Week in Review
So who’s to blame for Detroit? The greedy. The greed of the public sector. Who stole as much as they thought possible from future generations. Laughing all the way to the bank. But never did they think that their greed would eclipse the paying-ability of those they were stealing from. Future taxpayers. Which is what happened in Detroit. And will probably happen elsewhere throughout the nation (see The Unsteady States of America posted 7/27/2013 on the Economist).
Nearly half of Detroit’s liabilities stem from promises of pensions and health care to its workers when they retire. American states and cities typically offer their employees defined-benefit pensions based on years of service and final salary. These are supposed to be covered by funds set aside for the purpose. By the states’ own estimates, their pension pots are only 73% funded. That is bad enough, but nearly all states apply an optimistic discount rate to their obligations, making the liabilities seem smaller than they are. If a more sober one is applied, the true ratio is a terrifying 48% (see article). And many states are much worse. The hole in Illinois’s pension pot is equivalent to 241% of its annual tax revenues: for Connecticut, the figure is 190%; for Kentucky, 141%; for New Jersey, 137%.
By one recent estimate, the total pension gap for the states is $2.7 trillion, or 17% of GDP. That understates the mess, because it omits both the unfunded pension figure for cities and the health-care promises made to retired government workers of all sorts. In Detroit’s case, the bill for their medical benefits ($5.7 billion) was even larger than its pension hole ($3.5 billion).
Some of this is the unfortunate side-effect of a happy trend: Americans are living longer, even in Detroit, so promises to pensioners are costlier to keep. But the problem is also political. Governors and mayors have long offered fat pensions to public servants, thus buying votes today and sending the bill to future taxpayers. They have also allowed some startling abuses. Some bureaucrats are promoted just before retirement or allowed to rack up lots of overtime, raising their final-salary pension for the rest of their lives. Or their unions win annual cost-of-living adjustments far above inflation. A watchdog in Rhode Island calculated that a retired local fire chief would be pulling in $800,000 a year if he lived to 100, for example. More than 20,000 retired public servants in California receive pensions of over $100,000.
This is an important point. People say that we must honor these lavish pension and retiree health care benefits because they made a deal. A contract with the city. Or the state. But did they? No. The public sector unions and the cities and states colluded together to steal money from future generations. Who were not a party to those agreements. This amounts to generational theft. And the generous size of those benefits just makes that theft worse. Transforming the public sector into an aristocracy. That cares little for the future taxpayers that they will be bled dry to pay for their long and comfortable retirements.
Detroit is just the first domino to fall. This generational theft is just unsustainable. Something has to be done. But what?
Public employees should retire later. States should accelerate the shift to defined-contribution pension schemes, where what you get out depends on what you put in. (These are the norm in the private sector.) Benefits already accrued should be honoured, but future accruals should be curtailed, where legally possible. The earlier you grapple with the problem, the easier it will be to fix. Nebraska, which stopped offering final-salary pensions to new hires in 1967, is sitting pretty.
In other words our public servants should not live a better life than their masters. Those people paying the bill. There should be no aristocracy in the United States. People in the public sector shouldn’t be able to retire young and live a long life in retirement while someone else is paying the bill. The taxpayer. People who have to work until they drop dead to save for their own retirement. That just isn’t right. If our servants in the public sector want that long and comfortable retirement then they must do what people in the private sector do. Save for it. Make sacrifices. And live more frugally. Because there shouldn’t be two Americas. Where one enslaves the other. While setting up a string of municipal and state bankruptcies because of their greed that threatens the financial wellbeing of the nation.
Tags: aristocracy, cities, Detroit, future generations, future taxpayers, generational theft, greed, Health Care, medical benefits, pensions, public servants, retirement, states, taxpayers, unfunded pension, unions
Trying to follow a Baby Boom with a Baby Bust creates Problems in Advanced Economies with Large Welfare States
In the late 1960s began a movement for zero population growth. It called for women to have only enough babies to replace the current population. Not to have too many babies that would increase the population. Nor have too few babies that the population declines. Something that women could easily do because of birth control. And, later, abortion. The drive behind this was to save the planet. By keeping large populations becoming like a plague of locusts that devour the earth’s resources and food until the planet can no longer sustain life.
China did these zero population growth people better. By promoting a negative population growth rate. Limiting parents to one child. They did this because during the days of Mao’s China the country set some world records for famine. Their communist state simply couldn’t provide for her people. So to help their communist system avoid future famines they tried to limit the number of mouths they had to feed. Of course, trying to follow a baby boom with a baby bust creates other problems. Especially in advanced economies with large welfare states.
China’s one-child policy and the preference for boys have led to a shortage of women to marry. Some Chinese men are even looking at ‘mail-order’ brides from surrounding countries. But China is going to have an even greater problem caring for her elderly. Just like Japan. Japanese couples are having less than 1.5 babies per couple. Meaning that each successive generation will be smaller than the preceding generation. As couples aren’t even having enough children to replace themselves when they die. Leaving the eldest generation the largest percentage of the overall population. Being paid and cared for by the smallest percentage of the overall population. The younger generation.
States with Aging Populations are Suffering Debt Crises because they Spend More than their Tax Revenue can Cover
As nations develop advanced economies people develop careers. Moving from one well-paid job to another. As they advance in their career. Creating a lot of income to tax. Allowing a large welfare state. Which is similar to a Ponzi scheme. Or pyramid scheme. As long as more people are entering the workforce than leaving it their income taxes can pay for the small group at the top of the pyramid that leaves the workforce and begins consuming pension and health care benefits in their retirement. And there is but one requirement of a successful pyramid scheme. The base of the pyramid must expand greater than the tip of the pyramid. The wider the base is relative to the top the more successive the pyramid scheme. As we can see here.
Generation 1 is at the top of the pyramid. It is the oldest generation. Which we approximate as a period of 20 years. In our example Generation 1 are people aged 78-98. They’re retired and collecting pension, health care and other benefits. Some combination of Social Security, Medicare, Medicaid, food stamps, heating assistance, etc. All paid for by Generation 2 (58-78), Generation 3 (38-58) and Generation 4 (18-38). Each generation is assumed to bring 6 children into the world. So these couples are not only replacing themselves but adding an additional 4 children to further increase the size of the population. Which really makes running a pyramid scheme easy. For if we assume each member in Generation 1 on average consumes $35,000 annually in benefits that Generations 2 through 4 pay for that comes to $555.56 per person annually. Or $46.30 per person monthly. Or $10.68 per person weekly. Or $1.53 per person daily. Amounts so small that Generations 2 through 4 can easily pay for Generation 1′s retirement. Now let’s look at the impact of a declining birthrate with each successive generation.
When all couples in each generation were having on average 6 children this added 1.9 billion new taxpayers. Which greatly reduced each taxpayer’s share of Generation 1′s retirement costs. But thanks to birth control, abortion and the growing cost of living each successive generation has fewer babies. Generation 2 only has 3 children. Enough to replace themselves. And add one new taxpayer. Generation 3 has only 2 children. Only enough to replace the parents. Providing that zero population growth that was all the rage during the late 1960s and the 1970s. While Generation 4 only has 1 child. Not even enough to replace the parents when they die. Causing a negative population growth rate. Which is a big problem in an advanced economy with a large welfare state. For instead of adding 1.9 billion new taxpayers they only add 217.5 million new taxpayers. Greatly increasing each taxpayer’s share of Generation 1′s retirement costs. Instead of paying $555.56 per taxpayer they each have to pay $5,384.62 annually. Or $448.72 per taxpayer monthly. Or $103.55 per taxpayer weekly. Or $14.79 per taxpayer daily. Numbers that prove to be unsustainable. The state simply cannot tax people this much for Generation 1′s retirement. For if they did this and added it to the rest of government’s spending they’re taxing us to fund it would take away all of our income. This is why advanced economies with aging populations are suffering debt crises. Because their spending has grown so far beyond their ability to pay for it with tax revenue that they borrow massive amounts of money to finance it.
If you want a Generous Welfare State you need Parents to have More Children
If you carry this out two more generations so every generation only has one child the per taxpayer amount tops out at $14,736.84 annually. Or $1,228.07 per taxpayer monthly. Or $283.40 per taxpayer weekly. Or $40.49 per taxpayer daily. Amounts far too great for most taxpayers to pay. This is what an aging population does in a country with a large welfare state. It makes the population top-heavy in elderly people who no longer work (i.e., pay taxes) but consume the lion’s share of state benefits. When couples were having 6 children each across the generations there was a ratio of 84 taxpayers per retiree. When there was a declining replacement birthrate that ratio fell to 15 taxpayers per retiree. If we look at this graphically we can see the pyramid shape of this generational population.
With 84 taxpayers per retiree we can see a nice and wide base to the pyramid. While the tip of the pyramid is only a small sliver of the base (Generation 4). Making for a successful Ponzi scheme. Far more people pay into the scheme. While only a tiny few take money out of the scheme. This is why Social Security and Medicare didn’t have any solvency problems until after birth control and abortion. For these gave us a declining replacement birthrate over time. Greatly shrinking the base of the pyramid. Which made the tip no longer a small sliver of the base. But much closer in size to the base. That if it was an actual pyramid sitting on the ground it wouldn’t take much to push it over. Unlike the above pyramid. That we could never push over. Which is why the above Ponzi scheme would probably never fail. While the one below will definitely fail.
If you want a generous welfare state where the state provides pensions, health care, housing and food allowances, etc., you need parents to have more children. For the more children they have the more future taxpayers there will be. Or you at least need a constant replacement birthrate. But if that rate is below the rate of a prior baby boom the welfare state will be unsustainable UNLESS they slash spending. The United States has a replacement birthrate below the rate of a prior baby boom. While the Obama administration has exploded the size of welfare state. Especially with the addition of Obamacare. Making our Ponzi scheme more like the second chart. As we currently have approximately 1.75 taxpayers supporting each social security recipient. Meaning that it won’t take much pushing to topple our pyramid. We’re at the point where a slight breeze may do the trick. For it will topple. It’s just a matter of time.
Tags: abortion, advanced economies, babies, baby boom, baby bust, benefits, birth control, birthrate, children, China, debt crises, generation, Health Care, Japan, Medicare, pension, Ponzi scheme, population, population growth rate, pyramid, pyramid scheme, replacement birthrate, retirement, retirement costs, Social Security, tax revenue, taxpayer, welfare state, workforce, zero population growth
Week in Review
When people provided their own health care and retirement nest eggs it didn’t matter if the population was aging or getting younger. For each person planned to take care of him or herself. But when the government took over health care and retirement nest eggs the age of the population began to matter. For when the state provides these benefits they have to pay for them via taxes. And if the population is aging that is a big problem. Because more people are leaving the workforce and consuming health care and pension benefits than there are entering the workforce to pay for them.
Which means the government has to increase tax rates on those paying for these benefits. And when people are living longer into retirement it really throws a wrench into the state’s plans. For it is requiring a level of taxation that simply isn’t possible. And this is exactly what the baby boom generation is doing to advanced welfare states throughout the world. It’s causing greater governmental expenditures. Resulting in larger budget deficits. And financial crises (see Our aging population set to put a heavy toll on our systems, and we’re not ready by Simon Kent and Shawn Jeffords posted 6/14/2013 on the Toronto Sun).
The first baby boomers began turning 65 in 2012, and by 2036, one out of every four of our neighbours will be elderly…
“We don’t have a health care system in Canada, we have an acute care system,” [Sharon] Carstairs [former senator and was the first woman to lead an opposition party in Canada] after becoming Manitoba’s Liberal leader in the ’80stold QMI Agency.
The very sick are cared for well but we don’t do a good job of keeping others at home and out hospitals and high-cost facilities.
“We’re using acute care hospital beds to hold thousands of Canadians who should be in long-term care or home care,” she says…
Canada has a “little bit of breathing space” for preparations to cope with aging boomers, but not much, suggests University of Toronto professor emeritus David Foot, one of the country’s most respected demographers.
“We need to get this right to prepare for that boomer onslaught,” Foot says. “We can have an excellent system if we choose to.”
Zero hour is 2027.
“The first boomer born in 1947 reaches 80 in 2027,” Foot says.
That’s when the critical mass, the largest bulge of the baby boom, approaches 80 and will require the most care of their lives…
Canada needs to train gerontologists, therapists, psychiatrists, palliative care nurses and specialists, replace the workforce of aging nurses and the army of some 3 million volunteers who currently provide the bulk of in-home care to seniors, say experts…
“The sheer number of baby boomers that will be drawing on the system will magnify and put pressures on the systems that has not been felt before,” he says.
Both the United States and Canada have aging populations. And a baby boomer bulge coming down the pike. It will make it very difficult in Canada. And far worse in the United States. For they have about 9-times the population of Canada. And will have 9-times the baby boomer bulge. Making it a very poor time for the state to take over more pension and health care spending obligations. Which is exactly what the Americans did by passing Obamacare into law.
The United States is already suffering record trillion dollar deficits. By the time Obamacare pays to train gerontologists, therapists, psychiatrists, palliative care nurses, specialists, etc., and builds nursing homes to handle the baby boomer bulge the deficit will soar even higher. Unless there really are death panels in Obamacare. Which may be the only way not to break the fiscal back of the nation. Well, there’s that. Or they could let people provide their own health care and retirement nest eggs like they once did. And then the age of the population would be irrelevant. For it basically comes down to these two options. Either we pay for our own health care and retirement. Or the government will have to figure out how to cut costs. And how do you do that when the largest cost is caring for the very old and the very sick? In a word, death panels. Well, two words, actually.
Welcome to the brave new world of Obamacare.
Tags: age of the population, aging boomers, aging population, baby boom, baby boom generation, baby boomer bulge, baby boomers, Canada, death panels, deficit, elderly, Health Care, Obamacare, people are living longer, retirement, retirement nest eggs, welfare state
Week in Review
Counterfeiting money is against the law. We all know this. But do we understand why? Today’s money is just fiat money. The Federal Reserve prints it and simply says it is money. So why is it okay for them to print money but not for anyone else? Because the amount of money in circulation matters.
The goods and services that make up our economy grow at a given rate. You hear numbers like GDP of 2%, 3% or more. In China they had GDP numbers in excess of 8%. The goods and services in our economy are what have value. Not the money. It just temporarily holds the value of these goods and services as they change hands in the economy. So the amount of money in circulation should be close to the value of goods and services in the economy. Think of a balancing scale. Where on the one side you have the value of all goods and services in the economy. And on the other you have the amount of money in circulation. If you increase the amount of money on the one side it doesn’t increase the amount of goods and services on the other side. But it still must balance. So as we increase the amount of money in circulation the value of each dollar must fall to keep the scale in balance.
Now when we put our money into the bank for our retirement we don’t want the value of those individual dollars grow less over time. Because that would reduce the purchasing power of our money in the bank. Making for an uncomfortable retirement. This is why we want a stable dollar. One that won’t depreciate away the value of our retirement savings, our investments or the homes we live in. We’d prefer these to increase in value. But we can stomach if they just hold their value. For awhile, perhaps. But we cannot tolerate it when they lose their value. Because when they do years of our hard work just goes ‘poof’ and disappears. Leaving us to work longer and harder to make up for these losses. Perhaps delaying our retirements. Perhaps having to work until the day we die. So we want a stable currency. Like the gold standard gave us (see Advance Look: What The New Gold Standard Will Look Like by Steve Forbes posted 5/8/2013 on Forbes).
The financial crisis that began in 2007 would never have happened had the Federal Reserve kept the value of the dollar stable. A housing bubble of the proportions that unfolded–not to mention bubbles in commodities and farmland–would not have been possible with a stable dollar. The Fed has also created a unique bubble this time: bonds. It hasn’t popped yet (nor has the farmland bubble), but it will.
The American dollar was linked to gold from the time of George Washington until the early 1970s. If the world’s people are to realize their full economic potential, relinking the dollar to gold is essential. Without it we will experience more debilitating financial disasters and economic stagnation.
What should a new gold standard look like? Representative Ted Poe (R-Tex.) has introduced an original and practical version. Unlike in days of old we don’t need piles of the yellow metal for a new standard to operate. Under Poe’s plan–an approach I have long favored–the dollar would be fixed to gold at a specific price. For argument’s sake let’s say the peg is $1,300. If the price of gold were to go above that, the Federal Reserve would sell bonds from its portfolio, thereby removing dollars from the economy to maintain the $1,300 level. Conversely, if the gold price were to drop below $1,300, the Fed would “print” new money by buying bonds, thereby injecting cash into the banking system.
Yes, the subprime mortgage crisis and the Great Recession would not have happened if the Federal Reserve kept the dollar stable. Instead, they kept printing and putting more money into circulation. Why? To keep interest rates low. To encourage more and more people to buy a house. Even people who weren’t planning to buy a house. Even people who couldn’t afford to buy a house. Until, that is, subprime lending took off. Because of those low interest rates. With all of these people added to the housing market who otherwise would not have been there (because of the Federal Reserve’s monetary policies of printing money to keep interest rates artificially low) the demand for new houses exploded. As people tried to buy these before others could house prices soared. Creating a great housing bubble. Houses worth far greater than they should have been. And when the bubble burst those housing prices fell back to earth. Often well below the value of the outstanding balance of the mortgage on the house. Leaving people underwater in their mortgages. And when the Great Recession took hold a lot of two-income families went to one-income. And had a mortgage payment far greater than a single earner could afford to pay.
So that’s how that mess came about. Because the Federal Reserve devalued the dollar to stimulate the housing market (and any other market of big-ticket items that required borrowed money). If we re-link the dollar to gold things like this couldn’t happen anymore. For if it would put a short leash on the Federal Reserve and their ability to print dollars. How? As they print more dollars the value of the dollar falls. Causing the value of gold priced in dollars to rise. So they would have to stop printing money to keep the value of gold priced in dollars from rising beyond the established gold price. Or they would have to remove dollars from circulation to decreases the value of gold priced in dollars back down to the established price. Thereby giving us a stable currency. And stable housing prices. For having a stable currency limits the size of bubbles the Federal Reserve can make.
But governments love to print money. Because they love to spend money. As well as manipulate it. For example, depreciating the dollar makes our exports cheaper. But those export sales help fewer people than the depreciated dollar harms. But helping a large exporter may result in a large campaign contribution. Which helps the politicians. You see, a stable dollar helps everyone but the politicians and their friends. For printing money helps Wall Street, K Street (where the lobbyists are in Washington DC) and Pennsylvania Avenue. While hurting Main Street. The very people the politicians work for.
Tags: dollar, economy, Federal Reserve, financial crisis in 2007, gold, gold standard, goods and services, Great Recession, house prices, housing bubble, interest rates, money, money in circulation, print money, purchasing power, retirement, stable dollar, subprime, value
Week in Review
President Obama isn’t worried about the deficit. Or the debt. Neither are Democrats. Who see no problem with increasing federal spending even more. Probably because there are Nobel Prize winning economists like Paul Krugman saying deficit spending is a good thing. Because what can possible go wrong with spending money you don’t have? No doubt the very same things they were saying in Greece. Italy. And Cyprus (see Analysis: Cyprus bank levy risks dangerous euro zone precedent by Mike Peacock posted 3/17/2013 on Reuters).
A hit imposed on Cypriot bank depositors by the euro zone has shocked and alarmed politicians and bankers who fear the currency bloc has set a precedent that will unnerve investors and citizens alike.
After all-night Friday talks, euro finance ministers agreed a 10 billion euro ($13 billion) bailout for the stricken Mediterranean island and said since so much of its debt was rooted in its banks, that sector would have to bear a large part of the burden.
In a radical departure from previous aid packages – and one that gave rise to incredulity and anger across Cyprus – the ministers are forcing the nation’s savers to pay up to 10 percent of their deposits to raise almost 6 billion euros…
The decision sent Cypriots scurrying to the cash points, most of which were emptied within hours. Most have been unable to access their bank accounts since Saturday morning, a move unlikely to engender calm…
A Cypriot bank holiday on Monday will limit any immediate reaction. The deposit levy – set at 9.9 percent on bank deposits exceeding 100,000 euros and 6.7 percent on anything below that – will be imposed on Tuesday, if voted through in parliament…
“I understand that electorates in Germany and northern Europe demand some sacrifice. However, when you accept a solution that basically expropriates 10 percent of deposits, you set a dangerous precedent,” Vladimir Dlouhy, former Czech economy minister and now international advisor for Goldman Sachs told Reuters in Berlin. “If we get into deeper trouble, God help us, they may try to take 50 percent.”
Ouch. That’s what can go wrong with too much government spending. And too much debt. The government will just seize your money. Scary. Hearing stuff like this makes you pay a little more attention to that idea someone floated about the government expropriating 401(k) retirement accounts. Taking our retirement money. But being magnanimous enough about it to give us something valuable in return. A promise to pay us a fixed retirement benefit. Something as reliable and solvent as Social Security. Preferably like it used to be. Before they began forecasting it was going bankrupt.
So this is the downside to spending money you don’t have. Bank runs. As people pull their money out of our banks before the government can seize it. Causing banks to fail. Crashing the economy into a depression. Just like all those bank failures in the Thirties caused the Great Depression. But other than this there is little to worry about spending money you don’t have.
Tags: bailout, bank failures, bank runs, banks, Cyprus, debt, deficit, deficit spending, depression, expropriation, retirement
Week in Review
When the actuaries first crunched the Social Security numbers do you know what they did? They built a system that would start paying benefits to people who on average were already dead. That is the retirement age was pretty close to the average life expectancy. Which meant few people would live long into retirement. So if you’re collecting taxes from everyone but only have to pay about half of them in retirement (as the other half would already be dead) it wasn’t that hard to keep Social Security solvent. But then something happened. We started living longer. Which the actuaries never thought would happen. Worse, people were having fewer babies. So as more people lived longer into retirement there were fewer people entering the workforce to pay the taxes to pay for their long retirement. Creating an aging population. Something else the actuaries never thought would happen.
Put it all together and you have a financial mess. With both Social Security and Medicare projecting to go bankrupt. But it’s just not in the United States. It’s everywhere (see Britain ‘woefully’ under-prepared for rising number of elderly people by Juliette Jowit posted 3/13/213 on the guardian).
Britain is “woefully under-prepared” to cope with an expected explosion of older people and ministers need to respond by raising the retirement age and tackle the costs by reviewing pensioner benefits, a House of Lords inquiry concluded.
A special committee of peers blamed successive governments for their failure to tackle policy issues generated by the ageing population, warned that the biggest threats are to already stretched health and social services, and proposed a raft of new policies to help people cope.
Led by Lord Filkin, the group did not put forward a specific timetable for increasing the state pension age – already set to rise from 60 for women and 65 for men, to 66 in 2020 and 68 by 2046 – but the body did cite recommendations made by Lord Turner, chairman of the pensions commission, who had said the threshold could rise to 70 by 2030…
The wide-ranging inquiry heard startling evidence about the scale of the demographic change coming. Between 2010 and 2030 there is expected to be a 50% increase in people aged 65 or older, and a doubling of people aged 85 or older.
The consequences are predicted to be a 50% increase in people with arthritis, coronary disease or strokes, and an 80% rise in people with dementia to nearly two million.
So the British are talking about raising retirement ages. And means-testing their benefits. One thing they don’t mention is their Liverpool Care Pathway for the Dying Patient. To help the dying to die with dignity. Though many call it a quasi death panel. To help unburden the NHS with a lot of costly patients. Helping them to stretch their limited resources to cover more people. Obamacare includes something similar. Some bureaucrat will make life and death decisions to determine whether medical care will have an acceptable cost-benefit ratio. If not, well, there will be something similar to Liverpool Care Pathway for the Dying Patient in Obamacare. For it will be the only way to cut costs with an aging population. Unless you force health care workers to work at bargain discount pay rates. Like they do in Cuba. And North Korea.
This will be the future of Obamacare. For it is the present of the NHS. And we both have aging populations.
Tags: aging population, Britain, death panel, life expectancy, Liverpool Care Pathway, Liverpool Care Pathway for the Dying Patient, NHS, Obamacare, retirement, retirement age, Social Security
Week in Review
Britain is a social democracy. Not as much as they were before Margaret Thatcher. But still a social democracy. They have national health care. And state pensions. Something the American Left always wanted in the United States. They got the state pensions—Social Security—a long time ago. But they’ve been waiting a very long time for their national health care. Now they’ve got something like it in Obamacare. And now the Left can follow in the footsteps of that social democracy they so admire. Who has no problem whatsoever in providing those lavish benefits onto their people (see Start retirement saving now or the government may make you by Sarah Mortimer posted 1/25/2013 on Reuters).
Britain may soon have to force workers to start saving for retirement to cut a soaring pensions bill set to reach 120 billion pounds in 20 years…
The government’s current pension legislation is an attempt to tackle the country’s ballooning pensions bill, set to hit 8.5 percent of economic output by 2060, from 6.9 percent now…
Britain lags behind countries including Denmark, the Netherlands and Australia in global pension rankings. Its pension system ranks seventh out of 16 countries in a global comparison of national schemes, according to data from consulting firm Mercer. Its lowly ranking reflects an ageing population, low investment returns and large government debt…
“One way or another, long-term pension contributions will increase,” Paul Macro, defined contribution retirement leader at Mercer said. “The government are trying to stop people relying on the state to support them in retirement.”
An aging population, low investment returns and large government debt? Sounds like they’re talking about Social Security.
Note how Britain is trying to make their people less dependent on government while the U.S. is trying to make their people more dependent on government. Even though both countries face the same problems. An aging population, low investment returns and large government debt. So it would appear one country—Britain—is trying to be responsible. While that other country—the United States—isn’t. Why? Because Social Security, Medicare and Obamacare are not about taking care of people. They’re about increasing the power of government. Which is why the U.S. continues to increase their spending obligations no matter how much they can’t afford to. Because spending money buys votes. And winning elections give them power. Which is what they want. So they will ignore the responsible governing Britain is doing. While implementing the kind of programs that caused Britain’s financial problems in the first place.
Tags: Britain, dependent on government, Great Britain, National health care, Obamacare, pensions, retirement, social democracy, Social Security, state pensions
FDR Transformed the Country because he had a Great Crisis to Exploit like the Great Depression
Once upon a time in a place that seems far, far away there was once a people that saved for retirement. The savings rate was so high in this mystical land that businesses were able to borrow money at low interest rates to expand their business. And there was great employment. Then came an evil ogre who hated savings. And responsible behavior. He saw money saved as money leaked out of the economy. Hurting economic activity. His motto was spend don’t save. And don’t worry about how you will take care of yourself in retirement. So this evil ogre set out to destroy savings and responsible behavior.
That evil ogre’s name was John Maynard Keynes. Who empowered governments with his inflationary monetary policies. Allowing governments to spend a lot of money. Giving them a lot of power. By getting as many people dependent on the government as possible. Keynes met with Franklin Delano Roosevelt during the Great Depression. To offer him ideas of how to spend his way out of the Great Depression. FDR didn’t think much of Keynesian economics. For he did try to maintain the gold standard. But he loved spending money. And getting people dependent on the government.
FDR gave us Big Government. He did the things Woodrow Wilson wanted to do. But Wilson couldn’t because he didn’t have a crisis like the Great Depression to exploit. FDR did. And he was able to transform the country because of it. People saved less. And government spent more. Which led to deficit spending, massive debt and inflation. And perhaps the cruelest thing he did was impoverish the retiring class. By taking their wealth through taxes and inflation. And making them dependent on a meager Social Security benefit.
Social Security Contributions would create a Bigger Nest Egg if Invested in the Private Sector
After seeing so many poor, hungry, homeless, etc., during the Great Depression government did something. They punished those who saved responsibly for their retirement. By redistributing their wealth to those who didn’t. It seemed fair and just and kind. And there was an element of that in providing a social safety net for our most vulnerable people. But that wasn’t the intent of Social Security. FDR wanted to transform the country. Which he did. And today they forecast Social Security will go bankrupt in the coming years. Requiring ever more wealth redistribution. All while making Social Security recipients live a more impoverished retirement than they would have. Had they saved for their own retirement. A true transformation of the richest country in the world.
So let’s look at the numbers. Your Social Security contributions are technically saved in a ‘retirement account’ that accrues interest. Each payroll period both employer and employee contribute to this ‘retirement account’. Via a tax rate on a person’s gross pay up to a maximum amount (see Historical Payroll Tax Rates). So let’s see what this would have done in the private sector. Year by year. With the following assumptions. The worker enters the workforce at 18 and works until retiring at age 65. The worker earns the maximum amount for Social Security taxes. So all of his or her earnings are subject to the Social Security tax. With each successive year we add the current contribution to the running balance in his or her retirement account. The annual balance earns interest at 6% (including anywhere from 2-4% real return on their retirement investment and the rest of that 6% accounts for inflation). The following chart shows the beginning 5 years and the final 5 years.
Here we can see the power of compound interest. As we earn interest on both our contributions and the previous interest we earned. Note that the total contributions for 48 years of work total $282,608.38. Which earned a total of $540,413.12 in interest. Bringing the retirement nest egg up to $823,021.50. Again, this is assuming that the Social Security contributions were actually private retirement savings. That thing John Maynard Keynes hated. So this is what a retiree would have to live on in retirement. Had his or her money not gone to the government.
The Purpose of Social Security was to make People Dependent on Government and Redistribute Wealth
Now let’s look at what kind of retirement that nest egg will provide. Starting with some more assumptions. Let’s say the retiree lives 35 years in retirement. Reaching a grand old age of 100. Not your typical retirement. But one this retirement nest egg can provide. For someone with fairly modest means. Each year the retiree lives on $53,553. At the end of the year they earn interest on their remaining balance. Which helps to stretch that $823,021.50 over those 35 years. The following chart shows the beginning 5 years and the final 5 years of that retirement.
Note how that $282,608.38 in retirement contributions can provide $1,874,355 in retirement payments. Again, that’s the miracle of compound interest. So what kind of retirement would Social Security have provided? Someone who retires after working till age 65 who was earning $110,100 near retirement will receive approximately $24,720 annually in retirement. Over 35 years of retirement that comes to $865,200 in retirement benefits. Which is $1,009,155 less than someone would get investing in a private sector retirement plan. Or a reduction of 53.8%. Which is what people lose when letting the government provide for their retirement. So Social Security is a very poor retirement plan. Besides going bankrupt. Which is why the Republicans want to give younger workers the option to opt out of Social Security and provide for their own retirement. Which makes sense. And would probably increase their quality of life in retirement. As shown above. So why are the Democrats so opposed to privatization of Social Security?
Because the purpose of Social Security was not to provide a quality retirement. It was to make people dependent on government. To redistribute wealth. Increasing the power of government. And for those things Social Security is a resounding success. But there is one other thing why Democrats oppose privatizing Social Security. What would happen if the person that built up that $823,021.50 nest egg died 5 years into retirement? Who would get the remaining $781,392.18? The retiree’s family. Whereas if a Social Security beneficiary dies 5 years into retirement the government keeps their money. To spend as they please.
Tags: compound interest, contributions, Democrats, dependent on the government, FDR, Great Depression, inflation, investment, John Maynard Keynes, Keynes, nest egg, private sector, retirement, retirement account, retirement investment, retirement nest egg, savings, Social Security, Social Security benefit, Social Security contributions, Social Security recipients, Social Security taxes, wealth redistribution, Wilson, Woodrow Wilson
Small Business Owners may have Nicer Homes but Chances are they are Mortgaged to the Hilt
A lot of people think business owners are cheapskates. Greedy bastards. Who hate their employees. And try to pay them as little as possible. Not for any business reasons. But just because they are so greedy. And hateful. During bad economic times when the employer has to make some cuts labor leaders will tell the rank and file don’t believe the employer. “Just look at the house the boss lives in. And the house you live in. Whose is better? Bigger? That’s right. The boss’ house is. Always remember that.”
Yes, bosses may have nicer homes. But chances are they are mortgaged to the hilt. Not to mention the fact that these bosses may be working an 80-hour week. Which is not uncommon for a small business owner. Especially during bad economic times. As they may be negotiating with creditors, their banker, their vendors, keeping their customers happy and trying to find new customers. While the rank and file work their 40 hours, collect their paychecks and enjoy their free time.
So it’s not easy being the boss. That’s why so few people want to be the boss. For it’s easier being an employee. You work. You get paid. And you leave work at work. Even if you think you’re not being paid as much as you deserve to be. Something most employees feel. That they’re overworked. And underpaid. But they never look at things through their employer’s eyes. And see what they really cost their boss.
Most Businesses have gone from a Defined Benefit Pension Plan to a Defined Contribution 401(k)
What an employee gets paid and what an employer pays for that employee are two different things. To begin with an employer pays for more hours of an employee’s time than he or she actually works. When you factor in vacation time, holidays and sick days an employer may pay for 2,080 hours while the employee only works 1,896 hours. If an employee makes $35 an hour those nonworking hours can add up to $6,440. Which an employee gets for doing nothing. We call them fringe benefits. Just an employer’s way of saying, “Hey, I don’t hate you. Here’s some money for doing nothing.”
Why do they pay this? Because of free market capitalism. If they don’t pay it someone else may. And attract their good workers away from them. Because if there is something employees will do is jump ship the moment they get a better offer. Which is a good thing. This is supply and demand. And despite workers feeling overworked and underpaid this free market dynamic makes sure employees get paid as much as they can while helping employers pay as little as they can. That equilibrium point where employees will keep working. While leaving employers still competitive. Though that’s getting harder and harder to do these days. As the cost of doing business has never been higher.
In addition to these fringe benefits there are also health insurance, life insurance and retirement contributions. With health care often being the greatest single employee cost to a small business owner. Which is why most now make employees pay a small portion of their health care these days. Retirement contributions have also gotten very costly. Few people still have a defined benefit pension plan these days. Typically an owner will offer a defined contribution 401(k) for the employee to contribute to. And if times are good the employer may match their contribution up to a certain amount. But employers will call this a discretionary contribution. And it will be one of the first things to go when they are having cash flow problems in a bad economy.
The Last Thing a Business Owner needs while trying to Deal with Soaring Labor Costs are more Costs and Taxes
In addition to fringe benefits there are payroll taxes and insurances. Such as Social Security. Which the employer and employee split. At least in theory. The employer currently pays 6.2% on the first $110,100 in an employee’s earnings. The employee kicks in 4.2% (which may go up another 2 points after the fiscal cliff, as that tax cut expires). In reality the employee doesn’t pay any of this. They get their check and go on their way while the employer has to find the cash to pay the 10.4% due. For an employee earning $66,360 that Social Security tax payable comes to $7,571. Another big check the owner has to write is for state unemployment. Which can be anywhere around $4,000. The following chart summarizes these and additional labor costs (note: the retirement contribution is probably between a 401(k) matching contribution and a defined benefit pension contribution).
An employee with a pay rate of $35/hour will gross $66,360. Deductions will lower actual take-home pay. But the employer’s total cost for this employee in this example is $108,252. Or an additional $41,892 than the employee grosses. Which comes out to another $17.04 an hour. Something the employee never sees. This is why labor is so costly. And why employers want to hire as few people as possible. For each additional employee they hire (in this example) they have to pay an additional 22.2% in payroll taxes/insurances. And an additional 41% in fringe benefits. Or a combined 63.1%. In addition to what they’re paying the employees for their actual work.
And this is why employers want to offload health care (especially for their retirees). And their pension liabilities. As they can add an additional 30% (or more) to their labor costs. What started out as fringe benefits to attract some of the best workers is now bankrupting many companies. People are living so long into their retirement that these cost are growing faster and larger than any other cost a business has. And it’s also why small business owners are very worried about new regulations and taxes. For the last thing they need while trying to deal with these soaring labor costs are more costs. Or taxes. Which doesn’t make them cheap or greedy. It just makes them very cautious business owners who are trying to keep their businesses afloat in an ever more difficult business environment.
Tags: 401(k), boss, bosses, business owners, defined benefit pension plan, defined contribution 401(k, employee, employer, free market, free-market capitalism, fringe benefits, health insurance, insurance, labor, labor costs, overworked, payroll taxes, pension, retirees, retirement, retirement contributions, small business, small business owner, Social Security, underpaid
Week in Review
Raising a family is expensive. Once upon a time you could do it on one income. But now with huge welfare states requiring heavy taxation one income rarely cuts it anymore. It takes two. Childcare. And more cooperative employers. For without all of this young people just won’t be able to afford to raise a family (see Survey: 50% couples not have babies because ‘Money No Enough’ posted 10/6/2012 on TR Emeritus).
According to a recent survey conducted by voluntary welfare organisation ‘I Love Children’, about 1 in 2 couples (50%) said not having enough finances is the main reason for not having children…
‘I Love Children’ is a voluntary welfare organization set up in September 2005 with a purpose of keeping Singapore young — by advocating a higher priority to having children, and promoting a society where children are loved and mainstreamed. It hopes to inculcate the value and importance of parenthood and family among Singaporeans, as well as encourage a children-friendly environment in Singapore.
To keep Singapore young. All nations would like to keep their nations young. To have an expanding population growth rate. So they have more young workers entering the workforce than older workers leaving the workforce. Why? To avoid the financial crises they’re having in Europe. Japan. The U.S. And like they will probably soon have in China. Where all of these nations have an aging population. Where more people are leaving the workforce while fewer are entering it to replace them. So the tax base is shrinking. As is tax revenue. And this at a time when government spending on pensions and health care for the elderly is rising. Which means fewer and fewer people will have to support more elderly people in their retirement. As the tax base dwindles governments replace that lost revenue with more and more borrowing. Leading to those financial crises.
At the dialogue session, 26-year-old Ms Gillian Neo, said, “Currently, infant care in Singapore is still quite expensive. Even the more affordable ones, after government subsidies, is still $700 a month…”
During the the dialogue session, young parents also said that flexi-work arrangements are a major incentive as that will enable them to spend more time with their children…
However, there is still a lot of resistance in the mentality of some of the management of companies towards this mode of working.
“I was offered a full-time work from home arrangement with my previous employer… Six months into it, it really fell flat on the ground. One of the reasons was my immediate supervisor was really not supportive of the arrangement,” said Mandy Loh, a freelance writer…
She said, “In fact, there have been studies done by the employers federation, for instance, to show that for every dollar spent on flexi-work options, the return is S$1.68.”
Madam Halimah also suggested that flexi-work arrangements could be used to attract people to work for SMEs [small and medium-sized enterprise], which are currently facing a labour crunch.
The problem is not lack of affordable childcare. The problem is that a high level of taxation (often to support an aging population) requires two incomes to raise a family. Children are not supposed to be a nuisance that we dump off at childcare while we go to work. They should be raised in a loving family with a full time stay-at-home parent. A role typically filled by the mother. The CEO of the house. While the husband works full time to pay the bills. Parenting is a team. It takes two to raise a family. A mother and a father. Not a childcare facility. And, no, this isn’t discriminatory to women because they can’t have a career and be a mother. It’s what’s best for the children.
The working mom also comes with some baggage. Especially if she is a key person on a project. Because a snow day may pull her out of the office when they call an emergency meeting. If a child falls ill she may be out of the office for a few critical days of the project. If a meeting runs long because of a crisis she will still have to leave at 4:00 PM to pick up her kids from daycare. If a project requires an emergency trip to another state she will not be able to go. School holidays and half-days will take her out of the office, too. These aren’t hypotheticals. Many of us have probably experienced this in the workplace. This is why employers are reluctant to hire single moms or single dads. And a little reluctant to hire a married mom with young kids. Because it is often the mother and not the father that will miss work for the kids. As the father’s career will be more established because of less time missed for the birth of their children. It’s not unfair. Men and women are just different. Women give birth. Men don’t.
Emphasizing a woman’s career over her children has put more women into the workforce. Which has allowed greater government spending. This is why governments want state-provided childcare. Because they want to get women back into the workforce as quickly as possible so they can resume paying taxes. Which governments can never seem to collect enough of with an aging population. Making it ever more difficult for young people to have the children governments want them to have. To bring new taxpayers into the workforce. So bringing women into the workforce probably hurts in the long run more than it helps. For it allows the government to spend more. But it also discourages young people from raising families. Leading to fewer children. An aging population. And a shrinking tax base. Which will probably be made up with more government borrowing. As more nations join those in Europe, Japan, the U.S. and probably China who are suffering from the pressure of aging populations. And the financial crises they cause.
Tags: affordable childcare, aging population, borrowing, childcare, children, elderly, expanding population growth rate, family, father, financial crises, government spending, mother, older workers, raising a family, retirement, Singapore, tax base, tax revenue, taxation, taxes, workforce, working mom, young workers
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