This is a repost from Forbes. 

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In December 2017, Congress cut government revenues by passing a $1.5 trillion tax cut. Congress claimed the corporate tax cuts would benefit everyone because businesses would invest or use the tax cut to raise wages. Donald Trump tweeted “TAX CUTS will increase investment in the American economy and in U.S. workers, leading to higher growth, higher wages, and more JOBS!” (Emphasis in his original tweet.) The promise hasn't materialized. Even Fox News, in an August 2018 poll, found Obamacare to be more popular than the tax cuts.

Here is the Fox News poll.

But so far, the cuts have not been linked to an increase in labor share or more investments. The Federal Reserve Bank of Chicago’s current capital spending index indicates private business investment plans have remained in negative territory since 2015. The most certain effect of the tax cuts has been to help fuel a massive increase in the federal deficit and debt.

So where is all the money saved from corporate tax cuts going? First, to companies’ bottom lines and second to stock buybacks, which were recently at a record high. So far, in 2018, the 500 corporations in the S&P Index have received $30 billion from the corporate rate cut, which in turn accounts for over 40 percent of S&P equity earnings growth. When economies are strong, equity values rise because the issuing corporations are engaged in innovation and other fundamental strategies to raise the real performance of the company. However, innovation and fundamental performance do not seem to be the cause of the rise in equity values. The Shiller PE ratio, which compares share prices to earnings, is now over 30, the highest since the expansion began mid 2009.

Buybacks are attractive because most CEO pay is directly linked to stock values and not to productive capital expansion. Increasing pay for the wealthiest Americans and reducing their taxes will boost equity values, but America’s inequality will get worse. The Economic Policy Institute (EPI) documented that 2017 average compensation for the CEO of large companies increased by 17.6%.  And that was before the tax cuts kicked in. (Disclosure:  I am on the board of EPI.)

Unfortunately, corporations have not used the money they've saved from the tax cut to raise workers’ pay and any potential increase in compensation could be soaked up by health insurance premiums. And, of course, paying more for health insurance doesn’t help households buy food or shelter. Without substantial income growth for most Americans and without new productive investment by businesses, tax cuts will not boost economic growth. Worse, government spending cuts triggered by cuts in tax revenue could cause a recession.

The bond market bolsters the assertion that the tax cut did not boost economic growth. Long-term interest rates remain low, and observers see a recent small bump as a result of the long-term government deficit and debt forecast, not business investment.

If you hold stocks, you have benefited from the cuts pushing up stock prices, though you should beware of a sharp downturn. These P/E and price levels are probably not sustainable, especially with little overall growth and continuing inequality.

But what of the promise that these cuts would benefit all Americans? Most household incomes haven’t received a meaningful increase in after-tax income from the cuts, and since they are skewed to the rich, it is unlikely they will spur a broad-based economic stimulus.  Companies are using the cuts to further push up stock prices, not make productive investments.

Regrettably, the President’s tweet turns out not to be true.  Perhaps that’s why voters aren’t enthusiastic about the tax cuts. People just aren’t getting any real economic benefits from the tax cuts and they know it.

This is a repost from Forbes. 

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National debt is now 105% of GDP. Should we worry? Debt alone is not a problem.  During WWII, war-related debt was at a all-time high: 118% of GDP. And, debt levels naturally rise in recessions.

So, not all debt is bad.  But economists worry when borrowing fuels consumption and not investment.  Increase debt to build schools, railroads, health systems, create anti-recession spending, and to fight fascism. Good debt makes us richer. But debt used to cut taxes for corporate stock buybacks and affluent household spending, which yields little research and development and other productive investment is bad debt. Bad debt makes us poorer.

And high debt levels can leave little room to maneuver. The IMF predicts that among rich nations, only the U.S. will increase its debt-to-GDP ratio in the next five years, the wrong direction during an economic expansion.  During an expansion, especially the current nearly record-setting long one, debt should be falling, not rising. In Q3 of 2008, the government had collected revenue from the booming economy; the debt-to-GDP ratio was a low 64%. When the Great Recession hit, the government had room to borrow to finance our fiscal lifesavers, including the American Recovery and Reinvestment Act (ARRA) and TARP, which helped keep the deep recession from turning into a global depression.

Government deficits before a recession are even more dangerous.  Fueling a large federal deficit before a recession is a big mistake. If the economic downturn hit now the government would have less ammo to fight it. Interest payments alone will take up an ever-higher share of the budget as the debt ratio grows.  And as the Federal Reserve continues to raise interest rates, the interest share will grow even faster, again leaving little room to increase spending when the next recession comes.

The Congressional Budget Office (CBO) issues a monthly report on deficits and debt. Compared to fiscal year 2017, the deficit for the first 11 months of the fiscal year rose by $222 billion, an adjusted 22.8% over last year.  A steep rise in the deficit while the economy is growing will cause debt to rise even more in the next recession and eventually fuel increasing tax rates while boomers are retiring.

Although rolling back last year's tax cuts would make economic sense, politics may prevent tax cuts ever getting repealed— President Obama left over 80% of George W. Bush’s tax cuts in place.  Without healthy revenues, federal spending cuts and a national recession could erode federal and household investments in human and physical capital and infrastructure.

Why is the deficit spiking during an economic expansion?  Mainly because of the Republican 2017 tax cuts.  Although income and payroll taxes have kept pace, the tax cuts sharply reduced revenue coming from capital gains and corporate tax receipts, and that is creating a revenue gap.

But the biggest red warning light on the spending side is the rising net interest on the public debt.  Using our precious income to pay off past debts – especially if the debt wasn’t used for investment --  leaves less for future investment and help during a recession. Driven both by the overall increase in debt and rising interest rates, CBO writes that "the government’s net interest costs are projected to more than double as a share of the economy over the next decade."

Former Forbes contributor Stan Collender called the debt-causing tax cuts among the most fiscally irresponsible in modern history. Yet Republican majorities in Congress --  hoping to influence the fall elections – are proposing another $2 trillion in tax cuts.

We can afford to reverse the tax cuts now and we should before the recession.  Forbes contributor  Jeffrey Dorfman argues  tax revenue to GDP is a better measure of national capacity than debt. In 2016, the U.S. took 26% of GDP in taxes, compared to 31.7% in Canada, 33.2% in the United Kingdom, and 37.6% in Germany.  The economics and math for stabilizing the economy is known and easy – raise tax revenue during an upturn, take on good debt, and cap increasing interest payments. But last year’s tax cuts aimed to repeal the laws of math and economics and ignored the goal of stabilization.

All in all, the 2017 tax cuts created bad debt and more economic risks.  When the next recession hits, we all will pay the price.

This is a repost from Forbes. 

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Our retirement system invites financial abuse of the elderly -- it causes the same problems we would have if we sent old people out on buses with thousand dollar bills pinned to their shirts. More elderly people will have lump sums, live alone, and begin to suffer cognitive decline, making them targets. This problem is an American one – Americans suffer five times the risk of financial abuse than our counterparts in Europe. The U.S. is a ripe environment for financial abuse because Americans are expected to handle so much cash alone.

I do not believe that financial tips will help people significantly because the problem is systemic, widespread and deeply-rooted. The only way to make an impact is to change the system, which includes heavily regulating the money management and advice industry. And other countries have proven that it is possible to minimize the abuse. But until our government moves boldly and quickly to prevent it, I feel obligated as an American to provide protection tips. Whatever we do, we must not let these financial tips become an easy way to blame the victims; to stop financial abuse, we need a system-wide fix.

Here are some tips. Warning: the list is insanely long and not always practical to elders living alone and in isolation.

  1. When you or someone close to you is still mentally sharp, create powers of attorney and health care directives. Unfortunately, for those who are alone and without a trusted family member or friend, options are limited. Bank trust advisors are not regulated well enough. Some tip sheets suggest going to a financial institution (but I do not), or an attorney (they are usually helpful for contracts but not financial advice). I recommend a fee only financial advisor, which are more transparent and objective. You can find a fee only advisor here.
  2. To protect your parent, develop a relationship with his or her caregiver and be a hawk over finances. The caregiver will be deterred from financial exploitation if they know you’re paying attention.
  3. Set up direct deposit for checks so others don’t have to cash them.
  4. Consult with a financial advisor or attorney before signing any document – assume you don't understand it.
  5. Shred receipts, bank statements and unused credit card offers before throwing them away.
  6. Lock up your checkbook, account statements and other sensitive information when others will be in your home.
  7. Order copies of your credit report once a year to ensure accuracy.
  8. Never give personal information, including a Social Security Number, account number or other financial information to anyone over the phone unless you initiated the call and the other party is trusted.
  9. Never pay a fee or taxes to collect sweepstakes or lottery "winnings."
  10. Never say yes to a financial decision the first time a decision is asked for. Never. Get all the details in writing and get a second opinion.
  11. Have the bank and advisor look out for any suspicious activity related to your account.
  12. Don't allow people you have hired (caregivers, cleaners, etc.) to have access to information about your finances.
  13. Get references for any worker you hire. Do not be afraid of sounding mean or rude. In double checking, you are you are being careful, professional and friendly.
  14. Pay with checks and credit cards instead of cash to keep a paper trail.
  15. Say no more often than yes. It is your money.
  16. Trust your instincts. Watch and acknowledge your own feelings of being threatened or intimidated. Don’t ignore those gut feelings – they are important clues. If you think or feel someone close to you is trying to take control of your finances, call your local Adult Protective Services or tell someone at your bank. There are new rules to make banks proactive about elder abuse. Exploiters and abusers are often very skilled. They can be charming and forceful in their effort to convince you to give up control of your finances. Don't be fooled; if something doesn't feel right, it may not be right. If it sounds too good to be true, it probably is.

Here are some worrisome bank activities that are warnings signs of financial abuse or exploitation.

  1. Unusual activity in an older person's bank accounts, including large, frequent or unexplained withdrawals or ATM withdrawals by an older person who has never used a debit or ATM card.
  2. Changing from a basic account to one that offers more complicated services the customer does not fully understand or need.
  3. Withdrawals from bank accounts or transfers between accounts the customer cannot explain.
  4. Uncharacteristic attempts to wire large sums of money.
  5. New "best friends" accompanying an older person to the bank. Also, a caretaker, relative or friend who suddenly begins conducting financial transactions on behalf of an older person without proper documentation.
  6. Sudden non-sufficient fund activity or unpaid bills.
  7. Closing certificates of deposits (CDs) or accounts without regard to penalties.
  8. Suspicious signatures on checks, or outright forgery.
  9. Confusion, fear or lack of awareness on the part of an older customer. Shame could be conveyed by refusal to make eye contact and reluctance to talk about the problem.
  10. Checks written as "loans" or "gifts."
  11. Bank statements that no longer go to the customer's home.
  12. New powers of attorney the older person does not understand.
  13. Altered wills and trusts and/or loss of property.

True protection comes from a radical change in self-directed individual accounts.

This is a repost from Forbes. 

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Elder abuse will get worse as 10,000 people turn 65 every day for the next ten years. A growing pool of fragile people – retirees, older workers and survivors – are susceptible to financial exploitation. Sure, thieves and legal exploiters are the perpetrators, but the root of elder financial abuse is our retirement system that for 40 years has required individuals to accumulate and handle very large pots of money to last their lifetime. In 2017, $14.5 trillion (85% of GDP) is in self-directed retirement accounts, which are targets for financial predators.

Bottom line: our 401(k) and IRA system invites financial abuse. We can warn people, but offering financial protection advice to older Americans with lump sums is as effective as saying “be careful” before sending a group of mentally and physically impaired and socially isolated people out on a bus with thousand dollar bills pinned to their shirts.

Helpful experts provide tips (I will in my next blog) about how to help yourself or loved ones. But providing “tips” inadvertently blames the victim. They can barely have an effect because the U.S. do-it-yourself retirement system practically begs financial predation to occur.

Requiring professionals who handle Individual Retirement Accounts to be fiduciaries, legally bound to act in their clients' best interest, would have helped prevent legal financial abuse. Sadly, that regulation was overturned by the Trump Administration and Republicans in Congress. The headline in Bloomberg news told the story – “The ‘Fiduciary Rule May Sound Boring, But Its Collapse Threatens Your Retirement.” Now professionals handling IRAs, the fastest growing type of retirement account, are held to a lower professional standard. They can't lie, but they can manage your account without putting your interests first because they are not required to be fiduciaries.

Just how widespread is financial abuse among the elderly? One in 20 older adults said they were financially mistreated in the recent past, according to a study financed by the Justice Department. In one year, the prevalence of emotional abuse among elders was 4.6%; 1.6% for physical abuse, 0.6% for sexual abuse, 5.1% for potential neglect, and a whopping 5.2% for current financial abuse. Even this number doesn't tell the whole story as it only considers abuse by family members.  The Government Accountability Office also found elder abuse to be a growing epidemic. And because our unique American system advises workers to acquire 8–10 times their final salary in retirement individual-directed accounts, with no realistic option to acquire a fair and efficient lifetime annuity, elder financial abuse is far more prevalent in the U.S. than in other nations.

survey of four nations found financial abuse to occur less than one percent of the time in these nations and five times more in the U.S.—a finding consistent with the Department of Justice survey. Stories of abuse confirm the survey’s findings. The New York Times, in a story aptly called “Declaring War against Financial Abuse Among the Elderly,” described a 87-year-old women who was defrauded of $127,000 by a younger friend. The abuse came in the form of mild and gentle persuasion of the older woman to loan money.

Another chilling story came in an advice column to The Moneyist from “Concerned for my Golden Years":

I have a situation that keeps me awake at night. I have no family left. I’m 65 and concerned about being victimized as I get older. I have some reason to believe … I have cognitive decline. How do I protect myself from being taken advantage of as I get older? I am already wrestling with a bank investment adviser putting me in an investment with ridiculous fees. Currently I am able to undo the damage but what if I wasn’t able to do that? As my mother got older (she died at 92), I felt people had the attitude that they could “fleece” her anyway they wanted to and it was appropriate. With her I went through crooked lawyers, accountants, church members, the investment “people who lunch,” charities, and on and on. .. Who will help me? My net worth is about $1.3 million, but money goes fast as my health needs increase.

This concerned retiree, who like many Americans has saved throughout her life in an effort to live comfortably in her "golden years," reminds us that our retirement system and lack of financial safeguards leave older Americans on their own and in the dark, grasping blindly to hold on to their savings. We should be adding financial protections, but instead the Consumer Financial Protection Board and the federal government under the current Congress and Administration are backing away from much-needed regulation that would protect everyday Americans and worry the financial advisement industry.

It's true that a large share of financial abuse comes in the form of theft and illegal behavior outside the money management industry. But abusive financial practices that are completely legal, like selling inappropriate products when the advisor is not a fiduciary, can be just as harmful, and this exploitation will be on the rise as more and more elderly people have cash nest eggs.

August 2018 Unemployment Report for Workers Over 55

August2018 Jobs ReportThe Bureau of Labor Statistics (BLS) today reported a 3.1% unemployment rate for workers age 55 and older in August, which represents no change from July. Although the economy is still expanding, the fastest-growing job sectors for older workers pay wages so low they claim food

Most of the job growth for older workers is in unstable or low-paid jobs, including jobs in the home health and personal care aid sectors. From 2016 to 2026, the economy is expected to add 11 million jobs, an increase of 7.4%. In contrast, the home health and personal care aid sectors will add almost 1.2 million jobs, an increase of 43%. In 2008, workers 55 and older made up approximately 25% of home health and personal care aides. Today, they represent a third.*

At just $23,200, the median wage for health and personal care aides is below the national average of $31,100. Their wages are low enough that 14% of older workers employed as health and personal care aides claim food stamps, compared with 4% of all older workers.

Aiming to curtail public subsidies to employers who pay low wages, U.S. Senator Bernie Sanders and U.S. Representative Ro Khanna introduced legislation to recapture from companies every dollar their workers receive in public assistance.

In the meantime, the growth of low-wage work for older workers leaves many near-retirees unable to afford food, let alone save for retirement. Expanding Social Security and creating Guaranteed Retirement Accounts (GRAs) will ensure older workers are not stuck in low-wage jobs because they can’t afford to retire. GRAs allow workers to save in safe, efficient investment vehicles over their lifetime.

*Authors' calculations using Bureau of Labor Statistics (BLS) and Current Population Survey (CPS).

This is a repost from Forbes. 

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Trump's recent executive order will help the wealthy avoid taxes and do little to promote retirement security.

The order directs Treasury to review the rules on required minimum distributions from tax favored retirement plans. The intent is to change the rules so elders can keep more money in 401(k)s and individual retirement accounts longer – delaying collecting after age 70 1/2.

This rule change matters to the wealthy because IRAs and 401(k) type plans get tax breaks by deferring tax on the contributions and the buildup. Though the public goal of the tax break is to allow people to save for retirement security, the danger is that rich people shift money in the IRAs and 401(k)s from money they save anyway, to avoid taxes. IRAs are tax shelter for the wealthy.

Congress had worked around that danger by requiring distributions from IRA accounts starting at age 70-1/2 so that the money doesn’t languish tax free. If the wealthy do not have to withdraw from their retirement accounts, they will never pay taxes. Their heirs will, but the taxes will be paid in the future. The heirs have an additional benefit because the money in the untouched IRA builds-up tax-free. Also, the heirs' tax rate will likely be lower. All features lower taxes on the wealthy and their families. Delaying paying taxes on an IRA will mean a large tax break for wealthy families and little else. Trump wants to help them delay paying taxes on IRA balances.

President Trump’s initiative will disproportionately benefit the very wealthy, do nothing to increase middle-class retirement security, and increase the budget deficit.

Retirement account participants benefit from the $120 billion tax break mostly, in the form of deferral.  The government grants these tax breaks hoping to induce households to accumulate wealth to finance retirement.  The tax break is not intended to facilitate the bequests.

To prevent IRAs being used as a mechanism for accumulating dynastic wealth, the government therefore requires participants to take required minimum distributions (RMDs) starting at age 70 ½, when the overwhelming majority has retired.  A RMD is the minimum percentage of the market value of the IRA or 401(k) at the end of the previous calendar year that must be withdrawn during the current tax year in order to avoid a penalty. The RMD increases from 3.65% of the account balance at age 70 ½ to 8.77% at age 90.  These withdrawals are subject to income tax, the tax revenues partially offsetting the cost of the tax expenditure.  To illustrate, let's say Anna attained 70 ½ years of age during 2018. The market value of her account on 31 December 2017 was $100,000.  She must withdraw at least $3,650 during 2018 to avoid a penalty.

If current RMD rules burden retirement plan participants who are using their plans to actually finance retirement, then perhaps the rules should change. Would they prefer to withdraw smaller amounts, perhaps out of uncertainty about how long they might live, or the investment returns they will experience?  Tony Webb, my colleague here at the New School,  who helped me with this post, examined this point and found the opposite. Even participants who were highly anxious about becoming poor would choose to withdraw percentages of their wealth at least equal to the RMD, and sometimes, considerably less because they are worried. They want more money of course, but they may hoard the IRA and die with more money than they intended. Most workers need the opposite of what Trump proposes -- more money in retirement at earlier ages.

Thus, relaxing the RMD limits will do nothing to benefit households using their retirement plans to finance retirement. Instead, relaxation would enable the wealthy to continue to accumulate wealth free of taxes on interest, dividends, and capital gains, to pass on as a gift to their heirs. Households should, of course, be free to consume or bequeath their wealth as they see fit.  But tax dollars should not be used to subsidize wealthy heirs. We have better things to do with our tax money.

Instead of proposing reforms to benefit the wealthy, President Trump should focus on the retirement savings crisis facing the middle class. Among workers aged 55-64, about 33 percent have no retirement wealth, and the median IRA and 401(k) balance of the remainder is a mere $60,000.

A better plan is to help people accumulate more money and convert to a fair annuity. We don’t know when we are going to die, and we all need insurance against outliving or money. Traditional pensions and Social Security insure against that risk; we need more retirement plans with annuity features.

Rather than worsening the retirement crisis by giving away more money to the wealthy, or cutting Social Security benefits, policymakers should both strengthen Social Security and expand retirement plan coverage. Guaranteed Retirement Accounts (GRAs) are individual accounts requiring employers and employees to contribute with a fair and effective refundable tax credit provided by the government. GRAs provide a safe, effective vehicle for workers to accumulate personal retirement savings over their working lives.

This is a repost from Forbes. 

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Summer is over and its back to work and school. Odds are you, as an American, got less paid vacation than if you lived in any other economically developed country.

In the U.S., there is no legal requirement that employers offer any paid vacation at all. Nevertheless, 77% of U.S. workers have access to some paid vacation time. Who doesn’t get paid time off?  Part-timers, lower income and workers in small businesses. For those of us who get paid vacations, workers with 10 years on the jobs average 17 days per year. If you lived in the United Kingdom or Germany, your employer would be legally required to provide 20 days per year; in Denmark or France, 25 days.

When you add in mandatory public holidays, the U.S. falls further behind.  Again, no private employer is required to give time off for holidays in the U.S., but on average, we get eight per year.  In the UK, nine; in France and Denmark, 11. (Don’t we have just as much to celebrate as Denmark? Come on!)

So there’s a big vacation and holiday gap between us and the rest of the rich world.  But the paid time off gap is even worse.  Consider paid sick days.  Again, the U.S. doesn’t require them, but around 60% of workers have some paid sick days. Of the 34 countries in the Organization for Economic Cooperation and Development (OECD), only two—the USA and South Korea—do not mandate any paid sick leave.  In contrast, 28 of the 34 countries provide at least six months.  Yes—almost all other developed countries have legal requirements for six months of paid sick leave.

Well, but we love our newborn children and their new mothers, right?  Maybe we do, but our policies don’t show it.  Mandatory paid maternity leave in the U.S.?  (You know the answer by now, right?)  Zero required at the national level.  Estimates are that only 11% of American workers have access to paid maternity leave. Our competitor nations? Fourteen weeks in Germany; 16 weeks in France; 18 in Denmark; and a whopping 39 weeks in the .UK.

All this adds up to Americans working more hours than our competitors—6% more hours annually than the average U.K. worker, 18% more than in France, 26% more than in Denmark and 31%—almost one-third—more than the average German worker.

But isn’t it better for the economy if we work more and have less time off? No. In her 2016 book, economist Heather Boushey argues that solving work-family conflicts would help drive more sustainable economic growth. And Americans agree. A recent study by the Pew Research Center found that 85% support paid sick leave for themselves, 82% favor paid maternity leave, while 69% support paid leave for new fathers and 67%for paid sick leave to take care of family members.

But all that is legally required at the federal level is twelve weeks of unpaid leave, and we exempt small businesses (those with fifty or fewer employees) from even that minimal standard.  Some states are acting on their own—six (plus the District of Columbia) require some paid family and medical leave.  But we won’t close the gap with our economic competitors without national legislation.  Look for this issue to be fought over in upcoming elections, and maybe some day you’ll get more paid time off from work.  Hey, all of us working people deserve it. Happy Labor Day!