This article was posted on September 1, 2004.
If a Social Security check and a Medicare card are part of your retirement planning, Laurence Kotlikoff and Scott Burns have some bad news for you. These programs are likely to be curtailed in the future. There just isn't enough money to fund the $44 trillion fiscal imbalance these programs represent ($50 trillion if you include the recently approved Medicare prescription drug program.) Those with an interest in the gory details can read the Gokhale/Smetters Report.
The authors describe the problem in terms of generational accounting, a technique that measures budget constraints over time (i.e., several generations) by calculating the present value of the nation's financial obligations. The $7.4 trillion currently showing on the national debt clock doesn't begin to describe the real total. The $7 trillion fiscal imbalance in Social Security and $33 trillion fiscal imbalance in Medicare are much bigger problems.
Kotlikoff and Burns do a good job outlining the various economic failure modes that could result if we continue down our current path. Stock market crashes, rapidly rising interest rates and inflation, riots, military coups -- there are any number of ways it could end.
The authors review all the usual proposals to "fix" Social Security and Medicare without sacrifice and show why they won't work. Their own eleven-point proposal includes eliminating any further accural of Social Security benefits and instituting a 12% National Sales Tax to pay the benefits accured to date. The current Social Security system would be replaced by personal retirement accounts that are invested by the Gov't (not the individual) in a single market-weighted global index fund.
The Coming Generational Storm: What You Need to Know about America's Economic Future
by Laurence J. Kotlikoff and Scott Burns
April 2004, 328 pages. Click here to order The Coming Generational Storm Today!
Retire Early rating:
Perhaps the most useful part of the book was Chapter 8 "Securing Your Future". Burns and Kotlikoff began by warning readers about "financial malpractice" -- not fly-by-night scam artists, but the fact that most of the nation's most prominent financial institutions operate on a business model that sucks a minimum of 2% per year out of their clients' retirement accounts in fees and commissions. The first step in "securing your future" is moving your retirement accounts to a low-cost provider.
They suggest using Treasury Inflation Protected Securities (TIPS) as the core fixed income holding rounded out with international bond funds and foreign currency Certificates of Deposit. Another idea is supplementing the core equity holding of a US Total Stock Market index fund with gold and energy sector funds and international equity funds -- particularly those invested in China.
Other practical suggestions from the authors include paying your income taxes today while rates are still low by converting traditional IRAs to a Roth IRA, downsizing your home now to avoid the rush of Boomers fleeing their McMansions, and the old standby -- keep working.
The Coming Generational Storm is a well written and easy to read book on a subject important to retirees. It's highly recommended.
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Copyright © 2004 John P. Greaney, All rights reserved.