I have just posted a video of my 90-minute seminar: "Retirement Armageddon." It presents the background for a series of nasty surprises.
For those of you who don't have time to watch a 90-minute video, let me summarize its implications.
The U.S. government has a nasty surprise for tens of millions of retirees: a now-empty piggy bank. Two of them, actually: Social Security and Medicare.
Congress will soon have a nasty surprise for voters: a larger deficit than announced to fill these now-empty piggy banks.
The Federal Reserve System will also have a nasty surprise for investors: newly created digital money to fill up the empty piggy banks when the Treasury cannot sell any more debt at low interest rates.
The free market will have a nasty surprise for everyone: rising prices in response to the Federal Reserve's digital money.
Medicare will have a nasty surprise for physicians who treat Medicare-funded patients: limits on payments per service that are set below urban costs (price controls).
Physicians will have a nasty surprise to patients: longer waiting periods (rationing by sitting in an office). The days of wine and roses are over. The era of nasty surprises has begun.
Social Security will go bankrupt in 2010. It will take new legislation increasing Social Security (FICA) taxes to overcome this. Or it will take siphoned-off money from the general fund. I have covered this issue here.
WHY A VIDEO?
A non-profit research organization brought me in to present a seminar for people who prefer a seminar to reading on-line. Then it produced a DVD of the seminar for its donors. It released the DVD in January.
I persuaded the organization to let me make the seminar available to my readers. Because of the technology of on-line video hosting, this is easy to do.
My targeted audience includes these groups:
1. People who are now retired but under age 70
2. People who think they will be able to afford to retire in the next ten years
3. Sons of members of either of these two groups
For people over age 70, my video probably will do no good. They have made a decision to leave the labor market and become dependent on the government. Their skill sets are rapidly becoming obsolete. Their mental stamina is fading. Their physical stamina is fading. For these people, I am like a physical trainer who recruits customers in a convalescent center for oldsters — a polite name for a facility to house people who are not expected to recover. My seminar offers too much, too late.
It is true that people in their eighties can profit from a rigorous physical training program. It is also true that bad habits are difficult to break, bad ideas are difficult to change, and it's easier to vegetate in front of a TV screen than to exercise.
I have targeted newly retired people and people who will legally be able to retire and receive Social Security checks at age 62, or full payment at age 66. (To gain Medicare coverage, you must sign up by the day you turn 65.)
My video does not go into the question of whether it is better to go on the dole at age 62 or wait. In either case, the welfare checks will not cover most families' expenses, according to Social Security.
The video raises other issues, such as how people can avoid a cut-back in their income. There are no easy answers. It is like physical training: there is a choice of which pain to endure. It is not a choice of avoiding pain.
Unfortunately, there are ways to defer pain. This is called "kick the can." The best example of this strategy in action is Congress.
Kicking the can escalates the pain to be endured later on. But most people are present-oriented. When faced with a choice between pain now and greater pain later, they choose the latter. They discount future pain by a high rate of interest. Or they think this: "The pain is so far away. Something may turn up."
This outlook is close to universal. This is why Congress can safely play kick the can. There is no politically acceptable way to reform the system in order to avoid the day of fiscal reckoning. Their re-election is not threatened by silence on this issue, because their opponents do not have the courage to raise it. A politician who has no politically acceptable answer to an inevitable problem is safe for as long as his potential opponents also have no politically acceptable answers. Everyone kicks the can.
But fewer people kick the bucket. Life expectancy slowly rises. Medicare is letting people live longer, though more expensively.
Do you know what Medicare's annual expenses are per person today? Take a wild guess.
The costs vary per county, but the average cost nationally in 2008 was over $11,000 a year. Every oldster you see at Wal-Mart is siphoning this much money out of the government. For the official estimate by Medicare's Trustees, click here.
I don't think most voters care. This lets Congress kick the can. Voters think the money will be there to fund their golden years. The money will surely be there. It just will not buy very much.
My seminar gets across this story in a way that most people with enough brains to have a 401(k) or an IRA can understand.
Some older people do not want to hear this story from younger people, especially their adult children. I figured they might listen to someone who is already on the dole.
I have beaten the system . . . so far. I am not a ward of the state . . . yet.
WHAT WENT WRONG?
The Federal government set a trap in 1935: Social Security, a program funded on a pay-as-you-go basis, meaning a promise-as-we-go program for members of Congress. It was never funded. The trust fund is an accounting trick. There is nothing but IOU's from the Treasury in it.
The trap got sprung in 1983, when Social Security went bankrupt. That was the year Reagan — President Tax Cut — signed a new law for funding Social Security. The new law imposed income taxes on Social Security payments. It also scheduled a series of increases in the wage base subject to FICA taxes.
That emergency measure deferred the day of reckoning until now. The law was passed in the first year of Reagan's massive deficits: over $200 billion in 1983 dollars, meaning close to $500 billion in today's money. That was the end of the Republican Party's commitment to a balanced budget.
Bill Clinton benefited politically from balanced budgets, 1998—2001, but only by means of a statistical trick: using Social Security's net income after payouts as net revenue for the government, and then burying the liabilities in the government's off-budget accounts. This has been common practice ever since the Johnson Administration.
That game of political deception will end this year. This year marks the year — like 1983 — when receipts from FICA taxes will not cover outlays in the program. The flow of funds will henceforth move from the general fund to the Social Security Administration.
The public is unaware of this. It means nothing to voters. The Federal deficit is so enormous today that one more needle jabbed into the arm of the Treasury Department will get no attention.
On January 26, the Congressional Budget Office estimated a deficit of $1.35 trillion for fiscal 2010. On February 1, the Obama Administration offered an update: a deficit of $1.6 trillion. In less than one week, the estimate of the shortfall between now and the end of the fiscal year on September 30 rose by $250 billion. Who will get any attention for sounding the alarm about an outflow to Social Security of $10 billion to $20 billion? Glenn Beck might. But he has other, larger fish to fry. Same with Rush Limbaugh.
In any case, potential critics of the program would not dare to tell their audience that the Social Security system is busted, that the Ponzi scheme has hit a brick wall, and that it's time to reform the whole system. Why not? Because there has never been a politically acceptable plan to reform the system. Politicians have occasionally raised this issue. They do this only once. Self-interested people do not jab their fingers into a hornets' nest a second time. The most famous example is Barry Goldwater in 1964.
As a Senator, he had on occasion suggested that the government should implement certain aspects of voluntarism into the Social Security system. The Democrats took advantage of this. As recently as 2009, a Time Magazine article on the politics of Social Security reported on this.
President Lyndon Johnson's campaign ran a TV ad showing a pair of hands ripping a social security card in half as a narrator says: "On at least seven occasions, Senator Barry Goldwater said that he would change the present social security system. But even his running mate, William Miller, admits that Senator Goldwater's voluntary plan would destroy the social security system. President Johnson is working to strengthen social security."
The Goldwater campaign went into full reverse as a result of this ad. Here is an extract from one of his campaign brochures.
"I favor a sound Social Security system and I want to see it strengthened. I want to see every participant receive all the benefits this system provides. And I want to see these benefits paid in dollars with real purchasing power.
"Social Security is a system of basic protection for the aged. In addition, most Americans now participate in private pension plans while many have their own savings and investments Social Security was never intended to replace these voluntary programs. Its prime purpose was and is to supplement them, to provide a basic floor. I am convinced it can do this job, the job for which it was created.
"Essentially, protection against need in America depends upon a free economy which produces an ever-growing abundance and an ever-greater opportunity for all. In this framework, I believe Social Security has a vital and legitimate supporting role."
Politicians can take the hint. They know what not to mention in public. Social Security reform and Medicare reform are two such forbidden topics.
PREPARING FOR PERMANENT HOUSEHOLD GUESTS
You may think your parents have their financial house in order. Maybe they do. If they do, they are unique among Americans.
You should assume that they will live longer than their parents.
If you know anything about their habits and health, you can get an estimate of their life expectancy by using an on-line life expectancy calculator. Here is a good one.
Once you have an idea of how long they will live, you can make an estimate on when they will run out of money.
The trouble is, no one asks about someone else's assets. We can at best make guesses.
If your parents were blue-collar workers, maybe they had a corporate pension if they worked for a large company like an auto company. Go on-line to see what the condition of the company's pension fund is.
If they worked for a small company, they probably have no pension. They may have savings. Assume that these will be gone five years after retirement. Most people do not adjust their spending habits in the year they retire. It takes several years. Depleted savings force this change.
If they own their home, this is no longer a source of funding. Home equity loans are scarce. They may be tempted to take out a reverse mortgage. This is like an annuity, but with the home's equity as the initial investment used to purchase the reverse mortgage. If you want the home as your inheritance, you will lose it if they do this. To get the house, you may have to make them an offer of a reverse mortgage. You will pay them a monthly stipend. You wind up as owner. Consult a CPA for details of what formula to use.
The advantage here is that they do not move in with you until they are infirm. When they do, you own their home. You can rent it out for income. You pay now, collect later.
Frankly, I do not recommend this. I recommend buying a home located close to you. Buy it from a highly distressed seller. Rent it out. Let the renters pay off the mortgage. If your parents ever need living space closer to you, evict the renters and let your parents move into the house. Renters understand this. They are unlikely to resent this. Just tell them up front: you do not plan to sell the house, but if your parents ever need living space, the house is for them. No problem. That sounds like a safer deal for them as renters. You really will not sell the house out from under them.
The other way is to convert your garage to a bedroom apartment. Don't apply for zoning if you think there will be major hoops to go through. Just do it.
Most old people don't want to think about all this. It's too painful. It threatens their retirement plans. People don't like to re-structure their lives away from their lifetime dream. But, at some point, tens of millions of retired Americans will have to do this. Better sooner than later.
That's why I did the seminar. Maybe older people will listen to an older person.
I listened to my high school civics teacher when he warned us in 1959 that Social Security would go bankrupt. It happened in 1983. It will happen again in 2010.
I planned ahead. I did not retire. I am not a ward of the state.
February 6, 2010
Copyright © 2010 Gary North