Just as other countries are making changes toward their perception of an American lifestyle the real American lifestyle is also confronting issues that may result in change that is not for the better and of course we are seeing that happen very quickly.
My father in law worked for the same company from the time he graduated high school until he was 55. In retirement he draws a pension that is certainly less than his final salary but it is sufficient and along with social security can do the job for as long as it needs to (assuming it is properly funded).
His son (my brother in law) is about my age and as best as I can tell is more successful than his father but has had three or four jobs in the 19 years I have known him and at no point has he had to think about a pension. His retirement will boil down to social security (if it is still there) and whether or not he and his wife have been able to save money effectively.
So from one generation to the next (literally) a completely different retirement, transformational really. This example belies an evolution of sorts that could be for the better or worse depending on your viewpoint. The extent to which this is big or important also depends on your viewpoint. We've seen other big changes in recent years including a complete redrawing of the map of Eastern Europe and mass adoption of the internet within 10-15 years of each other.
Anyone thinking these are big changes then needs to be prepared for more big changes. In this context social security and medicare seems like an obvious place to look for big changes in our lifetime. The numbers are massive (perhaps as much as $53 trillion) and no one appears to have the will to actually fix it. Given that no politician will ever vote to pull the plug (my choice) then saving it probably requires some combination of higher taxes, smaller benefits, pushing out the eligibility age and means testing. All four things are "unfair" one way or the other but the program is $53 trillion in the hole.
Once we got over the pain of pulling the plug on social security and medicare and presumably finished swearing in 535 new legislators we could move on to something like a 10-15 year wind down where people above a certain age receive their benefit while the rest of us pay in bitterly (sorry, but the real solution will involve meaningful sacrifice).
From there I think the size of the problem gets much smaller and the government (they are going to be involved no matter what) can then figure out what the one time costs might be, clearly something so radical will cause numerous dislocations, I'm thinking related to housing expense and healthcare expense for people who end up destitute as a result. Welfare may end up being a larger program than it is now but I think much smaller than social security and medicare.
Then a little down the road there would be fewer people newly displaced people in welfare as people realize there is no government check waiting for them when they turn 70. These folks will be forced to do something like work longer, save more or both. Americans will have to adapt, plain and simple and of course we can even if we are ticked off for a few years.
Ok back from fantasy land. I realize nothing like this will ever happen and can see some of the flaws of what is mentioned above. The point of this is not how unviable my thoughts are, the point is that solving the country's financial problems will require us to make big transformational sacrifices to pull off a positive and big change.
Did you watch that hockey game last night? As intense as Olympic hockey is, when was the last time a game was that intense? Have you ever seen an empty net goal like the one Ryan Kessler poked in? Sorry about the picture, it was the best I could get from the NBC video.
22 comments:
Roger,
Do you ever invest in energy MLP's as an asset class? If not, why not?
"53 trillion in the hole"
Big changes likely, sure, but when you start out with fantastic assumptions it can badly skew analysis.
For example "53 trillion" is a completely screwball number that ignores everything from national income and revenue to GDP growth. Various partisans and nut jobs have been promoting numbers like this scare the masses and, not surprisingly, a corporate media outlet here and there has picked it up under the new media rule of "balanced reporting" AKA opinions-on-the-shape-of-the-earth-differ.
To avoid being made into a chump by these chimps in this day and age it is usually necessary to go to the original source and, reading the actual 2008 SS Trustees Report, notice things like Table IV.B7 which shows the present value of Social Security's unfunded obligations over an infinite horizon: The number is $13.6 trillion.
Not a great number but, projected out over that same long horizon, it comes to roughly 3.2% of taxable payroll or 1.1% of GDP which is certainly manageable as long as we can avoid control of the country's purse by another bunch of profligate nutcases like the Bush/Cheney Republicans ...hmmm, I feel a sudden impulse to check my overseas bank accounts.
RW,
Too bad you had to expose your political views.
Roger,
What are you worried about? RW has taught us we have a printing press and we can just print 53 trillion in money or government bonds with no consequences. Obama is just initiating a couple trillion dollar test on bridges to no where.
Not a huge Bush fan (but he was better than the two alternatives) because he was also a big spender, but Obama is much worse on the spending front. The US does not have an income problem, but a spending problem. Obama also does not understand basic economics. Now he wants to put price controls on healthcare. Yeah that will work??
Jon
i dont do much with MLPs. they tend to be volatile at the wrong time (not all of course).
re the $53t v 13t; the full context is as much as so i took a short cut in the wording. That $53t is too big would be easy to believe but i have trouble think the correct number is in the low teens.
i knew i did not like Bush when he decided to increase spending early on such that instead of getting to a surplus we would get to breakeven.
gawd
1st the Nasdaq went to excessive levels and people said everything would be fine. It has never recovered.
2nd to "fix" things they let consumer debt and house prices go to excessive levels and people said everything will be fine. House prices and consumer debt will take a decade plus to recover.
3rd to "fix" the 2nd problems they are letting government money printing and government debt go to excessive levels and people are saying everything will be fine.
If you believe excess debt and money printing will be fine your complete lack of understanding is enormous. There will be no fix as there is no bigger bubble to "fix" things. Our economy will be broken for many decades to come.
typo typo typo
in my comment at 8:32 i may have not been clear. i doubt the correct number will turn out to be in the low teens. i think it will be higher
Roger, what one is inclined to believe or not is not really the issue I was addressing, everyone has a bias which is all more reason that starting with the real numbers and arguing with them becomes so important. In the context of SS and national budget I believe that means starting with the SS Trust reports rather than a number manufactured for talking points to be trotted out on the cable channels.
OT to various anons: Anyone who objects to a "political view" is themselves expressing a political view (in the negative) but my comment was carefully stated ambiguously so that it could be taken as a nod that, since Obama is doing many of the same things the Bushites did, I was far from comfortable; those implying otherwise are clearly reading between the lines.
In any case, everyone has a political view and there is no particularly reason to hide it in a democracy particularly if it is germane to analysis and transparency. Unfortunately these days that usually does more harm than good since it frequently leads to screaming and other tedious behaviors.
Like creating a straw man out of a complex argument: No one can find any place where I stated a nation could just keep printing money until multiple of GDP debt levels like 53 trillion were reached because I never said it and the place doesn't exist but they are welcome to try and find something close enough to debate and post the link here for perusal.
In the meantime, commenters who consider themselves smart enough to discern a political view in an economic analysis are doubtless smarter than I and much better investors too so I do hope they will post their methods here now that they have decided to speak up. I'll wait with bated breath for further elucidation as will everyone else I'm sure but do hope they'll have enough courage to adopt a handle other than Anonymous so folks can track their commentary.
@RW
I can't speak for Roger, but I think the $53,000,000,000,000 (I spell it out for shock value) is Medicare and Social Security.
These numbers come from government agencies like the CBO and Trustees of Social Security so they aren't manufactured by the media or Chicken Littles. In fact, I would bet that the number is actually much higher as the government tends to underestimate numbers that make the guv look bad.
Based on current numbers, the social security fund will be able to pay 75% of the projected benefits in 2040 when the fund is defunct. So, everyone should be able to receive a portion of Social Security with no changes. You are right that some minor changes may have an impact down the road. However, raising the tax rate won't help much because Social Security is set up to pay out based on the payment in. So taxing more means paying more out later.
What scares me is we already saw negative cash flow from the Social Security fund in 2009. Unless employment roars back, 2010 will be the same. The fund is already expecting permanent negative cash flow in 2016 so this alarms me.
Medicare is an absolute nightmare and difficult to nail down because health care costs rise so fast. So the $38 Trillion deficit might be substantially higher. We are going to have to get people to pay more upfront for medical care. There is no way around this.
Either we can make some tough decisions now (with spineless politicians) or the market will do if for us someday.
more ongoing context; yes i was referring to social security and medicare
Kirk Kinder,
Do not worry we will just borrow and print money. There are no consequences for borrowing and printing and we can never go broke. Don't worry be happy :)
Kirk, thanks, that was more useful but two corrections to add deeper context must follow:
1. SS and Medicare are entirely separate trusts with separate budgets (there are a number of government trusts and that's the way they are all handled) so lumping the troubled Medicare trust in with the SS trust is not something CBO would do and doing so after the fact could be somewhat misleading in its own right however ...
2. to get to a number like $53 trillion it is necessary to count only liabilities while ignoring assets and revenue and this, to be polite, is a genuinely less than accurate picture; rather akin to only reporting the liabilities of a household without w/o mentioning any of the assets or that the wage-earners in the house earn enough to handle the carry.
NB: Given the full picture rather than the liability-only picture it becomes fairly obvious that, for example, the SS fund will not become "defunct" in 2040 or anything close to it.
What is clear when the full picture is presented and these funds are appropriately discussed separately is that we still have plenty of time to deal with SS but time is beginning to run out to do something serious about Medicare and the rapid inflation of medical costs in the US.
Shorter version: big numbers of dubious quality in the absence of a bigger picture rarely leave an audience better informed. JMO
Forgot to add that some big numbers result when only one side of the national balance sheet is allowed to grow; that is, you grow the liabilities over time but keep the assets and income (revenue) constant.
Extending the household metaphor in point 2 above -- (I'm being careful because national budgets are not readily comparable to other budgets but it works in this limited case) -- this would be comparable to assuming the wage earners in the household never got a raise or figured out how to be more productive.
NB: This points to the real problem of infinite time-horizon analysis even though it can be useful to show the most extreme case; it must assume things go on forever essentially as they have before. Not bloody likely.
"another bunch of profligate nutcases like the Bush/Cheney Republicans"
Ambiguous. Ha! How do you write when you're explicit.
My investment philosophy is buy/hold/rebalance. There is no sense advocating those views here because they are routinely dismissed.
Your comment made you sound like a left wing academic. Your bias against FOX news and the conservative point of view is obvious. I'm just pointing it out because interjection of your biases weakens your objectivity. If that is of no concern to you, so be it.
anon 12:02, who are you talking to?
Roger, think Anon 12:02 was talking at me (not to me obviously) but I'm not sure how long they've been visiting or how much attention they've been paying since many folks here including myself (strategic port) buy and rebalance as a core strategy.
As to the rest (shrug), another poor soul who believes that "balanced reporting" typical in cable and talk is "conservative" and/or that anyone who dislikes it must be a "left wing academic" ...well, that's slightly depressing but whatever.
Since most companies are no longer providing pensions, I would think this is a huge windfall for their bottomline. Maybe this is why CEO salaries and benefits have skyrocketed.
Since the U.S is not growing very fast, we cannot get out of our SS and Medicare problems. A politician's job is to get re-elected...and he can't do that if he has a plan for SS or Medicare.
I've worked in health care deliverance my entire life. You can be assured there is no tangible way to keep costs in line without affecting the end product of patient care. Other countries are way ahead of us in keeping costs down. I know of no physician that would be willing to accept lower reimbursement. The name of the game is capitalism. Physicians in Canada make about half of their U.S. counterpart. Everyone hates the term "rationing", but that is exactly what insurance companies do routinely every day.
I'm talking to RW.
I am trying to politely point out that his political tone, IMO, detracts from his discussion...that's all. His intelligence is several orders of magnitude beyond mine, heck I barely understand what he says half the time.
Anon 12:02
He is intentionally obtuse.
Ah, anonymous internet comments.
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