by FS
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It’s no secret that the United States faces massive fiscal troubles in the form of unfunded liabilities, but we don’t seem to have the political will to do anything about it.
Laurence Kotlikoff, a professor at Boston University and one of the leading experts on Social Security, discusses the magnitude of the problem and why, he believes, this is likely to lead to a crisis.
Social Security Isn’t Secure
Between all entitlement obligations and interest on the national debt, around 70 percent of the Federal budget goes to paying these debts. The Social Security Trust Fund is slated to run out of money between 2027 and 2033.
“Social Security is absolutely broke, and it’s in far worse shape than the Detroit pension situation, and that brought Detroit to bankruptcy,” Kotlikoff said.
The U.S. is short about $34 trillion, more than one and a half times the level of the $20 trillion in official government debt.
This $34 trillion is essentially off-the-books, Kotlikoff noted, with the magnitude of the problem largely hidden.
All politicians in both parties are ignoring the problem. President Trump has only mentioned it once since taking office.
“What we’re talking about is the prospect of the system running out of money at a point where it will have to cut benefits — if we can’t raise taxes — dramatically, by 25 to 30 percent,” Kotlikoff said. “People will starve to death. There’s no question about it. We’ve got 20 percent of the elderly entirely dependent on Social Security.”
What We Can Do
To address this problem, we need to begin by freezing the old system. The entire system of government payments has been run on a Ponzi scheme basis for decades, Kotlikoff stated.
“We’re taking from the young and giving to the old on an ongoing basis, and we just hide all of the liabilities,” he said. “Our official debt is $20 trillion. If you add up all the off-the-books liabilities, including Social Security, we’re at $200 trillion in total.”
If we freeze the Social Security system in place, pay off what we owe and avoid accruing any additional benefits, we can stem the hemorrhaging. The next step is to require people to contribute about 10 percent of their pay to a personalized account that’s co-invested, Kotlikoff stated, so everybody’s return is the same.
A computer system would administer the investments, and that money would be used to pay out pension benefits and annuities that are inflation-indexed.
“Through time, what we have is a gradual transition from the old system to the new system,” Kotlikoff said. “In the end, everybody gets paid off every penny they were owed under the old system. … It can be done tomorrow, and it can eliminate this fiscal Sword of Damocles hanging over the Baby Boomers and their kids.”
We’ll Likely See Fiscal Crisis First
Some kind of financial crisis may be necessary before change can come, Kotlikoff said.
“No other country acts this irresponsibly,” he said. “It’s just unspeakably stupid. … The system is not broken in the future. Let me be clear, it’s broke today. Every year we wait, it just gets more broke.”
The market is not pricing the problem correctly, Kotlikoff noted, but at some point, enough people are going to realize what’s going on and there could be a run on markets.
Kotlikoff does not advise holding any long-term government bonds. The government is likely to print money to pay its bills, and subsequent inflation will erode the value of those bonds.
“I’d be very concerned about inflation because I think that’s the first way we’re going to see this financial crisis erupt,” he said. “Anybody who is depending on a nominal income is going to be wiped out. The government is going to say, ‘Not our problem.’ This is the reality of what our government has been up to for decades.”
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