I've written frequently about debt and its effects on our economy. John Mauldin draws the inescapable conclusion about federal government debt, and how it may - almost certainly will - impact our retirement.
The projected total US debt will be $30 trillion within 10 years, using the CBO’s own numbers. But the CBO also makes the rosy assumptions that there will be no recessions and that GDP will grow at a 4% nominal rate ... If you asked me to bet the “over/under” on the debt in 2027, I would bet the over at $35 trillion.
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Note: That ... does not take into account the off-budget deficit that still ends up having to be borrowed. Last year the deficit was well over $1 trillion—but we were told it was in the neighborhood of $600 billion.
If any normal company tried to use accounting like the US Congress does, the SEC would rightly declare it fraudulent and shut it down immediately.
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... looking at the demographic reality of longer lifespans and lower birthrates, it’s hard to believe Social Security can survive over the long run in anything like its present form.
But any major change will mean that the government is breaking its promise to workers and retirees.
And now we come to the really uncomfortable part.
Larry Kotlikoff wrote in an article on Forbes that we would need an immediate approximately 50% increase in taxes to fund our future deficits. That’s what we would need to create a true entitlements “lockbox” with the funds actually in it.
But surely everybody knows by now that there is no lockbox with Social Security funds in it. That money was spent on other government programs and debts. And so when the CBO doesn’t count the trust funds as part of the national debt, they are not only being disingenuous, I think they are committing financial fraud.
The money that will actually pay for Social Security and Medicare down the road is going to have to come out of future taxes, just as for any other debt of the US.
So at some point – even though Republicans are jawboning hard about cutting taxes now – we are going to have to raise taxes in order to fund Social Security and Medicare. I personally think it will have to be done with a value-added tax (VAT), because the necessary increase in income taxes would totally destroy the economy and potential growth.
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But the simple fact of the matter is that no Congress is going to fund Social Security and Medicare through tax hikes. Before they ever go there, they will means-test Social Security and increase the retirement age – which they should.
There's more at the link.
So, if you're expecting to rely on Social Security for any part of your retirement income (let alone a significant proportion of it), keep in mind:
- SS is very likely to become a means-tested program, meaning that only those who lack other means of financial survival will get it (or part of it). No matter how much you, personally, have paid in Social security "contributions" (for which read "taxes"), you are no longer guaranteed a return on that money. It'll depend on your net worth and other financial factors.
- Your tax burden is almost certain to increase, whether by direct or indirect means. Therefore, you may get less than you expected from SS, and you may have to pay out more in taxes - a double financial whammy.
I think the odds of both happening are pretty darn good, as Mr. Mauldin points out. Mathematics is a hard science, not a feeling or an opinion. If the money isn't there, it can't be spent; and if Congress wants to spend it, it has to find more money somewhere. Either way, we're the victims.