Saturday, February 25, 2012

Federal Budget Cuts

                                             Federal Budget Cuts

In a conversation with a friend recently he mentioned that all the employees at his company would have to take a 10% pay cut this year. He was naturally concerned but at the same time he realized that it was necessary in order for everyone to keep his or her jobs.

Companies, even major ones like the one he worked for, cannot necessarily raise their prices in order to achieve greater revenue. In a highly competitive environment, higher prices often mean less actual revenue as customers either flee to cheaper products, or just buy less.

Unfortunately, the Federal Government does not work this way. Facing a huge operating deficit, the President can only propose increasing prices or taxes without one cent of spending reduction.

Here is a modest proposal. Many years ago I read a letter to the editor of a major newspaper from the owner of an auto dealership that was trying to weather another economic recession like ours. He came up with what he called a 5-10-15 plan. In his company the top third of wage earners had to take a 15% pay cut. The middle third had their pay cut by 10%, and the bottom third only had to take a 5% cut.

In other words, if the CEO was making $150000 per year, his pay was cut by 15% or $22500. Someone making $75000 per year had to take a cut of 10% or $7500. An administrative assistant making $30000 per year had to take a cut of 5% or $1500. Given the circumstances, anyone would agree that these cuts were fair and equitable, but they also worked. The company was saved and weathered the storm until the economy recovered, but in the meantime not one employee lost their job.

How much would the Federal government save if every employee, including the President and Members of Congress, making over $150000, had to take a 15% pay cut? Substantially more would be saved if the great mass of Federal employees making between $50000 and $100000 had to take a $10% cut. Even greater savings would be realized if all those making less than $50000 per year had to take a 5% cut.

In this way, no one would lose their jobs and there would be no need to cut needed departments and services. Cutting jobs usually means that higher salaried government workers just bump lower salaried ones out of their jobs. To ease the pain the cuts could be phased in over two years.

This 5-10-15 plan would be an important first step in turning the massive ship of state around before it sinks under the massive load of debt and taxation. We are not too far from following Greece and Italy into a titanic disaster. ###

Saturday, February 18, 2012

Contraceptive Insurance?


Should medical insurance cover the cost of birth control pills? Some politicians claim that the cost for a year’s supply can be $600. That is surely the high end since a web search indicates that birth control pills can cost from $15 to $50 per month. The same site indicated that organizations like Planned Parenthood sell them for much less. A letter writer to a newspaper argued that a month’s supply can be purchased at Walmart for $4.00.

Advocates argue that the pills are a necessary women’s health item. But toothpaste is also a necessary health item and no one suggests that it be covered by insurance. We expect everyone to purchase their own from the huge array that can be found on the shelves.

Most people don’t realize that medical insurance that covers relatively minor items is really a prepayment of claims. Take dental insurance for example. Most policies exist as riders to basic medical coverage and provide a cap on benefits as well as significant restrictions on what is covered. For example, most policies won’t pay for caps and implants. In addition, most policies won’t pay more than a $1000 for all covered dental expenses in a given year. The annual premium for these dental policies usually comes very close to the annual cap on benefits.

Automobile insurance provides another example. No one expects automobile insurance to cover yearly oil changes. If a company had to provide such coverage, it would have to increase the cost of each policy by the expected number of oil changes with an additional charge for overhead and claims processing. There is no other way.

Why would birth control insurance be any different? The government claims that it is free but there is no such thing as a free lunch. Whether the pills cost $50 per year at Walmart or $600 per year at the Congressional dispensary, the cost must be included.

Why is the government embarking on such an expensive and controversial program when its annual debt is already over 3 trillion dollars?###

Saturday, February 11, 2012

The New Aristocracy


Despite the economic hard times there is a large class of Americans for whom there is no retirement crisis, no health-care crisis, and no employment crisis. Federal, State, and Municipal employees have no reason to worry. They all have defined benefit retirement plans that are guaranteed against market loss by taxpayers. They all have excellent medical insurance at virtually no cost. After a short period of employment, their jobs are virtually guaranteed and it is only with great difficulty that they can be terminated or laid off.

This class constitutes a kind of aristocracy that is entirely supported by the rest of the population that has nowhere near the benefits enjoyed by its members. The Federal government is the largest employer in the Nation and its size gets bigger every day no matter which party is in office. State and Municipal employees include police officers, firefighters, teachers, as well as an army of civil servants.

Retirement benefits are the least understood part of the compensation of the government class but they provide a good example of the disparity between the two classes. Virtually everyone in the government class enjoys the benefits of what is known as a defined benefit pension plan. These plans, which have largely disappeared in the private sector, provide a guaranteed lifetime income at retirement.

For example, in my home state of Connecticut a teacher can retire after 35 years of service on 70% of their final average pay. Final average pay is important. In Connecticut it means the average of the highest three years earnings, not an average of lifetime annual earnings. Teachers whose final average pay is $90000/year could retire as early as age 56 on $63000/ year for the rest of their lives.

Unlike the 401k plans prevalent in the private sector the defined benefit plan income is guaranteed by the State’s taxpayers no matter what return is achieved by the underlying pension assets. The town of Fairfield recently lost $40,000,000 on a Madoff investment and has just raised taxes in order to cover the expected shortfall. Although not the victim of a scam, the neighboring city of Bridgeport experienced such losses in the recent downturn that it had to come up with $25,000,000 to cover its shortfall.

The very generous pensions enjoyed by members of the government class in Connecticut seem miserly compared with some other states. On a recent visit to San Francisco  I read the local paper and found it full of news of the draconian budget cuts proposed in that nearly bankrupt state. San Francisco itself was being forced to cut essential services to balance its budget. Nevertheless, buried inside the paper was an article detailing the incredible pension benefits of its municipal employees.

The article referred to over 480 retired city workers and their survivors who are “knocking back $100,000 or more a year in pension money.” To keep it simple, if 480 people receive $100,000 per year, that’s a minimum of $48,000,000 a year in pension benefits. At 4% interest it would take $1.2 billion to provide $48,000,000 per year. However, in a low interest rate environment such as we’ve been through in the last few years, the pension actuaries must demand that even more be allocated to fund plan benefits. That is why so many of these plans are underfunded.

Budget difficulties in New York State and City have led to new taxes and fees. However, the generous pensions of retired New York State and City employees are not subject to either State or City income taxes. Could there be greater proof of the disparity between the two nations?

A call for pension reform does not imply criticism of government employees and their work. Like the rest of us most of them work hard at their jobs and deserve to be financially secure in retirement. Nevertheless, their defined benefit pension plans are dinosaurs that are crushing the rest of us under foot. They even prevent cities and states from hiring much needed teachers, police, firefighters, medical, and social workers.

How did such a disparity come about? Basically, defined benefit plan formulas were designed to protect employees, who were typically underpaid, from being destitute in old age. Until the last decade or so government salaries were too low to allow employees to save for retirement on their own. However, recent increases in salaries were not matched by modifications in retirement plan benefit formulas.  In Connecticut an attempt to change the average pay calculation formula from a 3-year average to a 5-year average failed largely through the efforts of the teacher unions and their friends in the legislature. Minor modifications in pension benefit formulas can produce millions in savings and still provide adequate retirement income for state and municipal employees.

Basing final average pay on the last 5 or 10 years of service would produce significant savings. Just ask the actuaries. Of course, the Social Security system, the primary source of retirement income for the rest of us in the private sector, uses 30 years to calculate final average pay. Using more years to calculate final average pay would also eliminate a common form of abuse where municipal employees find ways to significantly boost salaries in the last years of service.

A first step in the reform process should be the removal of elected officials, especially members of Congress and State legislators, from any future participation in these retirement plans. Their current pension benefits should be frozen, and future payments placed into a defined contribution retirement plan. Otherwise, they would have no incentive to modify the existing arrangements.###

Saturday, February 4, 2012

Primary Winners and Losers


The real winner in the Republican primaries so far has been Fox News anchorwoman Megyn Kelly whose short hair do and conservative attire have set her apart from the bimbos usually seen on cable news. Although still a very attractive woman, viewers are not distracted by long blonde hair that needs constant attention, a plunging neckline, or exposed thighs. Now we are able to appreciate her presentation and knowledge. On the other hand, Bret Baier, her co-host, seems to be eating himself out of a job.

Conservatism has been another loser in the primaries. Above all else, conservatives should be non-ideologues. Conservatives don’t value the constitution so much because of its ideas but because it has worked like a charm for two centuries. Moreover, it is based on principles that can be found in any political system that has enjoyed success over the centuries.

Yet, in each primary so far conservatives have managed to split their support among rival claimants. Even in Florida where Romney seemed to have won a decisive victory, the majority of Republicans voted against him. It is time for Gingrich and Santorum, who agree on practically everything, to stop wasting their money and cut some kind of a back room deal. If Santorum had withdrawn in Florida, most of his support would have gone to Gingrich and the contest would have been a virtual dead heat despite Romney’s ad blitz.

Speaking about Santorum, how can he claim to be a champion of family values? He has seven young children. I don’t question his integrity as much as his sanity in putting his family through the ordeal of a Presidential campaign. Did it ever occur to him that even in the remote possibility of his election that his children would be torn from the home environment and have to live in virtual house  arrest for the next four years?

Gingrich was a big winner in South Carolina but was not able to maintain his momentum in Florida. Most pundits blame it on Romney’s negative ad blitz but I think that Newt could have neutralized the ads by just ignoring them. In Florida he went on the defensive and kept trying to explain his past conduct. No one wants to hear what he did or didn’t do in 1994. That’s so yesterday. We want to hear what he believes today, and what he will do in the next four years if elected.

Ron Paul may have some good ideas but you wonder about the judgment of a man who loses 93 % of the voters, and still feels that he’s won a victory. Frankly, he’s too old to consider the rigors of the Presidency. Maybe he’s just holding the torch until his son can take over?

Finally, most of the pundits have been big losers in the primaries. It would appear that they know little more than the rest of us. They always seem to predict the continuation of the current trend and largely seem unaware of the different electorates in each state. Also, they have themselves become so predictable. Even before they open their mouths, you know pretty much what they are going to say no matter what the issue.

Finally, the media tend to attack those whom they fear the most. So far most of their artillery has been directed at Gingrich. It’s really not about his marital history. The media fear Gingrich’s ideas much more than they fear Romney’s. ###