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Wednesday, December 17, 2008

How do we pay back all this debt? 


My continuing and unshakeable faith in the American system notwithstanding, it is painfully clear that the credit of the United States and therefore our standard of living will suffer if we do not both restart our economy and show a credible plan for paying back all the money that we are borrowing now. The problem, of course, is not the current borrowing but the massive unfunded liabilities for public pensions, healthcare, and now the personal indebtedness, through financial institutions, of tens of millions of Americans who borrowed more money than they could afford to pay back (it matters not whether this happened because those debtors are idiots -- many of them are -- or because they were, in effect deceived by complex financial instruments that were inadequately explained, as many of them were).

The foundation’s grim calculations are based on Sept. 30 consolidated federal statements, which showed that Americans’ total household net worth, diminished by falling stock prices and home equity, is $56.5 trillion. But rising costs for unfunded social programs like Medicare, Medicaid and Social Security increased to $56.4 trillion – and that was before the more recent stock market crash, $700 billion bank bailout, and monster federal deficits chalked up in October and November.

The ugly truth is that our generation -- people born between roughly 1945 and 1970 -- who have made this mess. If we do not fix it, we will crush the standard of living of the people who come behind us. Sadly, the only way for us to fix it is to work longer, which would dramatically shrink the long-tail liabilities of the United States government. As I wrote two weeks ago, we need to extend the date of first eligibility for Social Security along a sliding scale, which would, I believe, massively reduce the total pension liability.
[T]he generation born between 1945 and 1970 has borrowed too much, spent too much, and saved too little, all the while expecting to work for actual money something under half its time on this pale blue ball. The resulting pile of debt incurred, and still to be incurred, will reduce standards of living for decades to come. Our generation must make amends, and there is an obvious way to do it. We should immediately raise the age for first eligibility for Social Security and Medicare according to a sliding scale. For each year a person is under age 62, the ages of first eligibility and full eligibility should be extended by three months. So, for example, if you are 50 today you would not become eligible for any benefits until age 65, and for full benefits until age 69. If you are only 38, your ages of eligibility would be 68 and 72, respectively. I would push the scale back to people who are as young as 32; for those that age and younger, the ages of Social Security eligibility would be 70 and 74.

This change would have a host of advantages. First, it would drastically reduce the government's liability for future Social Security and Medicare payments (somebody out there ought to do the math to come up with the actual amount, but it is bound to be huge). With a stroke of a pen, we would effectively fund the massive borrowings necessary to protect our incomes today off of the pensions of the people responsible for these debts, rather than with future taxes or inflation borne by innocent people who are younger than us. Second, it avoids the philosophical fight between the statists who want to preserve Social Security as a government program and the conservatives, if there are any left, who want to substitute private savings. Third, it aligns Social Security with the reality of easier jobs and longer lifespans. Social Security was never meant to subsidize "golden years"; it was meant to protect people who were essentially unable to do work from poverty. Well, far fewer jobs are physically demanding, and the vast majority of people are actually capable of economically productive work long after age 62 (or 66). Finally, it creates an enormous new incentive to save; if you want to retire before your declining body and faculties mandate it, save your goddamn money!

Further, I believe that it would be politically possible to do this now. People instinctively understand that we are going to have pay back all this debt, and the sliding scale means that the burden will be small for people close to the finish line. If you are 60 today, it is not so terrible to think that you will have to work another six months before you retire. If you are 30, it is easy to persuade yourself that you will personally save enough money in the next 35 years to finance a retirement before the government subsidy kicks in at age 70. Do it now, and watch the massive impact on the value of the United States dollar, which will suck capital in from the rest of the world.

Of course, the biggest long-tail obligation is for health care, which will burden the economy regardless of the payment mechanism. Working longer will not do anything to mitigate that. However, there are enormous savings to be had in reforming our system of paying for and organizing health care, and that will reduce the long-tail liability. Perhaps people will be more willing to support those reforms if they have already absorbed the reality that they will be working longer anyway.

CWCID: Glenn Reynolds.

33 Comments:

By Blogger smitty1e, at Wed Dec 17, 10:37:00 AM:

Just forget about retirement.
Here is the play-by-play:
"From each according to his ability, to each according to his need"
->
"If I can't have it, you can't have it."
->
"You have, therefore you stole."
->
"Since you're a thief, all can be taken by the government"

In summary, once the WorldWideWonks render national governments into a single moot, debt becomes another disposable post-modern text to be deconstructed.  

By Anonymous flashman, at Wed Dec 17, 11:28:00 AM:

Good plan. It should have a chance, since congress did something like it years ago. As a 60 year-old, I'd have no problem working 6, 9 or 12 months longer for early eligibility.  

By Anonymous Anonymous, at Wed Dec 17, 11:37:00 AM:

Pay off the debt?

Are you serious? "Everybody has three mortgages on their house, Ray."

The interest alone on the new debt will be staggering to the effort to balance the budget "sometime" in the future.

Euthanasia (for thee and me) will be the key for solving the national debt problems of Generation X,Y and whatever. (That's a joke, just gallows humor.)

"I regret that I have but one life to give for my country" - Nathan Hale.

-David  

By Blogger Georgfelis, at Wed Dec 17, 11:43:00 AM:

Your problem there is that the Social Security system has lost the confidence (what little it had) of the American people. More young people believe in UFOs than believe that SS will pay them when they retire. And the issue can be so easily demagogued by both parties, and although we can see the train coming, it has not hit us yet (long term vs. short term benefits)

So in a Democracy, you have to convince a Majority of the people to sacrifice now to benefit a Minority of people who reach the new Social Security Retirement age later. Good luck. (Puts more money into a 401K)  

By Blogger Charlottesvillain, at Wed Dec 17, 11:57:00 AM:

Alas, I believe that the demographic bulge that has created the retirement problem will also prevent an equitable solution from being implemented. I hope I am wrong but I see no indication that the boomers will ever vote to enact policy that surrenders their entitlements for the benefit of future generations.

More likely, the US will find itself in a position where it cannot honor all its promises. It is frightening to think about which ones it might reneg on. We've been warned for years that the balance of payments was unsustainable, and we've ignored the warnings and continued to push our excess as far as the system would allow. At some point, the piper must be either paid or stiffed. The ramifications of either course will be terrible.

I don't think a painless solution exists, although that's not something most Americans can yet conceive of. We've had prosperity for so long the very notion of sacrifice is alien to our culture, and will make the adjustment that much more difficult.  

By Anonymous Anonymous, at Wed Dec 17, 12:01:00 PM:

New Jersey is an example of where we're heading nationally. The state is effectively hamstrung in raising taxes or borrowing substantial new money to fund current spending, and yet rather than renege on promised employee retirement benefits the governor tried to sell the only substantial income producing asset the state has (the turnpike), an asset whose debt capacity is otherwise supposed to be limited to maintenance and improvement of the road itself, and give the sale proceeds to a union trust fund. This was the grossest sort of political maneuver, deep-sixing the voters and taxpayers in favor of political hacks and union contributors. Yet, the voters aren't reacting. Given a lesson like that one, and operating on the premise that "no crisis should be wasted" in efforts to expand government, wouldn't you expect the national politicians to continue borrowing until the credit markets are closed and the dollar is in a tailspin?  

By Anonymous Anonymous, at Wed Dec 17, 12:10:00 PM:

P.S. Isn't it instructive that in our whole country we don't have even one influential media voice decrying the financial destruction of the country. IBD does it's best, but it's a small voice and all of the MSM has abandoned their responsibilities.

The internet has created an increase in demand for content of historical proportions, and simultaneously offered the industry a massive decrease in distribution costs, yet big traditional newspapers are threatened with going out of business.

It's because they are incompetent at what they are supposed to do, which is to protect the public interest from rascally politicians.  

By Anonymous Anonymous, at Wed Dec 17, 12:16:00 PM:

I'm 26 and the unfunded social programs enacted by my parent's generation makes me furious. I don't think they intended to sell us into debt but they did. I will never see a dime from SS but I'll pay into it for decades. It's intergenerational robbery, sanctioned by the government.  

By Anonymous Anonymous, at Wed Dec 17, 12:19:00 PM:

Exactamundo.  

By Blogger Mrs. Davis, at Wed Dec 17, 01:07:00 PM:

I'm 58 and I don't recall enacting any unfunded social programs except Bush's drug subsidy. I do remember my parents' generation enacting Medicare and Medicade and making Social Security an entitlement and my grandparents' generation enacting Social Security. (I am old enough to remember the good old days when congress debated the amount by which to increase Social Security payments each year.) So, Anonymous 16:00, Those programs you condemn were more likely enacted by your grandparents or great grandparents. It is more Ponzi scheme than inter-generational robbery. Public education is inter-generational robbery.  

By Anonymous feeblemind, at Wed Dec 17, 01:08:00 PM:

Agree wholeheartedly with your post TH, up until you get to entitlement reform. Don't see that happening, at least in the near term. Recall that Bush's plan to privatize a minute percentage of SS went no where. Dems just want to confiscate ever more money to run the programs. I see no political will to do any reform. Someday the USA either walks away from it's debts or prints money at a fantastic rate to 'cheapen' the debt.  

By Blogger Simon Kenton, at Wed Dec 17, 01:13:00 PM:

Barring true catastrophe, I have enough to fund my own retirement. So I intend to collect social security and invest it for my kids - dull stuff, like paying down principle on their houses, or employing them enough to max IRA contributions if they stay home with the kids.  

By Anonymous Anonymous, at Wed Dec 17, 01:26:00 PM:

I like your plan, but I agree with Mrs. Davis that it's not my generation (51-year-olds) who created these plans, and it's going to be a hard sell. My parents' generation seems to feel plenty entitled, and so do the young adult offspring of friends who are my age -- we 50-somethings just feel squeezed. On a happier note, though, congratulations on your anniversary as a blogger (assuming that I'm correctly interpreting the nearly illegible notation on my calendar) -- MCU  

By Anonymous Anonymous, at Wed Dec 17, 02:49:00 PM:

Public education is inter-generational robbery

but which generation is being robbed?  

By Anonymous Anonymous, at Wed Dec 17, 04:04:00 PM:

I don't see why I should feel obligated to paying anything back. All my life I've spent less than I earned, took out a student loan, paid it off, took out a mortgage, paid it off 20 years early, paid into Social Security and Medicare even though I only expect to receive 25 cents on the dollar, paid my income taxes to the tune of one brand new Benz every couple of years (I drive a used '99 Ford pickup truck).

I've done everything right, saved my money, lived within my means, obeyed the law, been a good honest citizen, and now I am rewarded by my 401K balance dropping 40%, my home value by 30%, government spending money like there's no tomorrow, everyone has their hand out for government cash but no one admits responsibility for their own bad decisions.

Tell me again, why am I on the hook to bail everyone else out?  

By Blogger smitty1e, at Wed Dec 17, 04:10:00 PM:

@Anonymous:
Tell me again, why am I on the hook to bail everyone else out?

Because as long as the Fed has power, the power will be used, occasionally for good.
Understand the 10th Amendment, repeal the 16th, and we shall enter into national rehab.  

By Blogger DEC, at Wed Dec 17, 04:30:00 PM:

Are you searching for other ideas, TH?

Look at Singapore's Central Provident Fund:

"The CPF scheme has progressed over and beyond an old-age savings plan to a comprehensive savings scheme that caters to members’ needs for retirement, health care, home ownership, family protection and assets enhancement."

Basically, it's a forced savings plan.

Ninety percent of Singapore's adults own their own home -– the American dream.


Link:

http://en.wikipedia.org/wiki/Central_Provident_Fund

Additional links are at the bottom of the Wiki page.

P.S. I have no plans to collect my Social Security, so you can shout at somebody else.  

By Anonymous Anonymous, at Wed Dec 17, 05:35:00 PM:

"I have no plans to collect my Social Security, so you can shout at somebody else."-DEC

You aren't gonna die soon, are you?

No, I know you are a well-to-do capitalist roader (heh), and probably don't need the SS-$$, but I know plenty of ne'er do well folks that are absolutely DEPENDING on it. So there you go.

I read where some Chinese in the PRC think Lew Kuan was a real fascist (heh, again), and "forced savings" indeed sounds totally beyond the pale in terms of American liberty (and personal stupidity, which is rampant).

-David  

By Blogger Elise, at Wed Dec 17, 05:42:00 PM:

I hope I am wrong but I see no indication that the boomers will ever vote to enact policy that surrenders their entitlements for the benefit of future generations.

That seems to be the general viewpoint about boomers but I'm one (born in 1954) and would be perfectly happy with TigerHawk's plan. It's totally painless for people 62 and older and those are the people who can justifiably claim it would be pretty hard for them to scare up new sources of income if their Social Security was cut. And it's not that painful for people over 50: so you retire 3 years later.

Is it fair to younger people? No, because they'll have to work longer but yes, because unlike their older fellows they have more time to plan ahead *and* because it means SocSec will still exist when they get old enough for it.

I sent the idea along to a handful of friends who are about my age and I got back no screams of dismay and one "good idea". A small sample but no one I know is digging in their heels and refusing to give a little. If nothing else, an awful lot of people my age have children and they're smart enough to realize it's their kids who are going to take the hit if this mess isn't straightened out.

As for Medicare, this plan will help with that program but it won't help with increasing health care costs for an aging population. The care people need is a function of their age rather than whether they're retired. Later retirement just means people are going to have to get their (increasingly expensive as they age) health care somewhere else. Still the plan would salvage Medicare and that's certainly worth doing.

In other words, I, officially one of those selfish boomers who belongs to AARP, think this is a great idea. So instead of trying to make my icky horrible generation feel guilty by constantly telling us we're not willing to take some lumps, try treating us like reasonably bright people with a reasonable sense of responsibility to the next generation(s). After all, you catch more flies with honey than with vinegar.  

By Blogger DEC, at Wed Dec 17, 05:50:00 PM:

David,

Re: Singapore

From the article at Wiki (not my favorite source, but its accurate this time):

"Singapore is a successful nation which revolves on a national philosophy of self-reliance. Therefore, throughout its rapid development, instead of becoming a welfare state, Singapore introduced CPF in 1955 as a compulsory savings scheme ... ."

Life's full of little trade-offs.  

By Blogger DEC, at Wed Dec 17, 06:06:00 PM:

David,

P.S.

From Cato Institute last September:

"Economic freedom around the world remains on the rise but it has declined notably in the U.S. since the year 2000, according to an authoritative study released today by the Cato Institute and Canada's Fraser Institute.

"In 2000 the U.S. was the second-freest economy listed in Economic Freedom of the World, an annual report written by James Gwartney from Florida State University and Robert Lawson from Auburn University. This year the U.S. has fallen to 8th place, behind Hong Kong (ranked in first place), SINGAPORE, New Zealand, Switzerland, the United Kingdom, Chile, and Canada."

Link:
http://www.cato.org/pressroom.php?display=news&id=159  

By Anonymous John, at Wed Dec 17, 06:22:00 PM:

Social Security and Medicare suffer first from a simple phenomenon: Fraud, and people collecting it who should see nothing. You have tons of faux recipients, illegals, and late age immigrants who deserve jack squat.

As for Medicare and insurance in general, people take virtually no responsibility for their health, but expect millions of coverage when the expected happens from decades of obesity, smoking, lack of exercise.

Look ... I've paid in at the max most of my life. My social security, if I live to see it, will be my beer and walking around money. It's just chump change. How people think they can retire on it escapes me (always has), and how it became some sort of old age pension is just shameful.

We need leadership in DC that makes it clear people need to save some of their freaking dollars, for their golden years, because their Uncle can't foot the bill for an aging population indefinitely.

I can live wiht waiting a few years, and my current statement says I'll get an entire 400 in future dollars if I wait for 70 vs. 67.

So I've got THAT working for me.

At 3% ... 22 years, what is that ... about 200 pretax in today's dollars?  

By Anonymous Anonymous, at Wed Dec 17, 09:01:00 PM:

DEC,
I totally agree with your analysis and exposition of the intentions of Singapore fiscal policy with regards to savings plans. I was being totally facetious and sarcastic. I guess I didn't do it very well.
We do have a compulsory savings plan in the US, it's called "Social Security". It just is managed in a very stupid way, that exhibits none of the financial/fiduciary responsibility that a private fund would be required by law to exhibit. I think that Social Security is doubly "anti -liberty" than anything that the good people of Singapore have done, in that it poorly rewards those who are compelled to use it, and is going to bring about financial hardship to millions based on the gap between expectations and the reality of what is going to happen in a few years. And the denial of the rights of property (ownership of the money itself) is truly a monumental abrogation of personal rights by the US Federal Government.
Don't you go shuffling off very soon, either. We still have more to learn from you.

-David  

By Anonymous Anonymous, at Wed Dec 17, 09:24:00 PM:

"The ugly truth is that our generation -- people born between roughly 1945 and 1970"
I was born in 1954 - speak for yourself. As a college student, I was so poor I wouldn't eat some days but I didn't go on welfare. When I was laid-off, twice, I didn't collect unemployment - I used my own savings. I pay my taxes, more than most since I have very few exemptions. All my loans are paid off and most of all, I vote against Democrats who use these costly social programs to bribe voters!

Also anonymous  

By Blogger Dawnfire82, at Wed Dec 17, 11:03:00 PM:

But Anonymous... your history is the exception. And because it is the exception, the generalization of 'your generation' is accurate.

But thanks for your responsibility, anyway. I hope it serves you well as our society collapses in a perfect storm of passive stupidity and overwhelming debt.

(I don't really believe that... yet. I just don't have any faith in people)  

By Anonymous Anonymous, at Thu Dec 18, 09:35:00 AM:

It's massively ironic that President Obama, riding into office promising a new "new deal" will almost certainly be forced by the reality of our economic distress to consider undoing enduring aspects of the original new deal. The idea that the government can underwrite blank healthcare and retirement promises must end. Social Security and Medicare/Medicaid reform will have to be confronted, finally. Traditional federal responsibilities versus state responsibilities may be reasserted. These will be difficult and uncomfortable positions for new and ideological Democrat Congress and President, so I expect them to buy time with another stimulus package, or three, in hopes the problem will disappear in a wave of improving economic news. I wonder what scares the Congress more: massive inflation or confronting our debts?  

By Anonymous Anonymous, at Thu Dec 18, 04:14:00 PM:

"Only Nixon could go to China"; me hopes that Obama can do all this and more, but methinks that thou are projecting onto Obama as his electoral supporters have done before.

I think what scares Congress the most is that the money merry-go-round may finally break and they might have to do some actual work to keep their phoney-baloney jobs.

-David  

By Anonymous Anonymous, at Wed Jan 28, 11:37:00 AM:

The problem you run into is people like me: promises were made to me by the state. Any politician who suggests that those promises won't be kept, gets FIRED.

You're going to have to buy me off.

Lamont  

By Anonymous Meredith Dixon, at Wed Jan 28, 11:56:00 AM:

"The generation born between 1945 and 1970" ?!? Excuse me, but that covers 35 years. That's nearly *two* generations. My generation didn't vote for any of the things you mention, nor, by and large, have we ever expected to benefit from them, presuming that the real boomers (1945-54) would drain the treasury long before it was our turn.

But in any case, your math is wrong. Under your system, that 38-year-old would be eligible for full benefits at age 73 and 9 months (67 + 6.75), not 72, and your 32-year-old would be eligible for full benefits at 76.

Or did you forget that we're already scheduled to get our benefits two years later than the real boomers?  

By Anonymous Anonymous, at Wed Jan 28, 12:07:00 PM:

The whole problem with us working longer to save Social Security, is that business has to let us work. If you are oolder than fify, how many times have you been laid off? How many of your friends were laid off as they approached fifty? You think that working at minimum wage in retail from age 60 to age 70, is going to i9mpact SS insolvancy? And what about people who have already spent there life in retail and construction. Do you think their bodies can handle another ten years?  

By Blogger jmatt, at Wed Jan 28, 12:58:00 PM:

SS and Medicare don't need to be "fixed", they need to be ended. And unfortunately, bankrupting this house of cards is the only way that will ever happen.

Fortunately for people that are inclined to believe as I do, any breathing room you create in entitlement programs by "fixing" them will immediately be soaked up by politicians who will spend it on vital national interests, like sprucing up the National Mall and condom giveaways.  

By Blogger Dave Cornutt, at Wed Jan 28, 03:19:00 PM:

TH, the problem with the plan you suggest is that it's already been implemented. I was born in 1959 (I don't consider myself a Boomer, BTW), and I already can't receive full SS benefits until age 68 and some number of months. The new plan will have to be stacked on top of the retirement age increases that have already been implemented.

On top of that, I still don't think that saves the program. I think it's going to have to become means-tested, which of course means it devolves into just another welfare program. Now, I could make an ethical argument in favor of that -- the original purpose of SS was eliminate poverty among the elderly, not to fund senior cruises -- but this coupled with age increases will destroy what little faith the American public still has in the program. I would be open to an argument saying that's the way it should be, if the FICA tax went out the door with it. But I know that won't happen.

Plus, don't forget that millions of government employees will be exempt from all of this, because they don't have to contribute to SS. They have their own plans, which actually work. Add to this the fact that the federal government has now assumed financial liability for the pensions of most unionized industries, via the Federal Pension Guaranty Agency or whatever it's called, and you are going to see a very sharp divide between the retirement haves and the retirement have-nots. Once people who are still working in the private sector well into their 70s start looking around at all of these government and union employees who have been living the life of leisure since the age of 55, well, it could be riot conditions.

I personally am doing my financial planning with the assumption that I will never see a dime out of either SS or Medicare. Everything I've read says that SS will go bankrupt about five years before I reach eligibility age (Medicare will go sooner). We built our current house with 50% down. Of course, it doesn't help that the current market has devalued both the house and our retirement plans. And I see stagflation around the corner; with massive government intervention in the market, plus the Treasury running the presses at high speed, it's going to be like Carter all over again. The irony here is that stagflation very much favors those who have lots of debt, while it absolutely kills investors.  

By Anonymous punditius, at Thu Jan 29, 12:09:00 AM:

Dave: "Plus, don't forget that millions of government employees will be exempt from all of this, because they don't have to contribute to SS. They have their own plans, which actually work."

Actually, federal government employees have been paying into SS since the mid 1980s. It's a component of their retirement plan, the other components being a 401k type savings/investment plan, and a one percent of high 3 salary per year of employment - 30 years gives them 30 percent of their salary.

Federal employees who are still in the old retirement system have a better deal - at 30 years, they get 56 percent of salary. But most of them get NO SS, and their 401k is not matched.

State employees are another matter, of course. There's evidently a big big funding problem for their retirement accounts, & they could take a big hit on them in states where they don't have the clout to get the government to raise taxes.  

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