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The fiscal cliff deal is insufficient in long run

Opinion Column

Thankfully, common sense prevailed and legislation passed averting the fiscal cliff. Not passing this deal would have caused unnecessary financial market turmoil and loss of wealth. It would have shaken consumer and investor confidence, even if Congress would have been able to craft a deal quickly in 2013. With that being said, this piece of legislation will hamper future economic growth as uncertainty continues as we prepare for another painful, bruising battle in February when negotiations take place for raising the debt ceiling.

Just when the economy was showing signs of life with a steady increase of jobs and an improving housing market, the lack of comprehensive deficit reduction will make job creation more difficult in 2013. Even though the balance sheets of Americans are improving, the economy really needs investment spending to be more robust, which was starting to rebound this year with 6.6 percent growth last quarter. By adopting a temporary plan that adds $3.6 trillion to an already bloated debt level in 10 years, industry will likely reverse their spending trends as they wonder whether interest rates will rise as a result of even higher deficits.

What has been missing in the dialogue is an understanding that deficit reduction will be painful and will cost jobs, whether it is in the form of tax increases or government spending cuts. However, Americans must realize that we must face our dose of distasteful medicine now, so that our future generations are not burdened with higher taxes and stunted economic growth due to excessively high deficits. While the U.S. economy can pay for Social Security and Medicare today, that will not be the case in the near future and we can blame that on a Baby Boomer generation that chose pursuit of wealth over pursuit of family.

With Baby Boomers choosing career over expanding their families, this led to a dramatic demographic shift where our future workforce will be far outnumbered by retirees. That is a problem for Social Security because its payments of benefits depend on a fully-funded Social Security Trust Fund that started running negative balances over the last two years. The Social Security Trust Fund increases when payroll taxes are paid and decreases when retirees cashes in on their benefits. When retirees outnumber workers, then basic math tells you that Social Security will eventually run out of funds. Current projections have that occurring within the next couple of decades unless either benefits are slashed or Congress legislates new sources of revenues to boost the trust fund.

We need a paradigm shift in reaching deficit reduction in a manner that does not place too much pressure on a delicate economic recovery , but recognizes the reality of unsustainable entitlement programs. Congress needs to have a frank discussion with Americans that outlines the crises of both Social Security and Medicare. Under the present system with no changes, it will not be enough tax revenues raised without wilting the economy or enough deficit spending to risk default from global financial markets.

Given our predicament and strong public support for both Social Security and Medicare, there is no denying that we will still need a solution that raises revenues, while curtailing benefits. To state otherwise is irresponsible. For Republicans who say we have a spending problem, that is true. However, when households run into financial distress due to irresponsible spending habits, it is ideal to cut expenses and increase income by working more hours. That is why Congress must insist on more revenues. Even if income tax rates rose to 39.6 percent for incomes over $250,000, those rates would still be competitive with the other six most advanced economies, with Canada being the only country whose federal income tax rate is lower than the U.S. at 29 percent.

As for Social Security and Medicare, we need to shift the mindset away from entitlements to safety nets. Let’s ensure that the basic needs are met for those who can least afford the benefit cuts. That means aligning with Democrats, by not adopting Chained CPI, which would essentially lower benefits for Social Security due to cost-of-living adjustment increases that would not match increases in food, energy and health costs. However, we should also consider Republican proposals to means test both programs and raise the retirement age.

Means testing Social Security and Medicare would maintain the same level of benefits for the less fortunate, but benefits would be reduced as incomes rise. As for raising the retirement age, that can be justified on the grounds that Americans are living longer and are healthier. Therefore, it is reasonable to suggest that they can remain in the workforce a few years longer.

We also must consider other radical bipartisan proposals from the conservative think tank, the Heritage Foundation, who believes the aim should be more focused on preventing poverty. That could mean phasing out benefits for upper-income Americans to stabilize both Social Security and Medicare.

In summary, we can only reach our goals by reaching across the aisle and finding common ground.

Aaron Johnson is the Assistant Professor of Economics at Darton College in Albany. In addition to his teaching duties, he is a board member for the Albany Dougherty Economic Development Commission and the Albany Dougherty Planning Commission. He also publishes a blog on economic and financial literacy at http://www.econprofaj.wordpress.com, which highlights research sources for this article and others.

Comments

free_ur_mind 1 year, 11 months ago

Just what we need, another double-minded economist telling us what to do. Republicans need to realize that the U.S. cares for the poor less than any rich country in the world. We should be ashamed of that.

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Cartman 1 year, 11 months ago

You need to travel a little before you post comments like that.

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VSU 1 year, 11 months ago

The New Year has helped me out a lot so far this year. Already my take home pay has been reduced by $30 per paycheck.

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Tonto 1 year, 11 months ago

A load of bull. I was "taxed" to provide my social security. I wasn't asked and I certainly would not have invested in a government scheme that said you pay this amount but we'll decide how much of that someone else should get and what you get back will be based on our ever-sliding scale that measures wealth or poverty and our attitude of the day. We were told you get out what you put in...and if you don't put any in YOU DON'T get any out. Economists and bleeding hearts should call the ball: they want to claim a democratic process for promoting socialism. Everyone has the 'right" to be all they can be and treated failrly...not "made equal" by economic distribution.

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free_ur_mind 1 year, 11 months ago

@ Cartman and Sister Ruby, you're the ones that need to be educated. Cartman, when you talk about travels, I hope you're not referring to Central America, South America and Africa. I'm talking about rich countries that have the means to care for the poor. Here's the facts and it shows that the US is below average in social spending: http://www.oecd-ilibrary.org/docserver/download/190400011e1t003.pdf?expires=1357349862&id=id&accname=freeContent&checksum=3D732668113601084A72F056E4518687

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Sister_Ruby 1 year, 11 months ago

You must include voluntary charitable giving to get a full comparison. Americans are the most generous people in the world. Period.

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RedEric 1 year, 11 months ago

10 million government retirees receive more money than 54 million social security retirees. The only poor people in this country are working poor and old people on SS. Welfare recipients receive over $60,000 per year in money and benefits. The average working wage in this country is around $50,000 per year. These morons who are somehow able to speak and write don't acknowledge this because it isn't mentioned on the John Stewart show.

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RedEric 1 year, 11 months ago

The average life span IS higher now than it was in the 1930s. There were a lot of farm and industrial accidents then that had a negative effect on average lifespan. Considering only people who reach 65, we now live 2 years longer. This is another example of a liberal semi truth that is effectively a lie. They use this lie to justify decreasing SS payments. I am disappointed that Aaron does not know the real truth.

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free_ur_mind 1 year, 11 months ago

@ RedEric, do you lack basic reading comprehension skills. It's CONSERVATIVES, not liberals, that are trying to decrease our SS payments. Romney wanted to raise the retirement age, not Obama. Boehner and Republicans want to lower SS payments, while Democrats are trying to maintain our earned benefits.

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RedEric 1 year, 11 months ago

Retirees on social security had their raises eaten by increased Medicare and supplemental increases. Our buying power is lower than last year. Democrats might wish to maintain our earned benefits, but Obama does not. He said he intends to keep SS raises below inflation, so people who paid in their whole working lives will have to learn to live on decreasing income. Romney wanted to change SS. Everyone age 55 and above would see no change. Another example of a liberal half truth.

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free_ur_mind 1 year, 11 months ago

How convenient for you to say that it was Obama's idea to keep SS raises below inflation. However, check your history. Republicans, since the Clinton era, have tried to do that and Democrats have fought it tooth-by-tooth. Own up to it. It's Boehner and the Republicans that want chained CPI and not Obama.

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Sister_Ruby 1 year, 11 months ago

@free_ur_mind (you're mind is so free it fell out of your head it seems)

Just riddle me this, Einstein: where are you going to get the money? We borrow FORTY CENTS OF EVERY DOLLAR WE PISS AWAY NOW! Where will all this free money come from? And don't forget the wise man who once said "When you pay people to be poor... there are going to be a lot more poor people........"

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free_ur_mind 1 year, 11 months ago

It's "your", not "you're", so get your English together when insulting others. As for spending, there are choices. We can choose the Republican route that wants to lower benefits for poor and MIDDLE class Americans or we can choose the Obama way that wants the rich to pay their fair share. First, we can cut wasteful defense spending of planes and ships that even the Pentagon realizes they don't need. We can stop wasteful giveaways to rich people in the form of tax credits and subsidies. We can stop giving away farm subsidies to highly profitable agribusinesses.

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Sister_Ruby 1 year, 11 months ago

You are laboring under the moronic assumption that letting people keep the income they earn is somehow a government giveaway. It's not the government's money, it's my money if I earn it. Our problem is TOO MUCH SPENDING BY THE GOVERNMENT, TOO MUCH PISSING AWAY OF MONEY THAT IS NOT THEIRS TO SPEND AND WHICH THE GOVERNMENT IS NOT ENTITLED TO IN THE FIRST PLACE.

And believe me I know how to spell and to conjugate. It was a mistake made in haste. The same can't be said of many posters here.

Taking more from the so-called rich would run the government for a couple of weeks. But you and I both know that more money from whatever source to the government would simply mean an increase in spending by said government which would in turn require more borrowing and we would get nowhere. IF ANYBODY BELIEVES THAT DEMOCRATS ARE WILLING TO REDUCE SPENDING (i.e. PISSING AWAY 140+ PERCENT OF WHAT THE GOVERNMENT TAKES IN) ESPECIALLY IF IT REDUCES THE MONEY BEING SENT TO "THE POOR" TO BUY THEIR LIFETIME VOTE, THEY ARE A MORON.

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free_ur_mind 1 year, 11 months ago

Farm subsidies are not income earned, but rather taxpayers lining up the pockets of already rich agribusinesses. You must not know what tax credits and deductions are, but it's a form of crony capitalism where rich people can lower their tax liabilities in order to direct funding to favored sectors. That just increases the burden on the middle class, but go ahead and be deceived by traditional Republicans.

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Sister_Ruby 1 year, 11 months ago

I take credits and deductions every year, as anyone with a mortgage and charitable contributions should. It's my money, not the government's. There's the underlying fallacy of your liberal (socialist) argument.

Keep on reminding us how free ur mind is Mr. Socialist.

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free_ur_mind 1 year, 11 months ago

You're confusing income with investment. Of course, I'm the moronic one, while you know it all.... smh

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Sister_Ruby 1 year, 11 months ago

It's my money. SMW - Shaking My Wallet

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agirl_25 1 year, 11 months ago

Hiya free_ur_mind.....I guess I am an anomoly in here...I am content with things the way they are... worked hard for what we have and enjoy retirement....no complaints about the fiscal cliff...never felt I would fall off it...always felt it was a bunch of bovine scat that Congress was using to get the populace all worked up over to cover up their ineptness, as they uusally do and would come up with some miracle cure at the last minute. As far as rich countries taking care of their poor..that is sort of a conundrum...doncha think...for I have traveled thru most of Europe and the rich countries have no slums and very few poor people...with the tiny principality of Liechtenstein being the richest and Norway coming along at second with enough money is reserve from oil to stop drilling tomorrow but still to be able to provide for their populace for 75 years. ( I learned that at a conference in Oslo.) Keep up the arguing...my only regret is that we have buffons running our government and not people who are in it for the GOOD of the people....but only those who want to line their own pockets.

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