Posted on 05/02/2003 6:31:53 AM PDT by dgallo51
Subject: The Hidden Cost To Future Retirees Of Democratic Obstruction To President Bush's Tax Cuts
I have assembled four articles on the “hidden” cost to future retirees of the Democratic political strategy to obstruct economic stimulus along with my letter to Senator Mark Dayton, D., MN.
Dear Senator Dayton,
Thank you for your letter dated 4/23/03 outlining your objections to President Bush’s Economic Stimulus Plan.
The cost of your tax strategy to future retirees is hardly inconsequential.
How big a hit, are you asking us to take in our retirement living standards to restore Democrats to power? How much economic growth are you willing to fritter away to achieve that power? And you wanted to know the cost of war in Iraq?
Why isn't anybody talking about the hidden costs of Democratic stonewalling on tax cuts to future retirees?
Believe me Senator, I intend to break it down for the “average” Minnesotan so they can discuss your strategy around their kitchen tables and it’s effects on their retirement living standards.
Sincerely,
Don Newell
Subject: The Hidden Cost To Future Retirees Of Democratic Obstruction To President Bush's Tax Cuts
I have assembled four articles on the “hidden” cost to future retirees of the Democratic political strategy to obstruct economic stimulus. The RNC apparently doesn’t believe this to be an issue that is easily understood, and thus has focused their appeal on employment, while ignoring, to the extreme, the hidden cost to future pensioners. I post these to encourage everyone to write their elected officials and write their news outlets to raise this issue.
Men must work to 71 to recoup pension value By Benedict Brogan, Political Correspondent (Filed: 01/03/2003)
A man of 65 will have to keep working until he is 71 to make up for the collapse in the value of his retirement fund, according to House of Commons research released last night.
The stock market slump has wiped billions off the value of private pensions, leaving thousands of workers faced with a sudden drop in the amount they can expect to have to live on in old age.
A study produced by the Commons library estimates that the average male worker who is due to retire this year would have to put off his retirement until 2009 to make up the loss.
The new figures show that in 1999, when the stock market was at its peak, a 62-year-old could have looked forward to retiring with an average pension pot of £65,000, which would have provided an annual income of £3,600.
Since then the value of equities has collapsed by almost half. Annuity rates have also dropped sharply, which means that pensioners have to spend more to buy a particular level of income.
With more and more companies closing their final salary schemes, employees are increasingly having to turn to risk their retirement on the ups and downs of the market through schemes that require the worker to buy an annuity.
The vast majority of annuities bought each year involve small sums. In 2000 for example, industry research found that two thirds of annuities purchased were for less than £20,000.
Under current market conditions it costs £80,000 to buy an annuity that produces an income of £3,600 a year for a man aged 65. Three years ago it would have cost £65,000 to produce the same income.
The Commons estimates that the change in the markets means a 65-year-old today would have to keep working until he is 71 to make up for the drop in the value of his private fund.
Instead of the annual income of £3,600 he was looking forward to in 1999, his fund today would buy him an income of only £1,600.
The Commons research concludes: "This calculation depends on annuity rates remaining static and share prices recovering, albeit modestly over the next five years, as well as his ability to continue to contribute at the same rate. A continued decline in annuity rates and/or share prices could put this off track."
Steven Webb, the Liberal Democrat work and pensions spokesman who commissioned the research, said the figures illustrated the scale of the pensions crisis. He called for Government action.
"Unless the Government acts quickly to sort out the crisis in private pensions and guarantees a decent state pension, then comfortable retirement will be a thing of the past," he said.
THE BEAR FACTS ABOUT PENSIONS
The three-year bear market has left many companies with big pension shortfalls, which may weigh heavily on share prices for years to come
IN THE bull market of the 1990s, many firms boosted their profits by taking "holidays" from contributing to their staff pension funds. Since the funds were stuffed with shares, which were soaring, they seemed more than amply funded to meet future payouts to retiring workers, so there seemed no need to keep putting money into them. In America, the peculiarities of the accounting rules even allowed some firms to treat part of their pension funds' surpluses as though they were income earned by the company itself.
But now, after three years of falling stockmarkets, at a time when interest rates (and thus the returns on bonds) are also low, many pension funds have swung dramatically from surplus to shortfall. This week, Watson Wyatt, a consultancy, estimated that pension funds worldwide have lost a staggering $2.8 trillion--21% of their value--since 1999. The persistence of the downturn, and the closer attention to accounting practices following recent corporate scandals, is forcing firms to make hefty top-ups to their pension funds that will cut their earnings and thus depress stockmarkets further.
The latest big company to face up to the problem is NCR, a computer-maker, which said this week it would set aside $850m from its retained earnings to cover increased pension liabilities resulting from the stockmarket decline. Oddities in the accounting rules on pensions last year allowed NCR to boost its stated profits with $74m of pension "income", even though shares plunged. But the persistence of the stockmarket decline means that this year the company will be forced to deduct $95m of pension expenses from its stated earnings.
The pensions crisis is worst at older, heavily unionised firms with lots of retired staff and generous benefits. Last week, General Motors said it would triple, to $3 billion, its annual contribution to its pension fund, to start reducing its $19.3 billion shortfall. Ford, another carmaker, whose pension-fund deficit is $7.3 billion, will suffer a $270m pension charge this year after pensions "income" of $190m last year. A report this week from Fitch, a credit-rating agency, said America's big airlines now have combined pension deficits of $18 billion. The worst affected are Delta and United (the latter currently in Chapter 11 bankruptcy), each with deficits of more than $4 billion. These longer-established airlines, like the majority of large companies in America and Britain, have "final-salary" pension plans (also known as "defined-benefit" schemes), in which the company guarantees that retired workers will get a certain percentage of their final salary. Under such schemes, the company risks having to top up its pension fund at times of poor investment returns, such as now.
However, companies are increasingly moving across to "defined-contribution" schemes in which the company promises only to contribute a certain percentage of each worker's salary each month to the pension fund. The value of pensions is not guaranteed--it depends on how the fund's investments perform--and so there is no danger for the companies of having to make big top-ups.
The rising burden of defined-benefit schemes is forcing some firms to restrict them to existing staff and to put new recruits into new, defined-contribution schemes, thereby transferring to the employee the risk of low investment returns in the future. Britain's National Association of Pension Funds, which represents 1,400 retirement funds, says 84 of its members closed their final-salary schemes to new members last year, up from 46 in 2001.
Optimists hope that the big top-ups that many firms are having to make to their pension funds will be invested in the stockmarket, thereby helping the market to recover. But pension funds are already over-invested in shares by historic standards, so this may not happen. Meanwhile, the cost of pension top-ups will eat into companies' earnings and thus depress share prices further. Steve Russell, a stockmarket strategist at HSBC, says that the 350 top publicly quoted companies in Britain now have a combined pension deficit of £36 billion ($58 billion). Unless this is wiped out by a dramatic rebound in the stockmarket, he reckons, paying it off will cost firms about 3% of their profits for the next five years. American firms face a similar hit to their profits as a result of their pension shortfalls.WITH OR WITHOUT PROFITS?
The bear market is hitting other types of investment besides pensions. In Britain, small investors who put their money into so-called "with profits" life-assurance policies and endowment mortgages also face disappointment, as falling stockmarkets force insurers to cut the annual bonuses they pay out. This week, Aviva, Britain's largest insurer, became the latest to do so, cutting its bonus by 0.5%, to 3.25% of the fund balance. This follows Britannic's revelation last week that it may not pay any bonus. It seems likely that the falling returns on what had hitherto been seen as safe investments might drive many potential customers away--thereby driving the insurers' share prices down further, as well as reducing the flow of money into the stockmarket.
The current bear market is unusual in that it has come at a time of falling interest rates and bond returns, making it harder still for pension funds and insurers to earn good returns. The growing shortfalls in many funds, combined with a tightening of accounting standards (such as Britain's new FRS17 rule, which makes companies face up to pension liabilities sooner) mean that many firms face a drag on their earnings for years to come. Another good reason (as if fears of high oil prices and a crashing property market were not enough) to be gloomy about the stockmarkets' short-term prospects.
See related content at http://www.economist.com/agenda/displaystory.cfm?story_id=1534207
Go to http://www.economist.com for more global news, views and analysis from the Economist Group.
CAUGHT SHORT Governments are not the only ones feeling the strain over the rising cost of pensions. Falling stock markets, tougher accounting standards and a surge in the number of retirees are increasing the pressure on companies' pension schemes too. Only a rebound in equity markets or an increase in the retirement age are likely to bring relief
JOHN MONKS, the famously moderate leader of Britain's Trades Union Congress, admits to being a "militant"--not about jobs or even pay, but about pensions. His shift in priorities is due partly to the fact that unemployment in Britain is at its lowest for nearly 30 years; but mostly it is because his members' pensions are under threat. And British workers are not alone. Increasingly, workers in all developed countries seem less concerned about finding a well-paid job than they are about how to support themselves when they retire. Indeed, Britain has joined a growing list of countries--among them Australia, Germany and Italy--thinking about raising its official retirement age. In its first report, Britain's Pensions Policy Institute suggested on September 19th that people now aged under 40 should retire at 70, not 65.
Companies are feeling the strain already. In most rich countries, they are closing to new entrants their traditional pension funds, known as defined-benefit schemes. Such schemes pay pensions out of a general pool based on the final (or near final) salary of the retiree. In their place, firms are offering cheaper, defined-contribution schemes that depend on separate and individual contributions and which, importantly, shift responsibility for investment risk from the employer to the employee. As Mr Monks well knows, such pensions leave the retiree more exposed and are usually less generous than final-salary ones.
Not surprisingly, Mr Monks's militancy is spreading to the rank and file. Last week, workers at Caparo Group, a manufacturer of steel and engineering products in Britain's West Midlands, forced the company to reinstate a final-salary scheme for existing employees instead of a cheaper alternative that it wanted to introduce. The workers staged a series of one-day strikes at weekly intervals--the first in the company's history and probably the first anywhere in Britain purely on the issue of pensions.
In America, workers are also becoming more sensitive about their pensions. Boeing recently won a crucial vote to reduce the number of workers building commercial jets by offering, among other things, higher pensions for those who signed up to a new, three-year deal that will introduce more flexible working conditions. A 20% uplift in their pensions as well as a bonus in return for signing on were said to have swung a majority of workers behind the offer. Companies are being squeezed from all sides. More than two years of falling stock markets have caused the return on most pension schemes' investments to slump. Schemes with a high proportion of equities have fared worse. This is happening at a time when the number of would-be retirees is also rising. Not only is the population ageing as better medical standards help people to live longer, but the number of people over 60 years is expected to jump from 10% to 22% of the total worldwide by 2050, according to forecasts by the United Nations.
New accounting rules have also restricted firms' room to manoeuvre. In Britain, listed companies have until 2005 to adopt FRS17, a new accounting standard that forces firms to show in their accounts any movements in the value of their pension funds. Unlike America's GAAP standard, FRS17 allows little or no leeway for companies to smooth deficits and surpluses from one year to the next. If there is a shortfall, under the new rules British companies will be expected to make it up the following year from their profits.
Small wonder, therefore, that companies with mounting liabilities have seen their share prices fall lately or that many have been queuing up to close down their final-salary schemes. Not only is this thrusting on to workers the onus to build up a sufficient level of savings for their retirement; it is also storing up problems for companies seeking to raise fresh capital. Royal GBP SunAlliance, a British insurer that needs to raise money in the markets, is facing resistance because of a shortfall of more than £600 million ($930 million) in its pension fund. According to a new study by Dresdner Kleinwort Wasserstein, an investment bank, an increasing number of companies may find that such shortfalls will affect their credit ratings and so increase the cost of raising money by issuing bonds to investors.
Of 47 companies with outstanding bonds examined by Dresdner, only six had pension funds with assets that exceeded liabilities: General Electric of the US; Unilever; Philips; Corus; FKI; and Dow Chemical. Worryingly, the rest all had shortfalls. Those with the worst deficits were German companies, but for good reason: German firms are not required to set aside money to cover their pension-fund liabilities but do have to carry the cost on their balance sheets. For well-heeled firms like Aventis, a pharmaceuticals and agribusiness group, this poses little problem even though in 2001 the company's pension liability was half as much again as its earnings before interest, tax, depreciation and amortisation. But for others, such as E.On, an international energy and engineering group, any increase in its liabilities may well affect its credit rating and so the interest rate it has to pay when issuing new bonds.IN A JAM
Indeed, a number of companies may find themselves in a jam because of the size of their pension-fund liabilities and the effect that this may have on their credit rating. Standard GBP Poor's, a rating agency, is sufficiently concerned about the problem that it is carrying out a survey of companies with outstanding bonds that it tracks worldwide. The results are likely to be announced within weeks and may throw up some surprises.
It is not just the fall in equity values that has led to shortfalls in companies' pension funds. The low level of interest rates has also contributed to their woes. In most countries with rules regulating the provision of pensions, companies are given scope to choose the rate at which they must discount the liabilities of their pension funds back to present-day values. However, in general, the lower interest rates fall, the lower the discount rate that companies must adopt. This has a direct impact on the level of their liabilities. Moody's, another rating agency, reckons that each 1% reduction in the discount rate translates into an increase in liabilities for companies' pension funds of between 7% and 15%.
Companies can expect little respite unless equity markets rebound or more people retire later. As often happens, however, the companies' plight is opening up opportunities for investment banks that know how to quantify risk. One option open to companies closing their final-salary schemes is to parcel up the liability of pensions that have to be paid and pass it on to somebody else, naturally for a fee. Goldman Sachs, Morgan Stanley and Deutsche Bank are among those evaluating opportunities in the market for so-called "bulk purchase" pensions. Like most forms of insurance, such deals enable companies to cap their liabilities and wind up the scheme without fear that costs will spiral out of control. If the number of companies nursing shortfalls in their pension funds is anything to go by, this market could be worth billions in the months to come.
See related content at http://www.economist.com/agenda/displayStory.cfm?story_id=1335875
Go to http://www.economist.com for more global news, views and analysis from the Economist Group. Sincerely,
The TRUTH about Democrats and Taxes HLR ^ | 4-27-03 | Jonathan M. Stein Posted on 04/27/2003 11:37 AM CDT by jmstein7 Breaking Down the Opposition
While the detailed economic mechanics of tax cuts and stimulus is quite complicated, one need not be Arthur Laffer to understand the Democratic opposition to President Bush’s full tax cut package. The chatter from Democratic presidential hopefuls has made it clear that the economy is going to be the dispositive issue in 2004, and a good economy would foreclose any possibility of political success for the Democrats in that election year.
Stating that politicians are driven by politics may be begging the question, and quite cynical, but it is also an undeniable fact. To exert any influence, politicians need to be elected and re-elected. As in 1992, the Democrats understand that the Republicans have a lock on credibility with regard to foreign policy, one of the two major issues that pollsters show resonates with voters. Anti-war rhetoric, in particular, would be guaranteed to result in a concession speech on Election Day. Nor are “minor” issues like healthcare or education going to carry the day in a general election. And, unlike Clinton/Gore, the character issue, employed against Bush, would be a non-starter. Thus, by process of elimination, the Democrats are left with two choices: the economy or bust. Further, to win an election, a candidate needs something to run against, and, simply stated, one cannot run against a good economy. In sum, the Democrats want to win, the dispositive issue will be the economy, and they need to be able to run against a bad economy.
Given these premises, the Democrats have three options on President Bush’s tax cut proposal: they can vote for the full package, they can vote for a substantially reduced package, or they can vote for no package. Each option has distinct political outcomes, and a simple analysis of these limited options reveals the true nature of the Democratic opposition to the President’s full tax package.
If the Democrats truly believed that voting for the full tax package would not result in a significant economic stimulus, then the savvy Democrat would “reluctantly” vote for the full package. If the President got the full package and the economy continued to stall, the President and the Republicans would lose all credibility on the integral issue of taxes and, consequentially, the economy. The result would be an Election Day bonanza for the Democrats, who would need only to say, “See! We gave the President everything he asked for, and look what happened!” Alternatively, Democrats who believe that the full tax package would stimulate the economy would not want to vote for the full package. Voting for the full package and having it result in significant economic stimulus would deprive them of their sole issue by vindicating the Republican position that tax cuts lead to economic stimulus. The Democrats would be slaughtered in the general election.
If the Democrats believed that cutting taxes would not result in significant economic stimulus, then voting for no package would be an unattractive option. By voting against a tax package, the Republicans, if the economy continued to stall, could point their fingers at the Democrats and blame them for failing to act to stimulate the economy. On the other hand, if Democrats thought that delivering the full tax package would result in significant economic stimulus, they would certainly not want that, as, again, they would be deprived of their sole issue. Nonetheless, the same finger pointing would result. Thus, there is an attractive third option – voting for an ineffective tax package.
By voting for a smaller, ineffective tax package, a Democrat who believed that the full tax package would lead to significant economic stimulus could cast an illusory vote. That Democrat could vote for a tax cut with the full knowledge that it would not be enough to lead to significant economic stimulus. Come Election Day, that Democrat could claim that he gave the President a tax cut and it failed to stimulate the economy. Of course, the Republicans could still counter that the tax cut was insufficient, but the issue of the economy would still be in play, and the Democrats would own the advantage. Again, if Democrats believed that tax cuts do not lead to economic stimulus, they would derive more political capital from voting for the full package than from voting for a smaller package, as Republicans would be left without a counterargument.
In sum, the most attractive option for Democrats who believe that tax cuts do not lead to significant economic stimulus is to vote for the full package and deprive the Republicans of the dispositive issue of the 2004 elections. The most attractive option for Democrats who believe that tax cuts will lead to significant economic stimulus is to vote for a smaller, ineffective tax cut, which would allow the Democrats to appear to have given the President a tax cut and claim that tax cuts failed to stimulate the economy.
The Democrats, savvy politicians, have chosen to support a smaller, ineffective tax package. Therefore, the truth must be that Democrats believe that the President’s full tax package would significantly stimulate the economy. The economy is the key issue in the upcoming elections, and the Democrats can only win by running against the political carnage of a bad economy. There is a name for parasitic creatures that can only survive by feeding off carnage – vultures.
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