Pres­i­den­tial can­di­dates don't re­al­ize US is bank­rupt

The Pak Banker - - OPINION - Lau­rence Kot­likoff

So­cial Se­cu­rity is the best and worst of public poli­cies. Its goals are noble - give peo­ple re­tire­ment in­come and pro­tec­tion against dis­abil­ity, ex­ces­sive longevity, pre­ma­ture death, and even di­vorce. But So­cial Se­cu­rity's ex­e­cu­tion is hor­ren­dous. The sys­tem is pos­si­bly the most com­pli­cated and the least user-friendly public in­sti­tu­tion ever de­vised by man. It's also in­cred­i­bly un­fair, both within and across gen­er­a­tions. (Trust me. I just co-au­thored a book to help peo­ple nav­i­gate the sys­tem.)

That's the bad news. But here's the re­ally bad news: So­cial Se­cu­rity is flat broke. The just-re­leased 2015 Trustees of the So­cial Se­cu­rity and Medi­care trust funds re­port has a se­cret lit­tle ta­ble that ap­par­ently the po­lit­i­cal ap­pointees, eu­phemisti­cally called "trustees," haven't both­ered to view. It's tucked deep in­side the re­port in ap­pen­dix ta­ble VI.F1. It says the sys­tem is $25.8 tril­lion in the red.

That's al­most a year and a half of U.S. GDP. Detroit went bank­rupt in large part be­cause its pen­sions were some 20 per­cent un­der­funded. So­cial Se­cu­rity has that beat. It's 32 per­cent un­der­funded. We need to raise the sys­tem's 12.3 per­cent pay­roll tax by al­most one third - by 4 cents on ev­ery dol­lar we earn - to pay, through time, all the sys­tem's promised ben­e­fits. And if we don't hike the sys­tem's tax by one third start­ing to­day and keep it there for­ever, we'll need to raise the tax by even more down the road.

Un­for­tu­nately, we don't have some other source of net rev­enue to cover So­cial Se­cu­rity's short­fall. The over­all U.S. fis­cal en­ter­prise is, in fact, in worse shape than So­cial Se­cu­rity. It's not 32 per­cent, but 58 per- cent un­der­funded. And its red ink is 12 times GDP - $210 tril­lion at last count. This is our na­tion's fis­cal gap - the present value dif­fer­ence be­tween ev­ery­thing the gov­ern­ment plans to make in ex­pen­di­tures and hopes to col­lect in taxes. The hard truth, which not one of to­day's pres­i­den­tial can­di­dates will ad­mit is this ... our coun­try is bank­rupt. It's not bank­rupt in 50 years or 30 years or 20 years or 10 years. It's bank­rupt to­day. And the longer we wait to change pol­icy, the more we let our­selves off the hook and the more we put our kids on it. This is the ter­ri­ble zero-sum arith­metic of gen­er­a­tional pol­icy.

Sure, there are red and blue eco­nomic huck­sters who think we can cut taxes or raise spend­ing and bingo - the econ­omy will grow enough not just to pay for these free­bies, but also pro­duce more rev­enue. You can also find "econ­o­mists" who think we can just print money to pay our bills. But a who's who of econ­o­mists re­al­ize that fis­cal gap ac­count­ing is the only way to find our way. How did we get into such ter­ri­ble fis­cal shape? Sim­ple. Our politi­cians, Repub­li­cans and Democrats alike, have spent the last six decades run­ning a mas­sive Ponzi scheme.

I call it "Take As You Go." Un­cle Sam takes money from young work­ers, calls it taxes, and gives it to old peo­ple to spend. "But don't worry," Un­cle Sam says. "When you're old, I'll pay you back in spades. I'll just hit up your kids. Oh, and if you don't mind, let's keep this to our­selves. I'm not putting these I.O.U.s to you on the books. It would make our of­fi­cial debt ex­plode and we wouldn't want that."

All Ponzi schemes in­volve fraud­u­lent ac­count­ing. Un­cle Sam's deficit ac­count­ing is the mother of such fraud. And all Ponzi schemes end badly. Amer­ica's will be no ex­cep­tion. So on Aug. 14, when So­cial Se­cu­rity cel­e­brates its 80th birth­day, don't look for me at the party. I'll celebrate when So­cial Se­cu­rity gets fixed right - by adopt­ing the Pur­ple So­cial Se­cu­rity Plan. This plan, which I urge all the can­di­dates to en­dorse, is sim­ple. We freeze the cur­rent sys­tem and pay off, through time, all ben­e­fits owed.

All work­ers then con­trib­ute 8 per­cent of their pay to a per­sonal se­cu­rity ac­count. Con­tri­bu­tions are shared be­tween spouses. The gov­ern­ment makes ex­tra con­tri­bu­tions for the poor. All as­sets are in­vested in one way only - in a global mar­ket-weighted in­dex of stocks and bonds, with the in­vest­ment done by a sin­gle com­puter. Wall Street plays no role and earns not a penny.

At re­tire­ment age, all ac­cu­mu­lated as­sets are bumped up if they don't ex­ceed what was con­trib­uted so in­vest­ments in the per­sonal se­cu­rity ac­count are pro­tected against loss. Fi­nally, when a co­hort reaches re­tire­ment age, the ac­count grad­u­ally sells off its share of the global port­fo­lio and uses the funds to pro­vide re­tir­ing work­ers in­fla­tion-pro­tected pen­sions.

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