Solving the REAL Debt Crisis

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Now that the debt ceiling impasse (circus) has been resolved, it’s time to address this country’s real debt crises. Our leaders need to conquer the far more daunting entitlement issues we face. Our choice is simple – either reduce costs and face austerity, or raise taxes.   Those alternatives need not be as painful as you or they might think, as I will demonstrate.

Here are some key terms for the discussion.

Entitlements – Simply those services which are owed or felt to be owed — good if you can get them and primarily paid for by others. Many entitlements have become too expensive in their present forms. People’s expectations and demands about what they should receive, however, haven’t changed. Is this generational narcissism, ignorance or the only way the beneficiaries can survive?

Austerity – A tightening of one’s fiscal belt — spending less and requiring less. There are real, perceived and social limits to belt tightening. And if one agrees with the adage “It takes money to make money,” then austerity poses risks to future economic growth.

Taxes – Ideologically, the costs we incur for a civilized society: the revenues that pay for entitlements and more. Studies, such as those by former Obama adviser Christina Romer, have shown that higher taxes contain risks to future economic growth.

If both austerity and taxes contain risks to future economic growth, then the most appropriate action is to “needs balance” entitlements. Needs balancing imposes higher costs (caps or contributions) and/or lower benefits (older eligibility and means-testing) on entitlement recipients.

Without economic growth, funding entitlement will become an enormous, if not intractable, handicap. Promoting higher productive capacity in our country is far more preferable.

The present value estimates on our unfunded entitlement liabilities vary greatly depending on the analyst‘s party affiliation and underlying assumptions. Growth estimates, years discounted and the year in which the estimate was done can all influence results. It is difficult to be certain just how deep a hole we’re in, but we should consider the classic admonition: “When you’re in a hole, stop digging.”

Here is how we might fix our two biggest entitlement holes and our public pension problem without imposing undue hardship on any of our citizens.

Social Security: An unfunded liability between $8 and $20 trillion

Let’s begin with a little perspective. Nobel Laureate Paul Samuelson, at a 2006 conference sponsored by the Boston Federal Reserve, called Social Security “a system – of which I was in on – formulated deliberately in Depression times to intentionally discourage savings and coax job ‘hoggers’ into retirement.” How about that shovel? Social Security was signed in 1935 as an insurance program to prevent the elderly from lacking a minimum level of income.

Aside from add-on features over the years, this was an insurance system – making payments to those in need. Today, the average person receives 100% of what he or she paid in within 60 months after reaching full retirement age (FRA). This could be considered a premium refund from an insurance perspective. A 65-year-old today has a life expectancy of roughly 83 years, while the actual insurance payments would be expected to last for roughly 13 years.