by Linda Blackford
Four years after Kansas began its “real live experiment” cutting taxes for wealthy and powerful interests, the damaging consequences – including a deeply underfunded education system, college tuition hikes, crumbling roads and bridges and three credit rating downgrades – provide a timely warning for Kentucky: this is not a path we should go down.
And yet the hints our leaders have provided about the kind of tax changes they might push for, as well as outside influence from defenders of trickle-down economics, raise concerns there could be attempts to follow the example of states like Kansas, North Carolina and Louisiana. Ideas like lowering income tax rates for high earners and corporations, providing new tax breaks for profitable industries and repealing the inheritance tax would leave us with an even more upside-down tax system (one that asks the least of those with the most and vice versa) and with less to invest in the things we all need to thrive.
Kansas’ March to Zero
In 2012, Kansas lawmakers passed a tax overhaul bill that, along with other changes since then, has sharply reduced the state’s income tax revenue. The “march to zero” – referring to Governor Brownback’s plan to phase the income tax all the way out – started by collapsing and reducing the state’s 3 income tax rates at 3.5 percent, 6.25 percent and 6.45 percent into 2 rates at 3 percent and 4.9 percent. Legislation in 2013 phased in additional cuts over the next 5 years to 2.3 percent and 3.9 percent by 2018, with a new formula set to go into effect in 2019 which will reduce rates further as other revenue grows.
Another component of the 2012 tax overhaul was an exemption for business income that individuals receive from “pass-through” entities. Because existing firms could restructure to take advantage of this loophole, in 2013 there was a surge in the number of registered pass-through entities in Kansas – 140,000 more than were predicted. In light of Kansas’ lackluster economic performance and revenue growth since 2012, it seems that rather than stimulating entrepreneurial activity, the pass-through exemption has encouraged tax avoidance.
As a result of these cuts, revenue from income taxes in Kansas fell by $700 million from $2.9 billion in 2012 to $2.2 billion in 2014 – or by 12 percent of their $6 billion state budget. In a series of budget crises since then, receipts have continued to fall short of forecasts, leading to budget cuts and fund sweeps, as well as tax increases on other revenue sources. In 2013 the state raised the sales tax from 5.7 percent to 6.15 percent and then again in 2015 up to 6.5 percent. The second hike was part of a package that also added 50 cents to the cigarette tax, regressive tax changes estimated to generate $176 million and $41 million, respectively, toward a $400 million budget gap. Overall, taxes on Kansan families and individuals in the lowest 20 percent of incomes have gone up by $197, while the top 1 percent has received a $24,632 tax cut.
Though trickle-down economics would suggest such cuts at the top eventually pay for themselves by stimulating the economy, Kansas is doing poorly. According to data from the Bureau of Economic Analysis, since the cuts went into effect in 2013, total nonfarm employment in Kansas has grown by 2.4 percent – about a third of the US average (7.1 percent) and less than half of the growth in Kentucky (5.2 percent). Likewise, the GDP in Kansas has grown by 4.6 percent (Q1 2013 – Q1 2016), nationally by 11 percent and in Kentucky by 8.6 percent.
In addition, an economic index from the Federal Reserve Bank of Philadelphia – which includes non-farm employment and wage and salary disbursements, for instance – put Kansas in very last place among states for its performance over the previous three months. The state also has the dubious distinction of being one of five states with the biggest decreases in per-pupil funding since the Great Recession. Compounding the debt Kansas’ children are inheriting, three credit down-grades make it more expensive for the state to borrow and invest in their future.
Drawing the Right Lessons from Kansas’ Failed Experiment
Shifts away from income taxes don’t pay for themselves, and there are common-sense reasons why:
- Lowering income taxes is not the way to attract people to Kentucky. Data show that few people migrate anyway, and when they do, it’s for other factors like a job, family or climate – not taxes. This is especially true for wealthy people.
- Few individuals – less than three percent – employ others, meaning individual income tax cuts are poorly targeted to potential job creators.
- Since income tax cuts benefit the wealthiest the most – people who are less likely to spend extra money than low-and middle-income people who spend additional income meeting basic needs – income tax cuts are also poorly targeted to stimulate economic demand.
- Shifting away from income taxes means increasing tax responsibility from low- and middle-income families. Replacing just one penny of our income tax rate with a penny more on the sales tax rate would increase the average tax payment by families in the lowest 20 percent by $59 and the middle 20 percent by $61, while providing a $5,396 tax cut to the top 1 percent.
- And since state corporate income taxes are a very small portion of business expenses, they are not a big factor in where businesses decide to locate or how many people they decide to employ.
Another big problem with tax cuts for the wealthy is that, in an economy where incomes are soaring for those at the top while everyone else is left behind, shifting from income to consumption taxes is a sure recipe for sluggish revenue growth – and even higher sales tax rates down the road.
The lesson from Kansas is that tax cuts for the wealthy are not the path to prosperity. Instead, they undermine the foundations of a stronger state.
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State legislation enacted in recent decades has limited workers’ compensation benefits in Kentucky. As a result, workers’ compensation insurers have benefited, which has translated into both income for the industry and lower premiums for employers. Strong profitability for the industry and rising fund balances suggest significant financial health for many insurers providing workers’ compensation coverage.
Commercial insurers are earning consistent profit
The commercial workers’ compensation insurance industry makes up about three-fourths of Kentucky’s workers’ compensation market 1. The Kentucky Employers Mutual Insurance Authority (KEMI), the quasi-public workers’ compensation insurance provider, has about 31 percent of the commercial market. Private for-profit insurers make up the balance, and no individual for-profit insurer currently has more than 3.71 percent of the commercial market 2.
As workers’ compensation laws have changed in Kentucky, the direct losses paid for injured workers have declined. Losses in the commercial market decreased 22 percent in Kentucky between 2005 and 2010, from $510 million to $400 million. The amount of direct premiums earned also declined by 22 percent over that period as competition forced insurers to share some of the benefits with employers 3.
A favorable environment for workers’ compensation insurers in recent years has translated into growing net assets for the biggest insurer, KEMI. KEMI’s net income averaged $11.2 million a year between 2004 and 2015. KEMI in turn built up a policyholder surplus that totaled $196 million in 2015, an amount more than its total underwriting expenses of $171 million that year and an increase in its surplus of 159 percent since 2005 (see Figure 1).
Source: Analysis of KEMI annual audited financial statements
In part because of public pressure in response to its large fund balance, KEMI paid a $30.8 million dividend to policyholders in 2010, and paid additional dividends of $4.7 million in 2012, $6.4 million in 2013 and $3.4 million in 2014. Still, its surplus has continued to rise most years 4.
Overall, the commercial market has demonstrated consistent profitability in recent years. The National Association of Insurance Commissioners’ profitability report indicates profits as a percent of premiums earned of between 13 and 14 percent for 2006-2008 and between 6 and 7 percent in 2009 and 2010 (NAIC reports a profitability rate of 0.2 percent for 2010, but that number is artificially reduced because of KEMI’s policyholder dividend, which was equal to 6.5 percent of premiums earned that year. Taking out the policyholder dividend, profits were 6.7 percent of premiums earned in 2010). In 2011, profitability rose to 14 percent and it was 19 percent in 2012, 16 percent in 2013 and 10 percent in 2014 (See Figure 2) 5.
Source: Analysis of National Association of Insurance Commissioners Report on Profitability by Line by State. Graph subtracts the impact of KEMI’s policyholder dividend for 2010.
The growing net assets of the industry as a whole can be seen also in the premiums earned as a percent of net worth. In 2014, premiums were only 26.2 percent of the net worth of Kentucky workers compensation insurers, a lower ratio than all but three other states — indicating that net worth is substantial 6.
Self-insurance groups also have substantial net assets
The financial condition of the self-insured groups provides another window into industry trends. The six self-insured groups make up one-fourth of the Kentucky workers’ compensation market (excluding individual self-insureds, as above) 7. As with KEMI, the improved workers’ compensation environment for insurers has translated into growth in net assets for these funds. The aggregate fund balance of the six groups has grown from $38 million in 2005 to $132 million in 2015 (see Figure 3) 8.
Source: Analysis of Department of Insurance reports
An improved underwriting environment for the workers’ compensation insurance industry has led to consistent profitability for the industry, reductions in premiums for employers and evidence of the accumulation of net assets for the workers’ compensation insurance industry.
- This estimate does not include workers’ compensation written on a surplus lines basis or through individual self-insureds, amounts for which are not readily available. Department of Insurance, Status Report on Workers’ Compensation Self-Insured Groups, December 15, 2015. ↩
- Market share within the commercial segment is indicated in the National Association of Insurance Commissioners market share report as excerpted in the annual status reports on workers’ compensation self-insured groups. The market shares reported in the most recent report are as follows:
KEMI 30.78% Zurich American 3.71% American Zurich 3.16% Bridgefield Casualty 3.05% LMS 3.00% BrickStreet Mutual 2.61% Praetorian 1.98% Continental 1.72% New Hampshire 1.67% Travelers 1.50% All Others 46.82%
- National Association of Insurance Commissioners market share report. ↩
- Annual audited financial statements of the Kentucky Employers’ Mutual Insurance Authority, 1995-2015. ↩
- National Association of Insurance Commissioners, “Report on Profitability by Line by State.” ↩
- National Association of Insurance Commissioners, “Report on Profitability by Line by State.” ↩
- The current self-insured groups are KESA, Kentucky Association of Counties, Kentucky Associated General Contractors, Kentucky League of Cities, Kentucky Retail Federation, and Forest Industry of Kentucky. ↩
- Department of Insurance, Status Reports on Workers’ Compensation Self-Insured Groups. ↩
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Since 1906, Kentucky has relied on the inheritance tax to help pay for the good schools, infrastructure and other investments that strengthen the Commonwealth. A repeal of the inheritance tax would be a $51 million tax cut tilted to the very wealthy that would weaken those investments and make economic progress harder in the state.
Tax is already limited by previous legislation
Kentucky’s inheritance tax applies to few inheritances because of exemptions put into the tax by the General Assembly. In 1995, the legislature began phasing it out for children, grandchildren, parents and siblings so that by 1998, these beneficiaries became totally exempt from the tax (spouses were exempted in 1985).
Today, the tax only applies to more distant relatives and beneficiaries. It’s also graduated so that higher taxes are paid on larger gifts and more modest taxes apply to small gifts. For example, a gift of $10,000 is taxed at 3.6 percent while a gift of $100,000 is taxed at 8.5 percent (for what are called class B beneficiaries). To make it easier to pay the tax, those who owe more than $5,000 in inheritance taxes can pay the tax over a 10 year period 1. Funeral expenses, costs associated with representation, debts, property taxes and mortgages are deducted to arrive at the taxable amount 2. Furthermore, to reduce the tax on inherited farms, and as long as the inheritor maintains “agricultural or horticultural use” of the land for five years, such property is assessed at its much lower agricultural value rather than market value 3.
Instead of helping family farms, as is often claimed by opponents of the inheritance tax, repeal would further a pattern in which Kentucky is gradually eroding its taxes on wealthy individuals. In addition to expanded exemptions to the inheritance tax, the state let its estate tax expire in 2005 as part of federal estate tax cuts 4. The estate tax only applies to those with extreme wealth, and 11 states have taken action to protect the tax after the federal changes. But in Kentucky, estate and inheritance tax revenues have fallen 55 percent since 2001, once inflation is taken into account. If these taxes were the same share of state revenue in 2016 they were in 1995 (see graph), Kentucky would have $108 million more for its schools and other foundational investments. To put that amount in perspective, it’s about how much the state spends on preschool and school textbooks combined.
Repeal would benefit the wealthiest at the cost of vast majority
According to data from the Survey of Consumer Finances, the wealthiest 5 percent of American households received about half of the total value of inheritances in 2013, while just 7 percent of inheritances went to the bottom 50 percent of households. The average inheritance was $1.1 million for the top 5 percent but only $68,000 for the few in the bottom half of households who received any inheritance 5.
Source: KCEP analysis of Office of the State Budget Director data.
Those who would benefit most from inheritance tax repeal are the people whose incomes and wealth — and therefore ability to pay taxes — have grown the most in recent years. Over the last 35 years, the top 1 percent of income earners in Kentucky (those with average incomes of $620,000) saw their real incomes grow 60 percent while everyone else’s fell 2.6 percent 6.
Furthermore, the inheritance tax helps ensure fairer taxation of wealth that otherwise might go untaxed during a high-income individual’s lifetime. For households at the top, wealth is primarily in the form of direct ownership of financial assets like stocks and bonds 7. In the case of assets like stocks or real estate, income tax on the value of the asset applies only when an owner “realizes” a gain, usually by selling it. But if an individual holds onto such an asset until they die, that capital gain is never taxed. Inheritances taxes are a backstop to help address that loophole.
And since inheritance tax money goes into the General Fund to help pay for investments like Kentucky’s public schools, universities and more, an inheritance tax cut for the wealthy would harm the very systems that strengthen economic opportunities for everyone.
Repeal of the inheritance tax would also make Kentucky’s already upside-down tax system even more unbalanced. Currently, low to middle-income Kentucky families pay between 9 percent and 10.8 percent of their income in state and local taxes, while the top 1 percent pay only 6 percent 8.
Revenue needed for investments that work
The inheritance tax is a modest but critical source of revenue for Kentucky that repeal would eliminate entirely. In the year ending June 2016, the inheritance tax brought in $51 million in revenue.
Those who support eliminating inheritance and estate taxes make the unsubstantiated claim that these taxes cause residents to leave states that have them. But research fails to find a connection between where the elderly choose to live and state inheritance and other taxes. While many states have changed these taxes in recent decades, elderly migration patterns have not changed in response 9. More broadly, it is a myth that states should be worried about “tax flight:” few Americans move from one state to another each year and among those who do the most common reasons are for a job, family considerations, weather and lower housing costs — not taxes 10. Rather than benefitting the economy and therefore the budget, repealing the inheritance tax would result in a big loss of tax revenue to the state.
The lack of sound policy purpose for eliminating the inheritance tax is why it was missing from the 54 recommendations of the Blue Ribbon Commission on Tax Reform in 2012. None of Kentucky’s prior tax studies and commissions has recommended eliminating the inheritance tax. In addition to generating revenue and increasing the fairness of the tax system, inheritance and estate taxes encourage heirs to work and incentivize contributions to charities 11.
With the need to invest additional resources in education, health, human services and other state priorities and to pay down our large pension liabilities, Kentucky has more important budget priorities than a tax cut for wealthy individuals whose incomes have soared in recent years.
- Kentucky Department of Revenue, A Guide to Kentucky Inheritance and Estate Taxes,” http://revenue.ky.gov/NR/rdonlyres/6D844DC9-B300-4EE7-963E-DB141FC0AED6/0/guide_2012.pdf. ↩
- KRS 140.210, http://www.lrc.ky.gov/statutes/statute.aspx?id=29001. ↩
- KRS 141.300-360, http://www.lrc.ky.gov/statutes/chapter.aspx?id=37672. ↩
- Anna Baumann, “Reinstating Kentucky’s Tax on Extreme Wealth a Part of Making State Taxes Fair and Adequate,” Kentucky Center for Economic Policy, September 24, 2015, http://kypolicy.org/reinstating-kentuckys-tax-on-extreme-wealth-a-part-of-making-state-taxes-fair-and-adequate-2/. ↩
- Janet Y. Yellen, “Perspectives on Inequality and Opportunity from the Survey of Consumer Finances,” Conference on Economic Opportunity and Inequality, Federal Reserve Bank of Boston, October 17, 2014, http://www.federalreserve.gov/newsevents/speech/yellen20141017a.pdf. ↩
- Estelle Sommeiller, Mark Price and Ellis Wazeter, “Income Inequality in the U. S. by State, Metropolitan Area, and County,” Economic Policy Institute, June 16, 2016, http://www.epi.org/publication/income-inequality-in-the-us/. ↩
- Emmanuel Saez and Gabriel Zucman, “Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data,” October 2015, forthcoming Quarterly Journal of Economics, http://gabriel-zucman.eu/files/SaezZucman2016QJE.pdf. Appendix, http://gabriel-zucman.eu/files/SaezZucman2016QJEAppendix.pdf. ↩
- Institute on Taxation and Economic Policy, “Who Pays? A Distributional Analysis of the Tax Systems in All Fifty States,” 5th Edition, January 2015, http://www.itep.org/whopays/. ↩
- Karen Smith Conway and Jonathan C. Rork, “No Country for Old Men (or Women)—Do State Tax Policies Drive Away the Elderly?” National Tax Journal, June 2012, http://www.ntanet.org/NTJ/65/2/ntj-v65n02p313-56-country-for-old-men.pdf. Conway and Rork, “State “Death” Taxes and Elderly Migration—The Chicken or the Egg?” National Tax Journal, March 2006, http://www.ntanet.org/NTJ/59/1/ntj-v59n01p97-128-state-death-taxes-elderly.html. ↩
- Robert Tannenwald, et al., “Tax Flight is a Myth,” Center on Budget and Policy Priorities, August 5, 2011, http://www.cbpp.org/research/tax-flight-is-a-myth?fa=view&id=3556. ↩
- David Joulfaian, “Inheritance and Saving,” NBER Working Paper 12569, October 2006, http://www.nber.org/papers/w12569.pdf. Aviva Aron-Dine, “Estate Tax Repeal—or Slashing the Estate Tax Rate—Would Substantially Reduce Charitable Giving,” Center on Budget and Policy Priorities, June 7, 2006, http://www.cbpp.org/research/estate-tax-repeal-or-slashing-the-estate-tax-rate-would-substantially-reduce-charitable. ↩
Tuesday’s election means total Republican control of state government with the party gaining a majority in the House for the first time in 95 years. Now the governor and legislative leaders say tax reform is among their issue priorities, which they hope to accomplish between now and the end of the 2018 session.
But what those leaders are talking about so far is not tax reform at all, but more tax breaks and giveaways to powerful interests — holes in the tax code that real reform would reduce. Far from helping our budget and economy, the kind of changes being discussed would sink us deeper into debt and diminish the foundation of good schools, health, infrastructure and more we need to prosper.
In interviews with media outlets over the last few days, the governor and top leaders have discussed shifting away from income taxes toward sales taxes, getting rid of the inheritance tax and the tax on business inventory, and creating more tax breaks for corporate special interests – all of which are designed to benefit those at the top. Though we haven’t yet seen a detailed plan, these are proposals they’ve floated in the past.
And they’re right out of the playbook states like Kansas and North Carolina have implemented recently to disastrous result.
In 2012, Kansas enacted what their governor called a “real live experiment” in slashing income and business taxes that he claimed would be “a shot of adrenaline in the heart of the Kansas economy.” Instead, revenues have plummeted leading to huge cuts to schools and other services and two downgrades of the state’s bond rating. Far from flourishing, Kansas’ economy and employment are growing less than half as fast as U. S. growth. And all that for a tax cut of $21,000 on average for the richest one percent.
North Carolina tried the same approach in 2013 with the same devastating consequences — a $2 billion hit on the state budget over the next five years meaning fewer kids in preschool, textbook shortages in classrooms and huge hikes in community college tuition. And North Carolina also gave a big tax cut to the wealthy while raising taxes on the poor and middle class.
These plans are backed with a promise that the growth fairy will reward the state with jobs as companies and entrepreneurs flock to set up shop. But that never materializes because state taxes don’t play a significant role in where people and businesses locate and grow, as research shows. Instead, the keys to job growth are the education, infrastructure and quality of life factors that are undermined when tax breaks drain the revenue stream.
A Kentucky plan has been in the works behind closed doors for months, with the governor receiving advice from Art Laffer, notorious advocate of failed trickle-down economics and architect of the Kansas plan. As The Courier-Journal recently reported, Laffer and his co-authors and allies donated over $160,000 to House races.
We can’t afford to go down Laffer’s yellow brick road. The public investments Kentucky needs to build an economy that works for everyone have been eroded already by the Great Recession and the failure of the legislature to clean up the tax code. The problem has been made worse by skipping regular payments to public employee pensions.
A tax plan that further weakens our budget through more giveaways to the powerful would leave our students, families and communities behind and create an even bigger mess we’d be cleaning up far into the future.
Last week Kentucky’s Public Advocate Ed Monahan testified to the Interim Joint Committee on Judiciary that the state needs to reform its Persistent Felony Offender (PFO) laws. This is also an issue under consideration by the state’s Criminal Justice Policy Assessment Council. So what is PFO and what changes are needed?
Overview of PFO
Kentucky’s PFO law provides prosecutors with the option of enhancing a felony offender’s sentence if he/she has previously been convicted of any felony crime (if the sentence has been completed within the past five years, the offender is on probation, parole, etc. from the felony conviction or if he/she is in custody or has escaped from custody). PFO 2nd degree applies to felony offenders with one previous felony and PFO 1st degree applies to those with at least two previous felonies. This means, for instance:
- With a PFO 2nd Degree sentence enhancement (which applies to offenders with one previous felony) a Class D felony with a 1 to 5 year sentence becomes a Class C felony with a 5 to 10 year sentence; a Class B felony with a 10 to 20 year sentence becomes a Class A felony with a sentence of 20 years to life in prison.
- With PFO 1st degree (which applies to offenders with at least two felonies) a Class D felony charge becomes a Class B with a sentence of 10 to 20 years. A Class C felony charge becomes a Class B with no parole eligibility for 10 years.
The PFO enhancement must be applied if the prosecutor pursues it.
According to Kentucky’s Department of Public Advocacy, Department of Corrections data show:
- 3,738 inmates in Kentucky are serving PFO sentences, 16 percent of inmate population.
- Average PFO sentence is 23 years.
- Average non-PFO sentence is 11 years.
Problems with PFO Law in Kentucky
Among the most important criticisms of Kentucky’s PFO law is that it is overly broad — one of the broadest in the nation — resulting in too many Kentuckians who have committed non-violent offenses, serving very long sentences. These sentence enhancements have also been one of the greatest contributors to the state’s too-large and growing inmate population, which means that a criminal justice reform package needs to include changes to the PFO in order to have a significant impact on reducing the prison population and its associated costs.
As described by former UK professor Robert Lawson, Kentucky’s PFO law:
“Clearly heads the list of tough-on-crime measures that have filled prisons and jails beyond capacity, pushed the state’s corrections budget off the charts, and changed the balance of power over punishment in ways that threaten the basic fairness of the justice system.”
Lawson writes that the overly broad reach of Kentucky’s PFO law “authorizes lengthy prison terms for offenders who pose very little (and oftentimes no) threat to public safety.”
A third of Kentucky’s PFO inmates committed the lowest level felony, a Class D felony, that alone (without a PFO enhancement) would carry with it a 1 to 5 year sentence. The average sentence for these PFO inmates is 12 years.
Actual PFO cases that illustrate some of these issues include:
- A 15 year sentence for stealing an expensive vehicle after prior Class D felonies.
- A 10 year sentence for cutting a hole in a convertible top with intent to steal items in the vehicle.
- A 60 year sentence for trafficking oxycodone and morphine.
According to the Department of Public Advocacy, in 2014 the state spent $65.4 million to incarcerate nearly 2,967 individuals serving PFO-enhanced sentences for non-violent offenses, with the average sentence of these individuals being more than 20 years. By the end of their sentences, the total cost to the state will be more than $1.3 billion.
Proposed Reforms to PFO Law
The Department of Public Advocacy’s recommendations to address some of the issues in Kentucky’s PFO law include:
- Eliminating PFO enhancements for Class D felonies or at least non-violent Class D felonies.
- Eliminating PFO 2nd Degree so that someone who has committed just one prior felony offense isn’t punished for being a “persistent” felon.
- Requiring that a prior felony that makes a felony offender eligible for PFO be serious enough to have resulted in incarceration rather than probation.
- Reforming the PFO enhancement — instead of raising the classification of the offense (i.e., from Class D to Class C) — so that a Class D felony sentence could be enhanced to 3 to 5 years instead of 5 to 10.
- Making PFO enhancement discretionary with the judge or jury; currently it must be applied if the prosecutor pursues it.
Reforming the state’s PFO law would mean fewer non-violent offenders in Kentucky serving long sentences. It would also have a big impact over time in reducing the state’s growing inmate population and associated corrections spending and should be included in the CJPAC’s recommendations.
Social Security helps nearly a million Kentuckians make ends meet, cuts senior poverty dramatically and supports local economies by ensuring more people have money in their pockets to spend, as outlined in a a new report by the Center on Budget and Policy Priorities.
The report shows a total of 936,497 Kentuckians received Social Security benefits last year, 263,000 of whom would have otherwise been in poverty. Social Security doesn’t just benefit seniors, but children dependents as well; in Kentucky 63,882 children benefited from Social Security.
|Age 65 and Older||Age 18-64||Children Under Age 18||Total|
Social Security provides modest cash benefits for retired workers, disabled workers, and aged widows and widowers. For the average American retired beneficiary, monthly income from Social Security is only $1,329; in Kentucky the average benefit is even less: $1,123 1. In fact, typically, Social Security replaces just under 40 percent of a retired worker’s previous earnings – far below other the average in other industrialized nations.
Still, if it weren’t for these benefits, 53.1 percent of Kentucky seniors would live under the poverty line, causing great hardship for them and economic stress in their communities (a 2013 AARP study found that every dollar spent through Social Security generates two dollars in the economy).
Source: Center on Budget and Policy Priorities
Social Security is a vital part of retirement security. Alarmists often claim Social Security won’t be around in the future, but the program can be protected with relatively modest revenue adjustments in the future. A trust fund was created to protect Social Security in 1983 as the baby boomers retire, and even when it is used up in 2034, incoming revenue will still be enough to cover three-fourths of the cost of benefits. Simple changes can be made to protect the program without reducing benefits or creating short-term disruptions, such as:
- Lift or eliminate the cap on taxable wages in the Social Security payroll tax (currently no tax is owed over $118,500 in income). By making sure those at the top don’t get a break, lifting the cap could close anywhere between 25-90 percent of the funding gap (depending on what amount you lift the cap to, or if you eliminate it altogether).
- Expand the kinds of compensation that can count as taxable payroll (like certain kinds of retirement contributions or health insurance contributions made by employers). This could close one third of the funding gap.
- Increase the Social Security payroll tax gradually by 0.6 percentage points over seven years (from 12.4 to 13 percent). This would close one fifth of the solvency gap. If it continued to rise to 14.8 percent, it would close two-thirds of the funding gap.
Social Security is not just a pension, it’s an anti-poverty tool that protects our most vulnerable – seniors, children and the disabled — and it’s an economic engine that boosts local economies when those dollars are spent. Decision makers in Washington should build on this program, and choose policies that ensure its long-term success.
- According to 2015 ACS microdata for US Citizens, in Kentucky, aged over 64. ↩
Wages for Kentucky workers finally grew last year, suggesting both a tightening labor market and pointing to strong recent growth in manufacturing and health care jobs, among other industries. But one year of good news doesn’t change the fact that the gains from economic growth are not being shared equitably with Kentucky workers.
Four decades’ worth of data show a long-term trend in which Kentucky workers’ paychecks are lagging behind growth in productivity, or the value of our economy’s output per hour of work. Between 1979 and 2015, typical Kentucky workers (median production/nonsupervisory workers) saw their real wages grow by 10.1 percent, while productivity grew by more than four times that rate at 41.6 percent.
Source: EPI analysis of unpublished total economy data from Bureau of Labor Statistics, Labor Productivity and costs program; employment data from Bureau of Labor Statistics, Local Area Unemployment Statistics; wage data from the Current Population Survey and compensation data from the Bureau of Economic Analysis, State/National Income and Product Accounts public data series.
Ideally, growth in the value of what we produce and what workers make shouldn’t be all that different: besides providing a fair and consistent share of economy-wide gains to the people whose labor helps grow the economy, pay rising in tandem with productivity supports a higher quality of life for a growing middle class. A larger middle class, in turn, generates more consumer demand. In other words, compensation growing in line with productivity is good for workers, their families and the economy.
(The opposite is true as well: when workers’ paychecks shrink relative to the wealth they’re helping create and the middle class contracts, families’ quality of life goes down and the economy suffers from lagging demand.)
It’s been decades since a virtuous relationship between productivity and compensation gave more Americans a fairer shot at climbing the economic ladder. Since the relationship broke in the early 1970’s nationally, compensation has grown by just 9.2 percent while productivity has gone up by 72.2 percent.
So where is the growth going that once went into typical workers’ paychecks? A rising share goes to owners and shareholders. Furthermore, there is an increasingly unequal distribution for workers across the wage and salary scale, meaning a few at the top are getting a lot more, and everyone else is being left behind. Income data, which capture not just wages and salaries but investment income as well, show that between 1979 and 2013 the top one percent in Kentucky saw their real income grow by 60.1 percent, while for everyone else it dropped 2.6 percent.
Growing inequality of wages and income is not coincidental. Policy action and inaction has decoupled compensation for average workers from productivity through a number of channels: declining unionization; eroding minimum wage and overtime protections (the latter of which will be updated in December); failure to provide workers paid sick and family leave; failure to end discriminatory and abusive employment practices; trade policies that eliminate middle class jobs while benefiting Wall Street interests and the abandonment of policies pursuing full employment, for instance. As the national conversation continues to shift toward building an economy that works for everyone, it will be important that state and federal lawmakers keep these policy issues in mind.