Tuesday, February 12, 2008

Entitlement Meltdown

A recent survey by Bankrate.com found that 68% of adults avoid news about the cost of retirement. Why? Some see their parents living fairly well on Social Security and pensions. Others simply lack the discipline to save. In a Fidelity survey, only a quarter of respondents said they would make a lifestyle change now to save for later.
These folks might want to go back and read Aesop’s tale about the ant and the grasshopper. Thanks to healthier lifestyles and modern medicine, Americans are living longer than ever. In fact, according to Allstate, which has a vested interest in this sort of thing, the average 65-year-old woman can expect to live to 87, and the average 65-year-old man to 85.
An increasing number of Americans will spend up to three full decades in retirement. That’s expensive. But there’s always Social Security, right? Yes and no.
Social Security is Not Your Legal Right
The nation’s biggest entitlement program is about to get hit by the “Silver Tsunami.” The first of almost 80 million babies born between 1946 and 1964 are now receiving Social Security benefits. More than 10,000 a day are being added to the rolls.
This would be great if the money for future payments was actually in the “trust fund,” a figment of Congress’ imagination, or if benefits were paid by aliens from another planet.
Unfortunately, that’s not the case. And the long-term outlook is not good.
David Brooks of The New York Times recently wrote that “the U.S. government has $43 trillion in unfunded liabilities, or $350,000 for every taxpayer. Standard & Poor’s projects that in 2012, the U.S. will lose its AAA bond rating.”
Laurence Kotlikoff, an economist at Boston University, calculates that future workers would have to pay tax rates from 55% to 80% over their lifetimes to sustain current Social Security, Medicare and Medicaid benefits.
Let’s be honest. That ain’t gonna happen. And that means entitlements will eventually be cut.
Some people have trouble believing that Uncle Sam won’t keep his promises. But there’s the rub. Entitlement obligations are not a contractual government promise like a T-bond. In a landmark 1960 decision, Flemming v. Nestor, the Supreme Court ruled that there is no legal right to Social Security.
Sobering? So is this: The federal government’s own website says the “current Social Security system is unsustainable in the long run.”
I’m not an alarmist. But facts are facts. There are not going to be enough workers to maintain the current level of benefits indefinitely.
Sure, the nation’s #1 entitlement program will survive in some form. But many New Deal and Great Society programs were designed for another era – and cannot be maintained at current levels indefinitely. Even in the most optimistic scenario, workers should only count on Social Security to cover a small portion of their retirement expenses.
If you’re retired or close to it, you can count on politicians – most of whom value incumbency like the rest of us value oxygen – to keep current benefits coming. For those further out, you better plan on your investment portfolio doing some very heavy lifting.

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