Conventional wisdom says you need to save $1 million for retirement.
That target may be easy to remember, but it falls short of the true cost of what's required for post-career comfort. Longer life spans, the threat of inflation and the uncertain future of Social Security benefits make this long-touted savings advice inadequate for most, advisers say.
Scottrade recently polled 226 registered investment advisers on the topic and found that 71% don't believe $1 million is enough for the average American family. Most said families need to save double, or more than triple, the amount.
"Younger generations, especially, need to set their retirement goals higher than other generations and start saving as early as possible," says Craig Hogan, Scottrade's director of customer-relationship management and reporting.
The survey solicited opinions about the current investment habits of Americans. Questions were broken down by generations to determine advisers' opinions on average investment goals in today's dollars for various groups.
Generation Y (ages 18 to 26) needs to save at least $2 million, according to 77% of advisers. Forty percent put the figure at $3 million.
Nearly half of advisers (46%) said Generation X (ages 27 to 42) should at least double the $1 million goal. Twenty-two percent suggested more than $3 million.
For Boomers (ages 43 to 64), 35% recommended $2 million to $3 million. Thirty percent suggested $1.5 million to $2 million.
According to Scottrade's analysis, seniors are the only generation that may come close to needing only $1 million. Forty-four percent of advisers said $500,000 to $1.5 million is sufficient for average families in that age bracket.
Bill Smith, president of Ohio-based Great Lakes Retirement Group, is among the advisers who took part in the survey. As he sees it, too many people rely on online retirement calculators. Much of that guidance uses a target based on making do with 70% to 80% of pre-retirement income.
"I've never been a big fan of planning to earn less in retirement than you are making now," he says. "I'd like to see an individual continue making the same amount of retirement as when he was working. Who wants to set themselves up in retirement to make less?"
While most people will spend less when they retire, inflation or the onset of a long-term illness could wipe out savings without proper protection or planning.
That said, there's no secret to meeting a retirement goal: maximize your contribution rate, have a greater tolerance for risk when you're younger and downshift to bonds as you grow older. Successful preparation, however, begins with setting a realistic goal and understanding your true financial picture.
Debt needs to be carefully considered as well as leaving money for the kids.
"There are two extremes," Smith says. "There are individuals who say, 'We don't care if we have anything left the day we die -- we are OK with that last check bouncing when we are gone.' Then there are the individuals who don't do anything in retirement because all of their decisions are made around, 'I've got to leave it for the kids.' "
Sunday, March 21, 2010
In the March 21, 2010 article "$1 Million Doesn't Cut It for Retirement, Joe Mont explains that "A majority of experts now say $1 million is not nearly enough for a truly secure retirement."
Friday, March 19, 2010
John Stewart's parody of Glenn Beck illustrates the folly of jumping to wild conclusions on the basis of unsound reasoning.
John Stewart's parody of Glenn Beck illustrates the folly of jumping to wild conclusions on the basis of unsound reasoning.
Monday, March 15, 2010
In the March 11, 2010 U.S. News & World Report article "What Happens If Greece Really Defaults?," Matthew Bandyk reports:
Earlier this week, Greek Prime Minister George Papandreou traveled to the United States to promote a message: We're in this together. The debt crisis that has threatened the Greek economy and the stability of the European Union's monetary policies "very much involves America's interests," Papandreou stated in a speech at the Brookings Institution in Washington.
The prime minister--who was born in St. Paul, Minn.--even connected the current crisis to the Great Depression as well as the Great Recession. "If the European crisis metastasizes, it could create a new global financial crisis with implications as grave as the U.S.-originated crisis two years ago," he said.
But the path from a Greek crisis to a U.S. crisis is not a direct one. The European Union is hoping it can contain Greece's debt crisis before the problems spread across the continent--threatening the stability of all countries that use the euro, or the euro zone--and then over the Atlantic.
The crisis began shortly after the election last fall of the new socialist government led by Papandreou. State officials revealed that Greece's budget deficit was at 14 percent of GDP--almost twice what the official Greek government statistics had reported. Two months later, Moody's downgraded Greece's debt to A2, raising the possibility of Greece defaulting on its debt.
If Greece defaults, "it risks exacerbating the economic downturns and could even reignite an acute financial crisis" through higher interest rates, Marc Chandler, global head of currency strategy at investment firm Brown Brothers Harriman, wrote in a report.
A Greek default would hit Americans hard in one major area: exports. According to the Economic Report of the President by the White House's Council of Economic Advisers, in order to "fill the gaps left in demand" by the recession, "net exports need to rise." President Obama announced in his State of the Union address a goal of doubling exports over the next five years. That goal might be hard to reach if Greece's debt crisis is not contained. "Under the scenario where things get much worse in Europe, the dollar would get strengthened relative to the euro, and that would create a policy headache for the Obama administration," says Steve Hanke, an economist at Johns Hopkins University. A stronger dollar would make U.S. exports more expensive. In addition, as interest rates in Europe soar and the euro falls in value in response to the credit crunch, Europeans would be unable to buy as many U.S. products.
The likelihood of that scenario depends partially on what the European Union decides to do about Greece. In reaction to this panic in Greece, much of the rest of Europe became frustrated over Greece's ability to hurt the rest of the continent economically but with little accountability owing to the fact that Greece is an independent state. Because Greece uses the euro, its fiscal problems can weaken the currency and lead to higher interest rates for all Europeans. A February poll found that a majority of Germans want Greece out of the euro zone.
Greek officials have received reassuring signs from Europe's leaders that the European Union will bail out the country in some way to assure creditors that it will not default on its debt. Jose Manuel Barroso, president of the European Commission, also announced this week that whatever mechanisms the EU uses to help Greece will be in line with the laws of the EU--assuaging fears that a bailout would violate the Maastricht Treaty, the agreement that created the euro.
But it is not guaranteed that bailing out Greece will save it and, by extension, the euro zone. Hanke worries that even with a bailout, wealthy Greeks and foreign investors will not stop withdrawing their money from Greek banks, from which they have already pulled out billions of euros. In order to get the rest of Europe's support for a bailout, Greece has had to promise to fill in its budget with more tax revenue. But paradoxically, those taxes might cause even more people to flee the Greek financial system, says Hanke. "In effect, with bank runs coupled with capital flights, you would get a collapse in credit in Greece," he says.
Such a collapse would have two major potential effects. First, a credit crunch would spread to other European countries that have vulnerable economies. For example, "if you had a lot of capital flight out of Greece, all of a sudden people in Spain say, 'We're going to be next,' " says Hanke.
Second, the credit crunch would increase the likelihood of Greece defaulting on its debt. In such a scenario, Greece could temporarily leave the euro zone and return to its former currency, the drachma, which would be heavily devalued against the euro.
There are still several signs that Greece can use the market to navigate out of the crisis without a default. Last week, Athens sold 10 billion euros of 10-year sovereign bonds to foreign investors. But an amount of 23 billion euros is needed to meet government obligations through May. And Greece has only begun to implement changes to its budget that will bring it out of a fiscal hole. Earlier this month, the government announced a plan of cuts to wages of government employees, tax hikes on tobacco and alcohol, and other measures expected to raise 4.8 billion euros. But these steps will reduce Greece's budget deficit by only 2 percent of GDP. It now stands at 12.7 percent of GDP, well above the European Union's target of 3 percent. Even the changes so far have not been easy politically. Several of the country's labor unions are striking in protest of the spending cuts and tax increases.
Perhaps, however, Greece can breathe its biggest sigh of relief over the fact that the international investors who recoiled in horror over the country's fiscal problems just a few months ago appear now to be softening their stance. Investors trade credit-default swaps on Greek sovereign debts, which are contracts that function as a kind of insurance on the chance the government will default. According to credit-default-swap prices from financial information company Markit, the annual cost to insure a five-year government bond for Greece hit a high of $425,000 on February 4. That was a 67 percent increase from the previous three months. But as of March 9, the cost had fallen to $289,000, down to the levels of December.
Sunday, March 14, 2010
In the March 14, 2010 article "Social Security to start cashing Uncle Sam's IOUs," Associated Press writer Stephen Ohlemacher reports the Social Security system will pay out more in benefits than it collects in revenues this year. As baby-boomers increasingly shift from working and paying into the system to retiring and collecting benefits, this problem will exacerbate:
PARKERSBURG, W.Va. – The retirement nest egg of an entire generation is stashed away in this small town along the Ohio River: $2.5 trillion in IOUs from the federal government, payable to the Social Security Administration.
It's time to start cashing them in.
For more than two decades, Social Security collected more money in payroll taxes than it paid out in benefits — billions more each year.
Not anymore. This year, for the first time since the 1980s, when Congress last overhauled Social Security, the retirement program is projected to pay out more in benefits than it collects in taxes — nearly $29 billion more.
Sounds like a good time to start tapping the nest egg. Too bad the federal government already spent that money over the years on other programs, preferring to borrow from Social Security rather than foreign creditors. In return, the Treasury Department issued a stack of IOUs — in the form of Treasury bonds — which are kept in a nondescript office building just down the street from Parkersburg's municipal offices.
Now the government will have to borrow even more money, much of it abroad, to start paying back the IOUs, and the timing couldn't be worse. The government is projected to post a record $1.5 trillion budget deficit this year, followed by trillion dollar deficits for years to come.
Social Security's shortfall will not affect current benefits. As long as the IOUs last, benefits will keep flowing. But experts say it is a warning sign that the program's finances are deteriorating. Social Security is projected to drain its trust funds by 2037 unless Congress acts, and there's concern that the looming crisis will lead to reduced benefits.
"This is not just a wake-up call, this is it. We're here," said Mary Johnson, a policy analyst with The Senior Citizens League, an advocacy group. "We are not going to be able to put it off any more."
For more than two decades, regardless of which political party was in power, Congress has been accused of raiding the Social Security trust funds to pay for other programs, masking the size of the budget deficit.
Remember Al Gore's "lockbox," the one he was going to use to protect Social Security? The former vice president talked about it so much during the 2000 presidential campaign that he was parodied on "Saturday Night Live."
Gore lost the election and never got his lockbox. But to illustrate the government's commitment to repaying Social Security, the Treasury Department has been issuing special bonds that earn interest for the retirement program. The bonds are unique because they are actually printed on paper, while other government bonds exist only in electronic form.
They are stored in a three-ring binder, locked in the bottom drawer of a white metal filing cabinet in the Parkersburg offices of Bureau of Public Debt. The agency, which is part of the Treasury Department, opened offices in Parkersburg in the 1950s as part of a plan to locate important government functions away from Washington, D.C., in case of an attack during the Cold War.
One bond is worth a little more than $15.1 billion and another is valued at just under $10.7 billion. In all, the agency has about $2.5 trillion in bonds, all backed by the full faith and credit of the U.S. government. But don't bother trying to steal them; they're nonnegotiable, which means they are worthless on the open market.
More than 52 million people receive old age or disability benefits from Social Security. The average benefit for retirees is a little under $1,200 a month. Disabled workers get an average of $1,100 a month.
Social Security is financed by payroll taxes — employers and employees must each pay a 6.2 percent tax on workers' earnings up to $106,800. Retirees can start getting early, reduced benefits at age 62. They get full benefits if they wait until they turn 66. Those born after 1960 will have to wait until they turn 67.
Social Security's financial problems have been looming for years as the nation's 78 million baby boomers approached retirement age. The oldest are already there. As that huge group of people starts collecting benefits — and stops paying payroll taxes — Social Security's trust funds will shrink, running out of money by 2037, according to the latest projection from the trustees who oversee the program.
The recession is making things worse, at least in the short term. Tax receipts are down from the loss of more than 8 million jobs, and applications for early retirement benefits have spiked from older workers who were laid off and forced to retire.
Stephen C. Goss, chief actuary for the Social Security Administration, says the crisis has been years in the making. "If this helps get people to look more seriously at that in the nearer term, that's probably a good thing. But it's only really a punctuation mark on the fact that we have longer-term financial issues that need to be addressed."
In the short term, the nonpartisan Congressional Budget Office projects that Social Security will continue to pay out more in benefits than it collects in taxes for the next three years. It is projected to post small surpluses of $6 billion each in 2014 and 2015, before returning to indefinite deficits in 2016.
For the budget year that ends in September, Social Security is projected to collect $677 million in taxes and spend $706 million on benefits and expenses.
Social Security will also collect about $120 billion in interest on the trust funds, according to the CBO projections, meaning its overall balance sheet will continue to grow. The interest, however, is paid by the government, adding even more to the budget deficit.
While Congress must shore up the program, action is unlikely this year, said Rep. Earl Pomeroy, D-N.D., who just took over last week as chairman of the House subcommittee that oversees Social Security.
"The issues required to address the long-term solvency needs of Social Security can be done in a careful, thoughtful and orderly way and they don't need to be done in the next few months," Pomeroy said.
The national debt — the amount of money the government owes its creditors — is about $12.5 trillion, or nearly $42,000 for every man, woman and child in the country. About $8 trillion has been borrowed in public debt markets, much of it from foreign creditors. The rest came from various government trust funds, including retirement funds for civil servants and the military. About $2.5 trillion is owed to Social Security.
Good luck to the politician who reneges on that debt, said Barbara Kennelly, a former Democratic congresswoman from Connecticut who is now president of the National Committee to Preserve Social Security and Medicare.
"Those bonds are protected by the full faith and credit of the United States of America," Kennelly said. "They're as solid as what we owe China and Japan."
On the Net:
Social Security Administration: http://www.socialsecurity.gov/
Trustees' reports: http://www.ssa.gov/OACT/TR/
National Committee to Preserve Social Security and Medicare: http://www.ncpssm.org/
The Senior Citizens League: http://www.seniorsleague.org/
Bureau of Public Debt: http://www.publicdebt.treas.gov/
Congressional Budget Office: http://tinyurl.com/ydgrl5d
Friday, March 12, 2010
In the March 12, 2010 article "Young war veterans returning home to unemployment," Associated Press writer Kimberly Hefling reports:
WASHINGTON – The unemployment rate last year for young Iraq and Afghanistan veterans hit 21.1 percent, the Labor Department said Friday, reflecting a tough obstacle combat veterans face as they make the transition home from war.
The number was well above the 16.6 percent jobless rate for non-veterans of the same ages, 18 to 24.
As of last year, 1.9 million veterans had deployed for the wars since the Sept. 11, 2001, terrorist attacks. Some have struggled with mental health problems, addictions, and homelessness as they return home. Difficulty finding work can make the adjustment that much harder.
The just-released rate for young veterans was significantly higher than the unemployment rate of young veterans in that age group of 14.1 percent in 2008.
Many of the unemployed are members of the Guard and Reserves who have deployed multiple times, said Joseph Sharpe, director of the economic division at the American Legion. Sharpe said some come home to find their jobs have been eliminated because the company has downsized. Other companies may not want to hire someone who could deploy again or will have medical appointments because of war-related health problems, he said.
"It's a horrible environment because if you're a reservist and you're being deployed two or three times in a five-year period, you know you're less competitive," Sharpe said. "Many companies that are already hurting are reluctant to hire you and time kind of moves on once you're deployed."
One veteran looking for work is Dario DiBattista, 26, of Abingdon, Md., a graduate student who did two tours in Iraq in the Marine Reserves with a civil affairs unit. He said he's found that a lot of military skills don't readily transfer into the workplace, and in many cases, there aren't jobs to apply for even if companies want to hire veterans.
"If you don't have a strong family support system ... it's hard to get over the hump to make the decision of where you're going to live, what you do for work, where you're going to go to school, if you can even qualify to get into school," DiBattista said.
Justin Wilcox, a 30-year-old Iraq veteran who is participating in a work-study program at a vet center operated by the Veterans Affairs Department in Charleston, W.Va., said he hasn't just had problems finding jobs, but keeping them. He's done work as a coal miner, as a salesman selling drill bits and in other positions, but he said mental health problems stemming from the war with side effects such as anger and difficulty concentrating have made it difficult.
There's a lack of understanding about the needs some veterans have, said Wilcox, who is studying to become a teacher.
"Basically, it's been a real hard time for me. Because when I do get a job, it's not a real high paying job," Wilcox said. "I have a difficult time relating to people and ... one job that I had that paid really good, I couldn't comprehend what I was supposed to do and how I was supposed to do it."
For veterans of all ages from the recent wars, the unemployment rate in 2009 was 10.2 percent. Historically, younger veterans have had more difficulty than their older counterparts finding a job because they often have less training and job experience. Some joined the military right out of high school.
Lisa Rosser, an Army veteran and company owner who sits on the advisory board of the Call of Duty Endowment that funds projects focused on veterans employment issues, said she encourages veterans to emphasize to prospective employers what they learned about managing people in a stressful combat environment.
"If they talk about their general leadership skills and their ability to supervise and to manage people, especially at a very young age, that is a good sell ... because the average 24-year-old and 27-year-old in the military has similar supervisory and managerial experience as someone in their 30s on the civilian side," Rosser said.
One possible solution is to make it easier for veterans to transfer certifications they have for jobs they did in the military into the civilian workforce, Sharpe said.
The Labor and Veterans Affairs departments have a variety of programs addressing the problem, including one that educates employers about how to work with veterans with special needs. The hope is that another program, the Post-9/11 GI Bill rolled out last year, will be particularly effective. Under it, $78 billion is expected to be paid out in education benefits over the next decade for veterans of the recent wars to attend school.
The national unemployment rate last year was 9.3 percent, the highest since 1983.
On the Net:
Department of Labor: http://www.dol.gov/
Department of Veterans Affairs: http://www.va.gov/
Call of Duty Endowment: http://www.callofdutyendowment.org/
American Legion: http://www.legion.org/
Thursday, March 11, 2010
In the March 11, 2010 Christian Science Monitor article "Why Rush Limbaugh would go to Costa Rica if Obama's healthcare plan passes," Chrissie Long reports:
San José, Costa Rica – Conservative talk-show host Rush Limbaugh said this week he’d go to Costa Rica for medical treatment if Congress passes proposed reforms to the US healthcare system.
That might sound like an unusual choice, since this is a country with one of the longest standing socialized healthcare systems on the planet. Everyone here (including resident foreigners), are required to pay into the government-run health system, whether they use it or not.
But Limbaugh’s choice may also serve to advertise what many Americans traveling here for medical treatment already know: Costa Rica is a fabulous place for medical tourism.
Life expectancy in this little Central American country surpasses that of the United States and at one point, back in the early 2000s when the World Health Organization rated countries’ general health, Costa Rica ranked higher (No. 36) than its northern neighbor (No. 37), despite spending 87 percent less on health care per capita.
Some who've studied Costa Rican health care consider it better overall, and attribute that to the fact that free coverage extends to 86.8 percent of the population.
But the Cadillac-style private hospitals at Chevy Aveo prices are what really draw 25,000 Americans to Costa Rica every year.
“People travel to Costa Rica (and) receive the same quality of medical services for a fraction of the cost,” said Jorge Cortés, president of the Council for International Promotion of Costa Rica Medicine and medical director of Hospital Biblica, one of three internationally-accredited private hospitals in Costa Rica. “When people see they can get the same surgery for three or four times less, they decide to get medical care abroad.”
Lower labor costs and fewer malpractice suits keep the prices down here. In Costa Rica’s private system, a teeth-cleaning might run $40 and a general check-up costs $50.
A facelift averages $2,800 to $3,200 in Costa Rica, compared to $7,000 to $9,000 in the United States. A knee replacement may cost $11,000 in Costa Rica, but can be as much as $45,000 in the United States.
But there’s another arm of the country’s medical system – the public system – which is relied upon by a majority of the population. While celebrated by Costa Ricans for “universal access,” it’s often criticized for long wait times and delays in treatment.
“There’s a difference between the healthcare system that serves people living in Costa Rica versus that which is known to foreigners,” said Robert Book, a healthcare economist for the conservative think tank, the Heritage Foundation. “It’s the private option for foreigners that Mr. Limbaugh was referring to when he said he would go to Costa Rica.”
On Tuesday, Mr. Limbaugh clarified his comment about leaving the United States, after “the liberal media” celebrated his vow of self-imposed exile, viewing healthcare reform as a way to rid themselves of the conservative talk show host.
“If I have to get thrown into this massive government health care insurance business and end up going to the driver's license office every day when I need to go to the doctor, yeah, I'll go to Costa Rica for treatment, not move there,” he told listeners Tuesday, according to a transcript on his website.
Mr. Cortés said Limbaugh would not be alone in traveling abroad for medical care. He’s expecting medical tourism to increase by 5-7 percent over the next year, regardless of what happens with the US healthcare reform bills.
And that increase is building upon a growth Costa Rica has already seen. Since the recession forced many Americans out of jobs, Costa Rica has seen a surge in the number of their northern neighbors coming here for health services. In fact, there’s an entire industry catering to the medical tourist, including post-surgery spa services, sightseeing packages, hotels, and transportation.
But, if Limbaugh did move to Costa Rica and chose to initiate the process of residency, he’d be required to pay into the government-run social security system – which runs the health care system too. Under law, all people employed in Costa Rica must contribute 5.5 percent of their salary to the state-run social security system and employers are required to match their payment with 9.25 percent. Even those here for retirement are obligated to contribute under new immigration laws, regardless of whether they hold private insurance.
“The strengths of our health system (is) that it is universal, that it’s based on the idea of solidarity and that it’s fair,” says Dr. Ana Morice, vice health minister in Costa Rica. “What we need to improve is access to health services. Many times someone requests an appointment and doesn’t receive it until a year later. In that area, we have much to improve.”
Of course, if Limbaugh decided to move to or buy real estate in Costa Rica, he wouldn’t be the first celebrity. His neighbors might include actor Mel Gibson, model Gisele Bundchen, AOL executive Steve Case, or Vice President Joe Biden’s brother, Frank.
Monday, March 8, 2010
In the March 8, 2010 article "Tax soda, pizza to cut obesity, researchers say," Julie Steenhuysen reports that excise taxes on pizza and soda might help reduce obesity.
CHICAGO (Reuters) – U.S. researchers estimate that an 18 percent tax on pizza and soda can push down U.S. adults' calorie intake enough to lower their average weight by 5 pounds (2 kg) per year.
The researchers, writing in the journal Archives of Internal Medicine on Monday, suggested taxing could be used as a weapon in the fight against obesity, which costs the United States an estimated $147 billion a year in health costs.
"While such policies will not solve the obesity epidemic in its entirety and may face considerable opposition from food manufacturers and sellers, they could prove an important strategy to address overconsumption, help reduce energy intake and potentially aid in weight loss and reduced rates of diabetes among U.S. adults," wrote the team led by Kiyah Duffey of the University of North Carolina at Chapel Hill.
With two-thirds of Americans either overweight or obese, policymakers are increasingly looking at taxing as a way to address obesity on a population level.
California and Philadelphia have introduced legislation to tax soft drinks to try to limit consumption.
CDC director Dr. Thomas Frieden supports taxes on soft drinks, as does the American Heart Association.
There are early signs that such a policy works.
Duffey's team analyzed the diets and health of 5,115 young adults aged age 18 to 30 from 1985 to 2006.
They compared data on food prices during the same time. Over a 20-year period, a 10 percent increase in cost was linked with a 7 percent decrease in the amount of calories consumed from soda and a 12 percent decrease in calories consumed from pizza.
The team estimates that an 18 percent tax on these foods could cut daily intake by 56 calories per person, resulting in a weight loss of 5 pounds (2 kg) per person per year.
"Our findings suggest that national, state or local policies to alter the price of less healthful foods and beverages may be one possible mechanism for steering U.S. adults toward a more healthful diet," Duffey and colleagues wrote.
In a commentary, Drs. Mitchell Katz and Rajiv Bhatia of the San Francisco Department of Public Health said taxes are an appropriate way to correct a market that favors unhealthy food choices over healthier options.
They argued that the U.S. government should carefully consider food subsidies that contribute to the problem.
"Sadly, we are currently subsidizing the wrong things including the product of corn, which makes the corn syrup in sweetened beverages so inexpensive," they wrote.
Instead, they argued that agricultural subsidies should be used to make healthful foods such as locally grown vegetables, fruits and whole grains less expensive.
In the March 15, 2010 TIME magazine article "Is There Too Much Worry About the Debt?," Zachary Karabell argues that the U.S. should not lose sight of the things that increase productivity and lead to real economic growth (which in turn, increase tax revenues): investment in physical capital (infrastructure, factories and machines), human capital (education and skills training), and technology.
Friday, March 5, 2010
Thursday, March 4, 2010
Ronald Reagan speaks out against Socialized Medicine, circa 1961. Audio file.
For more information, visit The Ronald Reagan Presidential Foundation & Library.
Wednesday, March 3, 2010
Monday, March 1, 2010
In the March 1, 2010 Salon editiorial "The ultimate deficit hawk says spend more -- on jobs!," Joe Conason says "The Republican noise machine, from Beck to McCain, loves David Walker. But now he is rejecting their rigid ideology."
David M. Walker, the former Comptroller General of the United States (i.e., the chief accountant) is a graduate of Jacksonville University.
Whenever conservative lobbyists, tea-party fanatics and Republican politicians start to scream about government spending, which is almost every day now, the authority they cite most confidently is David M. Walker. The former comptroller general and GAO chief has bipartisan credentials and the backing of billionaire Pete Peterson, who has put his personal fortune behind Walker’s warnings about an America doomed by debt and deficits.
From Glenn Beck and his followers to John McCain, Walker is the favorite expert of the harshest critics of the Obama administration’s stimulus spending (and any other federal effort to increase employment). During his presidential campaign, McCain promised that if elected, he would hire Walker to help balance the federal budget.
As for Beck, he has conducted more than one fawning interview with Walker; in fact, the excitable Fox News personality hosted him two weeks ago to discuss his latest book, titled "Comeback America." Beck clearly feels that Walker’s worries about fiscal balance somehow support his own demagogic predictions.
But Walker’s fans on the right may not be so quick to mention his latest insight, for as he reveals in an important essay he co-authored with Lawrence Mishel of the Economic Policy Institute, he now believes that employment is the overriding issue that must be addressed before any attempt to reduce deficits.
Mishel and Walker explain that the only way to bring spending back in line with revenues is to stimulate growth and employment. The entire piece is well worth reading, especially because the authors come from different sides of the political divide, but these paragraphs summarize their argument well:Though a concern, most of the recent short-term rise in the deficit is understandable. Furthermore, public spending can help compensate for the fall in private spending, and help stem the pain of substantial job losses.
With more than a fifth of the work force expected to be unemployed or underemployed in 2010, there is an economic and a moral imperative to take action. Persistently high unemployment drives poverty up, makes it harder for families to find decent housing, increases family stress and, ultimately, harms children’s educational achievement. For young workers entering the workforce, the current jobs crisis reduces the amount they will earn over their lifetime.
In deep recessions, businesses tend to make fewer critical investments in research and development that can improve our economy’s productive capacity over the long term. Entrepreneurs usually find credit hard to obtain if they want to start a new business. These factors hurt U.S. global competitiveness and growth potential.
That’s why we agree that job creation must be a short-term priority. Job creation plans must be targeted so we can get the greatest return on investment. They must be timely, creating jobs this year and next. And they must be big enough to substantially fill the enormous jobs hole we’re in. They must also be temporary — affecting the deficit only in the next couple of years, without exacerbating our large and growing structural deficits in later years.
So government must create more jobs now, for economic as well as moral reasons. The current deficit matters much less than growing the economy out of recession. And the nation's future depends on spending more, not less.
All this is precisely the opposite of current Republican policy and conservative ideology, including the imbecile slogans of Beck and his tea-party drones. If the Democrats were any smarter, they would bring Walker up to Capitol Hill to tell them why federal jobs spending is imperative -- and then we would see what Beck, McCain and the rest of the wingers would say about the wisdom of their erstwhile idol.
David M. Walker, the former Comptroller General of the United States (i.e., the chief accountant) is a graduate of Jacksonville University.
In the March 1, 2010 CNNMoney article "America's hidden debt problem," Jeanne Sahadi says"America's total debt load is on pace to top $13 trillion this year, and $22 trillion by 2020 -- and that's just the debt we're counting."
What's not being counted: potential debt bombs that don't get factored into most budget analysis.
When anyone talks about U.S. debt, they typically refer to two numbers.
The first is the debt held by the public. That's money owed to those who have bought U.S. Treasurys, most notably big bond mutual funds and foreign governments. Debt held by the public today is roughly $8 trillion and rising.
The second number is the money the federal government owes to government trust funds, such as those for Medicare and Social Security. The government has used revenue collected for those programs to cover other outlays. Currently, the debt to the trust funds is approaching $5 trillion.
The two combined is the total gross debt that's accounted for. But deficit hawks also worry about what's not on the books.
Here is just a sampling of the unseen or underplayed obligations that could worsen the debt outlook:
Losses from Fannie Mae and Freddie Mac
Mortgage giants Fannie Mae and Freddie Mac are private companies that for years had the implicit backing of the federal government. That backing assured investors that if anything went seriously south for the companies Uncle Sam likely -- although not absolutely -- would step in.
Well, things did go south, and now both are run by the federal government.
While the implicit guarantee has become explicit for Fannie and Freddie, its treatment in the budget is up in the air.
"Our budget doesn't have Fannie Mae and Freddie Mac on it, even though it's owned lock, stock and barrel by the American taxpayer," said Rudolph Penner, a former director of the Congressional Budget Office (CBO) during a conference held by the Peterson-Pew Commission on Budget Reform.
Last year, the CBO did start to account for both companies as if they were federal agencies on the budget. But the White House Budget Office only includes some potential costs because the future of the two companies is still under consideration. Last week, a Republican congressman introduced a bill that would require the two agencies be put on the budget.
It's still not clear what the companies' total hit to the federal budget will be. Amherst Securities, a broker-dealer in residential mortgage-backed securities, estimated that the total loss on the mortgages backed by the companies could reach $448 billion, with a portion of that covered by reserves or assumed by outside parties. The CBO estimated the net costs to the government could top $370 billion by 2020.
These are just estimates. But what's clear is that Fannie and Freddie are not cheap dependents.
That's why some argue that lawmakers should assess the potential costs of implicit government guarantees well before things go to pot.
"Their costs are largely unmeasured, unrecognized in the budget and unmanaged," federal budget expert Marvin Phaup wrote in a recent paper. "A troubling aspect of current policy aimed at restarting the financial markets is the likely expansion of implied guarantees to include the obligations of additional private financial institutions."
The governments' accrued debt to the Social Security and Medicare trust funds is known. And making those payments -- which begin in earnest this decade --won't be easy given the drop in federal revenue and the surge in government spending.
"[Lawmakers] need to acknowledge they have no way of funding them right now," said tax expert Len Burman, a professor of public administration and economics at Syracuse University.
But the piece of future entitlement debt that's not reflected under current budget protocols is what the government will have to pay into the system after its payments to the trust funds end -- which will happen by 2037 for Social Security and within the next decade for Medicare.
At that point, the programs will only be collecting enough in taxes to pay a portion of the benefits currently promised. There will be enormous pressure on the government to make up the difference, and Uncle Sam would have to borrow a lot of money to do so.
Some budget experts like Stuart Butler, vice president for domestic and economic policy at the conservative Heritage Foundation, would like to see the long-term obligations to Medicare and Social Security included in lawmakers' annual consideration of the federal budget.
Right now, money allocated to both entitlement programs is considered "mandatory" spending and therefore the spending increases for the programs are on autopilot and the financial commitment is uncapped in future years.
True cost of tax breaks
Everybody loves tax breaks. And there's more than a trillion dollars of them to love.
That's the amount of money the Treasury foregoes in annual revenue as a result of the many breaks in the tax code. And that effectively increases the government's need to borrow.
But that trillion-plus isn't really up for consideration during annual budget discussions. "Tax expenditures are basically hidden," Burman said.
No one advocates abolishing tax breaks altogether. But Burman and others believe tax breaks should be treated as discretionary spending. The idea is to bring them into the open so lawmakers can make a conscious decision annually about what they spend on tax breaks and recognize the costs associated with that decision.
Long-term costs of new rules
This year is the first year in which high-income investors with traditional IRAs or 401(k)s -- both of which let savings grow tax-deferred until withdrawn -- will have a chance to convert their accounts into Roth IRAs, where investments grow tax-free.
The new conversion rule is scored as a revenue raiser on the federal budget over the next decade because those who convert must pay the tax owed on their traditional IRA savings the year they convert.
But long-term it's a different story. Since investments in the converted accounts will grow tax-free, Uncle Sam will collect less revenue than he otherwise might have had the investors kept their ever-larger savings in a traditional IRA and paid taxes on them in retirement.
"It will cost federal coffers a lot beyond the 10-year window," Burman said.