No Economist Will Tell You This!
I’m not an economist although I’ve had courses from Nobel Prize winners in economics and had economists working for me. I am a long-range planner. I have a simple message that is very unpopular. Here it is: We are already past the point of no return, economically!
As near as I can tell, there are no unbiased economists. The ones who work on Wall Street always paint a picture that’s good for selling securities. The ones that work for the government want you to believe that their actions will improve the economy. The ones working for universities and most media have political agendas. Those that work for industry find ways to make it sound like their products are the solution to every problem. And so it goes wherever economists are employed.
Why do I say we are already past the point of no return? Because there are many unstoppable things going on, each of which is a disaster in its own right. Consider the ten points below:
1. The growth in the number of people getting old is far outstripping those that are working. This would not be a problem except that entitlements that support the elderly are built on a Ponzi scheme. We did not put money in a self-supporting trust or reserves to support our Social Security, Medicare, Medicaid and government pensions. Instead, entitlements are supported by a diminishing supply of those who are still working. It won’t be long until there are only two workers per retiree, not the current three workers. Further, we are living longer so costs will continue longer and in ever higher amounts. Demographers project that the number of people over 65 will increase by 90% in only 20 years.
The labor force is about 154 million according to the Bureau of Labor Statistics. The current population is about 300 million plus “undocumented” immigrants, so the workforce is almost half of the population. But 28% of the population are under age 20 while 13% are over 65. That leaves 59% of the population, or 183 million, between the ages 20 and 65. Therefore our labor force is roughly 84% of those between 20 and 65. What does this mean? Even if we were able to employ almost every mother of infant children together with all of the disabled and the currently unemployed, we could not approach World War II employment percentages. Hence, we can’t get the kind of tax revenues needed to support the forthcoming growing entitlements.
2. Entitlements are growing exponentially. Entitlements include Social Security, Medicare, Medicaid, government pensions and unemployment insurance. Politicians dare not run on a platform to reduce entitlements. Most politicians run on a platform to improve them—always adding to the financial burden entitlements bear. They can do this because the cost growth will be pushed into the future, and the public actually supports this. Why? It’s because we are approaching the point where almost half of the people don’t pay income tax. The costs grow exponentially because entitlements are inflation adjusted. An entitlement growing with inflation at the rate of, say, 3% would increase costs by 81% in 20 years. That’s if the costs don’t increase at more than the rate of inflation. But these costs do increase more. Consider Medicare costs which increase as treatments become more sophisticated. For example, if Medicare costs increase at 3% more than inflation, the costs will increase 221% in twenty years, not 81%. Medicare and Medicaid burdens grow by inflation PLUS the costs of better medical care. These costs are even more painful to taxpayers because the support from payroll taxes goes down as the number of workers goes down. That leaves the difference up to income taxes which are paid by only part of the workers.
3. There is no public will to cut the amounts to be distributed for Social Security, Medicare, Medicaid, government pensions or unemployment insurance. Take government pensions as an example. Very strong public unions easily dominate political office holders because these unions contribute so much to election campaigns while the office holders have little if any experience in running a business. Business leaders know there are times where they need to cut costs severely and stand up to strikers. Government organizations have learned to make it look like the only way they can cut costs is to reduce police protection, 911 help, the number of teachers, etc.--all things the public wants. They never propose meaningful cuts in the number of administrative staff, wages, benefits, pet programs, transportation, selling unnecessary property, or, Heaven forbid, their own perks and compensation.
4. National savings rates are a disgrace and beyond repair. Consumption is the enemy of saving. We have just gone through twenty-five years of excessive consumption growth encouraged by the government, financial firms, industry producing enticing electronic products, large homes instead of small ones, home ownership instead of renting, and a driving need to keep up with the Joneses. Savings, as a percent of disposable income, were fairly steady at about 9% rate from World War II till 1985. Then savings rates started a precipitous drive to almost 0% in 2005. They are now up to about 5% which some who call themselves “economists” think sufficient.
Economists never mention the fact that we now have a large segment of the population with too little savings and retirement in sight. If the population as a whole wanted to make up for the lost savings from 1985 on, they would have had to save 23% of disposable income for twenty years starting in 2005, not 5%. Many boomers will be lucky to have $100,000 in savings at retirement. That translates to inflation-adjusted spending of about $300 to $400 a month over a 30 year period. Add Social Security and results are still below the poverty level. Reserves for emergencies and capital expenditures are nil forcing people to seek more credit.
5. Industry has cut back on pension plans. Most companies have switched to 401(k) savings plans or cash balance plans rather than pensions. Funding a trust for a pension plan is expensive and requires administration to provide payments over the entire lives of employees. It’s a lot cheaper and easier to provide 401(k) matching funds. Then employees become responsible for their own retirement savings—savings which are falling pitifully short of a pension equivalent.
The average Boomer will get only a few hundred dollars a month from his/her savings in retirement. Few government employees have that problem because most not only get a generous pension, they have pension payments that increase with the cost of living, unlike virtually all private pensions which offer only fixed monthly payments. Further, government pensions are guaranteed unlike private pensions which are backed by smaller payments from the Pension Benefit Guarantee Corporation.
6. Low savings force people to either work longer or take Social Security as early as possible. Few realize the importance of that additional 8% of Social Security income they’ll get for each year they delay the start of Social Security. The best way to improve retirement benefits, other than by working longer, marrying rich or increasing saving, is for the primary wage earner to delay benefits till 70. Low income spouses maximize benefits by waiting till 66. There are lots of impediments to this strategy including having either sufficient savings to support the delay or the necessary skills and physical capacity to work this long.
7. Retirees have lots more medical related expenses than when young, not just because their employers pay much of a worker’s insurance premiums up to retirement, but also because age brings more medical difficulties. Fidelity estimates that retirees will need about $250,000 savings to cover retirement medical expenses. That’s a little over what I estimate is needed for our own Boeing subsidized medical insurance premiums, but if I add my Medicare monthly deductions and uninsured medical expenses, I get a larger number than Fidelity. People forecasting needed retirement budget items often forget that Medicare and most Medigap policies don’t cover dental, hearing or normal eye care—things that get worse as we age. And none of these numbers include long-term-care or end-of-life medical expenses which can be atrocious.
Adding 11 million undocumented workers plus about another 20 million uninsured to insurance roles can’t help but increase the cost of health insurance. Medicare and Medicaid burdens will increase as these additional people age. So will annual health checkups for everyone. Insurers forced to drop limits and restrictions must increase premiums accordingly.
It is already difficult to find doctors who will take Medicare patients—and the number of general practice physicians is declining because the pay is far less than that of medical specialists. Their pay will have to go up, not down. Yet the purported cost savings for the new health care program require substantial cost reductions in Medicare and Medicaid. The net effect will be increased insurance bills and longer waits for appointments. More people, not fewer, may be sent to Emergency Care.
8. For some, living on welfare is much better than working. After all, it’s not like times in the past where people lined up for soup in the public square and lived in tents. Many welfare recipients get subsidized housing and utility payments, free cell phone service, food stamps, have computers, internet service, cable television, free yard maintenance, own a car and have access to recreation areas. When ill, they can get free medical and dental care--even someone to come to their apartments a couple of times a week to clean and shop for groceries. No wonder that in some places, succeeding generations remain on generous welfare and immigrants want to come here.
9. Our debts keep building to the point where it is literally impossible to pay them. Setting aside the $11.7 trillion current consumer debt and $3 trillion from unfunded State entitlements, and unfunded Federal entitlements of about $100 trillion, the national debt of $13 trillion alone is now $113,000 per household. Government debts are growing exponentially as government programs increase. In only ten more years, the national debt could well exceed $200,000 per household. If the feds are able to finance that debt with 20 year bonds at 4% interest, that requires almost $15,000 taxes per year per household excluding personal and State debt payments.
States have crushing additional Medicaid and regulatory costs put on them by the federal government. This is an attempt to make federal deficits and debt appear smaller in public pronouncements for new federal legislation. 40% of the working people pay no income tax, and that percentage is growing as many not only don’t pay income tax, they get “refundable tax credits,” a euphemism for welfare payments.
Yet we tax everything else from payroll to property. Some things are taxed many, many times like manufactured goods which have taxes on the materials producers, the suppliers that use the materials and make the parts, the final manufacturer, the distributor, the retailer, and all of the labor that went into these operations. No one escapes taxes except for the 40% or more who don’t pay income taxes needed for the reduction of the national debt or for the country’s defense.
10. The combination of all of these things means that consumption will slow appreciably—which in turn will slow the economy—which in turn will reduce employment—which in turn will increase the tax load on the remaining workers—which in turn will reduce the amount they can save. This is a vicious circle that can’t be stopped. There is no political will to do so. We’ll all get hurt, but not as much as our children and grandchildren who will pay for our personal excesses and our lack of will to even slow our own demise. Ours will be the first generation to leave future generations poorer than our own.
There is hope for
some:
It’s possible for some individuals to suffer a lot less. They are those who will plan ahead, set stringent rules for family spending, stop emulating the Joneses, develop multiple skills, exercise and eat healthy foods (perhaps from their own garden), work hard and long, set provident examples for their children and others, and invest savings conservatively with a mind to a slowing economy, high tax rates and subsequent inflation as the government tries to reduce its debt with cheap dollars. They are those who will enter their retirement without daily fears of being able to pay their bills and outliving their money.
Henry K. (Bud) Hebeler
8/28/10