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.