Thursday, March 31, 2005

Don't Raise The Minimum Wage (a paper for ENG-118)

A debate rears its ugly head every few years over the minimum wage workers can receive for hourly compensation. Recently, Democrats in Lansing have once again brought this issue to the forefront. Many times a politician will bring this issue up to try and make the community feel bad for unskilled laborers that make minimum wage. The main question is whether raising the minimum wage helps or hurts people. A bill to raise the minimum wage in Michigan is “feel-good” legislation and will, in the long run, hurt Michigan workers far more than it helps.

Minimum wage laws got their start in 1921, in Australia and New Zealand. The idea spread to America in 1930, when the federal government enacted the first law, and the minimum wage was set at $0.25 per hour. Since then, the amount of compensation has been periodically raised to its current rate of $5.15 per hour. Throughout the history of minimum wage, the Democratic Party has shown themselves to be one of minimum wage’s biggest advocates. According to the U.S. Department of Labor, as Bailey (2005) states, only about three percent of Americans earn minimum wage. This translates to about 88,000 people in the state of Michigan, and of these 88,000 people, approximately half are in the age group of 16–24 years (paragraph 10).

Democrats in the Michigan House of Representatives, according to Bailey (2005), have recently proposed a bill that would systematically raise minimum wage from its current rate of $5.15 an hour, to $7.15 per hour over the next two years. The Democrat’s plan is to increase minimum wage by $0.75 in July 2005, and by the same amount again in January 2006. Finally, they propose a $0.50 raise in minimum wage in January 2007, bringing the minimum wage amount to $7.15. After the initial raise to $7.15, the Democrat’s plan is to link minimum wage to the inflationary rates, so legislation will not be needed for future hikes (paragraphs 1, 2 and 3). One of the reasons for this proposed legislation is stated by Michigan State Senate Democratic leader Bob Emerson, “In today’s market, hard working men and women in our state are struggling to make ends meet because their earnings have failed to keep up with inflation,” as is stated in House, Senate (2005).

The federal government currently sets the minimum wage. Proponents of legislation to raise minimum wages cite fifteen other states that have raised wages, over that of what the federal government requires. House Democratic leader, Dianne Byrum, said recently in House, Senate (2005), “We need to do the right thing in Michigan for working families.” She went on to say in the article, “We need to stand up for them by demanding a fair wage for a hard days work so they can support their families” (paragraph 2). According to the Michigan Democratic Caucus’s website, Michigan’s minimum wage has failed to keep up with inflation since the 1960’s, as stated in Raise the wage (2005). The Democratic Caucus has also stated that in today’s dollars, the minimum amount received for hourly wages is not enough to survive on with today’s cost of living (paragraph 1). They believe that today’s amounts would only be enough to survive if the worker was living in the year 1950, according to DeFrank (2005). Democratic leaders believe that this issue is a fairness issue, as House, Senate (2005) states, “. . . and unless someone speaks up for the little guy, the little guy will not be able to survive” (paragraph 2).

With every political issue there are two sides, and the minimum wage issue is no exception. Opponents of raising the minimum wage are just as vocal as the proponents. Those advocating raising the minimum wage mainly claim to side with the people receiving the low pay – the workers. Opponents of this issue tend to side with businesses, and believe that raising minimum wage would do more harm to the state’s economy than good. Opponents also believe that their position also helps the workers, because by helping businesses lower costs, it will in turn allow the business to hire more employees. Therefore, when more people are earning an income and prices are lowered, everyone benefits.

The Michigan Chamber of Commerce, which represents more than 65,000 employers, trade associations, and local chambers of commerce, recently stated in Michigan Chamber (2005) that, “Raising the state’s minimum wage will increase the cost of doing business in Michigan and reduce low skill, low paying jobs” (paragraph 1). The Michigan Chamber of Commerce is not the only Chamber of Commerce that opposes raising the minimum wage in Michigan. Detroit Regional (2004) states that according to a recent Detroit Regional Chamber of Commerce survey, most small businesses in Detroit already pay over the federally mandated minimum wage amount. The survey also shows that the region’s small businesses are planning to expand employment over the next six to twelve months. The CEO of the Detroit Regional Chamber of Commerce, Richard E. Blouse, says, “An increase in the minimum wage rates will hit small businesses disproportionately. ” He also says that, “This will limit, if not eliminate their ability to expand.” Mr. Blouse is also concerned that if this legislation were to be passed, it would increase the number of people seeking unemployment benefits (paragraphs 1, 2 and 3).

Michigan Republicans side with local Chambers of Commerce in opposing the new minimum wage hike proposal. According to Bailey (2005), the Republican House Speaker, Craig Deroche, is concerned that the proposal will destroy any chance of additional jobs being created in Michigan. According to the Associated Press article entitled, “Dems Want To Raise Hourly Minimum Wage to $7.15 Over Two Years,” Mr. Deroche said in a written statement that, “Raising the minimum wage, especially during a job crisis makes it harder to pay workers and even harder to hire new workers.” Later in his statement he wrote, “We already have the second highest unemployment rate in America, and we can’t be No. 1” (paragraphs 7 and 8).

With all of the controversy over raising the minimum wage in Michigan, who is right? The truth is something that has been alluded to by both sides, but not accurately portrayed. The subject of a mandatory minimum wage has been studied and debated by experts ever since its inception. The truth is, in West Michigan the average worker, according to the U.S. Department of Labor, as set forth in Crawford (2005), receives an hourly wage of $12.26, and a blue-collar worker does slightly better, earning an average of $15.83 per hour. Most of the workers earning minimum wage are under 24 years of age, and working in entry-level positions or part-time jobs to help offset the cost of their education (paragraphs 8 and 9). Massanori Hashimoto, Professor and Chairman of the Department of Economics at Ohio State University, estimates that for every 28% increase (which the proposed $2.00 per hour hike in the minimum wage would amount to), 2.7 to 15% of on-the-job training decreases, as stated in Gorman (n.d.). This decrease hinders all entry-level personnel from moving up in a company. Hashimoto also estimates that for every ten percent increase in the minimum wage, businesses lower their teenage employment by one to three percent (paragraphs 9 and 10). This hurts those part-time employees who are trying to offset rising costs of education.

Another truth, as stated in Gorman (n.d.), is that Hashimoto has found that only eight percent of those earning minimum wage in Michigan, are trying to support a family. With the U.S. Department of Labor’s estimate of 88,000 people earning minimum wage in Michigan, the total number of people attempting to support their family while earning minimum wage is only approximately 7,040 people. Proponents believe these 7,040 people would be helped with an increase in minimum wage, but the truth is that the help would only be short-lived. According to Alesse and Guilbualt (2004), Michigan State University found that when wages are increased, more teenagers leave school, displacing lower-skilled workers, making it harder for them to earn enough money to raise a family (paragraph 6).

Yet another truth, according to Henderson (1998), is that Fortune Magazine cited a study published by the National Bureau of Economic Research in Cambridge, Massachusetts, finding that the more the minimum wage is increased, a higher the number of people sink below the poverty line. In this study, it was found that, on average, each time minimum wage was increased, 4.5% more people fall beneath the poverty line (paragraph 4).

Perhaps the most important truth is that when minimum wages are increased, businesses suffer in a multitude of ways. Workers Compensation insurance, unemployment insurance and social security taxes are just some cost increases that are linked to the amount of money each employee makes. It is stated in Alesse and Guilbualt (2004), that for a small business with ten employees, it is estimated that a wage increase of $1.60 per hour will cost the company approximately $30,000 per year. With most small businesses running close margins of profit to stay competitive, this money has to come from somewhere. History has shown that this money comes from three major areas: first, fewer benefits can be paid such as vacations, overtime pay and health insurance; second, the money can come from employee layoffs or less hiring; and third - the solution most commonly used by small businesses - is they can raise the price of the goods they produce (paragraph 8).

The battle about minimum wage hikes will continue, especially among politicians. What must be remembered is that just because something feels good, or evokes an emotion, does not necessarily make it the right thing to do. Politicians, and the people who vote for them, need to remember that feel-good legislation, such as raising the minimum wage, might help initially; however, it will hurt far more people in the long run. If this were not true, the Federal government could set the minimum wage at $10 or even $100 per hour! This would certainly look good in the worker’s first paycheck, but when they arrived at the supermarket, that paycheck would not pay for any more than it did before, perhaps even less.

kenneth 2 Posted by Hello

Wednesday, March 30, 2005

Social Security - Ending the Insecurity (an english 118 paper)

President Bush threw down the gauntlet in his State of the Union Address when he mentioned privatizing a portion of Social Security. President Bush wants Americans to be able to invest four percent of their Social Security taxes into a personal savings account. This proposal, and any others suggesting privatization of Social Security, have come under heavy criticism from many Democrats. Recently, most Democrats have adamantly opposed changes that would allow for privatized accounts. Today, retirees struggle to get by when Social Security is their only income; however, with personal savings accounts, Americans may be able to retire without the worry of poverty, and in fact may even be able to leave a nest egg for their heirs.

After the Great Depression, Social Security was set up to be a safety net to protect older Americans. The Social Security Act was passed by Congress and signed into law by Franklin D. Roosevelt in 1935. According to Fiore (2005), when Social Security was implemented, President Roosevelt considered it only one part of a three-part system he called “a retirement tripod.” President Roosevelt’s three-pronged vision called for personal savings, pensions, and Social Security as a way to save for retirement (paragraph 1). Today, unfortunately, the Office of the President (n.d.) reports that one-third of all retirees count on Social Security for ninety percent of their income.

According to Williams (2005), the original plan for Social Security was far different than today’s reality. In 1936, the government distributed pamphlets explaining the Social Security plan to Americans. The explanation included a breakdown of how much money each American worker would pay into the system. Social Security tax would begin in 1936, at a rate of 1.5 percent, increasing to 2 percent after three years, and concluding in 1949, when it would be raised for the final time to 3 percent, applicable to only the first $3,000 earned by the worker. After that, the pamphlet explained, the cost would never be any higher (paragraph 4). Also according to Williams (2005), American workers today pay 15.6 percent Social Security tax on the first $90,000 of their income. Roosevelt’s pamphlet also explained that on November 24, 1936, the U.S. government was going to set up accounts for each contributor, and all money paid into the system would be held in that account for the worker until retirement (paragraphs1 and 2). Today, these accounts are nonexistent, and the money put into Social Security belongs to the government, and not to the person who has invested the money. In a report written by Tanner (2004), he states that two landmark U.S. Supreme Court cases, Helvring vs. Davis, and Flemings vs. Nester, were decided against American workers owning their Social Security accounts (pp. 5). Thus began the downfall of Social Security.

In the final report of the President’s Commission to Strengthen Social Security (1999), it is asserted that President Roosevelt knew, even in 1939, that Social Security was not a cure-all to protect American workers in their retirement; that is why he signed an amendment to Social Security. In his address to the nation after signing the amendment, he said, “We must expect a great program of social legislation, such as is represented in the Social Security Act, to be improved and strengthened in the light of additional experiences and understanding.” He also urged an “active study” of future possibilities (pp. 5). As is noted by Fiore (2005), in1950 there were sixteen workers paying into Social Security for every one retiree drawing from Social Security. Today, that number has shrunk to only three workers per retiree. In addition to the dwindling number of workers per retiree, forty-five percent of retirees are currently opting for early retirement, putting an even greater strain on the system (paragraph 4). It is apparent, there is no doubt something must be done in the near future to help Social Security survive.

In 2005, American workers are forced to pay 15.3 percent of their income into a forced savings account that does not exist. Both the worker and their employer pay this 15.3 percent, with both parties paying 7.65 percent. One of the biggest myths about Social Security is that employers pay half of the workers’ Social Security; however, it should be noted that the employer takes into account the 7.65 percent when determining the wages of employees (Social Security Online, n.d.). Another great Social Security myth that some politicians love to propagate is that the money paid into Social Security is put into a “lock box” and set aside; the truth is, the money in the “lock box” was spent by Congress years ago, and Congress has replaced all of the money in the “lock box” with I.O.U.’s. Even today, Congress continues to shift all excess money from Social Security into the general fund and spends it, without a plan to repay it.

Social Security money that is not siphoned into the general fund is paid out in three ways: retiree benefits, disability benefits, and survivor benefits. Retirees receive a check each month based on the age at which they retired and how much they contributed in Social Security taxes. For example, a retiree who had an income averaging $50,000 per year, who opts to retire at the age of 62, receives a check of $1,422 per month. The amount the retiree receives increases to $1,825 per month if he or she waits until the age of 65.25 to retire. If he or she should decide to wait until the age of 70 to retire, the amount is increased to $2,045 per month. This is, of course, pre-tax money (National Academy – Benefits Paid, n.d.). An employee who makes $50,000 per year earns $4,166 per month – pre tax. It is easy to see that if a person retires on Social Security alone, regardless of what age they retire, there is a significant reduction in the amount of money coming into their household. This is why it is absolutely necessary to have some sort of privately held retirement savings.

The second way in which Social Security is distributed is through a workers’ disability fund. When a worker is disabled, the money he or she draws is also dependent on how much is earned, on average, before the disability occurs. To a worker making $50,000 per year, the disability payment is $1,553 per month. This is considerably less than the $4,166 he or she earned per month before the disability. If a worker earns $65,000 per year, the disability benefit is raised to $1,728 per month, but the same worker, before a disability, earns $5,416 per month. Finally, if a worker earns more than $87,000 per year, the disability amount would be raised – and capped – at $1,975 per month. This person, before becoming disabled, would have a take home pay of at least $7,250 per month. If a worker becomes disabled, their spouse and any children under the age of eighteen may also collect a Social Security disability check, equal to one-half of the amount received by the disabled worker. An entire family cannot collect more than 150 percent of the Social Security disability due the disabled worker. It is clear that even with Social Security as a safety net, private disability insurance is a must (National Academy – Disability, n.d.).

The final manner in which Social Security is paid is to the spouse and any children under the age of eighteen of a deceased worker. This amount is equal to one-half of the amount of monthly Social Security to which the deceased worker was entitled. This amount is paid to the spouse of the deceased and every one of his or her children until they reach the age of eighteen. The spouse of a deceased worker who earned an average of $50,000 per year and who retired at the age of 62, with no children under the age of eighteen, would receive a check every month in the amount of $772.50. It would be extremely difficult, if not impossible, for anyone to survive on this small stipend. Hence it is easy to recognize the importance of an individual owning sufficient term life insurance (National Academy – Survivor Benefits, n.d.).

Benefits currently distributed by Social Security are based upon today’s standards, and are subject to change or elimination at any time. It is expected that Social Security will be bankrupt within the next thirty-five years. As reported on the Social Security Administration’s website (Social Security Online, n.d.), Social Security will begin to pay out more than it receives in payroll deductions, starting as early as 2018. By 2027, it will take an additional 200 billion dollars to keep Social Security afloat, and by 2033, that amount will increase to 300 billion dollars. In 2042, Social Security will be completely bankrupt, even if a 27 percent cut in benefits for retirees is implemented. In 2004, Medicare tax, which is 1.45 percent of Social Security tax withheld, depleted all of the excess funds collected through Social Security taxes. Beginning this year, 3.6 percent of the money needed to keep Social Security and Medicaid solvent will have to be diverted from the general fund into Social Security (Cato Institute – WSJ, 2005).

Politicians have discussed Social Security reform for years, with no clear solution in sight. President Clinton, in his 2000 budget proposal said, “Social Security does not consist of a real economic asset that can be drawn down in the future to fund benefits.” President Clinton went on to say that Social Security, “Will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.” President Clinton opted for raising taxes on the Social Security benefits received by retirees (Tanner, 2005). With politicians making these types of decisions, it is easy to understand why the dream of Social Security has become a nightmare for young workers, providing a low, below-market rate of return. Returns on investment of Social Security are expected to be less than two percent for most of today’s workers (Tanner, 2005). Social Security has overstepped its bounds; as proof of this, in 1997, 79 percent of American households paid more in Social Security tax than income tax (National Commission, 1999).

Social Security reform is desperately needed. President Bush recognized this fact, and when he ran for office in 2000, he started talking about privatizing a portion of Social Security. His position was great news for all those who already knew that Social Security was broken. Once elected, President Bush assigned a non-partisan commission to look at partial privatization of Social Security. This Commission studied the idea and decided it would be something worth implementing. The recommendation of the Commission was to let employees keep 2 percent of the 15.3 percent paid in Social Security taxes, to invest in a plan similar to the thrift savings plans enjoyed by government employees (National Commission, 1999). The thrift savings plans that the Commission suggested could be used offer three options for investing. The first, the G fund, averaged 6.7 percent in the past decade. The second, the F Fund, averaged 7.9 percent in that same period. Finally, the best option of the three, the C Fund, earned an amazing 17.4 percent in the 1990s (National Commission, 1999). Rates of return this high (the average of the three being approximately 10.66 percent) are one of the reasons the Commission recommended private accounts be authorized. Just two percent of Social Security taxes growing at 17.4 percent rate would quickly earn dividends surpassing the other 13.65 percent growing at a snail’s pace of just 2 percent per year.

The President’s non-partisan Commission is not the only group studying the feasibility of privatizing a portion of Social Security. The Cato Institute has studied the possible effects of allowing 6.2 percent of Social Security tax to be privatized (Tanner, 2004). The Cato Institute found that the biggest winners in such a plan would be low-income and minority workers. They contend that because these groups have lower life expectancies, the privatization plan would allow them to pass down any money saved to their spouses and children, whereas with Social Security, all money invested is lost, except for miniscule survivor benefits. The Cato Institute also concludes that this plan would also greatly aid families in breaking out of a cycle of poverty (Tanner, 2004).

The Cato Institute determined that a worker earning an average of $50,000 annually, who is allowed to save 6.3 percent of his or her Social Security tax, and earns an annual interest rate of ten percent on that money, would have a retirement nest egg of $987,850. If the retiree continued to receive ten percent interest, he or she could draw a pension of over $98,000 a year without ever touching the principle. That $98,000 per year is in sharp contrast to the $17,000 per year he or she would have received from Social Security. One of the most compelling arguments for Social Security privatization made by the Cato Institute, is that when that worker dies, he or she would be able to pass that $987,850 to his or her heirs. In the Social Security plan, when a worker dies, the government keeps whatever money remains (Tanner, 2004).
Similarly, President Bush’s plan, the details of which have not yet been released, proposes a four percent contribution of Social Security taxes to private accounts. Even with only the four percent President Bush endorses, there would be a greater chance for a worker to retire with an abundance of funds at his or her disposal. Not all politicians agree with President Bush or the Cato Institute regarding the privatization of Social Security. According to Cato Institute - Wessel (2005), some politicians believe the answer to the Social Security crisis is to borrow money to pay today’s retirees and water down current benefits for future retirees (paragraph 1).

Most Democrats who oppose Social Security privatization fall into one of three categories. The first group believes there is no problem with Social Security, and it should be left alone. With all of the evidence that Social Security is going broke, it may be that these politicians are too scared of offending constituents to do anything but pretend that everything is all right. The second group of Democrats admits Social Security is in trouble but believe modest tax increases are the answer to the problem. This group apparently likes to keep Americans dependent on the government for their survival. The third group believes privatization would work, but that the government should control the money invested. With the government’s history of raiding the cookie jar, this plan could only be a road to disaster.

Today’s retirees struggle when Social Security is their only income. The logical, moral, ethical solution to the retirees’ struggle is to implement personal savings accounts. These accounts can allow Americans to retire without the worry of poverty, and also allow them to leave a nest egg for their heirs. Imagine what a generation of retirees could do with the excess of funds that personal savings accounts can generate. These retirees would be able to not only help their families, but their communities and churches as well. Political partisanship needs to be put aside in the Social Security debate, and privatization must be enacted as quickly as possible. All Americans are one step closer to retirement every day, and the sooner politicians act, the greater the amount of money today’s middle-aged workers will be able to call their own.