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Pension Ponzi Scheme $16 Trillion Short?
Laurence J. Kotlikoff, professor of economics at Boston University and author of “Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking”, wrote an op-ed piece for Bloomberg, Retiree Ponzi Scheme Is $16 Trillion Short:
Social Security
just celebrated its 75th birthday. Love it or hate it, it has done its
job and should retire. We need a new system, the Personal Security
System, which retains Social Security’s best features, scraps the rest,
and covers its costs.Social Security’s objective -- forcing
people to save for retirement -- is legit. Otherwise millions of us
would seek handouts in our old age.
But Social Security has also
played a central role in the massive, six-decade Ponzi scheme known as
U.S. fiscal policy, which transfers ever-larger sums from the young to
the old.
In so doing, Uncle Sam has assured successive young
contributors that they would have their turn, in retirement, to get back
much more than they put in. But all chain letters end, and the U.S.’s
is now collapsing.
The letter’s last purchasers -- today’s and
tomorrow’s youngsters -- face enormous increases in taxes and cuts in
benefits. This fiscal child abuse, which will turn the American dream
into a nightmare, is best summarized by the $202 trillion fiscal gap
discussed in my last column.
The gap
is the present value difference between future federal spending and
revenue. Closing this gap via taxes requires doubling every tax we pay,
starting now. Such a policy would hurt younger people much more than
older ones because wages constitute most of the tax base.
What about cutting defense instead? Sadly, there’s no room there. The defense
budget’s 5 percent share of gross domestic product is historically low
and is projected to decline to 3 percent by 2020. And the $202 trillion
figure already incorporates this huge defense cut.
The 3-Year-Old Vote
Reducing
current benefits, most of which go to the elderly, is another option.
But such a policy is highly unlikely. The elderly vote and are
well-organized, whereas 3-year-olds can neither vote, nor buy
Congressmen.
In contrast, cutting future benefits is politically
feasible because it hits the young. And that’s where Congress is
heading, starting with Social Security. The president’s fiscal
commission will probably recommend raising Social Security’s full
retirement age to 70 from 67, for those who are now younger than 45.
This won’t change the ages at which future retirees can start collecting
benefits. It will simply cut by one-fifth what they get.
Some political economists point to Social Security’s 2010 Trustees Report and say, “Leave it alone. The system won’t run short of cash until 2037.”
Misleading Accounting
Unfortunately,
the Trustees’ cash-flow accounting, like all such accounting, is
arbitrary and misleading. In fact, Social Security is broke. Its fiscal
gap, which the Trustees measure correctly, is $16 trillion.
This
gap is small compared with the U.S.’s overall $202 trillion shortfall,
not because the Trustees treat Social Security’s $2.5 trillion trust
fund as an asset (a questionable choice), but because they credit
one-third of federal revenue to the program.
But dollars are
dollars. If we re-label Social Security “payroll” taxes as “general
revenue wage taxes,” Social Security’s fiscal gap increases by $60
trillion, and the fiscal gap of all other government activities falls by
$60 trillion, leaving the overall $202 trillion gap unchanged.
Even
by the Trustees’ measure, there’s a massive problem. Coming up with $16
trillion requires permanently raising revenue or cutting benefits by 26
percent, starting now. In other words, the program is 26 percent
underfunded.
Hitting Young People
Now cutting benefits
of new retirees by 20 percent, with an increase in the so-called full
retirement age, starting 20 or so years from now isn’t the same as
immediately cutting the benefits of all retirees by 26 percent. Hence,
the fiscal commissioners will need to hit young people with an even
bigger whammy if they really want to solve Social Security’s long-term
woes.
Most likely, Washington will simply raise the retirement age and kick the can further down the road. This is what the Greenspan Commission did in 1983, knowing full well that by 2010 the system would be in even worse shape.
I
say, retire Social Security and replace it with a version that works.
Do this by freezing the current system, paying today’s retirees their
benefits, while paying workers only what they have accrued so far once
they retire.
Next, have all workers contribute 8 percent of
their pay to the new system, with half going to a personal account and
half to an account of a spouse or legal partner. The federal government
would make matching contributions for the poor, the disabled and the
unemployed, permitting the system to be as progressive as desired.
Going Global
All
contributions would be invested in a global, market- weighted index of
stocks, bonds, and real estate. The government would do the investing at
very low cost and guarantee that contributors’ account balances at
retirement would equal at least what was contributed, adjusted for
inflation.
Between ages 57 and 67, each worker’s balances would
gradually be swapped for inflation-indexed annuities sold by the
government. Those dying before 67 would bequeath their account balances
to their heirs.
While this plan has
private accounts, Wall Street plays no role and makes no money.
Additional contributions would be used to fund life- and
disability-insurance pools.
Our nation is in terribly hot water.
Business as usual is no answer. The only way to move ahead is to
radically reform our retirement, tax, health-care and financial
institutions to achieve much more for a lot less.
The Personal
Security System is a major step in that direction. It meets all the
legitimate goals of Social Security without the system’s waste and
penchant for robbing the young.
Wall Street plays no role and makes no money? Who are we kidding here?
Wall Street wolves are hungry and they want a piece of the Social
Security (SS) pie. In fact, conspiracy theorists will tell you that this
whole financial crisis was manufactured with the ultimate goal of
privatizing SS, allowing the fat cats on Wall Street to make even more
money as they find new sources of revenues to fund prop desks, hedge
funds, private equity funds and real estate funds.
But there is a legitimate
argument to be made for properly diversifying SS. Back in 2002, Mark
Sarney and Amy M. Preneta of the Social Security Administration’s Office
Retirement Policy wrote a discussion paper on The Canada Pension Plan’s Experience with Investing Its Portfolio in Equities.
The paper is outdated but very relevant and well written. In particular,
there is an excellent discussion on governance and oversight on the
Canada Pension Plan Investment Board, including measures to ensure
accountability to the public:
- It is subject to special examination at
least every 6 years by the federal finance minister in consultation with
the participating provinces.- It must provide quarterly
financial statements and annual reports on the performance of the CPP
Investment Fund to the federal and provincial finance ministers and the
federal Parliament. The CPPIB also issues quarterly statements to the
public, though it is not required to do so by legislation.- It
undergoes a performance evaluation as part of the Triennial Review, a
required review of the financial status of the CPP that includes issuing
an actuarial report on the CPP.- It must hold public meetings to
discuss its performance at least every 2 years in each participating
province (Human Resources Development Canada 1997, 10-11).The
result of having these accountability measures is that the board’s
activities and finances are overseen by several entities: the
government’s Chief Actuary, the federal Parliament and the legislatures
of the participating provinces, the 10 finance ministers, and the
public. In addition, the board has an outside firm conduct an audit of
its finances for its annual report.
Canadians are lucky that they have the Office of the Chief Actuary of Canada (OCA) playing a key role overseeing the activities of the Canada Pension Plan Investment Board (CPPIB).
In my opinion, the OCA sets the bar in terms of professionalism and
accountability when it comes to how Canadian federal government entities
run their operations.
And while CPPIB has its critics, the reality is that they are very well
managed and take governance issues very seriously. My concern with CPPIB
and other large public pension funds is that they're too big. I prefer
splitting up CPPIB, the Caisse, CalPERS, and other large public pension
funds because at one point, size is an issue and it becomes harder to
deliver the required actuarial returns without taking undue risk. But
that's a discussion for another time.
Getting back on topic, is the Pension Ponzi $16 trillion dollars short? No, it's worse if you factor the trillion dollar gap of underfunded state retirement systems. Most state retirement funds lack the governance standards of their Canadian counterparts. [Note: Read on how trustees of the Kentucky state retirement system will re-open an investigation into payments to investment middlemen.]
One thing is for sure, the US and other developed nations face a
huge retirement problem and if they don't take measures and introduce
proper reforms, which includes the highest governance standards and
proper funding of these systems, then they're heading for a major
collision somewhere down the road.
Finally, as long as they reform
retirement systems, maybe authorities can finally introduce meaningful
reforms to financial markets. On Wednesday, the Council of
Institutional Investors applauded the Securities and Exchange
Commission’s (SEC) adoption of a rule that gives shareowners a bigger voice in electing corporate directors.
Great
but this is the tip of the iceberg. Much remains to be done to clean up
financial markets from the crooks and banksters who routinely and
legally steal money from individual and institutional investors. Before
you privatize SS, make sure you restore confidence and faith by cleaning up
markets once and for all. On that last point, listen to Jim
Puplava's recent interview with Laurence Kotlikoff below.
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"What can be done to address the looming retirement crisis?"
It's obvious, confiscate more wealth from those that worked their ass off to produce it.
You forgot to mention the part about then letting them die in a ditch.
Oh, but I just realized that you're not talking about the retirees who worked THEIR asses off.
To simplify Dr. Sandi:
If you haven't noticed the Government is doing a damn good job at annihilating itself, and us right along with it. Those of us that are producers are being squeezed by these parasites to the point of financial collapse. The Government doesn't create, produce, or manufacture. What it is doing is looting us taxpayers for every single cent to feed the beast it has become. The beast will suck from us in ways that are absolutely insane, like tax the air we exhale one of many dumb shit ideas these idiot minds chose to come up with. Our sovereign debt has become like a supersaturated solution with no hope of returning back to stasis. There will be no SS for the private citizen, and certainly no retirement for all those hard working government employees...
It's not going to matter whether your a producing retiree, or government parasite retiree, because when everything implodes you are going to be looking for the nearest enclave and you had better hope they accept you, cause if they don't you may be the one in the ditch!!!
+ 10,000
The destruction of the middle class was no accident.
Look at those #uckin numbers.
Now ask yourself how are we going to get out of this mess.
They say that chimpanzees can do some basic communication (up to 50 words using sign language). I'd venture to say that even a chimp could tell us we're about to go boom.
Here's just a taste of happens when the middle class revolts.
http://www.youtube.com/watch?v=rH6_i8zuffs
Argentina was/is not a 3rd world country. Advance the movie to about 4:30 and take a good #uckin look at what our future may entail. Imagine what downtown Manhattan or LA would be like.
I only see one missing element: guns. Lotsa guns. LOTS of guns in the U. S.
There really aren't that many firearms in the U.S. These figures are distorted by the fact some individuals have quite a few.
Analysts cannot get their weekly estimates right on (insert metric of choice here).
Do you really believe they have a clue how many guns are out there?
You may as well be guessing how many gold coins are out there.
The data did not come from "analysts", it came from research. Check the footnotes.
Looks like enough with adequate distribution to me....
Here is an eye-opener:
http://en.wikipedia.org/wiki/List_of_countries_by_gun_ownership
And I want to turn even more of my earnings over to the feds because......?
If there's a way for them to screw me out of my retirement, they're going to do it, no matter what the system looks like or who does the oversight.
Unless they let me invest it myself. And I already know that I can't be trusted with the job either just by looking at the track record of my own younger self.
No shit, the last thing I want is the government dictating how much, and in what form, I choose to save for the future. Only a blithering idiot would trust them with that decision.
That, or someone who has nothing to begin with. Which is part of the reason we're in this mess in the first place.
At this point any government dictated account is simply going to be a vehicle to take wealth from you and move it some place else.
Just when we think Leo is finally facing facts,
like Chile's and private pensions based on stock markets outperforming Social Security multiple times,
we read this socialist assumption by yet another academic who thinks the New Deal and WWII got US out of Depression:
"Social Security’s objective -- forcing people to save for retirement -- is legit."
If there were a permanent free lunch at the expense of the working middle class, big corporate governments would never collapse...
Indeed, let's figure out how to keep our money under our own control. The government is going to to try to chop a lot of value out of various stakeholders expected returns, one way or the other: by default(on debt), or inflation, or oppression(taxes), as the Morgan Stanley article this morning explained. But there is a fourth choice, that the central government shrinks a lot. It got big enough to do this to us in the first place thanks to stealth taxes like "Social Security," a ponzi scheme that permitted expanded government spending, up until now. The government and its constituency got very, very big feasting on these taxes. It needs to shrink by half or more, and should be encouraged to do so through starvation, if needed.
I wouldn't worry about that for a while.
The first thing that will happen is that they will start issuing new taxes.
They'll call it: "Social taxes": taxes on you land, house, gasoline, gas, petrol, water, electricity...
In America there was the new tourist tax, and that was a test to see reactions.
In France they are looking into the "Internet Tax", meaning the more you surf, the more you pay. Ridiculous? Nop, they already did that once in the 90's.
Soon also more taxes on public transportation, new passports, parking taxes, tunnel taxes, state taxes, city taxes... TAXES ON EVERYTING!
For example:
In the 80's my government introduced "The window tax" meaning: They check the number of windows you house has, and for every window in you house, you have to pay a fee.
That's why you still see some older house in my country that have bricked down windows to avoid these taxes.
They did it once, they'll do it again.
But this time I don't think they'll call it Social tax, my bet is that they'll call it : "The Consumer Tax"
The more you consume the more you pay. Sounds fair no? Yes... untill you'll see where they put the bar.
OR: THE ENVIRONMENT TAX
In Norway, they counted the number of farts a cow makes in one month. Now the farmers have to pay a extra tax on their cows "to save the environment tax"...
It might sound funny, but in turn it makes meat more expensive, milk more expensive...
UNCLE SAM WANTS YOU!
TO PAY MORE TAXES!
Government must shrink and grown in proportion to the high spending "42 to 50 year-old" population.
Wall Street fighting the real solution, replacing all taxes with the Constitutional Uniform 28 basis point Automatic Payment Transaction Tax, so now 0 advisers and AFL CIO proposing a 1% Financial Transaction Tax exempting Wall Street, on top of all other taxes, to retire US Debt:
http://www.apttax.com/execsummary.php
http://thehill.com/opinion/columnists/lanny-davis/107351-a-debt-free-ame...
TAX REVOLT !!!!