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The $2.3 Trillion State and Local Government Debt Monster – California Pension Systems on Unsupportable Path with $500 Billion Projected Shortfall. CalPERS, CalSTRS, and UCRS.

Posted by mybudget360

Much of the focus on government debt over the past few years has revolved around the federal government.  No doubt, this is a stunningly large amount.  Yet the government has the ability to finance this debt through the U.S. Treasury and Federal Reserve with a buffet of choices.  You have direct bailouts to Wall Street, quantitative easing, and systematically dismantling the U.S. dollar.  But one issue that is rising to the top is that of state and local government debt.  States do not have the ability to print money at the whim of any central banker.  And the state and local government debt market is up to a whopping $2.3 trillion.  At this point, trillion is the new billion.

Let us examine the growth of this debt over the last forty years:

The growth in local government debt has exploded since the 1970s.  We went from $295 billion in 1968 to $2.3 trillion today.  But as Greece is demonstrating, there is such a thing as having too much debt and at a certain point the markets no longer have an appetite for so much borrowing.  Average Americans probably have a hard time examining the large numbers being thrown around.  Yet state and local governments are now finding a hard time balancing their budgets.  In many cases, the ability to balance their budget goes in direct conflict with paying out pension distributions.  Or in many cases states need to raise taxes or cut services.

Wall Street enjoys exploiting this fact because they actually loot the public sufficiently with golden parachutes and ridiculous bonuses that they never need any sort of pension.  Yet the truth is, many of the gold plated pensions are just another side of the Wall Street mentality coin.  That coin relies on having others pay for your bailout or extended retirement.

Now Wall Street has implemented the biggest transfer of wealth in history with the $13 trillion in bailouts and backstops.  But many pension funds also bought into what Wall Street was pushing.  Let us examine the California state pension systems.

California Pensions – $500 Billion Underfunded

The Stanford Institute for Economic Policy Research issued a stunning report on the three largest pension systems in California.  The report was titled Going for Broke and what we find is a rather daunting mountain that California has to climb if it seeks to remedy their pension system.

Let us look at the three largest systems:

In total these cover 2.6 million of California state workers.  These are CalPERS (the largest), CalSTRS, and UCRS.  But if you look at the funds performance through the crisis, all of the funds saw 23 to 25 percent declines.  These declines only exacerbate the shortfall of the system.

The odds of shortfalls are virtually assured for all systems.  We are now entering a stage where many workers will be retiring and drawing into the system.  Expectations for deficits are large:

Part of this stems from the notion that markets will always return a standard rate.  As we have seen with the massive market volatility, markets are largely unpredictable especially when they become casinos for the wealthy.

As the report finds, these funds do not have the flexibility required in an unpredictable market:

“A public employee’s pension constitutes an element of compensation, and a vested contractual right to pension benefits accrues upon acceptance of employment. Such a pension right may not be destroyed, once vested, without impairing a contractual obligation of the employing public entity.”

It becomes a matter of law to pay even if the economy has rendered a new reality.  As Greece is showing, having very early retirement rates with generous packages is not supportable with a younger generation that isn’t having larger families.  The math doesn’t work but good luck changing that.  Some will argue that people contribute into these systems.  This is true but not anywhere to cover the actual payout over time:

In other words, there is a shortfall of coverage and a market decline only pushes the problem to the surface for all to see:

“As mentioned earlier, the pressing nature of California pension shortfalls is due in part to the losses CalPERS, CalSTRS, and UCRS sustained in the mar­kets over the past 18 months. CalPERS expects an average annual investment return of 7.75 percent, CalSTRS targets 8.00 percent, and UCRS expects 7.50 percent.”

Those expected rates of return are simply too optimistic.  These funds are expecting 7.5 to 8 percent annual returns in a market that is giving 0 percent rates to savings accounts and 4 percent for 30 year fixed government debt.  Instead of realigning to this low yield environment fund managers went all in to the market and gambled on Wall Street:

It is amazing that many fund managers look at the above as “safe” but it is anything but safe if you are losing 23 percent.  Part of the bets were flat out risky:

“(LA Times) SACRAMENTO — The value of residential real estate investments owned by the country’s largest public pension fund has plummeted 35% — a paper loss of $3.3 billion for current workers, retirees and their state and local government employers.

The California Public Employees’ Retirement System reported Wednesday that in the year ended June 30 its real estate portfolio declined to $6.08 billion from $9.36 billion, based on 461 independent appraisals of its investments in 288,000 housing units across the country.”

Housing, both residential and commercial has not recovered.  So these losses are still likely part of the funds new reality.  The massive rise in equities probably has helped but it is a long way from that 7.5 to 8 percent annual return:

Past performance is no indication of future returns especially when more and more retirees are going to draw from the system:

“In 1999 California passed Senate Bill 400 (SB400), substantially raising benefit factors and lowering retirement ages for public employees (see Table 3). Based on a National Institute on Retirement Security report, average monthly public pension benefits in California were $2,008 in 2006, the eighth highest nationwide.”

Now that $2,008 monthly benefit does not factor in additional healthcare benefits which cost a lot and are also provided.  Just do the quick math, let us assume someone retires at 55 and lives to 85 and receives that $2,008 monthly benefit:

$2,008 x 12 = $48,192 x 30 = $1,445,760 in total paid out

We are also assuming no COLA adjustments which some of these plans have.  We aren’t adding the added healthcare cost which an older retiree will be using up.  Something tells me that a state worker did not even come close to putting in $1.4 million over their working career.  And you wonder why these pension funds combined are projected to have a $500 billion shortfall?  And good luck if the stock market turns lower or simply remains stagnant for years.  California is only one example of many.

The paper lays out a few suggestions including higher contributions, a hybrid 401k/403b system, and safer investments but also a tiered system.  In reality, Wall Street has not wanted to deal with reality and has used the taxpayer as a bailout for their wealth protection.  Now that taxes are being talked about including a value added tax (VAT) people are getting angry.  You didn’t think bailing out Wall Street was free?  The same reality will hit the state pension systems.  Younger workers are going to enter a tiered system where they have to pay out more with no future guarantee while they watch older workers take on funds that they will never see.  I’m sure that is politically going to go over well.

The Weakest Bang for our Wilting Dollar – How we Overpaid for the Bailouts and were left with a Wilting Economy Propped up by Government Spending. Paying $446,000 Per Loan Modification and $43,000 for Homes that were already going to be Purchased.

Posted by mybudget360

So much horrible policy has occurred since the economy entered recession that the majority of Americans are shell shocked with each day of news.  It used to be that a billion dollars in toxic assets was enough to garner some movement out of the market.  Now, we talk about trillion dollar deficits as if they were normal.  Take for example the ridiculous home buyer tax credit.  Let us set aside for a second that massive home buying and speculation led us into this financial crisis in the first place.  The home buyer tax credit was basically a gift to people for doing something they were already going to do.  Keep in mind that even without the tax credit, people were going to buy homes.  But this is what we are left with:

“(Las Vegas Sun) It’s awful policy,” says Andrew Jakabovics, associate director for housing and economics at the liberal Center for American Progress. “It’s incredibly expensive. It’s not well targeted.”
…
“We paid $8,000 to at least 1.5 million people to do something they were going to do anyway,” Jakabovics says.
…
“A heck of a lot of people would have bought the house anyway,” says Ted Gayer, an economist at the Brookings Institution.
…
The tax break, due to expire at the end of November, is on track to cost $15 billion, twice what Congress had planned. In other words, it will cost $43,000 for every new homebuyer who would not have bought a house without the tax break.”

This is policy gone bad like milk left out on a hot sunny day.  In many parts of the country $43,000 will buy someone a home or a condo.  Instead, we will blow through $15 billion to encourage people to buy something they were already going to buy.  This is the kind of policy that we have had for decades.  But the game is hitting a massive wall.  For the first time in record keeping history household debt has contracted on a year over year basis:

Much of this comes from American households pulling back on spending but also, banks refusing to lend.  In fact, the bailouts have done nothing that they were promised to do.  First, the banking bailout was quoted as a necessity to keep liquidity in the system.  To the contrary, liquidity is being pulled out of the system.  Wall Street and their corporate public relations machines would like to convince you that banks are now having to be tighter with their lending given market conditions.  It is amazing how in midsentence banks are able to shape-shift their position to always maximize their own profits but only after they have secured taxpayer money.  If we really wanted to increase liquidity why don’t we just send each family $10,000 to get the economy going?  Is this any less preposterous than paying $43,000 for someone to buy a home they were already going to buy?

If you think that spending more and more and financing each purchase with debt is good for the long-term health of our economy, just look at the following:

Over the last 25 years the U.S. dollar has been cut in half and U.S. households are feeling the effects of this.  We would have felt this earlier in 2000 if it weren’t for the massive housing bubble that was ignited by the Federal Reserve and its spawn investment banks.  All of a sudden, instead of spending money we had and protecting home equity houses became ATMs:

Source:  Center for Retirement Research, Boston College

So even though incomes were stagnant for the decade, the average person on the street thought they were experiencing prosperity but all they were enjoying was a lease on a lifestyle that was no longer supported by underlying fundamentals.  Most Americans are now dealing with this as they see credit card access shut down and access to home equity is gone since home prices have collapsed.  Yet the only sector that seems to be back on its feet is the banking sector.  Or to clarify, the too big to fail banking sector seems to be fine.  Underemployment is still over 17 percent, credit is still pulling back, and states are still seeing faltering revenues:
 

Source:  The Nelson A. Rockefeller Institute of Government

Tax collections are a good indicator of the economy since they are derived from working people.  Looking at the stock market is like looking at someone who just hit blackjack 10 times in a row.  At a certain point it needs to reflect reality.  Yet the way we structured the bailouts was as absurd as the three page memo former Treasury Sectary Hank Paulson handed to Congress requesting $700 billion to clean up the toxic assets.  That price tag now sounds cheap!  And guess what?  The toxic assets are still here which is only more proof that banks are two-faced liars that will siphon off every penny from the productive sector of the economy.  As it turned out the $700 billion figure was simply pulled out of thin air by dividing ten percent of GDP ($1.4 trillion) in half according to the former interim Assistant Treasury Secretary Neel Kashkari:

“(WaPo) In Washington, he used his BlackBerry to determine the bailout sum presented to Congress. His arithmetic: “We have $11 trillion residential mortgages, $3 trillion commercial mortgages. Total $14 trillion. Five percent of that is $700 billion. A nice round number.”

Looking back, he says, he is more confident about the two-by-sixes.

“Seven hundred billion was a number out of the air,” Kashkari recalls, wheeling toward the hex nuts and the bolts. “It was a political calculus. I said, ‘We don’t know how much is enough. We need as much as we can get [from Congress]. What about a trillion?’ ‘No way,’ Hank shook his head. I said, ‘Okay, what about 700 billion?’ We didn’t know if it would work. We had to project confidence, hold up the world. We couldn’t admit how scared we were, or how uncertain.”

So what a shocker that GDP increased by over 5 percent when all was said and done.  It would have been a surprise if it hadn’t.  Yet where did the money go?  The vast majority into the stock market casino.  Was there any massive targeted effort for job creation?  Or what about reforming the financial industry that led us here?  None of that was accomplished.  So today, we have spent or committed $13 trillion on the financial sector with no strings attached.  It is the biggest bank robbery in history and it is happening under our noses.  In fact, people are pulling $700 billion out of thin air apparently just like Goldman Sachs needed every penny from AIG.

Most are familiar with the GDP equation:

GDP = private consumption + gross investment + government spending + (exports ? imports)

Right now the biggest factor boosting GDP is government spending.  Yet as we have seen with the home buyer tax credit, other programs have been a waste as well.  Take the HAMP program as well backed by $75 billion.  So far, only 168,000 permanent loan modifications have occurred.  So run those numbers:

$75 billion / 168,000 = $446,428 per modification

Now of course, the program still has money left for additional modifications and other gifts to the banks like aiding in short sales.  But do that math.  With $75 billion we could have bought 750,000 homes for $100,000 each.  Policy is so bad right now, we’d be better off just giving the money directly to the people to do whatever they wanted.  Ironically this would stimulate the economy more than continuing down a road of expensive policy that is merely a method of transferring wealth to the banking elite.

The weaker dollar is a symptom of a bigger problem.  The inefficient bailouts are a symptom of a bigger problem.  Our government being controlled by Wall Street is merely the ultimate conclusion of four decades of egregious mismanagement and corporate welfare.  If the government won’t do what is obviously right to reform the system then average Americans are left to wonder who is going to reign in Wall Street?

Middle Class Americans Losing Financial Ground on Retirement – As Stock Market Rebounds more Middle Class Americans Have Less Money and Fewer Jobs. How is Health Care Spending Boosting GDP a Good Thing?

Posted by mybudget360

As more and more data is released on this Great Recession it is becoming abundantly clear that we have two tracks people are following.  On one track where most travel, we have middle class Americans dealing with the highest unemployment in a generation while seeing their net worth dissolve.  On the other side of the road, the one lane highway for the tiny percent of the extremely wealthy, we see an extraordinary jump in wealth since the depth of the crisis in March of 2009 when the S&P 500 touched that unholy number of 666.  It must seem like a cruel joke that with the stock market being up nearly 70 percent since that low point in 2009, the vast majority of Americans are wondering why they don’t feel much of that rally when they open their wallets.  The reality is that most Americans are not invited to this resurgence and in fact, the destruction of the middle class is partly a reason for this stock market rally.

Take for example what Americans are saving.  A recent survey from the Employee Benefit Research Institute’s annual Retirement Confidence Survey found some startling data:

43% of workers in the survey stated they had less than $10,000 in savings while an amazing 27% of workers said they had $1,000 saved.  Many of these Americans are one illness or a job loss away from being broke (many are called the working poor).  It is no surprise that the survey found that only 16% of those who responded felt comfortable about retiring, the lowest rate in a generation.  What this survey highlights is that more and more middle class Americans are going to struggle in their retirement.  Thanks to the Federal Reserve artificially slamming interest rates lower, many Americans on fixed incomes or Social Security will see no cost of living adjustments even though their daily cost of living items will increase in price.  This is targeted destruction of the middle class.

And keep in mind this survey is comparing 2009 and 2010.  What happened to the rally here?  Workers clearly did not participate in the stock market rally.  Why?  Because a large part of the rally also hinged on “productivity gains” which is a nice euphemism for laying off people and making current workers juice out more production.  So this translates to great profits for the Wall Street elite while unemployment in the last year has done this:

Source:  BLS

It might be hard to save for retirement if you are getting fired.  And that is what millions of Americans experienced in 2009 as the stock market went on a massive rampage as Wall Street was fueled by taxpayer bailout money and decided to load into stocks.  Keep in mind that many of the large multinational companies are making a boatload of their profits internationally.  This is great for those companies but as most Americans know, small business is the juice of the American economy and most small businesses sell to domestic clientele.  A clientele that is increasingly poorer and unemployed.  We used to call this group the middle class.  This isn’t lost on some:

“(RR) Companies in the Standard&Poor 500 stock index had sales of $2.18 trillion in the fourth quarter, up from $2.02 trillion last year, and their earnings tripled. Why? Mainly because they’re global, and selling into fast-growing markets in places like India, China, and Brazil.

America’s biggest companies are also showing fat profits and productivity gains because they continue to slash payrolls and cut expenditures. Alcoa, for example, had $1.5 billion in cash at the end of last year, double what it had on hand at the end of 2008. Sounds terrific until you realize how it did it. By cutting 28,000 jobs – 32 percent of workforce – and slashed capital expenditures 43 percent.

The picture on Main Street is quite the opposite. Small businesses aren’t selling much because they have to rely on American – rather than foreign – consumers, and Americans still aren’t buying much.”

One of the disturbing trends especially when it comes to retirement is the massive increase in health care costs.  It is absurd to use health care costs (i.e., premiums, etc) to inflate GDP but that is exactly what is happening:

Source:  BEA

It is absurd that in 2008, as the economy was flying off a cliff and other service industries were contracting health care still managed to pull in 0.31 of the 0.32 gain in the entire year for this sector.  Take a look at 2009.  What service sector did the best in another troubled year?  Health care.  So to say that gouging Americans like the 39% hike in premiums in California is good for GDP is nonsense:

“(ABC) Reports that Anthem Blue Cross is raising premiums on some customers by 39 percent on March 1, have prompted the Secretary of the Department of Health and Human Services, Kathleen Sebelius, to write a letter to the company, Golden State’s largest private insurer, asking the company to “provide a detailed justification for these rate increases to the public.”

“Additionally, you should make public information on the percent of your individual market premiums that is used for medical care versus the percent that is used for administrative costs,” Sebelius wrote, noting that the profits of Anthem Blue Cross’s parent company, WellPoint Incorporated, have soared.”

Ask any middle class American about their health care costs and the likely story is that prices have gone up consistently over the last decade as incomes have gone stagnant.  How is this good especially when many baby boomers are now reaching retirement age with little savings as we have seen and are now going to shift a larger portion of their income to health care?

In many ways the health care industry is much in line with how Wall Street banks have operated for the last forty years.  They’ll gouge and exploit the middle class until every dollar you earn is either yanked by bank bailouts, health care costs, or taxes.  Let us run the numbers on a hypothetical family in California to see how this plays out.  We’ll use a family making $61,000 a year (Census 2008 data):

Now the above is merely a hypothetical budget.  I welcome people to comment on different items one way or another.  The above is a two adult household with no children with two cars.  This is very typical for California but I’m sure for other states as well.  But as you can see from the above, given that this household is at the median there isn’t much room for large amounts of flat screen TVs, expensive nights out on the town, or leased BMWs.  Yet many across the country lived like this and clearly that was on borrowed time and was all a ruse usually magnified by credit cards.  Now as many near retirement they are realizing that the only game in town is Wall Street and that has now become a large casino.

I know many people scream personal responsibility.  I’m the first to agree.  But there is this massive amount of cognitive dissonance when people blame the middle class and working class for this mess when Wall Street who created the financial instruments of destruction, not only got away with the biggest transfer of wealth in history, they are actually getting richer because of bailouts.  This is like putting a bank robber in prison for stealing $100 to feed his family while letting that same banker go to Wall Street and rob millions of Americans for billions of dollars and not only letting him go, but putting structures in place to make him richer!  Is it any wonder why there is so much anger festering in America?

Retirement is getting harder and harder for many middle class Americans.  What use is $1,000 a month in Social Security when your out of pocket costs for medicine is going to cost you $300 to $500 per month?  How did we do it before?  Stable banking that allowed people to pay off their mortgages and allowed people to live securely in their homes once they retired even with a small Social Security check.  But now, many have tapped out their equity and mortgaged their future.  Unlike Wall Street Americans don’t have access to the Federal Reserve.  Massive part-time employment, weak worker protection, a corporatocracy raiding the workers, and a disappearing middle class.  Get ready to work longer America because Wall Street needs that money to fund their bailouts and billion dollar bonuses for wrecking the economy.

The Middle Class Two Income Trap – Two Breadwinners plus Extra Money to support the Banking Industry. How Middle Class Americans are losing Ground by Supporting the Financial Sector.

Posted by mybudget360

If it isn’t enough that average Americans are contending with the rising cost of healthcare, education, and daily necessities like food now additional funds are going directly to the banking sector to keep them propped up like a money loving puppet.  Since the Great Depression the rise of the middle class has been the envy of many people around the globe.  The ability for hard working Americans to have access to an economy that supported them so long as they worked hard and followed an implicit guarantee with their nation.  With this implicit guarantee it was assumed that the government would also protect people to a certain degree especially when it came to their financial well being.  This did not assure a winning portfolio but it did mean we wouldn’t turn our stock market into a giant game of casino where the connected had a loaded deck.  Much of the strong regulatory arm that came from the Great Depression was because of the speculative gambling during the Roaring 1920s.  Yet as time went on slowly Wall Street took these structures away and now we are finding ourselves once again with the middle class largely at risk in the United States.  It isn’t by accident we are in the situation we are in today.

The first important thing to understand is that yes, the income of middle class families has gone up since the 1950s but a large part of this was the rise of the two income households with women entering the workforce:

The above chart is disturbing in many ways because it bucks the nearly 50 year long-term trend of employment.  Now, even with two income households many with rising job losses are finding they now have to make it with one income while inflation has eroded their buying power over the decades.  In this recession 3 out of 4 job losses have been men.  If you have any doubt regarding the insidious nature of inflation I put together a chart looking at various costs over the last few decades:

Part of this is due to the Federal Reserve and U.S. Treasury trashing the U.S. dollar over the decades.  For example, in 1950 it took the median household income (which was largely a one income household) about 2 times the annual household income to purchase the median priced home.  In 2008, it took the median household income (now largely a two income household) four times annual earnings to purchase the median priced home.  In fact, the two income household has hidden a large part of how much the middle class has fallen behind in this country.  Now with this recession, the deep cracks are now being exposed in the system.

Income inequality has also risen in this country and a large part of it is due to the financial sector.  1 percent of our population control 42 percent of all financial wealth.  In fact, in the last decade the only segment of our population that has seen any sizeable gains in true wealth is the top 1 percent.  Every other category has seen a loss of housing net worth, wage stagnation, and higher costs for daily items that consume a larger part of their budget.  Just take a look at the chart below showing this change:

Source:  CNN

The above is looking at a one income household in 1973 versus the two income household in the 2000s.  It is interesting to note that in the 1970s Nixon took the dollar into a purely fiat system and since that time, the dollar has lost much of its actual value.  This would be expected.  The Federal Reserve with its banking lieutenants has been able to put our country so deep into debt that realistically we are in a position of never paying back all our outstanding obligations.  The only way out is via inflation and with a fiat system that is the path we are heading down.  This is important because when you look at the charts above prices rise for various reasons and inflation is a hidden tax.  No need for higher taxes to bailout the banking sector when you can just destroy the purchasing power of middle class Americans by monetizing enormous amounts of debt as we have done.

That is why in the next decade, Americans are now working for someone else beyond their immediate household.  A large chunk of their money is now going to the banking sector.  This can be in absurd payments to credit card companies, loss of purchasing power because of the Fed, or other hidden methods of taxing the public.  We are really at a crossroads for the middle class.  If we dissect the data further we realize that even though things cost more, much of it has been financed through debt:

Ironically the family in the early 1970s had more discretionary income than the family in the early 2000s even with a dual income.  Yet if you look around, it isn’t immediately apparent because of the massive debt bubble financed by the banking sector.  Sure people bought bigger homes and newer cars but all this was under a phony veneer of success and was financed with debt.  All of it was built around a mountain of debt.  Yet here is where the big divide hits.  Middle class families are now losing their homes through foreclosure.  Many are having their cars repossessed because they can’t make their payments.  Bankruptcy filings are soaring because people cannot service their debt.  So middle class Americans are paying the price with the rules that are setup.  Yet banks are not.  They are sucking the American taxpayer for all their horrible bets and are not dealing with the ramifications of their actions.  In other words, the bill is going to the middle class as the middle class is dealing with their own bad decisions.  This is part of the system built around the corporatacracy model of government.  Losses are socialized while gains are privatized.

And don’t kid yourself, this entire game was financed on debt:

And the small group of banks at the top now control a large portion of all FDIC backed assets in our country:

Source:  FDIC, Bank Financial Statements

Forget about the Republican or Democrat parties, we are being governed by the financial sector of this economy.  It is amazing how hard it is to get sensible legislation even after this great calamity.  To prove this point, in California an insurance company announced they are hiking healthcare premiums by 30 percent in the midst of this recession even though they pulled in billions in profits.  The government will sit back and let the middle class get fleeced because they are part of the problem.  They speak a good game but are bought by the industry.  Prove us wrong if this isn’t the case.  Enough talk, time for action.  From now on we need to focus on who is delivering results.  If you can, take you money out of the big banks and put them in local regional banks.  Let your local representatives know that their number one priority should be focusing on protecting our struggling middle class.  Time to get some real reform or we really risk losing our middle class.

Class Warfare’s Next Target: 401(k) Savings

By NEWT GINGRICH AND PETER FERRARA

You did the responsible thing. You saved in your IRA or 401(k) to support your retirement, when you could have spent that money on another vacation, or an upscale car, or fancier clothes and jewelry. But now Washington is developing plans for your retirement savings.

BusinessWeek reports that the Treasury and Labor departments are asking for public comment on “the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams.”

In plain English, the idea is for the government to take your retirement savings in return for a promise to pay you some monthly benefit in your retirement years.

They will tell you that you are “investing” your money in U.S. Treasury bonds. But they will use your money immediately to pay for their unprecedented trillion-dollar budget deficits, leaving nothing to back up their political promises, just as they have raided the Social Security trust funds.

This “conversion” may start out as an optional choice, though you are already free to buy Treasury bonds whenever you want. But as Karl Denninger of the Market Ticker Web site reports: “‘Choices’ have a funny way of turning into mandates, and this looks to me like a raw admission that Treasury knows it will not be able to sell its debt in the open market — so they will effectively tax you by forcing your ‘retirement’ money to buy them.”

Moreover, benefits based on Treasury bond interest rates may be woefully inadequate compensation for your years of savings. As Denninger adds, “What’s even worse is that the government has intentionally suppressed Treasury yields during this crisis (and will keep doing so by various means, including manipulating the CPI inflation index) so as to guarantee that you lose over time compared to actual purchasing power.”

This proposal follows hearings held last fall by House Education and Labor Committee Chairman George Miller, D-Calif., and Rep. Jim McDermott, D-Wash., of the Ways and Means Committee focusing on “redirecting (IRA and 401k) tax breaks to a new system of guaranteed retirement accounts to which all workers would be obliged to contribute,” as reported by InvestmentNews.com.

The hearings examined a proposal from professor Teresa Ghilarducci of the New School for Social Research in New York to give all workers “a $600 annual inflation-adjusted subsidy from the U.S. government” in return for requiring workers “to invest 5% of their pay into a guaranteed retirement account administered by the Social Security Administration.”

Argentina provided a precedent in 2008, taking over that country’s private retirement accounts for forced investment in government bonds to cover spiraling deficits. Ambrose Evans-Pritchard editorialized at the time in Britain’s Daily Telegraph that this may be “a foretaste of what may happen across the world as governments discover .. . that the bond markets are unwilling to plug the (deficit) gap. . .. My fear is that governments in the U.S., Britain and Europe will display similar reflexes.”

This is just the latest chapter in what is developing into a war by the left on America’s seniors. All that class-war rhetoric about “the rich” ends up targeting seniors, who tend to have accumulated the most in savings and investment on average because they have been around the longest.

President Obama, House Speaker Pelosi and Senate Majority Leader Reid targeted seniors for hundreds of billions in Medicare cuts to finance expanded Medicaid for the poor and other new entitlements in the ObamaCare health care takeover legislation. If you liked your health insurance, you were supposed to be able to keep it, except for the 25% of seniors who had chosen Medicare Advantage private health plans for their Medicare coverage.

Even the Medicare actuaries estimated that most of those seniors would lose their Medicare Advantage coverage because of all the ObamaCare cuts for those plans. Obama has even begun rationing for seniors under Medicare by slashing payments to heart and cancer specialists serving seniors under that program.

All of this reflects a fundamental problem underlying socialist economic policies. If the government keeps punishing responsibility and rewarding failure, society ends up with a lot less responsibility and a lot more failure, destroying prosperity in the process.

As former British Prime Minister Margaret Thatcher said, “The trouble with socialism is you run out of other people’s money to spend.” And now they want to spend our retirement savings.

Congressional Republicans should introduce legislation to block the government from ever proceeding with anything like this. Call it the “Keep Your Hands Off My 401(k) Act of 2010.”

• Gingrich is former speaker of the House.

• Ferrara is director of entitlement and budget policy for the Institute for Policy Innovation.

The Devaluation and Fight for Survival of the American Middle Class – How Three Decades has Shifted the Concentration of Financial Wealth to the top 1 Percent.

Posted by mybudget360

The American middle class ideal is lionized around the world.  It is the core of what has made this country great.  The land of opportunity and endless wealth so long as people worked hard enough.  It was an implicit contract workers made with this country.  Well that vision is now quickly coming under attack by the corporate structure with banks being the main culprits leading the American middle class to the edge of financial ruin.  The average American is looking at their current economy and wondering what ever happened to the security that was once provided to the “greatest generation” era.  The Wall Street crowd after devouring their bailouts is telling Americans that this is simply how the market corrects.  Yet at the same time, they are offering record bonuses to their elite.  The same banking crowd that led this country to the financial edge is now rewarding itself with massive bonuses (taxpayer funded) while jobs are being lost and no industry is emerging to provide work to the middle class.  As tough as it may be for many to swallow we are in a class warfare struggle.  That is why you are seeing populist rage growing in both of our entrenchment political parties.

If you are wondering why those on Wall Street have a hop to their step, it is because the stock market wealth is concentrated in the hands of very few:

The top 1 percent control 42 percent of financial wealth in the United States.  Now think about that fact.  Let us assume you have saved diligently for a few years into your 401k.  Before the crisis hit, you had amassed $100,000 (much higher than the median amount for Americans but we’ll just use this to highlight our point).  At the low, that $100,000 was probably down to $50,000 even being diversified.  With the major run up, the amount might now be back to $75,000 to $80,000.  Has the life of the average American really changed?  This money is actually retirement funds and this amount is not going to make a big difference in the way people live on a day to day basis.  Yet those in the top 1 percent with the current shift have seen billions go their way and this does make a big difference since many draw off capital gains on a yearly basis.

The 401k structure is problematic in many ways.  It is a method to lure in money from people to give them a taste of the Wall Street money machine.  Most of these funds are designed for retirement.  And with massive baby boomers retiring in the next few years, billions of dollars in funds will be sold into the market (which ironically will add pressure on prices because of demographic shifts).  This will push prices down right when people will start drawing from their nest egg.  The notion that you can garner 7 percent each year into infinity is a fallacy that has been exposed in this market crash.

We have been getting richer as a nation overall.  This is true.  But why is it so hard for average Americans to now get by with two incomes when one income seemed adequate 40 years ago?  The income gains have largely gone to the top 1 percent from 1979 to 2005:

Source:  Wikipedia

The above gains are inflation adjusted over three decades.  While income did increase across categories this distribution was not even.  It was largely shifted to the top of the pile.  Now it would be one thing if the top was being run by companies that actually provided jobs for a large part of America.  But it isn’t.  You have CEOs of Manhattan banks that are trading derivatives on toxic mortgages and betting up oil futures all so they can skim the system for money.  How has that added value to our country?  It hasn’t.  All it has done is transformed part of our economy into one subsidized taxpayer casino at the expense of the working middle class.

If you want to visualize this class division, it would roughly break down like this:

But even here, the top 1 percent isn’t even reflected.  Even working families with say a nurse and an engineer can bring in $100,000 to $150,000 a year.  But with things like the AMT even this tranche is feeling the burden.  The big transfer of wealth is going to the top 1 percent:

“(Wikipedia) As of 2005 there are approximately 146,000 (0.1%) households with incomes exceeding $1,500,000, while the top 0.01% or 11,000 households had incomes exceeding $5,500,000. The 400 highest tax payers in the nation had gross annual household incomes exceeding $87,000,000. Household incomes for this group have risen more dramatically than for any other. As a result the gap between those who make less than one and half million dollars annually (99.9% of households) and those who make more (0.1%) has been steadily increasing, prompting The New York Times to proclaim that the “Richest Are Leaving Even the Rich Far Behind.” Indeed the income disparities within the top 1.5% are quite drastic. While households in the top 1.5% of households had incomes exceeding $250,000, 443% above the national median, their incomes were still 2200% lower than those of the top .01% of households. One can therefore conclude that almost any household, even those with incomes of $250,000 annually are poor when compared to the top .1%, who in turn are poor compared to the top 0.000267%, the top 400 taxpaying households.”

So we see where the money is really going.  Even if we break down a family in California earning $100,000 you can see what was once considered rich is no longer the case:

And for those out in high cost states they will realize that a $350,000 home does not buy you much even after the tremendous crash in housing values.  The cost of healthcare is rising and college costs are going up so with one child, they will want to set aside some money if they want to see their child have a decent college education when they are ready to go.  And keep in mind that making $100,000 puts you in the top 17 percent of households in the U.S.:

So in reality, we should look at household that brings in $65,000 per year to get a more accurate feel of what the middle class is going through:

So after taxes, this family is taking home $4,240 a month.  With rising taxes, higher food costs, healthcare rising, and wages stagnant you can see how the middle class is falling behind on a daily basis.  We can further breakdown the class distribution as follows:

We do have class in our system and the biggest misnomer that has been perpetrated is that somehow, our goals are aligned with those of the banking Wall Street elite.  How much longer do people need to realize that both political parties seem to serve one master and it has an address on Wall Street?  The debates and battles seem to amount to this charade because once it comes time for policy, nothing gets done.  Even Elizabeth Warren who is fighting for basic consumer rights is finding it even hard to get through because of banking lobbyist:

“It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street — and the mortgage won’t even carry a disclosure of that fact to the homeowner.”

The battle has gotten intense.  Credit card companies have been doing criminal activities by jacking fees up and setting up traps for consumers before simple regulations come into effect.  Banks have pulled back on lending to average Americans while profits from stock speculation have soared.  They don’t call it speculation but label it as hedge funds, proprietary trading, or some other Orwellian language that hides the true nature of the system.

With the underemployment rate at over 17 percent and bankruptcies, foreclosures, and other financial distress rising for average Americans one small chunk of our population is benefitting on the backs of bailout funding.  This has been characterized as it “taking a plunder” to rip off the village:

So what you do is take from the public:

Source:  It Takes a Pillage

And give to the people that created this crisis:

I completely agree with Elizabeth Warren who is adamantly arguing that we are at a cross-road in terms of defending the middle class of this country.  Instead, Wall Street enjoys the fact that Americans are split down the middle on issues and fighting over petty things while trillions keep rolling into their coffers.  Time to wake up and see what is really happening to our nation.