China Joins Russia in Blasting U.S. Borrowing

China, the largest foreign investor in U.S. government securities, joined Russia in criticizing American policy makers for failing to ensure borrowing is reined in after a stopgap deal to raise the nation’s debt limit.

People’s Bank of China Governor Zhou Xiaochuan said China’s central bank will monitor U.S. efforts to tackle its debt, and state-run Xinhua News Agency blasted what it called the “madcap” brinksmanship of American lawmakers. Russian Prime Minister Vladimir Putin said two days ago that the U.S. is in a way “leeching on the world economy.”

The comments reflect concern that the U.S. may lose its AAA sovereign rating after President Barack Obama and Congress put off decisions on spending cuts and tax increases to assure enactment of a boost in borrowing authority. China and Russia, holding a total $1.28 trillion of Treasuries, have lost nothing so far in the wake of a rally in the securities this year.

“It’s probably frustration more than anything else for China,” said Brian Jackson, a senior strategist at Royal Bank of Canada in Hong Kong. While the nation has concerns, “they realize there’s not a lot of options for them out there and so they need to keep buying Treasuries.”

China held $1.16 trillion of Treasuries as of May, U.S. Treasury Department data show. The nation has accumulated the holdings as a by-product of holding down the value of its currency, a policy U.S. officials have said gives China an unfair advantage in trade. •

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6 Likely Social Security Changes

Washington's current soap opera, As the Debt Ceiling Turns, is winding down to its season finale. Grand plans for a "big deal," including changes to Social Security and Medicare, have given way to face-saving efforts to permit the country to issue new debt and still allow the political parties to claim the high ground as they gear up for 2012 election campaigns.

[See 10 Ways to Boost Your Social Security Checks.]

So, for the time being, retirees can breathe a bit easier about changes to their key benefits. Even though nearly every "reform" plan said it would avoid changes for people at or even nearing retirement age, the only good entitlements plan for senior advocacy groups was a dead entitlements plan. It looks like they will get their wish. For now.

But no one expects the issue to go away. And with a large number of deficit reduction proposals circulating during the past several months, it's possible to get an informed look at the types of changes that will be considered when Congress finally decides it's kicked the deficit can down the road long enough.

The future shape of Medicare is more complicated. First, it has more moving parts, including related programs for hospital, doctor, drug, and supplemental coverage. Second, the health reform law has triggered cost-control efforts and other significant changes, although the continuance of these efforts depends on the outcome of legal and legislative challenges to the law. The Kaiser Family Foundation has a side-by-side comparison of Medicare provisions in both major and minor deficit-reduction plans, including last week's Gang of Six plan.

[See Top 10 Individual Tax Breaks.]

Leading candidates for change in the Social Security program are easier to summarize. The Committee for a Responsible Federal Budget was created 30 years ago by former federal budget experts. It bills itself as a bipartisan nonprofit and has developed a useful online tool to compare nearly three dozen deficit reduction plans, including those from President Obama's National Commission on Fiscal Responsibility and Reform, Wisconsin Republican Rep. Paul Ryan, and the Gang of Six plan, which is light on specifics. Looking at these plans' thoughts about Social Security changes, these common elements emerge:

Benefits. The most commonly recommended change is to create new minimum and old-age benefits. This would provide a floor for low-income earnings. It also recognizes longevity gains and the fear that many seniors have of outliving their money. Expect "means testing" to slow the rate of growth in benefits for higher earners.

Personal Accounts. Several proposals would create either optional or mandatory supplemental retirement accounts. People would set aside more of their earnings and receive higher lifetime income payments when they retire. Social Security was designed to provide modest amounts of retirement income when the program was created in 1935. But it has grown into the dominant source of retirement income for most retirees. Adding another layer of guaranteed, annuity-like income is appealing to many experts. They lament that employees do not voluntarily set aside more money in their 401(k)s and other retirement accounts.

[See How the Budget Deficit Could Lead to Generational Warfare.]

Retirement Age. Most proposals advocate raising the retirement age (now set to rise to 67) in steps over decades, with 70 being the most common age specified. Key details would include tying higher retirement ages to continued increases in life expectancy and to permit hardship exemptions for people forced to retire early because of health problems. A few proposals also would raise the so-called early retirement age to begin receiving Social Security. It's now 62 and would increase to 64 or 65 under those plans.

Cost of Living. Reducing the annual cost of living adjustment (COLA) to Social Security benefits is the most commonly proposed change to the program. The current index used for the COLA measures price increases for urban wage earners. The preferred replacement is called the "chained" consumer price index. It is expected to rise at a slower rate than the other measure, but proponents defend its use on the grounds that it more fairly reflects actual consumer spending patterns and not just price increases.

[See Seniors Don't Pay Full Medicare, Social Security Share.]

Payroll Taxes. High-income wage earners will pay more, but it's far from certain by how much and over what time period such increases would take effect. Employee and employer payroll tax contributions are now capped at $106,800 of wage income. In 2009, 86 percent of all wages were taxed. Many proposals would raise the wage ceiling gradually until it's high enough so that 90 percent of all wages were taxed. Some plans from more liberal groups would levy a high-earner tax on all wages above the ceiling. A fair number of proposals would remove any wage ceiling from the employer tax, meaning employers would be saddled with more of any increase in payroll taxes. However, many labor experts feel that employers regard payroll taxes as part of their total employee compensation expense, and that raising the employer portion of payroll taxes might come at the expense of future wage and benefit increases.

Other. The recommendation most often seen beyond using a chained CPI COLA would require newly hired state and local employees to participate in Social Security. Proponents say it would reduce financial pressure on stressed state and local pension programs and create a more stable retirement outlook for the many employees who work in both private and government jobs during their careers. Expect a transition period of about a decade for such a shift to take effect. •

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