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Friday, April 22, 2011

Since We're All In A Reflective Mood

Teri writes that since we are going to have to raise taxes the Republicans should get behind the idea and try to structure it in the best way possible.

We ARE going to have to raise taxes, regardless of what anyone says. You can get population pyramids for multiple countries here. US:
As of 2011, we are still 15 years out from the largest tier of retirees. In other words, in 15 years those who are now 50-54 are going to be in the 65-69 range. So we can confidently expect that the total number of retirees will continue to grow for about 30 years.

Providing basic social services to this number of elderly will require raising taxes. In many cases, it will require raising taxes on the wealthier retirees.

There is little point in bitching about this. Compared to many other countries we are quite fortunate. Germany:

It's hard to imagine what's going to happen there in about 25 years.

The three malefactor countries in WWII - Germany, Italy and Japan - all have bad demographics.

What was that bit about the sins of the father being felt until the third and the fourth generations?

So we should all feel relatively optimistic, and buckle down to dealing with what is not exactly a tragic fate. Unless we decide to temper tantrum ourselves into decline, we have what we need to have a decent future life. I strongly suspect that the group wandering around WI banging on drums is the last remnant of the temper tantrum crew, and frankly, they are not impressive.

Anyway, most people in the US are still in denial about Social Security. Two more graphs:

It is easy to see why we were fat, dumb and happy then.

The worker/retiree ratio actually increased in the late 1990s to 3.4 for four years. That's one of the reasons for the better budget performance. It has already dropped to 3 and it will decline until about 2.1-2,2.

Projected 2035:

Thin, better-be-smart and grumpy, it looks like.

We cannot borrow the money as planned, because we just borrowed it, and we keep borrowing on the order of a trillion more each year. Our "intergovernmental" debt (trust funds) plus our current public debt are already almost 100% of GDP right now. So since over the next few years we keep borrowing, in 2025 there is not a hope in hell of borrowing much, and whatever credit we have will then be involved in Medicare.

So the only feasible approach to save Social Security (mind you, everyone born in the 1960s and after already has to wait to 67 for full retirement) is to raise taxes. If we were to try to raise FICA enough to cover, you'd be coughing up about 18%. This is not feasible. We can raise the cap somewhat, and we could raise income taxes and divert some to Social Security.

Once we do that, spending on Medicare and Medicaid will be sharply constrained.

We're going to be poorer in the future. We don't have to be dirt poor.

The whole Tea Party thing is really about funding Social Security and some sort of medical coverage. To do so, we must kill off our current structural deficit.

If we don't, by about 2025 we will either be able to have Social Security and almost no medical coverage, or we will basically be forced to convert Social Security into an income supplement welfare program, with about 30% of the elderly getting very little out of it. This doesn't seem fair or right to me.

We only have a few years. I do not see this as a Democratic or Republican issue. It's an adding/subtracting/facing bad numbers issue.

I agree.

I'm in the position where I pay taxes on 85% of my SS. I expect that to go to 100%.

I also expect that increased Medicare co-pays and a basic premium for TriCare will be institued. (If not, they should be.) It won't put me out on the street. It will curb my travel habits. We try to take one big trip a year. Those trips will either cease or be scaled down.
Our needs are less every year, except for medical and dental. So as we scale back on things we used to do (eating out, parties/gifts for friends and family, fishing trips, etc.) we can pick up the slack. So, I am not against those who can afford to pay, paying some of the freight.

That said, I hate to see tax rates raised unless there is some mechanism to keep the sticky fingers of Congress out of the till. When revenues increase they always jack up the spending beyond the increase. Some conservative Rs seem to want to keep a rein on spending, but the overriding bent in Washington is to spend, spend, spend! Fiscally conservative men and women go there and somehow they are changed into spenders. The government has gotten too big and too intrusive. Go to a city council meeting. Half the agenda will be about conforming to Federal rules and regs or getting Federal money. That is just flat wrong and, we the people, are finally waking up to what it is doing to the country.

The best way to increase revenue is to get the economy up and running again. How do we do that? Drill, drill, drill, start fishing and lumbering again, lower the corporate tax, ease EPA regs, and open this country for business again. I don't really care for the Donald, but he is hitting on these issues and its giving him some traction in the polls. A booming economy and a ten year secular bull market would cure a lot of our problems. It's coming if we can elect fiscally conservative people in 2012.
We're going to be poorer in the future.

Please correct me if I'm wrong M_O_M, but when you say this, you are assuming no major structural increase in productivity, correct? Meaning no fundamental change in the linear progression of technology, no unexpected breakthroughs, that kind of thing?

W/V: reguessi, Italian for what you need to do if you're guessing there's no breakthroughs on offer in the near future.
Neil - I'm basing this just on demographics (very strong influence on economies) and energy costs, which I expect to go higher, and our current imbalance of trade, which must over time be rebalanced by dropping consumption and increasing production.

Energy costs can be redressed somewhat by technology, although there will be some remaining impact.

It would help if we stopped our current approach and worked on figuring how to get relatively cheap, reliable electricity. Over time that would provide the best way to boost incomes. Production depends on it and costs of basics depend on it.
Yeah, it's going to be hard to push more productivity out of all those 65-70 year olds, now having to work longer years before they can retire!

What I am seeing is the perception that the rich pay less and should be paying more. (I don't understand why there isn't a move to put more of the blame for our current situation on the banks, where it belongs.) Anyway, whether true or not, there will be a push to make the "rich" pay more. It's hard to argue that the Bush tax cuts have helped, although that could be true.

That link I posted, about the Border Patrol on federal lands, is part of the legal craziness we see now. Border Patrol agents were denied access to public lands using cars and trucks, told to pursue their duties either on foot or horseback. They couldn't put surveillance equipment into some areas, due to the protections in place. In our town, you have to apply for a permit to cut down a tree and have an urban forester decide if you can do that or not. (Keep in mind this is the Pacific Northwest, where there are no shortage of either trees or forests). Somehow, people need to be made aware of this stuff, because there aren't a lot of folks that find city council meetings and C-span as interesting as we do. (Frankly, I could watch bureaucrats squirm all day!)
Teri - most 65-70 year olds are not going to be keeping high-paying jobs.

And people who have physical jobs won't be able to go on working full-time. We need to get realistic!

For what it is worth, here's my take on it.

Nothing in the way of productivity increases will alter the fact that the latest 5-year TIPS auction had a negative real yield. Any inflation at all brings that yield down even further (since the inflationary gains will be taxed).

An older retiree investing "safely" right now is therefore pretty much guaranteed to become poorer. If the supply of older retirees looking for safety increases (due to demographics), then I would not expect to see this situation improve.

I've been predicting falling real yields since 2004. The theory was that the era of making easy money off of money was coming to an end. I continue to believe it.

I could be wrong to think this way of course. Time will tell.

"And people who have physical jobs won't be able to go on working full-time. We need to get realistic!"

I was once teased at my last company for saving so much.

Coworker: "Why save so much? You'll be too old to enjoy it anyway."

Me: "If I am too old to enjoy money when I am older, then I will definitely be too old to enjoy working."
And it is hard to find the joy in being poor and old!

But right now, persons who did save heavily are beginning to be looked at as filthy profiteers.

It's time to go back to the Ten Good Suggestions, before this gets even uglier.
Meaning no fundamental change in the linear progression of technology, no unexpected breakthroughs, that kind of thing?

Any linear progression of technology needs to be viewed in concert with progression of involuntary waste/luxury (and I consider regulation to fall into that category).

We usually wind up countering all productivity gains with unnecessary regulation and unnecessary government luxury spending. For example, what is the typical grammar school class size in 1965 versus 2011? Given enough time, one can come up with thousands of things we expect of government today that we did not expect 50 years ago. Nearly all of that is waste/luxury that is involuntary. (Students loans are a luxury that people can still voluntarily choose or avoid. People may think or act like they are necessary, but are still not required by law.)
But right now, persons who did save heavily are beginning to be looked at as filthy profiteers.

Ain't it the truth.

And ain't it a shame.
Irrespective of the issue, one must understand the issue before a constructive debate can occur. Regarding Social Security, we've been duped by those who are elected to represent us. Doesn't matter which side they part their hair on or if they have no hair at all. Our elected representatives have become a group of financial terrorists when it come to Social Security. We've peeled the onion on this financial affair, and created a comprehensive, community based proposal. You can find all the info at: www.aarp2.com - That's All About the Rest of the People 2
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