Private pay shrinks to historic lows

By Dennis Cauchon, USA TODAY

Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of this year, a USA TODAY analysis of government data finds.

At the same time, government-provided benefits — from Social Security, unemployment insurance, food stamps and other programs — rose to a record high during the first three months of 2010.

Those records reflect a long-term trend accelerated by the recession and the federal stimulus program to counteract the downturn. The result is a major shift in the source of personal income from private wages to government programs.

The trend is not sustainable, says University of Michigan economist Donald Grimes. Reason: The federal government depends on private wages to generate income taxes to pay for its ever-more-expensive programs. Government-generated income is taxed at lower rates or not at all, he says. “This is really important,” Grimes says.

The recession has erased 8 million private jobs. Even before the downturn, private wages were eroding because of the substitution of health and pension benefits for taxable salaries.

The Bureau of Economic Analysis reports that individuals received income from all sources — wages, investments, food stamps, etc. — at a $12.2 trillion annual rate in the first quarter.

Key shifts in income this year:

• Private wages. A record-low 41.9% of the nation’s personal income came from private wages and salaries in the first quarter, down from 44.6% when the recession began in December 2007.

•Government benefits. Individuals got 17.9% of their income from government programs in the first quarter, up from 14.2% when the recession started. Programs for the elderly, the poor and the unemployed all grew in cost and importance. An additional 9.8% of personal income was paid as wages to government employees.

The shift in incomeshows that the federal government’s stimulus efforts have been effective, says Paul Van de Water, an economist at the liberal Center on Budget and Policy Priorities.

“It’s the system working as it should,” Van de Water says. Government is stimulating growth and helping people in need, he says. As the economy recovers, private wages will rebound, he says.

Economist Veronique de Rugy of the free-market Mercatus Center at George Mason University says the riots in Greece over cutting benefits to close a huge budget deficit are a warning about unsustainable income programs.

Economist David Henderson of the conservative Hoover Institution says a shift from private wages to government benefits saps the economy of dynamism. “People are paid for being rather than for producing,” he says.


By Neal Boortz

When Barack Obama and the Democrats were trying to push ObamaCare, what was the line that we heard over and over and over again? Let me remind you: “45 million Americans don’t have health insurance!” Well despite the fact that that number is entirely incorrect, the point is that Democrats wanted to push the idea that a lot of Americans were without something that they were entitled to .. in this case, it was health insurance. As we know, eventually the Democrats succeeded by implementing an individual mandate; now it is against the law NOT to have health insurance.

Well if Democrats were up in arms over 45 million Americans, wait until they get a load of this number: 78 million. What is that number? That is the number of Americans who “aren’t able” to systematically save money for retirement through automatic paycheck deductions. In other words, they work for someone who does not provide access to employer-based retirement accounts. So here we go – another mandatory entitlement that Congress would be able to provide to 78 million Americans! Washington has already forced employers to provide access to healthcare coverage, or face a fine, why not do the same for retirement plans? I can hear the campaign soundbites now, “And I supported legislation that forced your employer to provide you with a retirement plan!”

Barack Obama is already working on a “solution.” Included in Obama’s budget proposal is a plan for “Automatic IRAs,” which would require companies to offer workers automatic deductions into individual retirement accounts. That plan would be for the big fish in the pond, but what about the little guys? More than 30 million Americans work for businesses with less than 100 employees and are not offered the benefit of an employer-based retirement plan. This does not mean that 30 million employees don’t have access to a retirement savings plan; it simply means that they must save on their own, rather than through an employer. So along comes an idea called the Multiple Small Employer Plan, which would enable small employers to join together to offer a single retirement program. These are often negotiated by unions .. but that is a whole other issue. Is this concept sounding familiar? Similar to what ObamaCare does – creating these pools for small businesses to buy into. But what else does ObamaCare do? It then mandates that these businesses provide health insurance .. wonder if it will be the same in terms of providing automatic retirement accounts?

At this point you are probably thinking, “Yeah right. You are a conspiracy nut.” Well Democrat Rep. Ron Kind has already introduced legislation called the SAVE Act – Small Business Add Value for Employees – which would include provisions for Automatic IRA enrollment and these Multiple Small Employer Plans. The legislation would, according to Investors Business Daily, do the following:

* First, it would mandate many of the ‘best practices’ of traditional defined contribution plans, including automatic enrollment and automatic contribution escalation. The bill would also direct the IRS to develop a model plan to ensure consistency across plan providers and keeping costs low.

* Second, the SAVE Act would remove a significant disincentive to pooling that exists today. Under current multiple employer plans, noncompliance by a single employer can jeopardize the tax-exempt status of the entire plan. Rep. Kind’s bill seeks to eliminate this obstacle.

* Finally, the bill includes a provision to align a plan sponsor’s fiduciary responsibility with its decision-making authority.

This legislation echoes some of Barack Obama’s proposals in his 2011 budget. As I already mentioned above, automatic IRAs is one idea, but there are more. Here, according to US News and World Report, is what the president has asked Congress to fund …

* Automatic IRAs. Companies that don’t offer a retirement plan may soon be required to enroll their employees in an IRA account. Under Obama’s current proposal, 3 percent of employee pay would be direct-deposited into a Roth IRA, the default savings vehicle. Workers may opt out, chose a traditional IRA, or elect to save a different amount. Small firms with 10 or fewer employees or companies that have been in business less than two years would be exempt from participation. Employers could claim a temporary tax credit upon automatically signing their workers up for the IRA for $25 per enrolled employee up to $250 for two years. Another tax credit would be available to small businesses that begin their own retirement plan equal to 50 percent of the start-up expenses for establishing or administering a new retirement plan up to $1,000 per year for three years, an increase from the $500 businesses are eligible for under current law. The proposal would become effective in 2012.

* A government 401(k) match. The Obama administration is proposing expanding the Saver’s Credit in 2011 to provide a 50 percent match on the first $500 of retirement savings for individuals who earn less than $32,500 annually. Couples who take home less than $65,000 could receive a match on their first $1,000 of savings and the match would be gradually phased out for couples with income between $65,000 and $85,000. The maximum credit would be $250 for a single filer and $500 for a married couple and be fully refundable.

* New 401(k) regulations. The White House supports adding more consumer protections to 401(k)s. The administration is calling for legislation that will require a transparent list off all 401(k) fees charged and disclosures about how target-date funds work. The Department of Labor also aims to streamline the process for workers to annuitize their retirement assets and outline who can give retirement savers investment advice to prevent conflicts of interest.

* More Social Security funding. Obama’s budget allocates $12.5 billion to the Social Security Administration, up 8 percent from 2010’s budget. The increase in funding is primarily to boost the number of employees, who will focus on processing retirement and disability claims and disability appeals faster. Also, $796 million is designated to scrutinize Social Security payments to make sure that only eligible beneficiaries receive checks and are paid the correct amount.

* Caregiving assistance. The Administration on Aging would be given $103 million, according to the budget, for a Caregiver Initiative that will allocate funds to agencies that provide senior and caregiver support services such as transportation and adult day care.

It’s coming, folks .. Democrats will remind you that you were the ones who wanted them to focus on small businesses, so this is their way of doing so. Look for the “crisis-speak” to ramp up, then the federal government will be the knight in shining armor swooping in to save us from our own inabilities … our inability to be self reliant and save for our own retirements.

Fred Barnes: Public-sector employees are the new fat cats

By: Fred Barnes
Sunday Reflections Contributor

ohn Edwards was right. There are two Americas, just not his two (the rich and powerful versus everyone else).

The real divide today is, on one side, the 20 million people who work for state and local governments and the additional 3 million who’ve retired with fat pensions. On the other, the rest of us, about 280 million Americans. In short, there’s a gulf between the bureaucrats and the people.

New Jersey Gov. Chris Christie, a Republican, puts his fight with teachers and their unions in roughly those terms. He says there are “two classes of citizens in New Jersey: those who enjoy rich public benefits and those who pay for them.” The teachers want to keep a pay raise and continue to pay a minimal share of their retiree benefits.

According to the U.S. Bureau of Labor Statistics, state and local government salaries are 34 percent higher than those for private-sector jobs. OK, that’s partly because government workers tend to have white-collar jobs. Benefits, 70 percent higher for these workers, are the real rub. And benefits for government retirees are the most flagrant.

They’ve become a national scandal, a fiscal nightmare for states, cities, and towns, and an example of unfairness of the sort liberals routinely complain about but are mostly silent about just now.

Let’s start with horror stories of pensions run amok.

o In Contra Costa County, Calif., the final salary of one fire chief, 51, was $221,000. He was given an annual, guaranteed pension of $284,000. Another chief, 50, whose final salary was $185,000, got a pension of $241,000. Credit the Contra Costa Times with uncovering this.

o Christie cited two tales in February when he declared a state of fiscal emergency in New Jersey. One retiree, 49, paid “a total of $124,000 towards his retirement pension and health benefits. What will we pay him? $3.3 million in pension payments and health benefits.” A retired teacher paid $62,000. She’ll get “$1.4 million in pension benefits and another $215,000 in health care benefit premiums over her lifetime.”

o In New York, a pensioner in the state retirement system received $641,000 in state payments in a single year. He was a triple dipper. He had a pension of $261,000, the highest in the state. He had a post in the state university system in which he made $280,000. And he was paid $100,000 a year as a consultant for the agency from which he’d retired, the teachers retirement system.

o Except for new hires, state workers in New York can retire at 55 with guaranteed benefits to which they contribute only in their first 10 years of work. They pay no state income tax on their pensions, and overtime is counted in computing the size of pensions. “Compared with the average New York worker, state and local government employees receive the gold standard of pensions,” the Syracuse Post-Standard said last year.

o Also in New York, the retirement system is riddled with lucrative pensions for retirees who were fired or convicted of crimes related to their state jobs. Former Comptroller Alan Hevesi, who once ran the state’s $154 billion pension fund, was found guilty of defrauding the state. Yet he’s got a pension of $104,123.

o In California, 9,111 retired government workers have pensions of more than $100,000. One retiree draws an annual pension of $509,664. Among retired teachers, 3,065 receive more than $100,000. One gets $285,460. Pensions for retired state workers and teachers will rise 2 percent this year, though Social Security recipients aren’t getting any cost-of-living increase. The increase in California isn’t tied to inflation.

o The city of Vallejo, Calif., declared bankruptcy in 2008, largely because the payroll for police and firefighters, and their pensions and overtime, consumed three-fourths of the budget. City employees could retire at 55 with 81 percent of their last year’s salary guaranteed as pensions. In bankruptcy negotiations, however, Vallejo officials declined to reduce current pensions.

The lofty pay scales and benefits for government workers — as compared with those in the private sector — suggest the idea of “public service” isn’t what it used to be. Once, taking a government job meant a sacrifice in pay and benefits. No more.

Most bureaucrats have secure, recession-proof jobs with automatic salary increases, paid leave and lavish benefits, notably in retirement. And they get to retire earlier than private-sector workers.

Christie has asked, Is this fair? The answer is no.

But if you happen to think it is fair, I’d advise you to click on the Web site It’s operated by one person in California who daily posts fresh examples of pension abuse across the country.

Lack of fairness isn’t the biggest problem with exorbitant pensions. The pension explosion has created a fiscal crisis in many states, cities and towns across the country, California being the worst off. Not only are pensions for government workers a perilously unfunded liability for many states, their soaring cost is causing sharp cuts in other programs.

“Paying for those pension promises is already crowding out funding for higher education, for parks, and for other areas like health care … and that crowding out is only going to get worse,” California Gov. Arnold Schwarzenegger said last week in touting a pension reform plan. “In California, we had the Internet bubble, we had the housing bubble, and I see in the very near future a public pension bubble.”

He’s not exaggerating. State pension funds have gone up 2,000 percent in the past decade. The unfunded pension debt in California is $500 billion, according to a new study by Stanford University’s public policy program. It’s seven times greater than the state’s general obligation bonds, says Schwarzenegger adviser David Crane.

A staggering pension shortfall “is not just [in] California,” Crane told me. “It’s every state.” Nationwide, unfunded retirement benefits are $3.2 trillion, according to Chris Edwards of the Cato Institute. On top of that, he estimates the unfunded debt for the health coverage of state and local government retirees is $1.4 trillion.

At least 17 states have either enacted or looked into cost-cutting pension reforms in the past two years, says Ed Mendel, a pension expert in California. In Illinois and New York, both with large unfunded liabilities, the rules governing pensions have been tweaked, though solely for new government employees.

Only Alaska, Michigan and the District of Columbia have adopted the obvious long-term solution to the pension mess: putting new workers in 401(k) defined-contribution plans rather than defined-benefit plans. The switch would save billions. Even Virginia’s new, conservative governor, Bob McDonnell, declined to do this for new state workers, instead requiring them to pony up 5 percent for a traditional pension. (Current Virginia workers pay nothing.) But hope lies in the state with the worst pension situation. Meg Whitman, the likely Republican nominee for governor of California, says she would make the switch for new state hires.

Fred Barnes is executive editor of the Weekly Standard, from which this is adapted.

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