A demographic whirlpool, too ?

There is the structural, economic whirlpool the USA is spinning down into. But there is also the demographic one, too. They are inextricably integrated. Arguably, leadership could mitigate and put us into a corrective, remedial course of economics that would positively influence the demographic short fall eventually, if not cure it.

Ok, this is not a news flash. How many decades have we known about the top heavy baby boomers expected to be supported by the generation X and Y younger folks behind it ?

Today's 3 minute interview by Rick Santelli on CNBC of Bill Frezza who is a fellow at the Competitive Enterprise Institute, and a Boston-based venture capitalist puts it all together. The first link is the interview; the second is the article Fezza had published. Santelli explained the article is something to deeply rerflect on [I think because the future is now and it ain't pretty]. The brackets are my words.

Is implosion unfolding much more visible now? Yes, the fiscal cliff with its tax burden on everyone and the associated recession to follow will probably awaken the sleeping public to make it understand what it just voted for last month, an apparent exacerbation in afterburner mode. But more importantly (GAWD can there be anything more important ?) will this be the catalyst that makes the public as a whole wake up to the $ 80 trillion of included unfunded liability, fiscal ABYSS and start making inquiry as to the significance of that ? (Over $ 100 trillion if including the states).

The printed article is like a huge jet on the end of the runway ready to take off. It is slow, dry reading the first few paragraphs. And like the take-off roll, it becomes easier to read. Like lift off from the runway, the article makes light bulbs go on in your head. And like the plane's gain of serious altitude with a good view of broad expanse underneath it, the article completes with its intended objective of making us understand the scope and depth of the subject and most importantly suggestive of the consequences. Very much worth reading.

(I picked up on some things in the article that looked familiar to me as if I had read it before. Excuse me if this article has been addressed before on ET.)

http://video.cnbc.com/gallery/?video=3000137129&play=1

http://www.realclearmarkets.com/art...s_enslave_my_future_grandchildren_100034.html

 

Ok CD, I gave you details on our PM exchange on how to find him, the nephew. As promised, since I had Joe take down my post about him on this thread and my meeting and photo of him at U of H (hawaii institute of geophysics), here is a replacement one so you will recognize him when you meet in Hawaii. Even though it is old and not close photo of him, he looks exactly like this today....slender and young appearance (darn vegetarians !) You will enjoy because you are both surfers (as was I when I lived there). Besides, even though you will talk trading with them, this is winter and a great opportunity, I hope, for you to see him surf the big ones on either North or West shore of Oahu.

Even though he is a geophysics guy, he is good on the demographics thing, as per my post above, and can give you lots of reference sources, so you have lots in common with your studies. I expect you to contribute to this serious subject / thread when you return.

He was enthusiastic about talking to other ET posters about pair trading when I brought it up, which is their forte and not necessarily yours. But remind him about posting and meeting other ET traders there. He's been trading for a long time. For the professionals among ET posters (or physicists....haha) maybe the trip can be written off in some sort of conference there !

 

There are substantial future liabilities for government that seemingly have grown rather dramatically since the 2008 financial crisis, that's true. The numbers do seem astounding, until reason takes hold and you look at future revenues -- its the same on a much smaller scale for individuals who just bought a 200,000 house on a 30 year mortgage at 7% and discover that they are now obligated to more than half a million dollars in future liabilities after taxes and insurance are included!

We are discussing future medical and retirement pension costs of a nation with, at present, a population ~1/3 billion persons. Naturally the numbers are on the order of ten to the twelfth.

For the purpose of getting a reasonable discussion going I'll state the following opinions and assertions.

First the opinions. In my mind they are justified by facts, but they nevertheless are opinions, and so I'm not going to back them up with any data or links. (I will try to back up the assertions.)

1) Misinformation on Social Security dominates over fact on the internet and in the media, but particularly on the internet. The origin of this misinformation and the forces promulgating it and feeding it are located on Wall Street -- where it is not a matter of misinformation so much as disinformation! The underlying incentives are self-evident. The disinformation campaign has, so far, been partially successful, but not completely so.

2) The problems for the Social Security pension trust going forward are, so far, minor, almost trivial, and very easily fixed (I don't wish to imply that they will be fixed!). The problems with the disability trust are more serious and harder to fix, because they involve even more highly politicized social issues.

3) Problems with Medicare and Medicaid should not be lumped together with Social Security. They are orders of magnitude more serious, and going to be orders of magnitude more difficult to remedy.

4) While medicare and social security liabilities are major contributors to, and strongly correlated with Treasury borrowing, NEITHER OF THESE PROGRAMS ARE RELATED TO GOVERNMENT DEFICITS AS CAUSE AND EFFECT. Treasury borrowing to pay what is owed to Soc.Sec. is caused by deficits, not the other way round; borrowing to cover medicare cost overruns is due to medical costs being grossly out of step with the rest of the world, and not to medicare itself. It must be acknowledged, however, that some aspects of medicare may have unwittingly contributed to exceedingly high medical costs in the U.S. -- fraudulent billing for example.


Now the assertions. I will make some attempt to back them up.

1) There are only two highly significant contributors to the Federal Deficits: Defense spending and Medical Costs. These two items are related as cause and effect to Federal deficits.

We spend twice on defense what the next four biggest spenders combined spend, and five times what the next biggest spender (China) spends . And these numbers do not include veterans' benefits, or nearly continuous off budget U.S. wars, or indeed the interest on money borrowed to support these wars!

U. S. medical costs are twice the average of the 13 industrialized nations we compare ourselves to. We spend 2.8 Trillion dollars per year on medical costs. Compared to what we should be spending, that's a difference of 1.4 Trillion per year! And these other countries have universal access to care and better outcomes!

As anyone can see, the per capita costs of these two items alone --defense and medical costs-- are so wildly out of whack with other advanced nations that they account for the entire U.S. deficit, and then some!
http://en.wikipedia.org/wiki/List_of_countries_by_military_expenditures#Footnotes
http://www.pbs.org/newshour/rundown...-countries.html

2) Robert Myers set up the original social security system to be self supporting. It was intended that those who died younger would subsidize the pensions of those who lived longer. When the system was first introduced, some famously received benefits far greater then their contributions, but that cost was amortized over many years and hardly noticeable. As years went by, the system was altered to include new benefits, which were to be properly paid for using sound actuarial principles. Congress, however, has not always been a good steward of social security, and has sometimes failed to act in a timely manner on the Trustees' requests for adjustments. In Reagan's time there was a crisis, and the system was again adjusted to put it back on a sound actuarial basis. In fact, Robert Myers was once again involved in putting it right, and the Trust later reached a peak balance of ~2.7 Trillion. It was never intended that there should not be periodic adjustments in the contribution rate and other features to maintain the system on a sound actuarial basis. Certainly it was never intended that current workers would pay the pensions of retired workers.

3) The most important features of social security, as it exists today, is that it combines annuity, insurance, and social welfare features in a defined benefits pension plan. Those who are well off are likely to receive an ROI, if they receive any at all, similar to risk free bonds; the retired poor, on the other hand, will likely receive a double digit ROI on their contribution.

It is a manifest impossibility for the working poor to set aside enough to build a private pension plan that they can not easily outlive that would be even close to commensurate with what social security can provide to them in their old age, let alone a plan that includes disability insurance and some survivor benefits.
http://www.angrybearblog.com/2009/03/social-security-return-on-investment.html
http://online.wsj.com/article/SB10001424052748704073804576023890972991846.html
(And many other articles, by searching Social Security ROI.)
A critical but balanced look at Soc. Sec.: http://en.wikipedia.org/wiki/Social_Security_(United_States)
Excellent is: http://www.nysscpa.org/cpajournal/2006/506/infocus/p15.htm
Of historical interest: http://www.nytimes.com/2010/02/26/business/26myers.html?_r=0

So, in summary, my problem with the Frezza article is that I vehemently disagree with its premises. Frezza's argument depends on social security being a Ponzi scheme, and it isn't! We could make a few simple, small adjustments to social security and its fiscal problems would vanish -- assuming we do it now and not put the adjustments off.

There is a problem with medicare of course, but that can't be fixed by simply reducing medicare benefits to balance revenue with expense, nor can it be fixed by raising medicare taxes. Either of these actions would only make matters even worse.

On the other hand you could bring medical costs in line with those of the other 13 industrialized nations, and the the fiscal problems with medicare will vanish. This is proof positive that medicare is not related to Federal deficits as cause and effect. It's medical costs that are causing the deficits, and that's where the focus should be. And while I'm on the subject of cause and effect, since social security is not responsible for federal deficits, why are we focusing on it rather than defense spending?

 

Thanks Piezoe for the post. I have lots of follow-up questions and statements to come.

I listened on the radio this Saturday morning to two local (Puget Sound area) financial adviser gentlemen who seldom talk THEIR financial business on the radio. Rather, they do an hour with very little commercial breaks (two breaks ? .... and a station news break on the half hour). Their style is to review a week in the news as relates to financial national and international, almost done in bullet like fashion with their own jibes and quick comments, but they are kool and with levity generally. Much of it is fill-in-the-blanks that you don't hear in the main stories of the week that just passed.

I've never known them to devote an entire hour on a topic. Today it was a coincidence that the entire hour was on social security, as they interviewed a supposed expert. (I've never known them to do interviews.) Turns out it was a rebroadcast as both co-hosts were sick. However, I would emphasize for those that know a lot about SS benefits, it would be unnecessary to listen to except for the first 10 minutes or so that is related to the origin and concept and so called mis-conceptions about it as per the interviewee's perspective.

The link will take you to their web page which has a spot to click on "Click play button to listen to our most recent show."

A week from now, today's show may be labeled by date Jan 5, 2013 or Social Security or whatever.

http://www.doncreech.com/

 

I listened to the Creedh broadcast this morning. Thanks for the link. The guest was very knowledgeable.

A law that everyone should be aware of is this:

EXCLUSION OF SOCIAL SECURITY FROM ALL BUDGETS Pub. L. 101-508, title XIII, Sec. 13301(a), Nov. 5, 1990, 104Stat. 1388-623, provided that: Notwithstanding any other provision of law, the receipts and disbursements of the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund shall not be counted as new budget authority, outlays, receipts, or deficit or surplus for purposes of - (1) the budget of the United States Government as submitted by the President, (2) the congressional budget, or (3) the Balanced Budget and Emergency Deficit Control Act of 1985.

This is the law that places the trusts off budget.

It is quite true that benefits paid to retirees are paid first from current receipts and any surplus is given to the Treasury in exchange for special bonds. The interest earned by the bonds is determined by the current Treasury market rates: in 2005 it was 5.5% , in 2011 4.4%. When current receipts are not sufficient to cover current outlays the difference is made up by redeeming trust bonds. One hears different estimates for the date at which the trust will have to start redeeming its bonds. In Bush's presidency it was 2022, that date may have been adjusted by now.

Even George Bush, and we all know how smart he was!, has been quoted as saying: "Some in our country think that Social Security is a trust fund – in other words, there's a pile of money being accumulated. That's just simply not true. The money – payroll taxes going into the Social Security are spent. They're spent on benefits and they're spent on government programs. There is no trust."

Of course, in truth George Bush was a bungling inept president, and he was probably parroting what some Wall Street character had told him. (Maybe Lloyd Blankfein at Hamptons cocktail party!)

Bush's statement is almost, but not quite 100% wrong. It's true that payroll taxes are spent on benefits, but they are NOT spent directly on other government programs without the Treasury incurring an obligation to repay them --that would be illegal!. The excess of receipts over expenditures are exchanged at the Treasury for trust bonds. Yes the treasury then spends the money they received in exchange for bonds on "government programs", but Treasury did not illegally, simply take the money and spend it without any further obligation to the Social Security system. That's a monumental difference, and that's what makes the Bush Statement so unbelievably idiotic. But with disinformation such as this, can anyone be blamed for thinking that social security really is a Ponzi scheme?!!!

In contrast to the Bush statement above, Alan Greenspan was asked at a hearing in 2001 whether the trust fund investments are “real” or merely an accounting device. His answer was: “The crucial question: Are they ultimate claims on real resources? And the answer is yes.”

The important thing to understand, and the point missed by so many, is that current dollars received from current workers in the form of FICA taxes are fungible with the dollar equivalent of trust bonds. Therefore there is no difference between exchanging current receipts for bonds at the treasury and then redeeming at the Treasury enough trust bonds to pay current pension obligations, or using current receipts to pay pensions and exchanging any excess receipts for special trust bonds at the Treasury. So it's nonsense to say that since current receipts are used to pay pensions, which they are, that social security is a Ponzi scheme. Of course there are many other features that distinguish social security from a Ponzi scheme. When I hear someone posting on ET or someone on the internet say that social security is a Ponzi scheme, it's understandable, but when I hear a Senator, Representative, or President say it, I'm appalled!

Social security faces significant challenges going forward, because large deficits in the discretionary budget negatively impact future social security recipients via incompletely compensated inflation. Every bond in the trust represents future borrowing by the Treasury to the extent that the government is operating at a deficit.

A competent Congress all pulling in the same direction would make handling the social security challenges a trivial matter. Sadly we don't have that at the moment. In fact, in the immediate future I expect government to get worse at solving problems rather than better. I believe, as George Soros does, that thinking that government is bad creates bad government, and we have a wing of the Republican party that thinks government is bad. If you want a competent government these are last folks you would want to send to Washington to run it. These people don't want to manage government well, they want to destroy it.

We have already learned what happened to the financial sector when we appointed a Regulator in Chief who did not believe in regulation --Alan Greenspan. Now we are repeating the mistake by choosing people who do not believe in government to run it!
( see George Soros, "Reflexivity")

Here is the source for specific information in this post.
http://en.wikipedia.org/wiki/Social_Security_Trust_Fund

 

Thanks Piezoe. I am still plowing through your two posts and Wikipedia. The latter corroborates, possibly, a point in your first post about disinformation / misinformation as follows:

I have only skimmed Wikipedia, but one thing that caught my eye was the following:

"In 2011 and 2012, the federal government temporarily lowered the rate of the employees' share of payroll taxes from 6.2% to 4.2% of compensation.[20] The resulting shortfall was appropriated from the general Government funds. This increased public debt, but did not advance the year of depletion of the Trust Fund.[21]"

That is contrary to what I heard on a news / talk t.v. show on a financial cable channel Friday. To put it in context, the panelist was on a slightly different theme but used payroll tax cuts as an illustration of exacerbating the draw down and accelerating the depletion in the Trust Fund. I never would have thought about disinformation and misinformation as contrived as I later inferred from your post; I would have thought in this example it is ignorance stated before panelist having done research before opening his mouth, which suggests a 4th source for bad info--laziness.

 

I anticipate the impact of the financial crisis and the aging demographic will create enormous poverty for the baby boomers in their retirement. I also expect taxes to increase due to their lobby power. If this is not the case it will be due to some kind of change in government system.

Either way it is nasty.

 

Yes, the boomers will not go down without a fight. They voted to keep taxes low and spending high all of their working lives, and now they are nearing retirement/retired, they will fight tooth and nail to make sure entitlement spending stays high and taxes go up on the higher tax brackets.

Old people vote in droves. Old people enter lower tax brackets in retirement. Old people will want to keep their benefits, regardless of its effect on their offspring. All of that equates to soaking the high earners.

It's not rocket science.

 

I can't find where I read this, but here is another interesting fact. The SSA assumes that in the future, workers will be about as productive as in the past. BUT . . . if you adjust that productivity for changing racial demographics (assume that future hispanic workers will be as productive as current hispanic workers), then the SS numbers look much worse. Of course the SSA is never going to make that adjustment, so the bad (if it comes to pass) will be a surprise to nearly everyone.

 

We have seen huge health insurance premium increases this year, and we must not forget that retirement does not bring an end to health insurance premiums which retirees pay on top of their continued payments into medicare. An individual in their seventies can expect to pay nearly nine thousand a year in combined supplemental and medicare premiums to be fully insured. Those who retired in the lower middle class that can't qualify for medicaid won't be able to afford this, nor without supplemental insurance can they afford the 20% copay that medicare leaves them with if they have any serious hospitalization event. They will be forced to take on risk by being under insured.