Laurence J. Kotlikoff & Scott Burns

Page Contents

Welfare entitlements

Social Security

Medicare & Medicaid

FUTURECASTS online magazine
Vol. 7, No. 7, 7/1/05.


A "conspiracy of denial:"




  Intentional ignorance of inconvenient facts characterizes the financial planning of the U.S. government and the governments of many of the world's advanced nations. In "The Coming Generational Storm: What You Need To Know About America's Economic Future," Laurence J. Kotlikoff and Scott Burns reveal the Alice in Wonderland accounting fictions that permit the U.S. government to ignore the unsustainable nature of the nation's welfare entitlements.

Everyone has too much invested in the entitlement welfare Ponzi scheme to acknowledge the inevitability of its collapse.

  Today's leaders finesse today's problems by making promises of future benefits that are far beyond the means available for fulfillment. Nothing better typifies this tendency than the recent legislation that adds a vast prescription drug benefit program onto an already obviously unsustainable Medicare system.
  It is "a conspiracy of denial," the authors point out. Our politicians "studiously [avoid] acknowledging the nation's long-term insolvency and its implications for future generations." The American people accept the "malarkey" of current political discourse because they, too, determinedly desire to remain ignorant of the inconvenient facts. Everyone has too much invested in the entitlement welfare Ponzi scheme to acknowledge the inevitability of its collapse.
  This tendency is not unique to the federal government. Many of the nation's most important corporations now stagger under legacy costs - pension and health care benefit obligations assumed in the past - mindlessly agreed to by prior management and union leaders. Many state government budgets are similarly overloaded.

  Although they provide a wealth of detail, the authors actually offer nothing new. Only those who are not paying attention - and those determinedly in denial of the inevitable collapse of the vast Ponzi scheme that is the entitlement welfare state - will be "shocked - shocked" by the reality presented in this book. The unsustainable nature of the medical entitlements has been clearly explained by FUTURECASTS  from its earliest issues. This review thus need present just a few of the many details provided in this book.

There is simply no way for the post-baby boom generations to fulfill these obligations.

  The U.S. now has unfunded future obligations of about $51 trillion. This is a very conservative estimate. It is about 4.5 times the size of today's Gross Domestic Product (GDP). There is simply no way for the post-baby boom generations to fulfill these obligations.
  Taxes cannot be raised enough to make a dent in the problem. Vast benefit cuts - unthinkable today - are inevitable. The doubts are only about the extent of the financial dislocation - the extent of inflation and depressed economic conditions - that will occur before the painful reforms are forced upon a reluctant nation.

  Intentional ignorance of  inconvenient facts is a plague that infects more than just the political class. It infects much of the nation's intellectual community and even extends into its top academic institutions wherever belief in the entitlement welfare state is strong. This intellectual plague was strong enough to sustain ridiculous socialist dogmas for decades before the worldwide collapse of socialist systems. Old dispirited socialist ideologues like Harvard's much honored John Kenneth Galbraith have since then fallen back on the entitlement welfare state as a substitute dogma. They determinedly ignore the impossibility of sustaining such programs.

  The authors expect that inflation will ultimately be the financial poison of choice for dealing with this mess. Vast amounts of money will have to be created to meet the rapidly expanding costs of "the nations implicit entitlement obligations." This will lead to ruinous rates of price inflation. They view market reactions in mid 2004 as evidence that the markets are already feeling the noxious effects of these unsustainable burdens.

  Cassandra forecasters generally tend to be premature in their predictions. The dire events are so clear to them, they cannot understand how others can remain in denial. The inertia of events persistently trips them up.
  As soon as the Fed demonstrated its determination to maintain control and began allowing its short term interest rates to rise, the situation stabilized. The markets still have great confidence in the U.S. Federal Reserve Board. Long term interest rates, gold and energy prices stabilized below peak levels, and the devaluation of the dollar stopped.
  Difficulties are certainly coming. They will begin to manifest themselves in this decade, and will probably reach unmanageable levels before the end of the next decade, as discussed below. However, they are not yet unmanageable.

Even before the new prescription drug program, Medicare costs were increasing more than 2 1/2 times faster than the wages that provide the resources to pay them.

  It is the unfunded Medicare and Medicaid benefits that constitute the primary unsustainable burden. This burden dwarfs that of Social Security. Even before the new prescription drug program, Medicare costs were increasing more than 2 1/2 times faster than the wages that provide the resources to pay them. By 2012, the first of 77 million baby boomers will become eligible for Medicare benefits.
  The book goes into considerable detail about the aging population. Almost 20% of the population will be 65 or over by 2030 - double the percentage at 2000. Workers per Social Security beneficiary have declined from about 16.5 in 1950 to 3.4 in 2000. The ratio will be just 2 in 2030.

  There is NO Social Security Trust Fund. FUTURECASTS  has repeatedly explained the fictitious nature of the trust fund. All the surplus receipts from the Social Security taxes have been spent for other current needs. Thus, the real crunch begins sometime next decade, as soon as payroll tax income becomes less than current outgo and general revenues have to be tapped to make up the shortfall. It makes absolutely no difference that those general revenue funds will be going to pay off government bonds rather than directly for Social Security expenses. However, at least for the Social Security entitlement, there are reasonable fixes available.

  Moreover, these figures are based on conservative calculations that have historically underestimated the pertinent population trends, the authors point out. Nor will these trends end with the demise of the baby boomers, since it is also related to factors of declining female fertility rates and continuing advances in longevity.
  Moreover, rising divorce rates and female longevity mean that more of the elderly will be alone - dependent on their children if they can't take care of themselves. However, many won't have children or will have only one or two - and their children may be living far away - or themselves may be old enough to be relatively frail.

  ""As marriages shorten, as mothers have fewer children, and as we become geographically dispersed around the country, the care and support elderly people could hope for -- no, expect -- from their children is shrinking. Sometimes it simply is not there."
  "The natural caring of family is strained and reduced by the same demographic change that will put the nonfamily substitutes -- Social Security and Medicare -- under extreme financial pressure."

  This demographic phenomenon is worldwide - except in the Muslim world and in Africa.

Generational accounting:



  There are lies, damn lies, and statistics, as Mark Twain famously remarked. Even worse (as FUTURECASTS  has pointed out), there are government statistics. (See, "Economic Statistics and Macro Econometrics: The Figures Lie,") The book goes into considerable detail over just how bad government statistics are. Indeed, they are awful - and getting worse as the pressure increases to understate the nation's exploding financial problems.

  To measure the nation's real debts - "the fiscal burden we are leaving our kids" - the authors employ "generational accounting." This technique has been widely applied by international financial agencies and by central banks and finance ministries in many countries. It is used in the U.S., but the results are not widely disseminated.
  The authors apply this accounting methodology to all levels and agencies of government together. They calculate "the burden on future generations" as:

  • "The present value of government purchases, plus,"

  • "Official debt, plus,"

  • "Implicit debt, minus,"

  • "The present value of taxes paid by current generations."

The Medical entitlements and Social Security implicit debts alone total about $72 trillion. To pay for them will require a doubling of payroll taxes by 2030 or a tripling by 2075 - an obviously impossible course of action.

  Implicit debt is the major factor. It is the present value of all the transfer payments - Social Security, Medicare and Medicaid and food stamps and other welfare programs - to present generations. The medical entitlements and Social Security implicit debts alone total about $72 trillion. To pay for them will require a doubling of payroll taxes by 2030 or a tripling by 2075 - an obviously impossible course of action.
  The real problem is thus not the official debts - bad as they may be - but the implicit obligations of the nation's exploding entitlements. Even worse is the nation's political dynamics.
  Benefits for retirees and near retirees - who vote in large numbers - are politically untouchable. Younger voters do not vote in such large numbers, but they do vote - so increases in already high payroll taxes are also politically infeasible. Children, grandchildren and the unborn don't vote - so the burden is simply passed off on them as much as possible.

The Democrats refuse to consider benefit cuts, and the Republicans refuse to consider tax increases, and neither party wants to push too hard against the position of the other party for fear of losing some voters in the middle.

  That these massive entitlements are unsustainable is obvious. So, what is the political response of the Bush (II) administration and Congress? They have enacted a major increase in the Medicare entitlement - for prescription drugs - and have presided over major increases in discretionary spending - even though the nation is increasingly burdened by the increasing expenses of a new conflict of long duration. Throw in some tax reductions, and the official debt, too, has ballooned.
   Both Democrats and Republicans have political reasons for an approach that involves the determined ignorance of the inconvenient facts of reality. The Democrats refuse to consider benefit cuts, and the Republicans refuse to consider tax increases, and neither party wants to push too hard against the position of the other party for fear of losing some voters in the middle.

  "Setting up the debate this way gives both sides what they want: an excuse to tax too little and spend too much."

Productivity increase is significantly less than the rate of increase of entitlement burdens - and there is a limit to how high taxes can go without crippling the economy.

  The authors recognize that productivity growth will permit future generations to bear far higher burdens than present generations. With just 2% productivity growth, lifetime earnings should double from generation to generation. Nevertheless, this increase is significantly less than the rate of increase of entitlement burdens - and there is a limit to how high taxes can go without crippling the economy.
  "Lifetime net tax rates" would have to at least double to keep pace. Since this projection is based on very optimistic assumptions, it is probably understated. The authors note how the Social Security trustees intentionally understate longevity gains - by as much as four years - to remain blind to the true extent of the system's problems. The Congressional Budget Office revenue projections are also probably overoptimistic. The CBO assumes real wage growth of 2.2% per year even though the rate since 1959 has been only 1.7%. Similarly, the Medicare trustees have in recent years become very optimistic about the rate of increase in expenditures per beneficiary. The cost by 2030 could be about 50% greater than currently calculated. (Costs that are 250% more than calculated are a much more likely result.)

Money is fungible. The division of the budget into discrete "funds" for various purposes paid for by revenues from dedicated taxes - i.e., Social Security, Medicare, etc. - is an obvious fiction.

  The government "fiscal gap" has been calculated as $45 trillion as of 2030 - assuming that the tax rate burden remains the same as today. This is four times the size of today's annual output. The Federal Reserve has calculated the nation's net worth as less than $40 trillion. "We are thus technically bankrupt," the authors assert. If the nation waits 15 years to begin tackling the problem, the fiscal gap increases to about $76 trillion.
  These are figures developed for the Bush (II) administration - figures it refuses to acknowledge. The Clinton administration was guilty of similar practices.

  "To recap, the CBO routinely assumes the government will miraculously shrink, the Clinton administration censored generational accounting, during its first term the Bush II administration yanked publication of the $45 trillion fiscal gap, the Treasury blocked generational accounting by the OECD, the Social Security trustees have ignored their own technical experts in forecasting longevity, the CBO is ignoring its board of advisers' generational accounting recommendations, the Social Security trustees have understated the system's financial problem by a factor of three and buried the truth deep inside their annual report, and the Centers for Medicare and Medicaid Services have low-balled future growth of Medicare expenditures by a factor of two. As indicated, the Bush II administration purposely suppressed the true costs of the Medicare drug bill until it was safely signed into law."

  Welcome to the dysfunctional world of government management. Here is a graphic example of why socialism failed - why the entitlement welfare state must fail - and why the avaricious beast that is government must be strictly limited in the resources it can claim.
  The implications for those who advocate enactment of the liberal agenda - who advocate an ever-increasing government role for an ever-enlarging government - are obvious - except for the liberals themselves who perforce are in determined intentional ignorance of such inconvenient facts. Of course, there are very few small government conservatives in Washington, and the big government conservatives are in a state of denial similar to that of the liberals. See, Government Futurecast, Part II, for an explanation of the inherent ineptness of government management.

  The Medicare drug benefit as currently calculated increases the fiscal gap by $6 trillion to $51 trillion.

  Of course, one should be more than a little skeptical of the authors' calculations. However, that is not the point. The cost of the Medicare prescription drug program will probably be twice the cost calculated by the authors. Remember that the original Medicare program was only supposed to cost about $9 billion per year by 1990. The actual cost was about $90 billion - only half the increase being caused by general inflation. In any case, the looming "fiscal gap" is huge and unsustainable.

  The authors estimate the vast increases in taxation that would be needed to eliminate the fiscal gap in the absence of benefit cuts. (These calculations, too, are irrelevant. Substantial tax increases are politically undoable and economically disastrous.)
  An entire chapter is provided explaining some of the fictions of government financial reporting.

  Some of the authors' own concepts are more than a little dubious - relying heavily on broad economic mathematical models and the propaganda myth of economics as "science." For example - the authors deal with the impacts of the sale of government assets as a mere mathematical exercise. They totally ignore the inherent ineptness of government management that frequently changes government commercial "assets" into a burden rather than a benefit for the government.

  However, the authors are correct in their expectation that governments will frequently botch even the relatively easy task of asset sales - and frequently misspend the proceeds in ways that further undermine their finances.
  Their most important point, however, is obvious and simple - - money is fungible. The division of the budget into discrete "funds" for various purposes paid for by revenues from dedicated taxes - i.e., Social Security, Medicare, etc. - is an obvious fiction.

All the surplus funds received from payroll taxes have already been spent for other government needs. A government budget is in reality just one pile of receipts and one pile of expenses - with one overall surplus or deficit - with increases and decreases impacting all segments equally.

  THERE ARE NO "TRUST FUNDS." All the surplus funds received from payroll taxes have already been spent for other government needs. A government budget is in reality just one pile of receipts and one pile of expenses - with one overall surplus or deficit - with increases and decreases impacting all segments equally. It is the current existence of future obligations above reasonable expectations of future receipts that is the complicating factor. (One obvious exception - of limited application - arises from self financing programs like toll roads.)

  "The only meaningful analysis to assess our fiscal condition looks at all the government's programs comprehensively based on what economists call the government's intertemporal budget constraint. This constraint requires the government to cover the present value of all its expenditures - including debt service - with the present value of all its receipts. This is a fundamental relationship. It says there is no free lunch, even in government."

  Again, there are more than a few problems with these concepts. Accounting is a very nebulous art - a practical art - not a science. It calls for professional understanding and evaluation, not mere mathematical calculation.
  For example, to what extent do dollars circulating abroad constitute a future obligation, and to what extent do they constitute a valuable and enormously profitable service that the U.S. performs for the world by providing a reliable reserve currency? This is no minor matter - there is about $700 million in cash circulating outside the country, and many hundreds of billions in low interest Treasury bonds and notes held abroad. However, what happens to that calculation if the dollar's reserve currency status becomes undermined? These are questions for professional evaluation - not mere mathematical calculation.

  Nevertheless, the authors' assertion is clearly correct that what is needed is generational accounting - something the government avoids like the plague.

Productivity growth:





  Factors that are expected to increase the resources available for the nation's future needs are reviewed by the authors. These include productivity increases, capital deepening, capital inflows from abroad, inheritance flows from increasingly prosperous parents to their children, employer retirement benefits, immigration of younger workers, supply-side "voodoo" economics, and that ever popular standby - the elimination of waste, fraud and abuse (like the shmoo in the Lil Abner cartoon strip - a resource of bottomless extent).

  The authors repeatedly slam supply-side "voodoo" economics. They repeat the oft heard assertion that the 1980s tax cuts failed to increase revenues and thus caused the surge in budget deficits of that decade. They claim the same thing is happening now, with tax revenues at just 16.2% of 2004 GDP - well below post WW-II averages.

  However, by 2005, revenues had climbed back over 17% of GDP - close to post WW-II averages - and GDP had increased substantially - just as happened in the 1980s. The official deficit has thus declined sharply to $350 billion. Supply side tax reductions do in fact increase tax revenues, but that takes some time to develop. Unfortunately, Congress can increase spending much faster.

  The murky calculation of "productivity growth" is discussed at some length by the authors. They explain some of the ways in which productivity growth was overstated in the 1990s.
  Their point, however, is that  entitlement payments are in several ways linked to productivity growth, so the result is almost a wash. As wages rise to reflect labor productivity growth, so do payroll tax receipts and the costs of medical and other services acquired by government.

  To repeat, these analyses have profound flaws - but it matters not. The nation's entitlements are so obviously unsustainable that they constitute the proverbial broad side of a barn. Only by intentionally shooting in the other direction can that fact be missed.
  Indeed, as stated, the weaknesses in the authors' calculations result in a gross understatement of the entitlement problems. Breakdown is not 75 years away or even 25 years in the future. It may come before the end of the next decade - rendering all longer term calculations irrelevant. The Social Security revenue surplus turns to deficit before 2020. The cost of the Medical entitlements will triple before 2020. If that isn't enough to do the trick, they will double again well before the end of the subsequent decade.
  The baby boomers will not escape the consequences of their blind support for entitlement welfare programs.
  Of course, with crisis comes opportunity. It is grossly stupid to underestimate the resiliency of flexible capitalist market systems once unsustainable policies are liquidated. It is a common weakness of Cassandra prophets to ignore the capacity for recovery from expected crisis.
  How the nation will respond to the onrushing crisis is the real question - a question that requires evaluation, not mere accounting calculations. Higher taxes will not be tolerated, and benefit cuts will be stridently fought - but it is benefit cuts that will ultimately prove unavoidable.


  Running the monetary printing presses and more modern methods of expansion of the money supply is, as a practical matter, the most likely way the government will initially try to pay the nation's obligations.

Inflation will not pay down the government's entitlement obligations, since those obligations rise faster than any degree of inflation that the electorate is likely to tolerate. 

  No politician will propose the kind of tax increases and/or benefit cuts required, so monetary expansion and subsequent price inflation will be the initial major response to the nation's financial problems. The authors provide some historical perspective on inflation and some explanation of its processes. 

  Again, those familiar with economics will here find some serious flaws with the authors' presentation - but again, it will not matter. The problem is every bit as serious as presented. See, Understanding Inflation.

  However, inflation will not pay down the government's entitlement obligations, since those obligations rise faster than any degree of inflation that the electorate is likely to tolerate. The authors provide some explanation of why entitlement costs always soar out of control. The costs of the other goods and services that government buys will rise at least as fast as inflation. Thus, inflation will not come close to resolving the issue. (But it will in its own right inflict societal pain that the electorate will ultimately refuse to tolerate).
  The other advanced nations are in even worse shape than the U.S. - except for Great Britain which - thanks to Margaret Thatcher - is in much better shape than the rest.







  The baby boomers begin to retire in 2008. Reality will then become increasingly undeniable as the succeeding years roll by.

  "Each passing year will bring us closer and closer to 2008, when the oldest baby boomers become eligible to collect Social Security retirement benefits and are out in full force to vote in the presidential election. That event is going to make a big impression on the public's collective conscience. So will the drip, drip, drip of information that will be coming out about our long-term fiscal woes."

  The crisis could come with relative suddenness soon thereafter, the authors suggest. Stagflation - with double digit inflation and unemployment woes running at the same time, and a depression soon thereafter - as in 1980 - but with the added burden of unsustainable entitlements that can prevent recovery - is a likely scenario.

Social Security:

  There is "a host of serious efficiency, equity and information problems" with Social Security. The authors provide some of the details.

As payroll taxes have risen, Social Security has become an economist's nightmare of perverse incentives.

  This simple income transfer system has slowly accreted 2,528 separate rules that nobody really understands - and is administered by a computer program written in an ancient code that is incomprehensible to modern programmers. As payroll taxes have risen, Social Security has become an economist's nightmare of perverse incentives - especially for second earners and the young.

  The authors offer a reform proposal. For starters, the financial gap caused by the plan is to be filled by a federal retail sales tax. Required payroll taxes would be replaced by required contributions to individual personal accounts owned by beneficiaries but controlled by the government and invested in a "market weighted global index fund of stocks, bonds and real estate." The "socialist" implications are readily acknowledged.
  However, the shifting from a defined benefit to a defined contribution system is long overdue and an imperative for any practical reform effort. Currently accrued benefits would be paid, but no more would be accrued, so the current defined benefit system would phase out over time.
  Survivor and disability benefit systems would remain intact. The retail sales tax would begin at 12% to substitute for the Social Security part of the payroll tax, and would phase out in part as the Social Security defined benefits phase out.
  After the phase out period, a retail sales tax of about 3% would remain. Protections for secondary earners and non-earner spouses would be included in the advocated reforms. The remaining sales tax would fund government contributions to the system to provide adequate benefits on a progressive basis for the poor, the disabled and the unemployed. The government - as administrator of the system - would guarantee the principle amounts in the individual accounts - so beneficiaries could only gain from the investments.
  Ten years prior to retirement age, the other investments in a beneficiary's individual account would be gradually liquidated and reinvested in appropriate inflation indexed government bonds to finance an annuity.

  "The plan is progressive -- it helps the poor. It protects spouses. It protects divorcees. It protects the disabled. It protects the unemployed. It protects minorities and others with early death rates. It provides everyone with the same return. It puts everyone in the market. It limits the downside risk of investing in the market. It minimizes transaction costs. It keeps investment bankers and insurance agents from getting their paws on our money and reducing our investment returns. It provides everyone with the same annuity deal. It limits the market risk of annuitizing one's assets. It ensures ongoing, inflation-indexed income for the elderly as long as they live. It achieves maximum portfolio diversification. It precludes huge Social Security payroll tax hikes. And it distributes the burden of paying off benefits owed by the old system fairly and squarely."

  Isn't it wonderful how simple and reasonable these schemes always appear before they actually become operational? As always, the devil is in the details. Aside from the obvious benefits of the shift from defined benefits to defined contributions, a host of questions quickly arise.
  Does anybody actually think that the federal government will be content with just 3% once it gains authority for a sales tax? What will be the economic impact of the sudden addition of a 12% sales tax? Will it be applied to all sales or will some necessities be exempt?
  The authors suggest using a Constitutional amendment to authorize and limit the tax. Do they actually think the states are going to ratify this competition for their sales tax revenues? Setting even a part of an entitlement scheme in Constitutional concrete will be of benefit only to the lawyers. What if 3% is more than is required - or more realistically, is not enough? The plan is, after all, an open ended welfare entitlement for the poor and disabled. Didn't the nation just recently reject that approach? Will every alteration in the plan require the litigation of Constitutional questions?
  And, who is going to vote all those shares? What policies will guide those votes?
  The government will quickly become the largest shareholder in most of the advanced world's largest corporations. What will its policy be towards mergers and acquisitions? What will its policy be towards board of director contests? Will Democratic administrations force acceptance of unionization on nonunion entities? What will its policies be towards outsourcing or the shutdown of facilities or decisions to shift production abroad? What provisions will it favor in articles and bylaws? What will happen if its policies conflict with those of individual states or other nations?
  What nations and which securities will be in - and what nations and which securities will be out - of the "global" index fund? Who will manage the real estate? Experience indicates that commercial real estate declines in value at about 10% per year under government management. What strings will be attached to - what policies will be imposed through - all these investments? Will the government be constantly involved in or threatening shareholder lawsuits? How will the government deal with the obvious conflicts of interests that will arise whenever it considers legislation or regulations that impact major economic entities?
  There are, after all, clear reasons why socialism failed. After all, the same clowns who are currently screwing up the current entitlements will still be in charge. What horrors will they add to the authors' proposed scheme?
  There are, in fact, obvious fixes for Social Security that do not involve disastrous experiments with socialism or government management. Shifting to defined contribution mechanisms - indexing accrued benefits to inflation rather than to wages - and increasing the retirement age to reflect the reality of the increasing longevity of health and life are simple and more than reasonable. The reduction or elimination of expected but unsustainable benefit increases is viewed as "benefit cuts" only in the fevered brains of left wing ideologues.

Medicare and Medicaid:






  The Medical entitlement system is broken - and Congress is crazy for adding a huge prescription drug entitlement to a program that is already clearly unsustainable, the authors point out.

  "Mind you, we agree 100% that the elderly need prescription drug insurance. And we think it should be a key part of Medicare. What we don't agree with is engaging in a major expansion of Medicare when the government is completely broke, when it has no idea how to pay for the Medicare program we've already got, and when the elderly who are to receive this insurance aren't being asked to pay the premiums necessary to cover its costs."

"There is no way that we can maintain Medicare's fee-for-service method of paying the elderly's health care bills."

  It is the "fee-for-service method of paying the elderly's health care bills" that the authors believe is the key weakness in the system.

  "It's time to get real. There is no way that we can maintain Medicare's fee-for-service method of paying the elderly's health care bills. We can't maintain that program in full, and we can't maintain it in part. Doing so will always leave the system open to adverse selection, which is economist speak for gaming the insurance systems. In this case, private insurers running HMOs will try to enroll the healthy oldsters and ditch the unhealthy ones."

  The authors' answer is a flexible annual voucher system. The size of each participant's voucher would vary according to their health that year. All medical records would be provided to the government for this evaluation process and for other medical purposes. Participants could then use that voucher to buy basic insurance suitable for their basic medical needs. Insurers and HMOs would be required to offer basic plans to all, and are free to market additional coverage to those who are willing to purchase it. Then comes the essential kicker - for cost growth containment.

  "From a cost perspective, the key thing to bear in mind is that the government can establish the values of the vouchers each year such that the total [Medical Security System] expenditure on vouchers per beneficiary grows only as fast as real wages."

  Once again - all these vast government programs seem so simple and reasonable when initiated - and how impossibly complex the reality always turns out to be. To repeat, Medicare, too, was supposed to be just a modest $9 billion program by 1990. What the authors propose is essentially a price fixing scheme for an incredibly complex economic activity. The government once again will fail in its efforts to substitute an administered pricing mechanism for market prices.
  The authors assume that costs for "basic" needs will grow only as fast as real wages - an assumption of facts definitely not in evidence. No insurer would tie itself to a program where income from government vouchers is guaranteed to increase at a much slower rate than program expenses. Then, there is the problem of how government would evaluate each participant's peculiar "basic" needs - a process of inherently enormous complexity requiring an enormous and complex bureaucratic effort.
  The authors' only concern seems to be the need to maintain confidentiality - a task they assume is as doable as with tax records. The massive - highly skilled bureaucracy required - the vast regulatory effort - the immense litigation to resolve inevitable disputes - the sheer complexity of the task - seems disconcertedly to have escaped them.
  And, that's just for starters. The authors don't even address the politics of trying to constrain the scope of "basic" medical needs.

  The authors sum up:

  "So, yes, there is a way out of the morass. It involves fundamental reforms of Social Security, Medicare and Medicaid; the enactment of a new retail sales tax; the elimination of the unaffordable tax cuts; and restraining discretionary spending [to the 7% of GDP level experienced before the Bush (II) administration]."

 Of course - even if Congress could be induced to consider such proposals - you can always rely on Congress to attach a host of additional goodies when it enacts such systems. You can always rely on Congress to attach a host of strings - involving some of its many other concerns - with efficient administration among its least concerns. As FUTURECASTS  has explained since its inception - government management is inherently inept - and for any program of any substantial complexity - government has a negative learning curve. The addition of a major prescription drug benefit to a failing Medicare system is irrefutable evidence of that.

Getting real:

  In the reasonable expectation that their advice will not be taken, the authors take a grim view of prospects.

  Social Security benefits are already being "cut."

  • The retirement eligibility ages are rising - and will be increased further. (This is a "cut" only for propaganda purposes. For normal people, it is only the elimination of irrational plans for unsustainable benefit increases.)
  • Medicare Part B premiums are rising faster than Social Security benefits. They will take an increasing percentage bite out of Social Security benefits. (However, nominal Social Security payments are still increasing.)
  • Taxation of Social Security benefits will hit more recipients harder, since the income thresholds are not indexed for inflation.

  Current figures (for what they are worth) indicate that the major entitlements will eat up about 16.7% of GDP by 2050 - more than double the 2000 figure. And, it gets worse form there. By 2075, they will eat up 21.7% of GDP - a figure larger than all government revenue, even during WW-II.

  The authors continue with such calculations, but they are all irrelevant doodling. The current system will crash and burn well before then.

Qualified plans are "tax traps."

  A few of the perverse aspects of the tax code are explained by the authors. Among other things, middle income people actually lose money by saving money in tax-deferred pension accounts. Qualified plans are "tax traps." The new Roth IRA accounts that are not tax deferred but that accumulate tax free are clearly the best option.

  "As a practical matter, if your family income is $150,000 or under, current tax law gives completely perverse results for investing in qualified plans: the higher your return, the greater the increase in your taxes and the bigger the reduction in your lifetime spending! Without an employer match, 401(k) plans are a losing deal for most workers."

  The government's financial problems are expected to be met with a combination of evils - higher taxes, heavier government borrowing, inflation, and negative after-tax interest rate returns on investments in government debt. After taxes, even the TIPS - Treasury Inflation Protected Securities - can have a negative real return. TIPS should thus be put in Roth IRA accounts.

  Some advice for retirement saving plans is offered. The authors slam the investment advising and financial planning industry and the excessive fees they charge. They advise use of low fee market index funds and personal Roth IRA accounts to reduce future tax burdens. (Why not just invest in index securities like Spiders, Diamonds or Qubes?)  With all its tax advantages, home ownership is among the most important of personal investments.
  The authors speculate about strategies for retirement during the harder times to come. They advise saving far more than current conditions seem to require. Upon retirement, equity can be pulled out of the home by moving to a smaller home or condominium and/or to a location where housing and living expenses are cheaper. Developing healthier living habits can keep medical expenses down aside from offering obvious life style benefits. Retirement can be delayed for a few years. 

"You need to save 'til it hurts, pay taxes up front, hoard some gold, and learn to eat broccoli. When you've done all that, you should think about quitting your job."

  A good job is one of the best protections against inflation. During periods of substantial inflation, retirement becomes something to be avoided. By delaying retirement, workers will also be helping the government meet its obligations.

  They offer standard advice for increasing savings. Eliminate credit card and other consumer debt and put the interest savings into a Roth IRA. "Imagine what putting an extra $300 to $500 every month into a Roth IRA or paying off your mortgage might do for your long term financial health and security."

  With mortgage rates below 6%, leveraging your money to buy as much house as possible is probably the best way to outrun inflation - just as long as you can maintain sufficient cash flow to maintain the house and service the mortgage.
  Unfortunately, even this has become complicated. The much feared "housing bubble" is quite real - and there will be a period of substantial decline in our future.

  They advise a diverse investment strategy with core holdings of tax and inflation advantaged I Savings Bonds and Treasury Inflation Protected Securities, followed by unhedged international bond funds, precious metals funds, energy funds and international equity funds. They are particularly fond of prospects in China, but note the difficulties of investing in that still risky venue. (China's economic reform program still has some major problems to address.)
  As much as possible, they advise use of passive low cost investment funds. They provide some particular recommendations.
  Variable annuities are bad - equity index funds are currently looking better because of the current 15% tax rate - and gold is an essential part of a defensive portfolio. The authors are not "gold bugs." They advise limiting bets against the dollar with gold and unhedged foreign investments to something less than 30% of total financial assets.

  Warnings about the financial disincentives for second earners are provided at the end of the book. The "lifetime marginal tax rate for second workers can be over 100 percent" they point out. Generally, its around 50%. However, add in the work related costs, child care expenses and stress induced spending, and the second earner can be slaving away for ridiculously small sums.

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  Copyright 2005 Dan Blatt