THE RETIREMENT CRISIS

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SEGMENT 4 LECTURE

RETIREMENT

Sunday, April 19 to Monday, April 27  (9 days)

 

Reading:

  • Text:  The Big Squeeze:

            –     Chapter 15 “The Not-So-Golden Years”

  • “Working Late, by Choice or Not,” by Steven Greenhouse, May 9, 2012 New York Times
  • “Gains Seen for Medicare, but Social Security Holds Steady,” July 28, 2014 New York Times
  • “Working for a Universal, Secure, and Adequate Retirement System,” an October 2009 Retirement USA Report
  • AFL-CIO website – Social Security facts
  • “Top Ten Facts about Social Security,” Center on Budget and Policy Priorities
  • “There Is No Social Security Crisis,” February 24, 2009 American Prospect
  • “Looting Social Security,” Part 1, March 2, 2009 The Nation magazine
  • “Looting Social Security,” Part 2, January 11, 2010 The Nation magazine
  • “Keep Wall Street Out of the Retirement Business,” September 19, 2008 Business Week opinion piece
  • “The Top 10 Myths About Social Security Reform,” September 2004 Heritage Foundation
  • Social Security Reform Center (this website, with the Heritage Foundation article, offer a conservative economic analysis of the Social Security system)
  • Optional:  Retirement USA website

Assignments:

  • Post at least three times a week to your Journal.  Your April 16 to May 6 Journal posts will be graded.
  • Take Exam 3, covering material in Segment 4, by 11:59 p.m. on Monday, April 27.

Discussion Forums:

  • 4A:  The Retirement Crisis
  • 4B:  Debating Social Security Reform

 

 

INTRODUCTION

How to retire while retaining adequate income to live a comfortable life is a challenge facing all Americans today.  And most Americans, including undoubtedly many – perhaps even most – students in this class, are very worried about their retirement and doubtful about the future of Social Security.

 

When asked in an August 2010 CNN poll, “Do you think the Social Security system will be able to continue to pay you full benefits, or do you think there will eventually be cuts in your benefits?,”  41% answered positively while 55% expected cuts in benefits.

 

When asked, “Do you think the Social Security system will be able to pay you a benefit when you retire?,” the results are more disheartening.  Thirty-nine percent said yes and 60% said no.  But among people 18 to 49 years old, the positive dropped to 30%.  They didn’t break it down further to those under 30 years old, but I’m guessing the positive answer would drop much further.

 

Your primary reading is another chapter from Steven Greenhouse’s The Big Squeeze, where he lays out the retirement crisis by sharing several poignant stories with us of elderly Americans unable to afford to retire.  I’ve also assigned you to read several reports and articles on the debate over the extent of the crisis facing Social Security, and possible solutions (which I’ll summarize later in this lecture.)

 

Let’s begin by looking at the crisis facing American workers when they consider retirement.

 

PENSIONS

Corporate America has been on a steady trajectory over the past two decades away from defined benefit pensions – where retirees receive a monthly paycheck – toward 401(k) savings accounts.  The reason is simple, as Greenhouse explains on pages 278-279 – 401(k) accounts cost companies much less money.  Greenhouse introduces us on page 280 to Larry Cutrone, an AT&T manager who was shocked to find his company, where he had happily and loyally served as a manager for three decades, slashed his pension in half from $44,000 a year to $23,000 a year.  How, employees like Cutrone ask, can a profitable corporation ($6.2 billion in profits in 2014) go back on its promise to valued employees and slash their benefits?  They feel betrayed.

 

Even in unionized workplaces, corporations often push unions to accept two-tier contracts.  This means that existing employees receive existing benefits – often including defined benefit pensions – while new hires receive 401(k) savings accounts, and usually far lower wages and more expensive health care.  Needless to say, this creates tremendous resentment among new hires who angrily look at the people working near them doing the same work, but receiving a far more generous compensation package.  For example, this is happening at Ford auto.

 

Besides saving corporations’ money by providing less money for workers, the other danger of relying on a 401(k) plan is, of course, what we’ve witnessed recently with the 2008 collapse of the stock market – the Dow Jones dropped from over 14,000 to 7,000. Workers with savings in 401(k) accounts, mutual funds, or with stock ownership saw their retirement accounts cut by anywhere from thirty to sixty percent.  And several years later, many their retirement accounts have still not recovered.

 

You may have read or heard news stories about a recent example, the heatedly debated contract negotiations of 17,000 Seattle Boeing workers who are members of International Association of Unionists Local 751.  The workers national leadership wanted the workers to agree to the eleven-year contract, while the local leadership campaigned against it.

 

After rejecting the contract by a two to one vote, the international president demanded a quick second vote, and on January 3, 2014 the workers succumbed to pressure and narrowly agreed to the contract.  Among other concessions, the pension of existing workers is frozen – regardless of how more years they work in the plant or raises in salary, the pension they would accrue if they retired today will be the pension they receive years from now.  And new hires will not receive a monthly pension check when they retire, but instead have a 401(k) account that the company contributes to.

 

And then, of course, there is the danger of a company going bankrupt, and turning its pension obligations over to the Pension Benefit Guarantee Corporation.  Particularly if the corporation had underfunded its pension fund (not put in as much money as it should have to guarantee its retirees would receive promised benefits), then retirees who had been employed by bankrupt corporations may not receive anything close to the benefits they expected to receive.

At the 2008 Democratic candidates’ debate in Soldier Field football stadium in Chicago, a retired steelworker from bankrupt LTV Steel made an eloquent appeal to the candidates; the video went viral and was viewed by millions nationally on YouTube.  Steve Skvara from Union Township, Indiana, said he’d lost a third of the promised pension and lost health care for his family.  Read about Mr. Skvara and view the video clip here.

 

Attacks against public workers’ pensions – usually union workers with defined benefit plans – have escalated during the Great Recession.  A significant focus of that criticism is leveled against teachers.  State and local governments exacerbated the situation by failing, year after year, to fully fund their pensions.  When moving to significantly cut or eliminate public workers’ pensions, media pundits and government officials label their moves “pension reform.”

 

Looking at the future pensions of all current employees, the State of Illinois owes an estimated $100 billion to its pension fund.  For years the state legislature did not pay into the pension fund, creating the deficit.  Then the Great Recession hit and lowered the value of the invested funds further.

 

In December 2013 the Illinois state legislature passed a bill cutting public workers’ pensions.  Democratic governor Pat Quinn declared “The people have won. We have all won” and that it was a “great day for the taxpayers of Illinois.”  The bill froze for a number of years any cost-of-living increases, substantially lowered the cost-of-living formula, and raised the retirement age.

 

Public sector unions denounced the legislation and promised to take it to court.  The government employees union (AFSCME) again reiterated that its members, after decades of public service, average a modest $32,000 a year pension and are not eligible for Social Security.  “It is a clearly illegal attempt to solve the problem caused by past governors and the legislature solely on the backs of teachers, caregivers and other public workers,” said Illinois AFL-CIO president Michael Carrigan.

 

LER professor Robert Bruno responded to the legislators’ assertion that Illinois public workers’ pensions were “too rich” in a Chicago Sun-Times piece:

 

Consider that state employees and school teachers in Illinois contribute between 7.0 and 9.4 percent of their salaries into their retirement systems. Only 11 other states require that their state and local government employees pay higher than 7 percent of their salaries into retirement.  Let’s also acknowledge that prior to reforms, pension benefits for state workers in Illinois accrued at 1.67 percent of their “final average salary” for every year worked. How does that compare to other states? Not so well. More than three-quarters of state retirement plans have an accrual multiplier greater than 1.67 percent.

These comparisons indicate that Illinois state employees are currently in the top quarter of states in paying into their retirement system while working, but in the bottom quarter of states in receiving a proportionate share of their final income during retirement. In comparison to other states, there is scant evidence of a “too rich” problem when measuring worker inputs and retiree benefits.

 

The case is pending decision by the Illinois Supreme Court. Meanwhile, Republican Bruce Rauner, who campaign by denouncing all public sector unions and calls for ending all public sector pensions, was elected governor in November 2014.  So the debate continues in Illinois.

 

CORPORATE PENSIONS

Meanwhile, corporate leaders and the wealthiest 1% of Americans with incomes over $1 million a year don’t have these worries.  Over the past decade, while average workers’ fears have soared about how to afford retirement, CEOs and top corporate leaders have had their pensions soar.

 

Greenhouse describes the situation on pages 285-286.  Also check out the Too Much website; their goal is to expose corporate and CEO excesses, like muckraking journalists did a century ago.  Google and you can find a number of good articles on this subject such as these:

 

 

HEALTH CARE: MEDICARE

Every other industrialized nation provides affordable health care for all – except the United States which has about 50 million people without health insurance.  And even for seniors, Medicare does not cover all expenditures.  Millions of elderly Americans continue working into their seventies so they’ll have employer-provided health care.

President Johnson signs Medicare legislation

Medicare has about 51 million people receiving benefits with total 2013 expenditures of $586 billion.  Medicare is part of the health care crisis in the country.  While administrative costs are less than 2%, far lower than any private health insurance, Medicare costs have risen as health care costs in general have risen.

 

Medicare trustees reported in 2013 that the system can continue until 2026, when its income will not meet expenses – at that point, unless changes are made, Medicare will only be able to pay 87% of expenditures.   The “Gains Seen for Medicare, but Social Security Holds Steady” New York Times article notes this has been moved back to 2030 in part because of repercussions from the Affordable Care Act.

 

How can we maintain the Medicare system so seniors will have health care?

 

Greenhouse gives the example of Harold Danley, whose $14,000 a year out-of-pocket medical expenses forced him out of retirement and into a low-wage job after thirty years working for – ironically – an insurance company.  In 1988, two-thirds of companies with over 200 employees offered health insurance to retirees; today it is under one-third, and the coverage costs retirees much more money (page 281).

 


SOCIAL SECURITY

President Franklin D. Roosevelt signed the Social Security law in August 1935 as a cornerstone of his New Deal program.  It is worth recalling his words as he signed what is arguably one of the most important pieces of legislation in American history.

 

Today, a hope of many years’ standing is in large part fulfilled. The civilization of the past hundred years, with its startling industrial changes, had tended more and more to make life insecure.  Young people have come to wonder what will be their lot when they came to old age.  The man with a job has wondered how long the job would last.

This social security measure gives at least some protection to 50 million of our citizens who will reap direct benefits through unemployment compensation, through old-age pensions, and through increased services for the protection of children and the prevention of ill health.

We can never insure 100% of the population against 100% of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and    against poverty-stricken old age.

This law, too, represents a cornerstone in a structure which is being built but is by no means complete. It is a structure intended to lessen the force of possible future depressions.  It will act as a protection to future administrations against the necessity of going deeply into debt to furnish relief to the needy. The law will flatten out the peaks and valleys of deflation and of inflation.  It is, in short, a law that will take care of human needs and at the same time provide the United States an economic structure of vastly greater soundness.

I congratulate all of you ladies and gentlemen, all of you in the Congress, in the executive departments and all of you who come from private life, and I thank you for your splendid efforts in behalf of this sound, needed and patriotic legislation. It seems to me that if the Senate and the House of Representatives, in this long and arduous session, had done nothing more than pass this security bill, Social Security Act, the session would be regarded as historic for all time.

 

The law included financial support for people with disabilities, a lump sum death payment, and unemployment benefits for those out of work, but for our discussion we’re focusing on the annual payments to retired seniors.  Social security is funded by a 12.4% payroll tax (“FICA” on your pay stub) shared equally by employees and employers, paid up to an income cap of $118,500 in 2015.

 

Calculation of benefits is complex, involving wages paid over a 35-year period, the year a person retires (partial benefits are available starting at age 62), year of birth, and so on.

 

In 2014 about 59 million Americans received about $863 billion in Social Security benefits (45 million receive retirement benefits and 11 million disability payments.)  The average benefit for retirees is only $15,600 a year.  According to a Center on Budget and Policy Priorities study, Social Security lifts 20 million people out of poverty.  (That is, lifts them above the official poverty line, which deeply understates the actual rate of poverty in the country – the poverty line for 2015 is $11,670 a year for a single person or $15,730 a year for a couple.)

 

The program is extremely popular.  Today 77% of Americans –including 68% of Republicans – believe Washington policymakers should “leave Social Security alone” and find other ways to reduce the deficit, according to a national poll in June 2010 by the University of New Hampshire.  A New York Times/CBS News poll in 2011 found 75% of Tea Party supporters, whose platform is grounded on cutting government spending, favor Social Security and Medicare.

 

For the past two decades at least, every summer when the annual report of the Social Security Trustees is released, there is a flurry of media attention and many politicians take the opportunity to decry the imminent financial crisis and call for reform. See this analysis, for example, of CNN’s coverage.

Rarely, though, are politicians specific about changes, because Social Security is labeled the “third rail” in American politics — i.e., no one will touch it out of fear of political death.  When politicians think about calling for radical changes in the system, their advisers and pollsters tell them they’ll be booted out by the electorate at the next election.
In 2013 about 14% of the population was over 65 – and they vote in far higher numbers than their proportion of the population.  And their numbers are rising, to an estimated 20% over the next twenty-five years.  In 2013, those age 45 to 64 – those most likely to be seriously thinking about how they will afford retirement, or whether they’ll have to continue working into their seventies – are 25% of the population.

 

But, as in past years, when the report was released critics decried the system’s supposed $41 billion shortfall, and demanded that changes be made soon lest Social Security go bankrupt.  What are the facts?  Is there a crisis?

 

The first issue to understand is that in the 1980s the federal government began to borrow funds from the Social Security account.  Nearly everyone who works pays into Social Security – 163 million people in 2013 – as do employers.  That fund is monitored and reported on annually by the Trustees.  But the money doesn’t actually exist in an account, as it would if an ordinary person put money into a savings account.

 

Today there is over $2.6 trillion in the Trust Fund for the Old-Age and Survivors Insurance (OASI), which pays retirement and survivors’ benefits – see chart below.

 

 

OASI DI HI SMI
Reserves (end of 2012) (in billions) $2,609.7 $122.7 $220.4 $67.2
Income during 2013 743.8 111.2 251.1 324.6
Cost during 2013 679.5 143.4 266.2 316.7
    Net change in Reserves 64.3 -32.2 -15.0 7.9
Reserves (end of 2013) 2,674.0 90.4 205.4 75.1

 

 

The annual report doesn’t just cover retirement – it covers four funds, which makes it more confusing:

  • OASI is the Old-Age and Survivors Insurance Trust Fund –retirement benefits.
  • DI is the Disability Insurance Trust Fund – disability benefits.
  • HI is the Hospital Insurance Trust Fund – Medicare medical expenses.
  • SMI is the Supplementary Medical Insurance Trust Fund — Part B pays for physician and outpatient services, and Part D covers the prescription drug benefit.

 

Two and a half trillion dollars in reserves sounds great, and it is.  But with an aging population, these figures will change over the next quarter century.

 

It is estimated that costs will exceed income for OASI (retirement benefits) in 2018.

Then, Social Security will use the funds in the Trust until retirement funds are completely gone in 2038.   (The dates, as you see below, vary for each of the four funds.)  At that time, if nothing else changes, the report estimates that retirees would receive 78% of what they are owed, for at least another quarter century.

 

But…these are the figures for the income alone generated by payroll deductions.  If it is assumed that the federal government has to pay interest on all that money it borrowed from its citizens, then the Trustees’ report notes that these dates change – instead of costs exceeding income in 2018, the date is 2026.

 

KEY DATES FOR THE TRUST FUNDS
OASI DI OASDI HI
First year outgo exceeds income excluding interest 2017 2005 2010 2008
First year outgo exceeds income including interest 2025 2009 2023 2008
Year trust funds are exhausted 2038 2018 2036 2024

 

And the July 2014 “Gains Seen for Medicare, but Social Security Holds Steady” New York Times article says the date when Social Security will have to, if no changes are made, pay three-quarters instead of full benefits to retirees is 2033.

 

So, is there a crisis?  By definition a crisis means an unstable situation of extreme danger or difficulty, involving an impending abrupt or decisive change.

  • There is a crisis if you focus on the year when costs exceed income.
  • There is not a crisis if you focus on the year when the Trust Fund would be depleted.
  • And even then, as the American Prospect article notes, it is not true “that at some future date, elderly recipients of Social Security will receive checks in the amount of $0, all the money having disappeared.” If nothing is done, in three decades retirees will get monthly checks, but only about three-quarters of the amount they should receive.
  • The year the system would face crisis is heightened if you exclude interest owed. If you include the interest (one estimate is $118 billion), then the crisis date is pushed years further into the future.
  • There is a crisis if you consider that the federal government did not put away Social Security funds for future use, but used the Social Security taxes that working people paid to pay for other programs.

 

Not to mention the fact that it’s very hard to make projections decades into the future. The estimated depletion date is sensitive to forecasts of economic growth, war, wage growth, immigration, and birth and death rates.  As the American Prospect article notes, the Social Security Trustees in their annual report note that their estimates are based on one of three guesses about well the economy will do in the next decades.  Under the most optimistic estimate, the fund is never depleted.

 

FIXING SOCIAL SECURITY

Here are some of the key options for fixing Social Security.  You may have read about others that you can share in the forum, and you will undoubtedly have more arguments in favor or against these proposals.  These are issues that will continue to be at the forefront of political dialogue.  In 2010 President Obama created the “National Commission on Fiscal Responsibility and Reform,” which was charged with identifying solutions to American’s long-term liabilities, including funding for Social Security and Medicare.

 

However, due to the complexity of these issues and the gridlock among our political leaders, the final report was not approved by the majority of commission members when it was released in December 2010.

 

Raise the age when full benefits begin to 70.

This change alone would make the system solvent far into the future.  The age when retirees received full benefits was 65 until Congress and President Reagan raised it in 1983.  If you were born in 1960 or later, full benefits do not begin until age 67.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The argument in favor is that, due to modern medicine, people are living longer.  When Social Security was created, people died younger.  The program was never intended to support a significant portion of the population for ten or twenty years of retirement.

 

The argument against is that an increase in the retirement age means you’re making working people work longer.  The proposed change only works fiscally because it means that more people will pay into Social Security their entire working lives and die before they retire.  When you put it like that, it sounds cold-hearted, doesn’t it? – “The way to fix the system is to make people work longer so more will die before they receive any benefits after paying into the system their entire working lives.”

 

Not everyone can work until they’re 70 – especially if you’ve worked backbreaking jobs your whole life.  Raising the age limit hits working people the hardest.  The most well-off 20% of the population (who tend to be white and be employed in less physically-demanding white-collar jobs) both are more likely to have the savings to retire earlier, and are more likely to live longer.

 

Plus, one could argue that it’s not life expectancy that we should be focused on.  It’s how long people live, on average, once they reach the age of 65.  According to The Battle for Social Security: From FDR’s Vision To Bush’s Gamble:  “In 1940, men who survived to age 65 had a remaining life expectancy of 12.7 years.  Today, a 65 year old man can expect to live not quite three years longer than he might have in 1940, or 15.3 years beyond age 65.  For women, the comparable numbers are 14.7 years beyond age 65 in 1940 and 19.6 years in 1990.”

 

Raise the payroll tax from the 6.2% paid by employees and employers to 8%.

The argument in favor is that it is an easy way to solve the projected deficit.  The tax has been raised many times before, as you can see in the chart, and has not been raised since 1990.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The argument against is that raising the tax is regressive – it would hurt working people the hardest, and better-paid people and the wealthy very little due to the cap on the tax.  That is, when there is a flat tax, the proportion of a person’s income that you pay in taxes gets steadily smaller as your income rises.  And business of course opposes raising its share of the payroll tax, arguing it would hurt job growth and the economy.

 

Cut benefits.

Benefits could be cut by either stopping or slowing the annual cost of living increase to Social Security benefits, or by reducing the amount people receive.  The argument in favor is that this is a quick way to resolve the projected deficit.

 

The argument against is that it would impact working people and the working poor the hardest, as they rely on Social Security for a large share of their retirement income.  As the AFL-CIO website notes, 64% of retirees rely on Social Security for over half of their income, and 32% rely on it for over 90% of their income.  Besides, is it really a solution to cut benefits now so that, in thirty years when the Trust Fund is depleted, we don’t have to cut benefits?

 

Raise the cap on the payroll tax to $200,000.

The cap in 2015 is set at $118,500.  That is, all income up to that amount is taxed, but no income above the cap is taxed.  So if you make $118,500 you pay $7,347 in Social Security taxes.  If you make ten times that, $1,185,000– you pay $7,347 in Social Security taxes.  Or if you make ten thousand times that and earn a billion dollars a year, you pay the same $7,347 in taxes.

 

The argument in favor is that this would be an easy way to solve the projected deficit.  It would only impact about 6% of the population, and would impact those most able to afford it.  Between 1983 and 2010, the share of total wages covered by Social Security and subject to tax has declined from almost 90% to about 80% because earnings have grown rapidly near the top of the earnings distribution.

 

The argument against is that this would slow economic growth, and is “class warfare,” “anti-rich,” “anti-business,” and “socialism.”

 

Eliminate the cap on the payroll tax entirely.

The argument in favor is that this would shift more of the country’s tax burden to the wealthiest 1% who earn more than $1 million a year. Plus, there is precedent – the taxable maximum was eliminated for Medicare payroll taxes in 1993.

 

The argument against is that – again — this would slow economic growth, and is “class warfare,” “anti-rich,” “anti-business,” and “socialism.”

 

Move away from the existing system to private accounts.

President Bush tried to win Congressional and popular support for this radical change in the system, and failed.  The Heritage Foundation article and Social Security Reform Center website advocate this change.

 

The argument in favor is that it moves the system from the federal government running a retirement system, to individuals taking responsibility to invest their own funds.

 

The argument against is that the stock market can be volatile, as evidenced by the 2008 drop by 50%, and that retirees need a stable source of income.  As well, those who want to privatize Social Security simply don’t believe in the system in the first place; their ideological heirs voted against it in 1935 and denounced Social Security as “socialism.”  Opponents of this change argue that the real motivation to privatize is to provide hundreds of billions of dollars for investment firms and banks to invest, while taking a hefty fee in the process.

 

 

*          *          *          *

 

Segment 4 has two discussion forums. The first is a “big picture” discussion of the retirement crisis, and the second a debate over fixing Social Security.

 

FORUM 4A:  THE RETIREMENT CRISIS

I had you look at an article about retiree Steve Skvara, and a video of Mr. Skvara speaking at the 2008 Democratic candidates’ debate in Chicago sponsored by the AFL-CIO.  You can read about Steve Skvara and view the video clip here.

 

In our first forum, I want to use Mr. Skvara as a symbol of the retirement crisis facing all Americans, and ask you to join a debate about that crisis.  Engage your fellow students and your instructor, critiquing, agreeing, or asking questions about their views.  Draw upon the assigned reading and videos to support your analysis and viewpoint.

 

To focus that debate, here is a viewpoint that is highly critical of retirees like Mr. Skvara.  Drawing upon the readings for this segment, debate this perspective:

 

Steve Skvara worked three decades at a steel mill and lost much of his pension, and he blames the federal government?  How much did he save for retirement?  Why didn’t he see that America’s manufacturing base was declining as we move from a 20th century industrial economy to a 21st century high tech economy, and get himself retrained long ago?

Steve Skvara and other retirees in financial trouble made bad choices, and they have to live with them.

The manufacturing era in America is over. The era of working one job (or even two jobs) during a lifetime are over. The era of using equity in your house for your retirement is over.  The era where Americans save very little must be over.  The era of expecting to have a defined benefit pension with a monthly check that will support you in your retirement years is over.  Big defined benefit pensions are making it impossible for American corporations to compete in the world economy, and bankrupting the federal, state, and city governments.

You want to live comfortably when you retire? This is America where it’s a dog eat dog world, and only the smartest and hardest working thrive – including in retirement. Plan ahead. Work hard. Get an education. Get retraining if you get laid off. Start saving 15% of your income as soon as you begin working full-time in your early twenties.

And the 90% of the country that doesn’t do so should shut up and stop whining about their situation.

 

FORUM 4B:  DEBATING SOCIAL SECURITY REFORM

The lecture and reading described the major options put forward to make Social Security solvent over the long-term, and a few of the pro and con arguments for each proposal.  As well, you may have other ideas or readings to suggest.

 

Imagine that the members of this class make up a Social Security Reform Commission. Your job is to reach a consensus on proposals to reform Social Security.  Use the forum to discuss and debate solutions with your classmates, and try to reach consensus. Engage your fellow students and your instructor, critiquing, agreeing, or asking questions about their views. Draw upon the assigned reading and videos to support your analysis and viewpoint.

 

 

 

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