Thursday, August 11, 2011

Will the Super-Congress Kill Your Benefits?

If you haven't been hiding under a rock, you know that Congress reached a budget/debt deal last week that was signed into law by the President. Well, they sort of reached a sort of deal.

They increased the debt limit by more than $2 trillion and they cut spending by about $2.5 trillion. Except that they didn't. You see roughly $1.5 trillion of that savings is yet to be decided. The dreaded Super-Congress (three each of Senate Democrats, House Republicans, Senate Republicans, and House Democrats) is charged with coming up with a plan to find that other piddling amount. If they can't do it by November 23 of this year, then the nuclear option kicks in (stop your wishful thinking, nothing inside the Beltway will be nuked). In oversimplified terms,  the nuclear option will make pre-specified cuts adding to roughly $1.5 trillion. And, those pre-specified cuts will come to a large extent to each party's sacred cows -- defense spending and entitlement spending.

So, somewhere between November 22 and November 23, the Super-Congress will miraculously reach agreement. Remember, you heard it here first.

Thus far, we know the names of 9 of the 12 members of the Super-Congress (the 3 House Democrats are yet to be named). Perhaps more important, we know the names of the co-Chairs: Senator Patty Murray (D-WA) and Representative Jeb Hensarling (R-TX). To say that there is common ground between these two is roughly akin to saying that Kennedy and Kruschev were best friends. I'll let you guess on the details.

So, why am I writing about this in a blog that is usually devoted to benefits and compensation? I'll get to that soon, but I am glad that you asked.

As the Super-Congress gets named, various members have deigned to give interviews to the media. The Democrats say that entitlements need to stay as they are and that the wealthy need to pay more taxes. The Republicans say that the defense budget is critical and that new taxes are not on the table.

Where they agree, though, is that we have too many tax loopholes. Their may not be agreement on what constitutes a loophole, but you can't have everything.

I don't recall where, but I read somewhere that the three largest tax expenditures are these (in no particular order):

  • The mortgage interest deduction
  • The employer deduction for health benefits for employees
  • The combination of the employer deduction for retirement benefits for employees and the tax-free build-up of assets in trusts for qualified retirement plans
The first one, in my opinion, is a goner. Not in its entirety, but above some limit, there will be no tax deduction for mortgage interest. And, there will be no deduction for interest on any but a primary residence. Again, in my opinion, as this has been floated before without tremendous resistance, this seems obvious.

The other two, they are in serious trouble. And, if either or both suffer, so will you, the American worker.

Let's use an example to illustrate. Suppose your cash compensation is $100,000 per year. Let's estimate then that the total cost of your employment to your employer (before tax deductions) is $140,000 (this number may be high or low, but it's not a bad representation). Presently, your employer gets a tax deduction for virtually every dollar of that. So, assuming a 35% marginal tax rate, that means that after $49,000 in tax deductions, you cost your employer $91,000 per year.

Are you with me?

Again, in very round figures, suppose your health and retirement benefits cost your employer $15,000 per year (before the effects of tax deductions). At 35%, the deductions for that will be $5,250. So, eliminating these deductions will cost your employer $5,250 (with respect to your employment). Do you think you are going to continue to get the same benefits? Think again. For most of you, the answer is no, or perhaps it's NO!

Your employer is going to cut its contribution to your benefits to save that $5,250. So, the value of your employment package will decrease by about $5,000 on a baseline of $140,000. That's a little more than 3.5%. Oh, you don't think that sounds like much? In this economy, how long does it take you to get a 3,5% pay increase? For many of you, that could be two or three years.

So, how can this happen. Well, the Republicans will swear up and down that this is not a tax increase and they will tell you that they have held to their pledge to not increase taxes. The Democrats will fight hard to ensure that this change does not apply to the lowest paid workers and that its effect progressively increases as a worker's pay increases, probably phasing in completely somewhere around $150,000 of cash compensation.

And, the chosen twelve will shake hands and know that they have saved their sacred cows, and each side will go back to its constituency and say that it has won. Don't believe them for a second. The losers will be you and me. The losers will be the American workers who "get up every morning to the alarm clock's warning, take the 8:15 into the city" (I know, Bachman-Turner Overdrive was a Canadian band, but the lyrics fit).

Remember, you read it here first. 

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