just to keep in mind if you're a few years shy of retirement -- and also when you're considering your vote...
Need a grim reaper smilie...
Tempest in a Tax Code
By TODD G. BUCHHOLZ
April 21, 2004; Page D10
A few pages into "The Coming Generational Storm" (MIT, 274 pages, $27.95) and you'll want to throw your favorite chair and your flat-panel TV into your SUV and, like "The Beverly Hillbillies" in reverse, drive back to the Ozarks beyond the pale of civilization. And beyond the absurd promises of Social Security and Medicare. Unlike Jed Clampett, you won't want to hitch granny to the roof, because she'll just bankrupt you with the cost of her blood-pressure medicine and arthritis pills.
"The Coming Generational Storm" makes "The Perfect Storm," Sebastian Junger's best-selling 1998 tale of coastal gales, sound like a rain delay at Fenway Park. Economist Laurence J. Kotlikoff has teamed up with financial journalist Scott Burns to expose our cherished entitlement programs as chicanery, foolishness and cowardice.
For more than a decade, Mr. Kotlikoff has been crunching numbers and leading the charge to create a "generational accounting" model that asks the question: "How much are we ripping off our children and grandchildren by promising retirement and medical benefits to ourselves?" The answer would make even Dennis Kozlowski blush behind his $6,000 shower curtain. The authors estimate that tax rates will have to rise to nearly 70% to pay the bills now accruing.
Tax rates will have to rise 70% to pay the bills now accruing.
How did we get into this mess? We've spent 70 years building a pyramid scheme. When Franklin Roosevelt set up the Social Security system, the median age of a retired worker was, well, dead. It was easy to promise benefits when most people died in their 50s. A pyramid scheme works as long as you've got an ever bigger supply of drones to lug the bricks and blocks. Pyramids worked fine for the pharaohs until Charlton Heston led the Hebrew slaves through that river.
But now the U.S. pyramid looks like it could turn upside-down. "In 2000 there were 82 million people under the age of 20 in the United States. Their numbers dwarfed the 35.5 million seniors." By 2080, there will be more seniors than young people. That means more walkers than strollers. We already have more golf courses than McDonald's. And that was before Phil Mickelson inspired perennial losers to head back to the links.
There is plenty of blame to go around, and Messrs. Kotlikoff and Burns delight in pointing their fingers at the presidents, bureaucrats and congressmen who won't listen. They especially mock President Clinton's fiscal "rectitude." After mentioning Monica Lewinsky's name, they state that the "president no doubt had just too many things in his lap to come up with long-term solutions for Social Security, Medicare, or Medicaid." This failure dwarfed whatever progress Mr. Clinton made on the debt, which fell to "only 35 percent of GDP by the time his moving van pulled up to the White House and started pilfering the place."
Nor do Republicans get off easy, as the authors invoke the dreaded "voodoo" word to describe the policies of Presidents Reagan and George W. Bush. All I know is that Mr. Reagan's voodoo was preferable to the doo-doo that Jimmy Carter left us with. (Remember stagflation?) This book's bipartisan slaps -- bred of frustration with futile congressional testimony -- can be summarized as a "Paul O'Neill on both your houses."
Perhaps the authors go a bit too far. Because the Treasury Department has issued 75-year projections for entitlement spending, but not 100-year forecasts, Messrs. Kotlikoff and Burns insist that they are hiding the ugly truth. Gosh, 75 years sounds pretty far away to me. What is the confidence interval on a 100-year econometric forecast? Might as well consult Nancy Reagan's astrologer.
Having painted a fiscal picture as awful as "Guernica," the authors unveil two bold plans. Their Social Security proposal pulls out the plug for young people, liberating them to invest in a government-run index fund of stocks, bonds and real estate. They cancel the payroll tax and substitute a new federal sales tax that would pay off accrued benefits. Their Medicare plan revokes the "fee for service" system that gives patients no incentive to curb their spending. Instead, older people would receive customized vouchers based on their current health. A "perfectly healthy 67-year-old might get a voucher for $6,000 whereas an 85-year-old with pancreatic cancer might get a voucher for $100,000." Their ideas are thoughtful and, whatever doubts one might have, preferable to the status quo, which sticks the country's entire financial future in the ICU.
The authors give some personal financial advice toward the end of the book, including buying your home and dabbling in gold and commodity funds. But they don't suggest moving to Europe or Japan. Those national pyramids are flipping over sooner than ours. Japan is aging faster than sushi. And Helmut Kohl caught hell for just proposing that German workers cut back their annual spa visits, in which the government pays them to loll about in bubbly waters.
Which is the only country to tackle the problem? Britain, thanks to the Iron Lady, who partially privatized that country's social security. But if most other countries are dumb and indebted, why do Messrs. Kotlikoff and Burns tell readers to invest money in international bond funds? They themselves predict that interest rates will be rising sharply, which hurts bonds, and other issuers of debt appear even more reckless than the U.S.
Of course, politicians will be politicians. The lesson is to give them less power over our money. This engaging book recounts the harrowing story of Rep. Dan Rostenkowski, who pushed through a health-care plan for the elderly and then asked them to help pay for it. At one event, he was "booed and chased down a Chicago street...by a group of senior citizens." Eventually he "cut through a gas station, broke into a sprint and escaped in a car, which minutes earlier had one of its protesters, Leona Kozien, draped over the hood."
Well, if granny is going to jump on your car anyway, you might as well, like Jed Clampett, take her with you to escape the Coming Generational Storm.