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Vectra Bank Expert Jeff Thredgold

For Starters

Written by Jeff Thredgold, President, Thredgold Economic Associates

November 16

A hypothetical corporate letter to valued employees:
This Company has faced severe economic and financial challenges during the past three years, threatening our long-term survival.  As an important contributor to our success and as a retiree now or at some point down the road, we thought it a good time to update you as to minor long-term changes to various programs.

We are considering making modest, but important, changes to our long-term pension program.  It is important to note that you will continue to receive the benefits you are receiving now.  The majority of these changes will have a modest impact on employees who retire decades in the future.

We are planning to slow down the future growth rate of spending on our pension program.  Note that various critics of our proposed changes have referred to them as spending cuts.  These are not spending cuts 

Note that we will spend more money on the program each year than we do now.  Note that you will receive more money from the pension program each year than you do now.  Note that cost of living increases will still be paid if appropriate.  Note that new entrants to the program will still be routinely added.

The current age to draw full benefits for the program is already 66 for those born between 1943 and 1954.  The age for full benefits for those born in 1960 and later is already 67.   Based on financial reality and necessity, we will raise the age to receive full benefits by one year, to age 68 by 2050…or 40 years from now!  We will enact a further increase to age 69 in the year 2075…or 65 years from now! 

As you can easily see, these changes will have little to no impact upon current retirees, or the vast majority of retires, in coming decades.  These modest changes will have a slight impact on your children and your grandchildren, with the slight extension to age 68 or age 69 more than offset by  1) the much stronger financial position of the program following these changes and  2) the high likelihood that younger people today will live and work longer in coming decades.

We will also implement a program adjustment to slightly increase the growth rate of future benefits for lower income retirees as compared to higher income retirees.  Again, ALL income groups will receive rising benefits each year, even as we strengthen these programs for decades to come.

We would appreciate your support of these modest changes.  Making small changes now, with most changes to take place decades from now, will enhance the viability and financial soundness of this program for years to come…for you…your children…and your grandchildren.

  • This discussion is in line with proposed modest changes to the future of Social Security.  Such changes, referred to by many as “tinkering around the edges,” are designed to make the program stronger for generations to come.

And So It Begins
The first official release of proposed changes to government receipts, spending, deductions, and deficits was provided last week by the two Chairs of the President’s debt reduction Commission.  The Commission’s formal report is due on December 1 of this year.

As one might expect, a Commission of 10 Democrats and eight Republicans, of which 12 are members of Congress and six are now in the private sector, might find little on which to agree.  Making matters worse, 14 of the 18 have to agree on any proposal to send it to the Congress…

…don’t hold your breath

No Bite
In addition, this type of Commission…created by the President’s Executive order...has no teeth as to requiring a Congressional vote or to limit any changes to proposals if a vote is taken.  This Commission differs greatly from the Social Security Commission of the early 1980s that required a yes or no vote, with no changes, by the Congress. 

A similar effort of recent years (with teeth) was the Base Realignment and Closure (BRAC) Commission. 
Congressional members were required to vote on accepting or rejecting the recommendations in full, with no changes.  Such Commissions were created by the Congress.

The information provided by the two Committee Chairs was, in total, a favorable starting point for critical and necessary discussions as to how to realign government and how to limit massive and dangerous annual budget deficits for years to come.  The fact that such discussions will occur in coming weeks and months is, by itself, a positive development.  Politicians traditionally noted that any discussion of touching Social Security was too sacred…too touchy…to even be considered—no more.      

Possible proposals to limit home mortgage interest deductions to mortgages of $500,000 or less and to tax the value of employer-provided health care could fly IF tied to a significant reduction in income tax rates.  Eliminating more tax loopholes in exchange for lower tax rates makes sense, but will be challenged by mortgage lending and home building lobbies, health care lobbies, etc.

The first order of business, and perhaps the most productive, should be for Commission members and for members of Congress to stop using the term spending cutsSlowing down future growth rates of spending is a more accurate terminology…and does not scare people nearly as much as when the incorrect phrase spending cuts is used.

Having a dialogue, beginning a discussion about emotional issues is important.  Perhaps nothing of value will come from the Commission.  Perhaps members of Congress will do what they do best…talk and posture and pontificate…and do nothing of substance this time around.

Who’s Time Table?
At some point, modest changes in programs must be made, with sooner rather than later being the best timing.  At some point, national politicians must work together.  At some point, we must address the need to slow future government spending. 

It is better to do so in coming months than to wait too long.  One has only to look across the pond to drastic (and real) spending cuts in Greece, in Ireland, in Spain, and in numerous other southern European nations to see where the U.S. road leads.

We can make difficult decisions now, under our time table.  Or we can wait until such a time as global bond market players and investors simply say no to additional U.S. government borrowing—or demand much higher interest rates as an inducement for them to buy anymore U.S. bonds…

…the choice, for the moment, is ours

Finance Expert Right Boarder