Remnant Review
Back in 2005, an up-and-coming author of financial books asked me to write an article for a collection of articles he was editing. The book's topic: the #1 economic trend or issue over the next 20 years. My choice: the unfunded liabilities of the U.S. government.
After the book was published, I discovered that my article was missing. I contacted the author/editor. He admitted to me only then that his editor had rejected it.
This author has since become a major player in the financial media field. But, back in 2005, he did not believe that he had enough authority to override the decision of some New York non-author to reject my manuscript. The vetoing editor was salaried. We can be sure of this: he had no investing experience. If he had, he would not have been a salaried editor. The author put his name on the book, but in fact he was not in charge of his own book.
Recently, he wrote a newsletter on the #1 economic problem facing the United States over the next 10 years: the unfunded liabilities of the U.S. government.
Here, for old-times' sake, is my original article. Since them, Prof. Lawrence Kotlikoff has shown that the figures are vastly worse: $222 trillion in present value unfunded liabilities.
For groups as diverse as government employees and recipients of social security (particularly those who hope to receive benefits in the future), the writing is on the wall. Either they start looking elsewhere for their economic status and, in some cases, even their physical protection; or else there is probably no future for them.
This was the warning of Israel's most distinguished military historian, Martin Van Creveld, in his 1999 book, The Rise and Decline of the State. Rarely does an academic say such an inflammatory thing, and rarely does an editor at a university press as distinguished as Cambridge University Press let such a statement get through. What the United States is facing -- the bankruptcy of the welfare state -- is also confronting every other industrial democracy in the West, including Japan. This is Van Creveld's assessment, and it is also the assessment of Jacques Barzun, in the final pages of his magisterial final opus after six decades of writing: From Dawn to Decadence: 1500 to the Present (2000).
What will governments do about this? Exactly what they do to solve every other problem created by government: dither.
As a former Congressional assistant, I learned how the Federal government -- and other levels of government -- prefers to deal with problems. There is a predictable sequence of responses.
1. Ignore the problem.
2. When it begins to get attention, deny the problem.
3. When the debate over the problem fails to go away, admit that there may be a partial problem.
4. Appoint a hand-picked committee to study the problem.
5. The committee reports that someday there will be a problem if nothing is done to solve it, beginning now.
6. Politicians announce that they are fully aware of the problem.
7. They defer taking politically unpopular steps to solve the problem because it's not going to be a significant problem for years.
8. Refer to all further discussions of the problem as "old news."
I first heard of the statistical problem facing Social Security -- no funds set aside for amortizing the obligation -- in the spring of 1959. Our high school civics teacher warned us that we would outlive the ability of the system to pay us what we were being promised. He trained his classes each year to ask tough questions of the public relations man who was sent out every year to the area high schools by the local Social Security office. He was unable to answer our questions. When he retired, he told our teacher that his students were the only ones in the district to ask such tough questions.
Four years later, I met a man in graduate school who told me that his brother had been a statistician (actuarian) with Social Security. When his brother saw the numbers, he resigned and went into private industry. "He says the system will go broke," my friend told me.
In 1977, I published a book in which I discussed the looming problem. Within the year, President Carter forced an FICA tax hike through Congress to "save Social Security well into the next century." In 1983, President Reagan forced another FICA tax hike through Congress because the system had temporarily gone bankrupt.
From the mid-1980s until today, Peter G. Peterson, an investment banker and the Chairman of the Council on Foreign Relations, has been publishing books and articles on the inevitable crisis of the system. The unfunded liability of the system, he estimates, is in the range of $10 trillion.
Today, there is at long last a public debate going on regarding the solvency of the Social Security system. This debate is a side-issue, to the extent that a unfunded liability of $7 trillion to $10 trillion can be dismissed as a side-issue. The gigantic, inescapable reality is the size of the unfunded liability of Medicare, which was fast approaching $50 trillion even before President Bush's 2004 prescription drug amendment to the program. The assertions and counter-assertions regarding the solvency of Social Security are a convenient political smokescreen, a way for politicians who do not have the courage to reform Medicare to keep the public's attention focused on what is a fiscal side-issue by comparison.
For at least three decades, defenders of the Social Security system have publicly dismissed warnings regarding the unfunded liability. They have referred to the program as the crown jewel of the American welfare system. Beginning in late 2004, after his re-election, President Bush has told the voters that the crown jewel is made of zirconium. Without reform, Social Security will indeed go bankrupt, he says. For this public service, he should be praised. Of course, his proposed reform will not come close to solving the amortization problem. This problem cannot be solved without drastically cutting promised benefits or drastically raising taxes, which no politician dares to say in public. And as for the killer fiscal problem, Medicare, nothing is said.
I have written this report for older Americans who have known for years that there is a looming problem with Social Security. I have written it to help them come to grips emotionally with what they have suspected intellectually. In dealing with our heirs, we should face reality. This reality includes the following: (1) They will be called upon by politicians to foot our generation's bills without legitimate hope of coming out ahead economically in what is essentially a compulsory chain letter. (2) They will be lied to as surely as we have been lied to. (3) They will possess less capital and therefore earning ability than our generation has enjoyed. (4) Competition from Asia will escalate. (5) Their parents may become an economic burden on them, or at least pass on a smaller inheritance than they had hoped, because of unforeseen escalating retirement expenses after younger workers revolt politically against the ever-larger costs of the retirement system.
The best information available to the general public on the dual liabilities of these tax-consuming twins was provided by an academic economist, Kurt Smetters, of the University of Pennsylvania's Wharton School. He had been hired by the government to examine the extent of the twin deficits. His testimony received national coverage two years ago, but soon was forgotten.
His testimony was published on the web by the House Judiciary Committee. Then it was shifted to a new page, where it is hard to find and harder to read because of its formatting. The text overflows the user's computer screen. I have therefore extracted it. I want you to read some of it. I realize that reading Congressional testimony is sometimes boring. This testimony is an exception. Smetters explained in layman's terms what the problem is, what must be done immediately (March 2003) to solve it, and why nothing is likely to be done. If nothing is done, the government will default, either to its bond-holders (unlikely) or to the elderly who are dependent on government promises (virtually guaranteed).
Smetters testified before the House Subcommittee on the Constitution. I would have thought that he should have appeared before the Ways & Means Committee or some other committee or subcommittee devoted to overseeing fiscal matters. It is indicative of how little interest there is on Capitol Hill in the dollars and cents of these twin programs -- the largest government wealth-redistribution programs on earth.
In the reports published by the media regarding Smetters' findings, I saw no detailed analysis from critics showing that his figures were incorrect or that his assumptions were incorrect. Given the magnitude of what he reported to this obscure subcommittee, there should have been a series of follow-up discussions in Congress, in Washington think tanks, and in the press. But the story, like most stories, soon went down the memory hole. Only because of the web can we still access his testimony. Hooray for the web.
As a former denizen of Capitol Hill -- Congressman Ron Paul's research assistant -- let me assure you that Smetters' performance was the exception: clear, understandable, forthright, and right to the point. If you have been confused about the debate over the unfunded liability issue, his testimony will clear up most of your confusion. I have rarely seen any expert witness get to the point so rapidly and drive home his points more effectively. The man ought to write a newsletter.
As of January, 2003, the public held about $3.8 trillion of government debt. But that statistic only reflects the excess of past government spending over past revenue. To be sure, less debt is a good thing since it requires less future debt service. But it says very little else about the future. For example, a person who is currently free of debt still faces a problem if his future monthly rent is projected to consistently exceed his monthly income. Similarly, U.S. fiscal policy is promising current and future generations many more benefits than can be afforded.
Here, I need to make an observation. If you go to any site that reports the public debt of the United States government, you will find that the officially reported debt is twice as high as the $3.8 trillion figure used by Smetters. I use the United States Government Debt Clock site:
The figure today is over $7.6 trillion. Your share, like your children's share, is a little under $26,000. Why the discrepancy with Smetters' figure? It has to do with the 50 government Trust Funds' ownership of U.S. debt. Smetters is using another (legal) way of assessing the debt. Debt owed to the government's trust funds can be counted as Trust Fund assets, but then the liabilities must show up on the other side. Or you can treat it as a wash. This is what he did in his 2003 report to Congress.
Here are the numbers. Table 1 shows that projected future spending across all federal programs plus the amount of debt currently held by the public exceeds projected future revenue by $43.4 trillion in present value, as of 2003. That imbalance is over 11 times the $3.8 trillion debt held by the public that the government officially reports. $35.5 trillion of this $43.4 trillion imbalance stems from Medicare (Parts A and B) alone while Social Security accounts for another $7.2 trillion. The rest of the government is in relatively good shape and has an imbalance of only $0.68 trillion. These estimates were made with a detailed model developed by Jagadeesh Gokhale and myself during our time in the Bush Administration. They conform to the Administration's newest economic and demographic assumptions, as just released in the President's 2004 budget, and they incorporate all of the President's new proposed policies, including, for example, his new tax reduction plan and prescription drug plan.
So, the heart of the fiscal problem is Social Security/Medicare. They are linked in most people's minds. They are close to being political Siamese twins. What we are seeing today is political sleight-of-hand. For a generation, neither program was called into question by means of detailed presentations of the unfunded liability. Peter G. Peterson, Chairman of the Council on Foreign Relations, has made this issue a personal crusade over the last two decades, but hardly anyone in power paid any attention, which he knew. But in the last few months, President Bush has put Social Security's unfunded liability on the table for discussion. It is significant that he has said nothing about Medicare. The real monster is Medicare. It's the Tyrannosaurus rex in the living room.
Next, what does Smetters mean, "present value"? He explains:
By "present value," we mean that all future spending and revenue are not only reduced for inflation but are additionally discounted by the government's (inflation-adjusted) long-term borrowing rate. This calculation allows us to determine how much money the government must come up with immediately in order to put fiscal policy on a sustainable course. Alternatively, the government must make cuts or increase revenue totaling more than $43.4 trillion in future years so that, when discounted to today, the sum of those cuts and extra revenue equals $43.4 trillion.
The fact is, nobody knows what the government's long-term borrowing rate will be over the next 75 years. It would have been helpful if Smetters had said here what rate he and Dr. Gokhale used. The higher the rate, the larger the unfunded liability.
Another wild card: no one knows what the cost overrun of the prescription drug benefit will be. The Washington Post reported on Feb. 9, 2005 that the White House now estimates the expense as $1.1 trillion over the next decade. This figure is almost double what the White House had officially estimated during Congressional debate over the law in late 2003, months after Smetters gave his testimony. (http://www.snipurl.com/cq8h)
Waiting just four years (until 2008) to implement this type of tax hike would require a permanent tax increase of 17.4 percentage points to close an even larger imbalance of $51.5 trillion. The fiscal imbalance grows by about $1.5 trillion each year between 2004 and 2008 (Table 1). That number is about ten times the deficit that the government officially projects for 2004. As with government debt, the fiscal imbalance grows with interest if no reforms are taken. Got that? The fiscal imbalance grows by $1.5 trillion per year. Why? Because the present programs are like home mortgages that increase when the homeowner doesn't pay off monthly principal. He makes low payments. The contract adds to the principal owed each month whatever the shortfall is in his monthly payment. The Federal government is making zero payments. In fact, it has never made any payments. Congress spends every dime that comes into the Social Security Trust Fund that isn't paid out immediately to retirees. This amounts to about $140 billion a year. So, using an amortization calculator, Smetters and Gokhale estimated that every year, the money not paid to amortize the fund must be tacked onto principal. This figure will grow as the obligation grows unless long-term rates continue to fall. In real estate affairs, such a mortgage is called a backward-walking mortgage. We have a backward-walking unfunded liability. Look over your shoulder. What's that chasm? To cover a fiscal imbalance of $1.5 trillion in a budget of $2.4 trillion would require, basically, that most of the U.S. government be shut down. Not a bad idea! I'd vote for it. But hardly anyone else would. It's preferable, in their eyes, to continue the game of "let's pretend." Smetters drew back from recommending anything specific. That's because it is way, way too late for anything that is both specific and politically possible to solve this funding problem.
For as long as I have followed the debate over Social Security, I have heard or read some version of this phrase: "The longer the delay in reforming the nation's fiscal policies, the more drastic are the changes required." Then nobody recommends anything. Congress does nothing. It's a child's game, and academic economists play it well. Economists are trained to regard change, including reform, as piecemeal and marginal. So, the crisis can be deferred at the margin for another fiscal year. The economist says, "Someday, there will be a day of reckoning." He never says in public: "This problem is now unsolvable in today's political landscape. It will take a disaster to change this landscape. When disaster arrives, it will be too late to solve the problem except by default." To say this would be to become an alarmist. So, economists hesitate. They don't say what their charts and tables and equations tell them, namely, that the American welfare state is beyond the point of no return. But Smetters has come close to saying it, and for this, he deserves enormous credit.
We need to do more than just balance the budget today. We need to make large changes that place Social Security and Medicare, in particular, on a sustainable course in order to avoid placing huge burdens on future generations in the form of higher taxes or reduced benefits. Smetters' point is simple: the magnitude of the funding shortfall is so enormous, and the likelihood of the required tax increase to amortize this unfunded liability is so remote, that nothing effective will be done to solve the problem. It will get worse, growing like fiscal cancer, until open default is forced on the government.
This is true. There is a bias against reform. But this has always been true. From the day that Congress passed the Social Security Act in 1935, it has been true. This is equally true in every Western industrial nation that has imitated the program, which is all of them. The entire scheme was premised on the assumption that amortization tables do not apply to the promises of the Healer State. The Healer State has always been assumed by its proponents to be above the laws of economics. There has never been any question, statistically speaking. Default is coming. This is why a solution to the problem has not been suggested by believers in the Healer State. This is why Democrats were paralyzed when Bush pre-empted them with his Medicare drug subsidy. Senator Kennedy railed that it just wasn't enough, it was a Republican sham. Most of them fell in line and voted for it. Now they say that Social Security really isn't in a crisis. Why? Because they hate the idea that younger workers should be allowed to invest in the market with money that would have gone to the Treasury to be spent immediately by the government. In their view, all of that money belongs to the Healer State. Most of all, they don't believe in amortization tables. In his February 17, 2005 testimony to the Committee on the Budget for the House of Representatives, Smetters updated his figures. They are vastly worse. The prescription drug benefit adds about $17 trillion. He estimates that as of 2005, the fiscal imbalance of the U.S. government, is $65.8 trillion, with Social Security at $8 trillion, Medicare at $63 trillion, and the rest of the government positive by $6 trillion. These are present-value estimates. This means, as he told Congress, that $65 trillion is "the amount of money needed today (if invested with interest) that would place the government on a sustainable course." By comparison, he added, "This $65 trillion imbalance is about $20 trillion more than the value of all U.S. corporations, homes, and land in the United States." By 2010, he estimates, the fiscal imbalance will be just short of $80 trillion. (//www.garynorth.com/SmettersOnLiability2005.pdf) President Bush has launched the most important tax revolt of our time. Reagan lowered marginal tax rates, but he increased the Social Security burden in 1983, when the system technically went bankrupt. Then he signed TEFRA in 1986. The total tax burden probably did not decline under Reagan. By calling on Congress to allow younger workers to opt out of the Social Security Trust Fund boondoggle with part of their wages, Bush has told Congress that he is going to reduce their "revenue enhancement" scam: spending everything that comes into the Trust Fund that isn't immediately spent on retirees. This is a tax revolt. Make no mistake about it. He is proposing that younger workers be given ownership of their private retirement portfolio, even to the extent of being able to pass it on to their heirs. Bush proposes to convert part of Social Security from an annuity to a true inheritance portfolio. The element of compulsion is still with us. The government will approve the types of investments allowed. This is not a free market program. But it has one overwhelming advantage: it will take hundreds of billions of dollars away from Congress and future Presidents. This money will go instead into the capital markets, not into the U.S. Treasury, to be spent by the government. This is a tremendous political benefit. It will put the government on a diet. This is why the Democrats are coming to the defense of the Trust Fund, which is in fact a pure slush fund for the government. They cannot bear the thought that the government won't get to spend that money. They have so many wonderful uses for that money. And now Bush proposes to let capitalists get their hands on it. The horror! Bush has not told the truth, the whole truth, and nothing but the truth about the unfunded liability. He has not come out and hammered on the history of the bipartisan fraud of the Trust Fund, which has been a slush fund from day one. He has not told the people, loud and clear, that he and all presidents since Johnson have used an accounting scam to make the Federal deficit look smaller: not counting the nonmarketable IOUs in the Trust Fund as government debts, and then using the income skimmed from the Fund as if it were not debt-based income -- not as a loan but as free-and-clear tax revenue. But Bush has done the following: (1) admitted that the Social Security system is heading toward bankruptcy; (2) offered hope to younger workers that they can opt out of the Trust Fund with part of their tax money; (3) offered hope to younger workers that this tax money, after their deaths, will go to their heirs directly. He has therefore launched a tax revolt. He is saying that taxpayers should have a right to convert tax payments (FICA) into family capital (inheritance). This is a conceptual revolution. Fiscally, it won't work because Medicare will bust the welfare state. Whatever Bush gets passed by Congress -- if anything -- will be reversed by Congress when it becomes clear that the red ink of the welfare state threatens the government's survival. But this reversal will be seen as a tax heist. It will be aimed at the wallets of voters who thought they were in possession of real capital. A future tax grab will help to de-legitimize the welfare state. President Bush has used the word "bankruptcy." Words can be powerful. This one is very powerful. When something goes bankrupt, it loses legitimacy. When Mikhail Gorbachev declared in 1988 the Soviet Union was essentially bankrupt -- the 1,000th anniversary of the establishment of the Russian Orthodox Church -- he injected a lethal dose of poison into the Communist body politic. Within there years, the Soviet Union was no more. He called for more loans from Western banks. He called for economic reform. None of this worked. The Soviet Union was an economically empty shell, and had been from the beginning. Communism had always been unsustainable economically. The USSR could not keep up with the West except militarily. Gorbachev went public with the truth in 1988. I had been saying this ever since I wrote Marx's Religion of Revolution (1968). A handful of free market economists had been saying it for decades. But we were not taken seriously. Because of Soviet military power, Western analysts assumed that the USSR had a strong economic base. It never did. It was, in Richard Grenier's marvelous phrase, Bangladesh with missiles. When Antony Sutton's 3-volume study was published in the early 1970s, it proved that the USSR had either bought or stolen 95% of its technology from the West, beginning in 1917. His books were ignored. I am aware of no academic history journal that reviewed the second and third volumes, despite the fact that they were published by the prestigious Hoover Institution. Yet within a few weeks of the collapse of the USSR in 1991, used book bins filled up with books on Marx and Marxism. Overnight, faculty Marxists became a laughing stock among their peers. Liberals respect power, and when Communism visibly lost power, they turned on the Marxist peers like cannibalistic rats. This is why Bush's reform crusade constitutes a knife at the throat of the welfare state. It is not because his reform, if passed, will work. It is because it won't work. It cannot possibly keep the Healer State from going the way of all flesh. He has used the dreaded word "bankruptcy" with respect to the crown jewel of the welfare state. He has said in public what better-informed younger voters -- always a small minority -- have worried about for two decades. George W. Bush is Gorbachev in blue jeans. When the Medicare default comes, the welfare state will face its day of reckoning. The weakest members of society -- old, sick people -- will be told to get back in shape. They will be told to go to their families or to charities for aid. Or maybe they will just be sent checks that entitle them to money that has depreciated to the point of oblivion. This, I suspect, will be the preferred form of default by welfare states around the world. Inflation is the lowest-cost way in the short run for political debtors to escape their liabilities. Politicians live in the short run. The United States is the world's largest debtor. The results of a 2004 Zogby poll, funded by the libertarian Cato Institute, shows support for the proposed reform. The press release is worth reading because it shows the following: (1) There is a majority out there that has lost faith in some of the promises of the government. (2) People vote their pocketbooks. (3) The Democrats don't believe in democracy. But it also revealed that the vast majority of voters really don't think there is a looming crisis. In short, they don't believe in amortization tables. Despite a drumbeat of criticism for weeks by congressional Democrats and a concerted public relations campaign by powerful interest groups such as the AARP against Social Security choice, 51 percent of those polled by Zogby support the introduction of individual accounts. Only 39 percent opposed individual accounts being part of any Social Security reform.
Not surprisingly, the results showed a split along age lines, with younger voters (61 percent among those under 30, 58 percent of those under 50) strongly in favor of individual accounts, while those over 65 were opposed (55 percent against). However, opposition by seniors dropped to just 45 percent if they were assured that their own benefits would not be affected. Reflecting the sharp partisan divide nationally, opinion of individual accounts also split along political lines. Republicans were overwhelmingly united behind the reform proposal, which is a priority of President Bush's second-term agenda (74 percent supporting, 14 While few voters (14 percent) agreed with President Bush that Social Security was in "crisis," an overwhelming majority (61 percent) said that the New Deal-era system was facing "serious problems" that required "major changes." Few voters (5 percent) accepted the argument that Social Security is fine or could be fixed with only "minor, incremental changes" (19 percent). When asked whether they believed private investing or the current Social Security system is riskier, voters split nearly evenly. Roughly 41 percent thought private investment is riskier, because "benefits could go down depending on how investments perform." But slightly more (44 percent) thought the current Social Security system was riskier "because it cannot pay all the benefits promised." Again, voters split by age, with young people believing Social Security is riskier (52 to 39 percent) and seniors believing private investment is riskier (46 to 31 percent). (http://bit.ly/ZogbySS2005) I most appreciated this finding: "Few voters (5 percent) accepted the argument that Social Security is fine or could be fixed with only 'minor, incremental changes' (19 percent)." All of the talking heads who have chattered on and on for three decades about how easy it would be to fix the system if we just made a few changes have failed to persuade the voters. I am not optimistic, however. Voters still have no clue about the amortization costs. Let's say that Social Security $8 trillion in the hole: a compromise between Smetters' $7.3 trillion (2003) and Peterson's $10 trillion (1999). At 6%, amortization over 30 years -- the time period that is imposed by the government on pension funds covered by the ERISA bail-out program -- would require $576 billion a year. This money would have to be invested in free market investments that will pay 6% a year for 30 years. Congress would not be allowed to gets its hands on a dime of this money. Is this reform politically possible? Of course not. The Bush Administration is proposing a budget with a $427 billion deficit for fiscal 2005. So, in round numbers, the government would have to find a trillion extra dollars between now and September 30 to keep from going into the red. Also, Congress hasn't yet allocated a dime to amortize Medicare. I would not have predicted a battle over this previously untouchable welfare state icon. That the President would risk this indicates that Karl Rove thinks it's winnable. The loss of confidence by younger workers in what was the crown jewel indicates that the ideology of the welfare state is now in a deficit condition. Despite the public schools, and despite the left-wing media, some awareness has at long last spread to a majority of younger voters that the New Deal's chain letter is not going to pay off for them personally. At some point, they will vote their pocketbooks with respect to this issue. There may be a swing back to the Democrats if the war in Iraq is not settled by early 2008. But Social Security is no longer the third rail of American politics. Medicare is. Philip Longman's book, The Empty Cradle, is a bombshell. It was published by the neoconservative publisher, Basic Books (2004). It complements another recent book by Ben Watenburg, Fewer. These books reveal that fertility rates are falling all over the world. The population bomb has become a dud. Because of this, both authors conclude, the existing retirement systems threaten to collapse. Longman points out that the health care costs for 12% of the population -- over age-64 oldsters -- absorb 5% of the nation's GDP. There are lots more of them on the way!
Longman has written numerous articles on the looming population dearth and the demise of retirement programs. In May, 2004, he wrote an essay in Foreign Affairs, the journal of the Council on Foreign Relations. When an article makes it into this journal of opinion, the topic has become a matter of discussion inside the American Establishment's elite. Never did I imagine that I would read the following in a CFR publication: The crown jewel of the welfare state is zirconium. The middle-class victims of the compulsory chain letter will have to be persuaded to fish or cut bait. The preliminary shift in public opinion has already taken place. The loss of faith is in the opinion polls. Even more astounding, the shift of opinion in the elite is slowly taking place. The amortization of the modern welfare state has been postponed for so long that the system is now statistically doomed. Those of us on the fringes of the American Right have said this since the Johnson Administration, or even earlier. The Left is now slowly and painfully coming to the same conclusion. For us, it is a cause of rejoicing. For them, it will be the world turned upside down. It will be Yorktown, and they're Cornwallis. The fact that you and I recognized all this several decades ago should have persuaded us to abandon faith in a government-supplied retirement program that would sustain us in comfort in our golden years. Most of us should have begun making preparations for retiring into new careers -- and I don't mean as Wal-Mart greeters. I made this decision in the 1960s. It's why I worked to become a professional writer. People don't like to change. They don't like to admit past mistakes. But the amortization table of the American welfare state cannot be rationally denied. The Left will have to accept the fact that the good ship Welfare State has hit an iceberg. It's going down. The general public has yet to face the fact. They still think that something will turn up. Nothing will turn up on its own. Families must take responsibility for their futures. This means that oldsters must develop new income streams while they still can. That's why I'm going to open a day care center at age 63. It's time for you to work out an exit strategy from the implosion of the welfare state. I think that implosion will take the form of inflation and the rationing of medical services: standing in line. The Left talks a good line, but any political movement that favors legalized abortion, and even tax-funded abortion, will not find it difficult to make the transition to pro-euthanasia. Your ability to develop alternative income streams is a life-and-death matter. It's a demographic problem. There will be too many mouths to feed. Older people must stay productive in order to compete with younger workers who are productive. In the bidding for consumer goods, the person with a stream of earned income can outbid the person who doesn't have one, unless that person has a pile of marketable assets in reserve, which very few people do -- maybe 5% of the population. If I can keep earning a living, I can transfer my capital to my children instead of to strangers who sell me what I buy. Those of you who are planning on retiring in the next ten years had better find something effective to do with your Social Security money. The threat, as always, is inflation. The government has got to keep the checks going out. In my view, the best bet is income producing real estate at today's low mortgage money. But a small, 3-bedroom, 2-bath home, move in, and thereby secure a 30-year fixed-rate mortgage, which is available only for an owner-occupied home. Rent your existing zero-mortgage home. Use the depreciating dollars sent by the government to pay off the new mortgage. At some point, you can move back into your existing home and rent the new home. Live off the rents, which you can raise if inflation hits, not Social Security.
Such tax increases, of course, would probably put our economy into a tailspin. And so the above example is not intended as policy advice. But these calculations show the magnitude of the current fiscal imbalance and emphasize the need for real reform today. The longer the delay in reforming the nation's fiscal policies, the more drastic are the changes required.
Let me describe the current $43.5 trillion shortfall another way. Instead of raising payroll taxes, suppose we eliminate half of the rest of the federal government in 2004 except for Social Security and Medicare. In particular, we eliminate half of the federal government's spending on the military, homeland security, roads, education, veteran's affairs, agriculture, labor affairs, NASA, commerce, law enforcement, Medicaid, etc. -- everything expect for Social Security and Medicare. And we do this not just in 2004 but forever. Also suppose that we don't change federal taxes so that people continue to pay taxes as projected. Now, for example, the $150 billion deficit projected for 2004 would turn to a $600 billion surplus! That sounds like a lot of money. But we would still accumulate surpluses too slowly over time. In particular, we would still be left with a fiscal imbalance of about $3.2 trillion. In other words, shutting down half of the rest of government forever is not enough to put the U.S. fiscal policy on a sustainable course.
And so why don't we see real reform yet? The reason is that, unfortunately, the government's budget documents are not forward looking. The $43.4 trillion imbalance is not shown in the official budget. Instead, the budget directs the attention of the public and policymakers to the level of government debt, which, in turn, creates a bias against reform. (http://bit.ly/Smetters2003)
WASHINGTON--A majority of Americans agree that younger workers should be allowed to invest a portion of their Social Security taxes in individual accounts, according to a new poll conducted by Zogby International for the Cato Institute.
Governments must also relieve parents from having to pay into social security systems. By raising and educating their children, parents have already contributed hugely (in the form of human capital) to these systems. The cost of their contribution, in both direct expenses and foregone wages, is often measured in the millions. Requiring parents also then to contribute to payroll taxes is not only unfair, but imprudent for societies that are already consuming more human capital than they produce. (http://bit.ly/LongmanFA2004)
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