Co-authored with Joshua Rauh
The budgets of many cities and states will soon be disrupted by new accounting rules for retiree health plans. Local governments pay most of the health-insurance premiums for their retired employees—for example, from age 50 until Medicare at age 65, and sometimes for life. Nationwide, the total unfunded obligations of these plans are close to $1 trillion, according to a comprehensive recent study in the Journal of Health Economics.
The accounting rules, adopted in June by the Government Accounting Standards Board (GASB), require local governments for the first time to report their obligations for retiree health care as liabilities on their balance sheets. Local governments must also use a reasonable and uniform methodology to calculate the present value of these liabilities. These are both steps forward, enhancing transparency and accountability.
The new rules further provide an incentive for local governments to establish a dedicated trust with assets invested today to help pay health-care benefits in the future. But here the GASB takes one step backward, by allowing local governments to make overly optimistic assumptions, including excessive returns for the trust.
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Tax experts from around the world gathered two weeks ago in Washington DC to push forward a Euro-led project for the prevention of BEPS — base erosion and profit shifting. This project is aimed at getting multinational companies to locate facilities and jobs in real countries, instead of post office boxes in tax havens.
The corporate tax rates in Europe are already 10% to 15% lower than the 35% rate in the U.S. If Europe moves forward with BEPS, that will put more pressure on US large companies to move people and plants abroad — unless Congress substantially reduces the U.S. corporate tax rate.
While almost everyone wants to reduce the U.S. corporate tax from 35% to 25%, almost no industry is willing to give up its current tax preferences to achieve this rate reduction on a revenue neutral basis. This means that the national debt would not rise because revenues lost by rate reduction would be offset by revenues gained by restricting existing tax preferences.
Therefore, Congress should finance a substantial lowering of the U.S. corporate tax rate largely by reducing the tremendous bias in the current tax code for debt and against equity. Most importantly, companies may deduct interest paid on all their debt, but may not deduct any dividends paid on their shares. As a result, the effective tax rate on corporate debt is negative 6.4%, as compared to positive 35% for corporate equity, according to the Congressional Budget Office.
Read the rest at realclearmarkets.com…
The U.S. Treasury recently amended its rules to encourage workers with retirement plans to purchase life annuities within these plans. Life annuities generally make fixed monthly payments from the date of retirement until the death of the purchaser.
For years, many economists have recommended that workers use all their retirement savings to buy life annuities in order to avoid outliving their savings. Nevertheless, few workers want to put their whole retirement nest egg into a life annuity.
Why? In one word, optionality. Retired workers want to have substantial resources available to deal with medical emergencies or unexpected disasters during their retirement years. Alternatively, retired workers want to bequeath any remaining savings at death to their families, friends and favorite charities. However, if workers buy a life annuity, all payments typically end at death — even if it occurs shortly after retirement.
To achieve their multiple retirement goals, workers should use PART of their assets within their retirement plans to buy a deferred life annuity that starts paying out at age 75,80 or 85. Then they would have the rest of their retirement assets available to deal with medical emergencies or to make bequests at their death.
Read the rest at realclearmarkets.com…
As I wrote last week, provisions built into current law threaten to take $500 billion out of the U.S. economy in 2013. While Congress cannot allow this “fiscal cliff” to occur as scheduled, it should use this “crisis” as an opportunity to pass a smarter package of spending cuts and revenue increases that will gradually put us on the road to fiscal discipline.
The Social Security Trustees released their latest report yesterday, which showed that the finances of the system are deteriorating. In particular, The Trustees moved up the date when Social Security will become insolvent by three years, from 2036 to 2033. In 2033, absent any reform, the Social Security benefits of all recipients will be reduced across the board by 25%.
With Newt Gingrich vying for front-runner status in the Republican presidential primaries, his positions on important public policies such as Social Security and income taxes deserve scrutiny. In both cases, Gingrich adopts familiar Republican concepts — but then undermines their key objectives.
Read the rest at the Washington Post