Tuesday, January 28, 2014

State of the Union 2014

In tonight’s State of the Union message President Obama is expected to focus on income inequality, something that he has already indicated will be the signature issue of his second term. More specifically, he will probably paint a picture of dramatically increasing inequality between the rich and poor in the Nation. 

This is a powerful political message even though, if true, it is an indictment of his own five years in office. However, is increasing income inequality based on fact or is it based on flawed and misleading government statistics? How does anyone know what are the incomes of 300 million Americans? It would appear that there are two sources. First, there are figures compiled by the Census Bureau that appear in the annual Current Population Survey, or CPS. These figures represent estimates based on census questions. The second source would come from the Internal Revenue Service (IRS) and are based on the total of all individual income tax returns.

Not surprisingly, these sources can yield very different results and be subject to much interpretation or spin depending on one’s point of view. Just last week the Wall St. Journal published an article by two former high officials in the Social Security System. The opinion page article, “Retirees Aren’t Headed for the Poor House”, showed an incredible difference in the CPS and IRS figures on retirement income.

For example, in the year 2008 the CPS reported that retirees took  $5.6 billion dollars out of their IRAs. Yet, in that same year retirees reported to the IRS that they took $111 billion dollars out of their IRAs.  In that same year retirees showed $222 billion in pension and annuity income according to the CPS but actually reported $457 billion to the IRS. That is a huge disparity.

What explains the difference? The CPS only considers retirement income received on a regular periodic basis but fails to include as-needed, lump sum withdrawals from IRAs and 401ks. The IRS figures are much more accurate but inevitably politicians and pundits will choose to rely on the Census Bureau figures. Already Democrat Senators Tom Harkin of Iowa and Elizabeth Warren of Massachusetts are proposing legislation to increase Social Security payments across the board for all seniors.

Both senators are also pushing the need for a new government run retirement savings plan based on CPS under-reporting of American participation in retirement plans. CPS figures claim that only half of Americans are offered retirement plans by their employers but the authors of the WSJ article cite a 2011 Social Security study that indicated that 72% of all workers were offered retirement plans by their employer, and that the number increased to 84% for firms with more than 100 employees.

I am afraid that the President’s claim of increasing income inequality in this country will be based on equally flawed figures that he and others will use to advance their own political agenda. What could be more popular issue in this year’s congressional elections than an increase in Social Security benefits? Below here are some figures that measure the median incomes of various income groups.

In the year 2000 the median income for the bottom 10% was $13398. By the year 2008 it had dropped to $12315 and in 2010, two years into the President’s first administration, it dropped to $11904. The median income for the whole country in 2000 was $53164. Median means that half the taxpayers in the country reported less and half reported more. By 2008, the income of those in the 50% percentile had dropped to $50939 and by 2010 it had dropped again to $49495. Finally, for those in the top 10% the median income in 2000 was $141805. By 2008 it had dropped to $140050, and then in 2010 it had dropped again to $138923. Even the top 5% has experienced a similar decline.

These figures do not tell the whole story and will require further discussion in future posts but it would appear that while there is income inequality in this country, it is not increasing at an alarming rate. There are problems in the country today but if the President and his advisors do not understand the problem, and base their solutions on false statistics, they will not be part of the solution.


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