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So far, city employees of bankrupt Detroit have stoically withstood all direct and indirect eliminations of their entitlements and retirement benefits, which was to be expected: after all as per a recent finding, they are merely an unsecured claim in an insolvent entity. However, following the latest shot across the bow from Detroit’s emergency manager Kevyn Orr, which freezes pension plans for all non-uniform employees, said stoicism will likely be acutely tested.
Emergency Manager Kevyn Orr has frozen the city’s pension plans for all non-uniform employees, closing the General Retirement System effective Jan. 1.
Orr’s Dec. 30 action freezes earned pension benefits for employees in the General Retirement System and creates a new 401(k)-style defined contribution retirement plan for existing and future city workers, according to a copy of the emergency manager’s order obtained by The Detroit News.
As part of the order, Orr also eliminated the pension “escalator,” effectively eliminating any future cost-of-living increases for all retired city employees in the General Retirement System.
The emergency manager’s order also closes the pension system’s Annuity Savings Fund, an added benefit for some municipal workers.
City employees who were not already vested in the retirement system “shall not be entitled” to pension benefits, according to the order.
Tina Bassett, a spokeswoman for the General Retirement System, called Orr’s pension freeze “an outrageous and over-zealous action.”
“Again the EM’s office demonstrates a lack of integrity and willingness to make a good faith effort when negotiating with our pension system,” Bassett said in a statement. “Currently we are in the midst of mediations that we thought were going rather well. We can only wonder, why take this action now and for what purpose?”
“The Biggest Redistribution Of Wealth From The Middle Class And Poor To The Rich Ever” Explained… | Zero Hedge
While the growth of inequality in America has been heavily discussed here, it was Stan Druckenmiller’s outbursts (and warnings that “from beginning to end – once markets adjust from these subsidized prices – that the wealth effect of QE will have been negative not positive”) that brought it more broadly into the average American’s mind. QE, taxes, income disparity, and entitlements are four major means by which wealth is transferred from the poor and the middle class to the rich. The following simple chart explains it all…
Via Shane Obata-Marusic ( @sobata416)
A – “the rich hold assets, the poor have debt” is how Citi’s Matt King described the distribution of wealth in the US.
B – QE has resulted in a loss of purchasing power for the US dollar. Faced with this problem, consumers in the middle class are taking on more non-housing debt in order to maintain the same standard of living. In addition, the US government – which continues to run a deficit year after year – continues to accumulate debt. Due to these facts, total debt outstanding – aka credit market instruments for all sectors – is at all time highs. More debt means more interest payments and lower savings rates. These trends do not bode well for the middle class consumer.
C – On the other hand, QE has been great for the rich. QE has inflated the prices of assets such as property, bonds, stocks, and non-home real estate:
Home prices in Detroit are going up despite the fact that the city is bankrupt. The “housing occupancy” table is meant to show what appears to be a higher than average amount of speculative demand i.e. lower than average owner occupancy rates.
The rich have most of the assets which is why the average family income of the top 0.01% increased by 76.2% from 2002 to 2012. In contrast, the average family income of the bottom 90% decreased by 10.7% over that same period.
D – Taxes as a percentage of real disposable income have more than doubled since 1980. This trend has not been kind to the bottom 90%.
Conversely, favourable tax rates on dividends and capital gains have allowed the rich to become wealthier over time.
E – Median household income has been in a downtrend since the late 90s.
In opposition, corporate profits are at all-time highs.
F – The entitlement problem is only going to get worse as more baby boomers leave the work force. Future generations will have to pay for the debt that the old and rich continue to take on.
Growing benefits and sympathetic tax rates on investments enabled the old to increase consumption by 164% from 1960-1991 .
G – In conclusion, QE, taxes, income disparity, and entitlements are contributing to “the biggest redistribution of wealth from the middle class and the poor to the rich ever” If things continue the way they are going, then millennials and future generations will pay the price:
Despite the fact that inequality in the US is nothing new:
Today, it might be worse than it ever has been:
Unless the distribution of wealth in America begins to change for the better, assets will continue to benefit the rich and debt will continue to burden the middle class and the poor.
For an economy that’s largely based on consumption, excess debt only serves to reduce expenditures and to slow economic growth over time.
Quality of life for the median American household is only going to get better if the issues associated monetary policy, entitlements, taxes, and income are addressed and dealt with.
For now, the best thing that you can do is to discuss these issues with your friends, family and colleagues and try to come up with solutions.