What Happened to Your New Year's Raise?

January is the time we pay our bills after the holidays, and Americans, it seems, are not feeling very merry.  Consumer confidence is plummeting, and a recent ABC News/Washington Post poll shows that only 1 in 5 Americans feel they are getting ahead financially.

But consider this:  The average American worker’s wages rose by $2,975 between the years 2000 to 2005 (the most recent period for which data are available). And that’s after inflation. With such a significant wage bump, why the pessimism?

The primary reason that workers don’t feel richer is that they see just a fraction of that wage increase in their take-home pay.  

Of that $2,975, the average worker received just $879 — about 29 percent — of their pay increase in actual cash wages over the five year period, according to Gary Burtless of the Brookings Institute.

So where did the rest of it go, if not into workers’ pockets? Most of it was snapped up in paycheck deductions before it ever reached their bank accounts or wallets.

Most of the money went to higher payments for job-based health insurance and pension contributions, both of which are deducted directly from workers’ paychecks.  More than one-third of the average wage increase went to pay for higher health insurance premiums and a fourth of it went to retirement contributions.  

With this in mind, it’s easy to see why many Americans may feel cash poor, even though they’re benefit rich.  In fact, a CBS News poll taken last year found that more than half of middle-class people — those with household incomes between $30,000 and $75,000 a year — thought that “life for the middle class” had gotten worse over the last 10 years.

Rising health insurance premiums have been behind much of this financial unease. Health costs are the fastest-growing business expense for employers. Health insurance premiums increased by more than 50 percent in real terms between 2000 and 2005.   

Premiums are rising at a slower rate now as some employers and workers are finding new ways to help control their health costs, including Health Savings Accounts and other consumer-directed health care options.

But what saved workers from actually going in the hole in the first half of this decade were the Bush tax cuts enacted in 2001 and 2003.

Despite all the political smokescreens and finger-pointing, the tax cuts were actually a boon for middle-class households. As Burtless said in testimony before the Senate Finance Committee last year, “For many middle class families, the [tax] cuts have made the difference between suffering a loss and experiencing a gain in spendable income.”

In other words, it was only the direct action of Congress to cut federal income tax rates that allowed workers to see any of their pay increases at all.

If Congress does not act soon, millions of taxpayers will see their tax bills rise after 2010 as key provisions of the 2001 and 2003 tax acts expire. Worse still, millions more Americans will experience a slower economy and slimmer job prospects as the economy adjusts to the higher tax burden on labor and capital income.

Lawmakers should keep this in mind, particularly as many of them enthusiastically endorse tax hikes proposed by some of the 2008 presidential candidates. It’s doubtful that middle-class Americans will take kindly to Washington increasing tax levies to the point that their real take-home pay actually drops and the bottom falls out of the economy from the burden of higher tax rates.

Economic issues, including taxes and health costs, are and should be first-tier issues in the 2008 election campaigns.  It’s important for lawmakers to look at the real impact their decisions will have.  Tax increase designed for the rich have a ripple effect through the economy and, history shows, will backfire by slowing the economy, increasing unemployment, and putting American workers further behind.

If we think consumer confidence is low now, just wait until the federal government takes all of workers’ extra pay – and then some. And that would be for those lucky enough to still have jobs.

Grace-Marie Turner is President of the Galen Institute, a tax and health policy research organization based in Alexandria, VA.

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January is the time we pay our bills after the holidays, and Americans, it seems, are not feeling very merry.  Consumer confidence is plummeting, and a recent ABC News/Washington Post poll shows that only 1 in 5 Americans feel they are getting ahead financially.

But consider this:  The average American worker’s wages rose by $2,975 between the years 2000 to 2005 (the most recent period for which data are available). And that’s after inflation. With such a significant wage bump, why the pessimism?

The primary reason that workers don’t feel richer is that they see just a fraction of that wage increase in their take-home pay.  

Of that $2,975, the average worker received just $879 — about 29 percent — of their pay increase in actual cash wages over the five year period, according to Gary Burtless of the Brookings Institute.

So where did the rest of it go, if not into workers’ pockets? Most of it was snapped up in paycheck deductions before it ever reached their bank accounts or wallets.

Most of the money went to higher payments for job-based health insurance and pension contributions, both of which are deducted directly from workers’ paychecks.  More than one-third of the average wage increase went to pay for higher health insurance premiums and a fourth of it went to retirement contributions.  

With this in mind, it’s easy to see why many Americans may feel cash poor, even though they’re benefit rich.  In fact, a CBS News poll taken last year found that more than half of middle-class people — those with household incomes between $30,000 and $75,000 a year — thought that “life for the middle class” had gotten worse over the last 10 years.

Rising health insurance premiums have been behind much of this financial unease. Health costs are the fastest-growing business expense for employers. Health insurance premiums increased by more than 50 percent in real terms between 2000 and 2005.   

Premiums are rising at a slower rate now as some employers and workers are finding new ways to help control their health costs, including Health Savings Accounts and other consumer-directed health care options.

But what saved workers from actually going in the hole in the first half of this decade were the Bush tax cuts enacted in 2001 and 2003.

Despite all the political smokescreens and finger-pointing, the tax cuts were actually a boon for middle-class households. As Burtless said in testimony before the Senate Finance Committee last year, “For many middle class families, the [tax] cuts have made the difference between suffering a loss and experiencing a gain in spendable income.”

In other words, it was only the direct action of Congress to cut federal income tax rates that allowed workers to see any of their pay increases at all.

If Congress does not act soon, millions of taxpayers will see their tax bills rise after 2010 as key provisions of the 2001 and 2003 tax acts expire. Worse still, millions more Americans will experience a slower economy and slimmer job prospects as the economy adjusts to the higher tax burden on labor and capital income.

Lawmakers should keep this in mind, particularly as many of them enthusiastically endorse tax hikes proposed by some of the 2008 presidential candidates. It’s doubtful that middle-class Americans will take kindly to Washington increasing tax levies to the point that their real take-home pay actually drops and the bottom falls out of the economy from the burden of higher tax rates.

Economic issues, including taxes and health costs, are and should be first-tier issues in the 2008 election campaigns.  It’s important for lawmakers to look at the real impact their decisions will have.  Tax increase designed for the rich have a ripple effect through the economy and, history shows, will backfire by slowing the economy, increasing unemployment, and putting American workers further behind.

If we think consumer confidence is low now, just wait until the federal government takes all of workers’ extra pay – and then some. And that would be for those lucky enough to still have jobs.

Grace-Marie Turner is President of the Galen Institute, a tax and health policy research organization based in Alexandria, VA.

SHARE THIS ARTICLE

About the author