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The Danger Time Between 65-80

Everyone thinks he can retire at age 65. It’s an American ideal born in the last century with the rise of unions, the defined benefit plan, and generous pension systems. In reality — especially due to advances in health, medicine, and nutrition — many people have great capability to continue to work and contribute to society and themselves until 70-80. And they should, because they need to.

There is a crisis of affordability looming. Besides the enormously wealthy, for the most part no average person can afford to retire at 65. It is simply not possible, living a normal lifestyle, for anyone to put enough toward retirement by age 65 that will enable him to be supported for another 20-30 years. A life span of 85-95 is swiftly becoming the new norm. The only workers today who are the exception to this reality, and have any hope of a lengthy retirement with comfort, are public service employees.  (That point is addressed in a subsequent piece entitled, “Abuse to the Taxpayer by Public Service Employees.”)

With the lifespan of Americans growing longer, retiring at 65 is no longer viable; the systems are badly strained. And it is certainly not rational for the longevity of Social Security and Medicare either. Yet the steadfast refusal of most of government to overhaul retirement systems or make age and formula adjustments to entitlement programs — in order to maintain this retirement facade — only compounds the problem.

Another one of the biggest detriments of being able to retire at 65 is investment return. Interest rates have been historically low for the last six years and there is a strong likelihood of them staying low for some time. As a result, people’s retirement portfolios have lagged in their anticipated growth and goals. The low rates mean less money overall for retirement time, a problem which can be offset by continuing to work and contribute to a retirement fund past the basic age.

Likewise, inflation is not the issue that everyone thinks it is. The true problem is the cost of living — but really, it’s the cost of modern living, the “keeping up with the Jones’s”. The cost of aspirin, color TV’s, computers, and long distance calls are NOT going up. But people now can have Celebrex instead of aspirin, surround-sound with flat screens instead of color TV, and smart phones instead of computers and standard phones. Newer models of everything due to technology is constantly changing — upgrading quality of life, but at an increased cost.

In sum, with living longer, low rates of return, and the “cost of Jones’s increase”, people must begin to realize that the time span between 65 – 75 can be, and should be, a healthy and productive time of life. Working, staying active, and continuing to save will be beneficial in the long run. The mindset of older citizens needs to change and they need to understand that they can should aim to be productive until they are 75. At 65 they can certainly slow down, but the concept of retiring and not working anymore at that age is unrealistic and unaffordable.

 

Treat Social Security Like a True Retirement Plan

Entitlement reform is necessary for the fiscal health of this country, but it is something that no one wants to talk about, much less tackle. How can we begin? How can we open up the conversation and the possibility to reform and improve our social security system?

One step in the right direction would be to treat Social Security as a true retirement plan, and not as a wealth transfer system that it currently is. This could begin with reclassifying the payroll tax. The majority (6.2% out of 7.65%) of the payroll tax covers Social Security retirement benefits. If we actually used it (or at least most of it) for that individual’s social security retirement, everyone’s perception would change. Instead of being viewed as a hated tax (just ask any young person who has received their first paycheck), it would be viewed as a desirable saving for their future!  

Let’s make another incremental change. The employer and employee contribute equally to the Social Security Tax. If the individual’s part went towards his personal retirement, the other part could go towards defraying the past obligations that are coming due. If we had done such a thing 20 years ago, the entire system would have been fixed.  Unfortunately, the present situation would probably require some portion of the individual’s portion to also go towards paying the ever growing obligation for past unfunded promises. It’s that dire! And every year that we do not fix it, it gets worse.

We must stop treating Social Security like welfare or wealth transfers and start treating it like a retirement system. It’s our money anyway, even though the government wants to act like it is being generous when it gives us back our money. This would lessen the loose-and-fast accounting gimmicks that contribute to the fiscal mismanagement of Social Security anyway — and may move it away from its impending insolvency.

 

Social Security: Not a Tax

Whenever tax reform, tax packages, or  tax changes get discussed and debated, the focus is always on “the middle class.” While this sounds noble, the reality is that the middle class already pays very little in taxes. The majority of the middle class “tax bill” is actually Social Security — which is not truly a tax.

For example, my son made about $35,000 last year. He paid $1,500 in income tax and $4,500 in Social Security. But contributions to the Social Security system should  not be viewed as a tax — it is effectively a forced retirement payment. Pundits and lawmakers need to stop calling Social Security payments a tax, and need to stop including Social Security payments in their tax equations because it does not operate as a tax.

I strongly believe that with some tweaks to the Social Security system that make the benefits more tied to contributions and allow for some ownership of the underlying assets, we can get people to view those payments in a positive light – investing for their future. When you remove the Social Security line item from the amount of tax liability, you see that the lower and middle classes have a very low income tax liability.

Social Security Reform, Part II: The Payroll Tax and Retirement

Entitlement reform is necessary for the fiscal health of this country, but it is something that no one wants to talk about, much less tackle. How can we begin? How can we open up the conversation and the possibility to reform and improve our social security system?

One step in the right direction would be to treat Social Security as a true retirement plan, and not as a wealth transfer system that it currently is. This could begin with reclassifying the payroll tax. The majority of the payroll tax covers Social Security retirement benefits. If we actually used it (or at least most of it) for that individual’s social security retirement, everyone’s perception would change. Instead of being viewed as a hated tax (just ask any young person who has received their first paycheck), it would be viewed as a desirable saving for their future!

A move in this direction could be helped by a characteristic of the present structure. The employer and employee contribute equally to the Social Security Tax. If the individual’s part went towards his personal retirement, the other part could go towards defraying the past obligations that are coming due. If we had done such a thing 20 years ago, the entire system would have been fixed. . Unfortunately, the present situation would probably require some portion of the individual’s portion to also go towards paying the ever growing obligation for past unfunded promises. It’s that dire! And it gets worse every year.

Let’s stop treating Social Security like welfare or wealth transfers and start treating it like a retirement system. It’s our money anyway, even though the government wants to act like it is being generous when it gives us back our money. This would lessen the loose-and-fast accounting gimmicks that contribute to the fiscal mismanagement of Social Security anyway — and may move it away from its impending insolvency.

Pension Fund Crisis Ballooning in Major Cities

Bloomberg did a feature this week on the long-term outlook on pension funds for several major cities, and found that it is swiftly becoming a fiscal tsunami in several places. Part of this stems from severe under-funding of pension plans over many years, while the other part is accounting tricks.

As Bloomberg notes, “Moody’s, which in 2013 began using a lower rate than governments do to calculate future liabilities, has estimated that the 25 largest U.S. public pensions alone have $2 trillion less than they need.” This rate gimmick ultimately hides the true cost of retirement liabilities in municipalities. Additionally, “officials have been able to lower the size of the liability by counting on investment earnings of more than 7 percent a year, even after they expect to run out of cash. New rules from the Governmental Accounting Standards Board require a lower rate to be used after retirement plans go broke. Many reported shortfalls will grow as a result.”

Already, many U.S. cities each face billions in costs, resulting in trillions of dollars in municipal-bond market deficit. By now, many places have been downgraded — even down to junk — and thus face higher yield demands from investors.

For example:

Cincinnati and Minneapolis have already been lowered. Chicago was already downgraded to junk this past May as a result of a $20 billion pension deficit, and “was forced to pay yields of almost 8 percent on taxable bonds maturing in 2042, about twice what some homeowners can get on a 30-year mortgage.”

Houston was put on notice in early July by Moody’s that their bond rating was lowered to “negative” due to unfunded pensions costs. Houston’s revenue faces limitations from property tax caps, and thus funding the pension promises properly for three pension systems at this point has become increasingly difficult. It faces an unfunded liability of about $3.4 billion.

Likewise, in Dallas, the firefighters and police pension system deficit is poised to triple its shortfall “to $4.7 billion because of the accounting-rule shift.”

Perhaps the most egregious example is the California Public Employees’ Retirement System, the biggest pension system in the United States. They reported this week that “it earned just 2.4 percent last fiscal year, one-third of the annual return it projects. The California State Teachers’ Retirement System, the second-biggest fund, gained 4.5 percent, compared with its 7.5 percent goal.” Years of over-generous promises have resulted in an enormous and unsustainable debt that ultimately taxpayer will have to foot the bill for.

When the public sector and unions signed off on lavish pension provisions for the employee, they hoped there would be enough growth and investment returns to cover it way down the road. There were no provisions made to handle the possibility of a low-interest rate society or a fledgling economy like we’ve experienced the last six years; they took their chances and their fallback was always that they could suck money from the taxpayer by raising taxes to cover budgeting shortfalls. That is reckless and irresponsible.

Years of fiscal mismanagement in the public sector has resulted in this fiscal nightmare. Because the public sector does not have the economic forces of competition to keep compensation levels in check, as the public sector does, it was always incumbent upon public negotiators to manage contracts properly. Failing to properly negotiate, making cozy deals, and maintaining unsustainable defined-benefit plans has created the soaring budget and pension deficits we are experiencing.

And its only going to get worse.