filibuster reform was less than hoped. Recall how overrepresented rural states are in the Senate in the first place. Here are Ezra Klein's pessimistic take and Chris Bower's somewhat more optimistic take on the changes.

$6.6 Trillion Retirement Savings Shortfall Shows 401(k)'s No Replacement for Pensions

Last week the Washington Post ran a story on the weaknesses of 401(k) retirement accounts, focusing on the the fact that 1/4 of Americans with 401(k)'s have used them to meet current income needs. Among people in their forties, the share rises to 1/3,  an astounding figure considering how close this group is to retirement. In the wake of the Great Recession and continuing job market problems, it is perhaps not surprising that 28% of 401(k) account holders presently have loans against their accounts.

As the Post delicately puts it,

Many employers have embraced 401(k) and other defined-contribution
accounts as a way of helping workers save for retirement while relieving
themselves of the financial risks that come with managing a traditional
pension plan. In theory, 401(k) accounts are better suited to an
economy in which workers are changing jobs more frequently than ever
because the accounts can be rolled over from previous employers.

A more accurate way of saying this would be that employers have embraced 401(k) plans because they are less expensive than providing pensions, thereby "cut(ting) overall employee compensation," and that 401(k) plans don't take into account the stagnation of real wages, points well made by commenter "Sean2020."

Moreover, as I reported before, 49% of private sector worker have neither a 401(k) or a defined benefit pension plan. Thus, they have no supplement to their eventual Social Security benefits unless they are able to save outside of a 401(k).

And they aren't saving. At least, they're aren't saving nearly enough to maintain their standard of living after retirement. As a report from the Senate's Health, Education, Labor, and Pension (HELP) committee states, there is a  $6.6 trillion gap (methodology here) between what people need to maintain their current standard of living and what they've actually saved for retirement. This is equal to the combined assets of defined benefit pensions and 401(k) type plans, more than total state/local/federal government retirement plans, and more than twice as much as the Social Security Trust Fund. There's a reason I've been using the word "crisis"!

Total Assets

Social Security Trust Fund      $2.7 trillion (12/31/2012)

Defined benefit pensions         $2.3 trillion (9/30/2012)

Defined contribution 401(k)    $4.3 trillion (9/30/2012)

State/local gov't employee      $3.1 trillion (9/30/2012)

Federal employee retirement  $1.5 trillion (9/30/2012)

IRA's                                    $4.9 trillion (6/30/2011)

Sources: Social Security Administration; Federal Reserve, tables L-116, L-117, and L-118 (financial assets only), for DB, DC, and government employee programs; Investment Company Institute for IRAs

This gigantic hole shows that the current model, based on 401(k)'s rather than true pensions, is not working. In a future post I will discuss ways to fix the crisis.

Sunday, January 13, 2013

US already has high elder poverty rate; how can cutting Social Security even be on the table?

In the recent debate over the so-called "fiscal cliff," President Obama was reportedly at one point offering to raise the eligibility age for Medicare from 65 to 67 and cut Social Security via "chained CPI.". However, in view of the coming retirement crisis due to the decline in defined benefit plans guaranteeing a specific retirement income, this is a terrible idea. Given that proposals to cut Social Security and Medicare will be repeatedly floated in the coming debt ceiling and related budget fights, we need to understand just how bad an idea this is.

First, let's look at what Social Security and Medicare have done to elderly poverty in the U.S. over time, using the standard poverty line as our measure. Daniel R. Meyer and Geoffrey L. Wallace of the University of Wisconsin have published data on official poverty rates for those over 65:

Official poverty rate for the elderly by year

1968          25.0%

1990          12.1%

2006            9.4%

1968, of course, is just three years after the enactment of Medicare and Medicaid. We can see that elder poverty was halved between 1968 and 1994, and dropped at a slower pace through 2006. In the bad old days, one in four of the elderly lived in poverty: why would we want to go back to that when we are a much richer society today than we were in 1968?

Moreover, before we pat ourselves on the back for how well we have done, we need to consider alternative measures of poverty and the experience of other industrialized democracies. As Arthur Delaney and Ryan Grim report, the Census Bureau has developed a "Supplemental Poverty Measure" (SPM) that includes items such as out-of-pocket medical expenses, which affect seniors more than those under 65. Thus, while the SPM was only slightly higher for all individuals in 2009 than the official poverty measure (15.7% vs. 14.5%), for seniors the increase was from 8.9% to 16.1%.

As Meyer and Wallace relate, when the poverty line was first defined in the United States in 1963, it was approximately equal to 50% of median household income. Today, according to Smeeding et al., it is approximately just 30% of median household income. Meanwhile, the European Union has gone in the opposite direction, defining poverty as 60% of median income. Researchers comparing poverty cross-nationally generally use a 50% of median income standard. How does the U.S. stack up?

Here are Smeeding et al.'s figures for poverty rates in 2000 for all over 65 (figures eyeballed from Figure 1; no table provided):

Country                        Poverty rate

United States                 25%

Australia                        23%

United Kingdom            18%

Italy                              14%

Germany                       10%

Sweden                          8%

Canada                          6%

I guess we can take solace in the fact that Ireland has a substantially (20 percentage points) higher elder poverty rate for households only comprised of the elderly, as Smeeding reports in a separate paper. Otherwise, the comparison is pretty grim.

Yet what do the Very Serious People, as Paul Krugman calls them, want? At the very least, they want to cut Social Security by changing how inflation is calculated, and they want to raise the Medicare eligibility age from 65 to 67. At some points, it appeared the President would go along.

This is lunacy. As David Rosnick and Dean Baker (via David Cay Johnston) show, cuts to Medicare, such as Paul Ryan's plan, shift far more costs to beneficiaries than what government saves through the cuts. In fact, while the Ryan cuts save the government $4.9 trillion over 75 years, the elderly will pick up $34 trillion in new costs. As Johnston puts it, for every dollar in saving for the government, there will be approximately $6 in net losses to the country as a whole.

Where are seniors supposed to find $34 trillion? Fewer and fewer people will have real pensions, 401(k) plans are vulnerable to market swings, and the Very Serious People want to cut Social Security. The simple answer is that seniors will be worse off than seniors today, yet 47% of the electorate voted for people who would have cut Medicare now.

It's time to take these cruel cuts off the table permanently. What we will need in the future is an augmentation of Social Security, not cuts. We've got to make sure politicians get this through their heads.

Cross-posted at Angry Bear.

Friday, January 11, 2013

Poll Results: 1 in 4 Never Expects to be Able to Afford to Retire

Thanks to everyone who answered the poll on when you have or expect to be able to retire. The biggest takeaway is that 1 in 4 never expect to be able to retire.

Full results:

Retire before 65: 20%

At 65: 20%

At 70: 20%

At 75: 4%

Over 75: 8%

Never: 25%

(Total does not equal 100 due to rounding.)

This underscores just how dire our retirement crisis will be. As I explained in my last post, the decline in defined benefit pensions from 38% of private sector workers in 1980 to 20% in 2008 means that Generation X will be particularly vulnerable to poverty in retirement, yet Republicans want to kill Social Security and Medicare. We see their efforts as well to eliminate defined benefit pensions for public sector workers.

Baby boomers, especially younger ones, will not be exempt from the crisis. But Generation X and beyond will be the hardest hit. More on the retirement crisis soon.

Thursday, January 3, 2013

The "Fiscal Cliff" and the Coming Retirement Crisis of the Middle Class

On January 1, Congress approved a tax and spending bill to avert the so-called "fiscal cliff" combination of tax hikes and spending cuts that would have created deflationary pressure on the United States (though Yglesias questioned the conventional wisdom of whether it would necessarily cause a recession). Let's take a look at the deal in some detail, then proceed to the gruesome details of what will happen around the Ides of March.

From Think Progress, here are some of the more critical parts of the deal.

1) The Bush tax cuts expire on only about 0.7% of households, those earning more than $400,000 per year as an individual or $450,000 for a couple. This brings in $600 billion over 10 years. Since rich people don't spend as much of their income as the poor and middle class do, this is less deflationary than a tax increase on the middle class, as I discussed in November.

2) With the expiration of the temporary 2% payroll tax cut, 77% of households will see their taxes go up. Indeed, every single income group will, on average, see their taxes increase, as shown below (via Matt Yglesias):


Since this hits the middle class more directly, the deflationary consequences are larger than they would be for an increase in taxes on the rich. On the other hand, this strengthens the long-run funding of Social Security, an issue I will return to shortly.

3) Unemployment insurance is extended for two million workers. This will get spent and have a definitive stimulative effect on the economy.

However, the second shoe of the fiscal cliff, the automatic cutbacks known as the "sequester" was simply postponed for two months, which is the same time that the Treasury Department will run out of creative ways to keep the country from exceeding the debt ceiling, which it hit on December 31.

Combining these two negotiations, the debt ceiling and the sequester, will be an extremely high-stakes battle where the middle class has a lot to lose. The big problem here is that some Tea Party Republicans really do want to use the debt ceiling to take the economy hostage and force cutbacks in Social Security, Medicare, and Medicaid. Despite the fact that Republicans lost the Presidency as well as both Senate and House seats (with a majority of the votes cast for the House going to Democrats), they see their gerrymandered House majority as giving them license to wreak havoc.

The consensus among most commentators (Krugman, Klein, and Yglesias, for example) is that the fiscal cliff deal will work out okay as long as the President does not cave in to the Republicans' threats over the debt ceiling.  I agree as far as that goes. But, as Yglesias points out, there is nothing great about what Klein says is the most likely scenario, where the President gets $1 trillion in new tax revenue for $1 trillion in cuts over 10 years. That is still $2 trillion in austerity measures at a time when unemployment is barely below 8%!

The looming problem rarely mentioned, even in the context of the Republican campaign against Social Security, is that my children's generation (Generation X, if you will) faces a retirement crisis that many of my generation will avoid, based on the end of pension plans. According to one Social Security Administration report, the percentage of private-sector workers with a traditional defined-benefit pension plan fell from 38% in 1980 to 20% in 2008. Over the same period, private-sector workers who only received defined contribution plans rose from 8% to 31%. Note that this means that 49% of private-sector workers are not covered by any pension plan at all. Moreover, while governments have more commonly provided defined-benefit plans than private employers have, they are under attack in many states.

Let's do the math. With 49% of private workers having no pension, and another 31% having an on-average less generous defined contribution pension, how will seniors support themselves if Social Security is cut? Hint: It won't be pretty.

Get ready for a bumpy March.

Cross-posted at Angry Bear.