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| Only a brave few acknowledge an entitlement crisis Posted: 11 Apr 2010 11:09 PM PDT
| Jewish World Review April 11, 2010/ 27 Nissan 5770 Only a brave few acknowledge an entitlement crisis
By
George Will
http://www.JewishWorldReview.com |
A puzzle from Philosophy 101: If a tree falls in a forest and no one hears it, does it make a sound? A puzzle from the prairie: If an earthquake occurs in Illinois and no one notices, is it really a seismic event?
Gov. Pat Quinn called it a "political earthquake" when the state's legislature recently voted — by margins of 92 to 17 in the House and 48 to 6 in the Senate — to reform pensions for state employees. There is now a cap on the amount of earnings that can be used as the basis for calculating benefits. In some states, employees game the system by "spiking" their last year's earnings by accumulating vast amounts of overtime pay.
An even more important change — a harbinger of America's future — is that most new Illinois state government employees must work until age 67 to be eligible for full retirement benefits. Those already on the state payroll can still retire at 55 with full benefits.
The 1935 Social Security Act established 65 as the age of eligibility for payouts. But welfare state politics quickly becomes a bidding war, enriching the menu of benefits, so Congress in 1956 entitled women to collect benefits at 62 and in 1961 extended the entitlement to men. Today, nearly half of Social Security recipients choose to begin getting benefits at 62. This is a grotesque perversion of a program that was never intended to subsidize retirees for a third to a half of their adult lives.
It also reflects the decadent dependence that the welfare state encourages: Because of the displacement of responsibility from the individual to government, 48 percent of workers over 55 have total savings and investments of less than $50,000.
Because most states' pension plans compute their present values — and minimize required current contributions — by assuming an unrealistic 8 percent annual return on investments, the cumulative funding gap of state pensions already may be $3 trillion and certainly is rising. For example, Wednesday's New York Times contained this attention-seizing bulletin: "An independent analysis of California's three big pension funds has found a hidden shortfall of more than half a trillion dollars, several times the amount reported by the funds and more than six times the value of the state's outstanding bonds." It is not news that California is America's home-grown Greece, but the condition of the three funds, which serve 2.6 million current and retired public employees, is going to exacerbate the state's decline by requiring significantly higher taxpayer contributions.
Asked how the nation might address the projected $17.5 trillion in unfunded Social Security liabilities, Rubio said that we should consider two changes for people 10 or more years from retirement. One would raise the retirement age. The other would alter the calculation of benefits: Indexing them to inflation rather than wage increases would substantially reduce the system's unfunded liabilities.
Neither idea startles any serious person. But Crist, with the reflex of the unreflective, rejected both and said that he would fix Social Security by eliminating "waste" and "fraud," of which there is little. The system's problems are the result not of incompetent administration but of improvident promises made by Congress.
Synthetic indignation being the first refuge of political featherweights, Crist's campaign announced that he believes Rubio's suggestions are "cruel, unusual and unfair to seniors living on a fixed income." They are indeed unusual, because flinching from the facts of the coming entitlements crisis is the default position of all but a responsible few, such as Wisconsin's Rep. Paul Ryan, who has endorsed Rubio. What is ultimately cruel is Crist's unserious pretense that America faces only palatable choices and that improvident promises can be fully funded with money currently lost to waste and fraud.
By the time the baby boomers have retired in 2030, the median age of the American population will be close to that of today's population of Florida, the retirees' haven that is Heaven's antechamber. The 38-year-old Rubio's responsible answer to a serious question gives the nation a glimpse of a rarity — a brave approach to the welfare state's inevitable politics of gerontocracy.
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| Posted: 11 Apr 2010 11:41 PM PDT The SKI principle A trip home to the Sunny Coast revealed several things. One of them was the SKI principle. This sophisticated philosophy allows people to retire in comfort, without having to depend on flawed retirement schemes, or rocketing house prices. The principle, pioneered by the talented musician and proud Scottsman, James "Jimmy" Davidson, even incorporates his other key philosophy; the KISS principle. (Keep It Simple Stupid!) But what does the SKI principle reveal? Well, actually, it doesn't just enlighten us on how baby boomers could fund their retirement. It is in fact the basis of the last 60 years of economic growth. It reveals just how people have managed to fund their prosperity, and why the next generations are in trouble. SKI stands for "Spend the Kids' Inheritance". But the baby boomers and their politicians have gone well beyond the kids' inheritance. They've borrowed against their kids' future income as well. (SKII) To fund their splurge, the boomers invented sophisticated tools of delaying the drawbacks. Exotic mortgages, credit cards and a fraudulent currency system were thought to delay the problem. But the boomers shot themselves in the foot by investing in the stock market and the housing market, which don't like exotic mortgages, credit cards and a fraudulent currency system. At least not in the long run. So now the boomers' children and grandchildren live to fear the yield curve, like some sort of temperamental beast, capable of smiting them at relatively short notice. Inflation, Depreciation, Damnation Inflating away their worries isn't an option either. Not just for the reasons explained regularly in Daily Reckoning. Nadeem Walavat at the Market Oracle points out something extremely obvious that has slipped your editor's mind previously. Countries can only inflate away the debt that is denominated in their own currency. This assumes their central bankers are feeling generous and were mentored by Robert Mugabe's central banking henchman Gideon Gono. If you think this sounds unlikely, check out similarities between the Reserve Bank of Zimbabwe's former policies and the Federal Reserve's recent policies. Of course, the Eurozone is unique in this respect. Individual countries can't just print Euros. But back to debts denominated in foreign currencies. If you have to pay your debt in a currency you can't print, then you have a problem. If you try to print your own money and then exchange it for the currency your debts are denominated in, your currency will depreciate, which offsets the gain from printing in the first place. Based on this, sovereign defaults are a lot more likely for countries with large foreign denominated debts. Who are those countries? According to Nadeem, Ireland, Greece, Belgium, Portugal and the UK are the top 5. He believes the luck of the Irish has a 57% chance of holding out. But how do the scenarios play out? Without a default, the debt burden is still there, along with much of the government burden it funds. A default might just clean up the country, forcing it to get rid of the things it can't afford. Clash of the bond traders The Greeks are back in the news. The cost of insuring their bonds has jumped dramatically. The last time it did that, the S&P 500 took a tumble. Opinions are amusingly polarised on the topic of a Greek bailout. In an article titled "Greek Default Unavoidable Without More Aid", Bloomberg writes this:
Credit default swaps say otherwise. But definitions of a default are mixed and muddled. If a German holds Greek debt and is forced to bailout Greece via the taxes he/she pays, is this a default? It's a bit of cop out, either way. But it's the model the IMF has staged such bailouts on in the past, so why the fuss? Do not pass "Go" The Chinese have decided that monopolies are only acceptable in the political arena, and that the three largest iron ore producers are just too... monopolistic. The result is a 2 month boycott, that is "doomed to fail". Diggers and Drillers editor Alex Cowie reports that his picks have done well out of the news. But what does it all mean? The Chinese are simply recovering "face" from the pricing change that was sprung on them recently. They have to show who's boss. And they are right. The customer is boss. Capitalism is all about consumer sovereignty. The most scrupulous business is still subject to the whims of its customers and their credit cards. Speaking of credit cards and monopolies, when was the last time you bought the Monopoly board game? In an effort to get with the times, the game designers have made several changes. Each of which is highly symbolic, but none more so than the payment system you now use. That's right, you guessed it. You use a credit card to buy the properties. Cash is no longer king. The bank now consists of an EFTPOS looking machine, which adds and subtracts funds, as well as transferring them when you land on your sister's hotel. So it's official. Even our board games now run on credit, let alone the economy. But it doesn't end there. In an effort to be politically correct, hotels and houses are now offered in a variety of options, from pyramids to grass huts. (I built an Aztec step-pyramid hotel.) And you are no longer limited to buying local properties. London, New York and Gdynia can now be bought on the same board for mere thousands in credit. For some reason, Canada features prominently on our version, while Melbourne misses out entirely. The game has not yet taken capital gains into account. And paying tax is still a matter of bad luck with the dice. In the age of taxation and negative gearing, you would think that relying on the rent is just so out of date. Please let us know if you happen to buy a version of Monopoly where this has been updated. Actually, that might be an interesting idea. We could design a Daily Reckoning version of Monopoly, where stamp duties and homebuyer grants are included. No more free parking! The new version might even breed out the property investment gene that Australians seem to have. Nobody would want to play the game if the bank and the government win all the time. Growing up with a Monopoly like that would surely teach kids a lesson early on. It would save all those first home buyers from learning the hard way. Chances are the game wouldn't sell particularly well. So the property mania continues. Actually, as The Age points out, it expands further than first thought: "... one in three investors saying their voting intentions will be affected by their ability to buy a house." What government scheme will KRudd come up with on this dilemma? Capital in Tears Dan has often commented on the Australian banks' overinvestment in housing. Daily Reckoning contributor and financial statement guru Greg Canavan delved into the issue here. His discovery is more vindicating than surprising. Vindicating in the sense that, once again, the Australian banks have managed to make the same mistake as their buddies overseas. It's all got to do with tiers, and for Bear Stearns and Lehman Brothers, that's how it ended too - in tears. As always, it's the regulator's fault. All those "world government" enthusiasts should take note of this one. Some clever fellows decided they would come up with capital requirements to impose on banks worldwide. So, they met up in Basel, Switzerland and created the Basel requirements. These established risk weightings for different assets and liabilities. But they got those risk weightings wrong. Not that it was their fault. Just having risk weightings set by a regulator means they had to be wrong, as people find ways of manipulating such rules. The rest of the story should be left to the expert. American sex offenders get the help they need The Congressional Research Service has confirmed a Republican Senator's suspicions that Obama is funding Viagra for sex offenders as part of his healthcare package. Some of the taxpayers who are paying for the sex offenders' Viagra have apparently been calling up insurance companies, asking where to sign up for free healthcare - they want in on the fun. Meanwhile, the insurance companies have reduced their offerings of insurance. The Massachusetts government is looking to fine them for this. Doesn't all this sound wonderful? And KRudd is threatening the states with a referendum on the issue! Retirement They don't call him the Governator for nothing. Arnie's commissioned Stanford University study revealed a $500 billion shortfall in retirement funds. "According to the study, California taxpayers are on the hook for over a half-trillion dollars. That's nearly six times the size of our entire state budget." Now that's what you call blowing a hole in the state's budget! So what does KRudd do when he hears the news? He proposes a tax on Australia's stellar exporters to fund retirees. Well, actually, Swann is the schemer, but the details only get worse. "The tax on miners would be based on net profits and eliminating earnings-based royalties set by state governments." When the states can't fund themselves at all, what's the point of having them? Why not get rid of them and make the federal government run everything? Who needs vertical separation of powers anyway? It's not like it's the hallmark of civilised government, is it? It's not like it's the "Key to Domestic Tranquillity", nor can it be found in the Old Testament, right? Moses is unlikely to have approved of the SKI principle though. The biggest fraud in history We have received several emails over the past few days asking us why we aren't covering the metals market fraud that has been exposed. To be honest, the story requires a book, rather than a Daily Reckoning article. And it is a story that makes our stomach churn, rather than filling us with glee. It is probably one of the most important things to inform yourself about, especially if you are interested in gold or silver. The short version is that banks don't hold the gold they say they do. They have been issuing gold and silver certificates and charging people for storage costs on the metal, without actually holding it. The London Bullion Market Association (LBMA) holds only 1% of the gold it has outstanding in certificates, according to testimony given at a Commodities Futures Trading Commission (CFTC) hearing. Best of all, the precious metals market has been subject to extreme and predictable manipulation. Can you imagine what will happen if people try to take delivery on the gold they hold in certificates? Reader-mail Reader-mail included the following comment:
Those crafty Germans are at it again. Have a great weekend. Nickolai Hubble. P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed. Related Articles:
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Five Filters featured article: Chilcot Inquiry. Available tools: PDF Newspaper, Full Text RSS, Term Extraction. |
Having recently escaped from academia, Nick decided to drop his tights (the required attire of a trapeze artist) and joined Port Phillip Publishing. Instead of telling everyone about the Daily Reckoning, he now spends his time writing for the weekend edition.| You are subscribed to email updates from Yahoo! News Search Results for Philosophy To stop receiving these emails, you may unsubscribe now. | Email delivery powered by Google |
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