http://articles.moneycentral.msn.com/RetirementandWills/InvestForRetirement/is-america-about-to-go-broke.aspx
Government obligations for Social Security and Medicare may soon exceed the combined net worth of every household and nonprofit organization in the country.
Prices dropped last year. But we still need to invest to protect ourselves from inflation. That's why our retirement-plan investing needs an inflation "tilt." You'll understand why in a few paragraphs.
How bad will future inflation be? I don't know. Neither does anyone else. It could be a normal inflation of 3% to 4% a year. It could also be a banana-republic 10% a month.
What we know is that all governments make promises they can't fulfill. Our government certainly has. Under both political parties, it has taken promise making to a high art. This is not hyperbole. The figures can be found in regularly published government reports.
Much worse than you probably think
The figures exist, but they are ignored. News reports regularly inform us of the growing federal deficit, projected at a stunning $1.75 trillion for fiscal 2009 and $1.17 trillion for 2010. But regularly reported, less visible government obligations have been growing much faster.In the nearly five years from January 2003 to December 2007, the Medicare trustees reported that the unfunded liabilities of Social Security and Medicare grew by a stunning $10.4 trillion. The average annual growth topped $2 trillion.
That exceeds the expected formal deficit of $1.75 trillion this year.
In the 2008 trustees' report (.pdf file), the unfunded liabilities of Social Security and Medicare -- promises of future retirement and health care benefits -- total $42.9 trillion. In a few days, we should be able to read the 2009 report. It's a good bet that the unfunded liabilities will show an increase in the new report.
Ironically, payroll tax payments are still large enough that the Social Security and Medicare programs don't need every dime. The extra money goes into the program trust funds as Treasury debt. The actual cash is spent elsewhere. Basically, the employment tax has been subsidizing other federal spending. This has been going on since the 1983 "reform" of Social Security, a disaster chaired Alan Greenspan, later the Federal Reserve chairman.
Today's deficits? That's nothing
Last year's Social Security trustee report estimates that OASDI (Social Security retirement and disability) and HI (hospital insurance), excluding book entry interest for the trust funds, will have more revenue than expenses until 2015. If higher cost assumptions prevail, however, the last year of positive flow will be 2010.That's next year.
The truth about target retirement fundsShould you consider target funds for your retirement account? Dan Wiener of Independent Adviser for Vanguard Investors discusses them.
I am not making this up. It is public record. You can see for yourself by examining table VI.F9 on page 191 of the 2008 trustees' report.
When Social Security and Medicare costs exceed their revenues, the Treasury will have to borrow money to cover the shortfalls. When that happens, today's stunning deficits will look small.
That's why our future contains inflation, not deflation.
The upside-down nation
There is another way to see how serious our situation is: Compare the unfunded liabilities of Social Security and Medicare with the net worth of every household in America.According to the Federal Reserve flow-of-funds figures for year-end 2007, our collective net worth as consumers was $62.7 trillion. By the end of 2008, the same figure had fallen to $51.5 trillion. Another year of growth for Social Security and Medicare liabilities would bring total unfunded government promises to about $46 trillion. That's nearly 90% of our net worth.
If consumer net worth fell an additional $5 trillion -- the same amount it fell in the last three months of 2008 -- we'd be broke.
Yes, you read that right.
Government obligations for basic programs would exceed the net worth of every household and nonprofit organization in America.
We'd be the upside-down nation.
Below: This table compares the unfunded liabilities of Social Security and Medicare over the next 75 years, which is the standard measure, with the net worth of all households in America.
| Program | Jan. 2004 | Jan. 2008 | Change | Projected Jan. 2009 |
|---|---|---|---|---|
Social Security and Disability: OASDI | $ 3.7 trillion | $ 6.6 trillion | $2.9 trillion | NA* |
Hospital insurance: HI | $ 8.5 trillion | $12.7 trillion | $4.2 trillion | NA |
Supplemental medical insurance: SMI Part B, doctors expenses, etc. | $11.4 trillion | $15.7 trillion | $4.3 trillion | NA |
Supplemental medical insurance: SMI Part D, prescription drugs | $ 8.1 trillion | $ 7.9 trillion | ($0.2 trillion) | NA |
Total unfunded liabilities | $31.7 trillion | $42.9 trillion | $11.2 trillion | $46.0 trillion (estimate) |
Consumer net worth | $51.9 trillion | $62.7 trillion | $10.8 trillion | $51.5 trillion |
Unfunded liabilities as % of consumer net worth | 61.1% | 68.4% | NA | 89.3% |
*Not available / Sources: Social Security and Medicare trustees' reports, Federal Reserve, author estimate
The only way out of this is to print more money, inflating the value of assets relative to the amount of debt.
Cutting the expense of investing through index funds alone wouldn't solve the inflation problem. In addition to cutting expenses, we would have to invest a portion of our money in assets that give us a hedge against inflation: Treasury inflation-protected securities, real-estate investment trusts and energy companies.
Would this be perfect protection? No way. But it would give our savings a fighting chance.
Questions about personal finance and investments may be e-mailed to scott@scottburns.com. Questions of general interest may be answered in future columns. More columns by Scott Burns can be found on MSN Money and at AssetBuilder.com.
This is REAL. We have not had to face this because the wealth of the rest of the world keeps flowing into investments here on the basis of our history (military, judicial and financial) AND NOT the reality of these deficits. We cannot continue to ignore this. At present, we are exporting our recession and importing the capital and brain-power that otherwise would fuel the growth of the rest of the world. This cannot continue indefinitely. Eventually the tide will turn.... with a vengeance.
You would think, with our recent history of overlooking threats and the failure of our "experts" to warn us of the obvious, we'd look seriously at the threat of inflation (and the collapse of the dollar) and take action.
We can (might) be able to invent ourselves out of this (again), but the window is narrowing. Unshackle enterprise and technology or suffer decades of pain here and unbridled disaster overseas.
"unfunded liabilities of Social Security and Medicare"
Actually they are unfunded liabilities of the government, since the government elected to borrow money from SS, and like anyone else needs to pay it back.
Print more money? Borrow more money? The real genesis of the problem is an inverse "working class" population. Thanks to the worlds worst generation (baby boomers) we have embraced population control to the point that there are more retirees than workers. That is the root of the underfunding. Take a look at Europe's cradle to grave social system that cannot fund anything anymore since they don't have the population to do it.
Ideas have consequences folks. Bad ideas have bad consequences. We are just now beginning to see the effects of Birth Control.
America is brokeStop the presses!
When government debt exceeds GDP by a 24-25% margin, everyone (left, right, old, young & unborn) loses America's future to pay off spiralling debt.
Solutions based on sound fiscal policy are difficult but possible. This is beyond the financial literacy of Congress.
Maybe another department like the GAO needs to run expense models and have the authority of recommendation upon a proposal for congressional spending.
Sad Reality
Go to:
http://www.brillig.com/debt_clock/
It's our national debt.
Look which way it's going. Right. It's rising. By the minute.
There will come a time when we cannot pay the interest on this. If we print more money to make the payment, it 'cheapens' our money (inflation) and we will have to print even more money (yet more inflation) to pay it the next time. And on and on, until the dollar is worthless.
At some point, we will not be able to make payment. At that point, we WILL be broke.
And your SS payments and medicare/medicade programs will cease to exist. THAT is reality.
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