What a Wonderful World

Originally Published in Flourishing May/June 2013

As many of you know, we are members of The Golden Circle, a group that provides support for a series of events performed by the South Kansas Symphony, led by Dr. Daniel Stevens.  Daniel is doing a fantastic job, both with the South Kansas Symphony and with the Southwestern Youth Symphony.  And, Daniel is himself a wonderful musician. 

Anyway, at this season’s finale, Daniel presented me with a plaque which says simply, “Life Is Good”.  Daniel said that he chose that message, because I’m always smiling.  He couldn’t have paid me a higher compliment.  Why do I mention this?  Simply to establish my credentials as an optimist.  And, yes, I am bragging.  Optimism is a state of mind, and as such, it is not something you’re born with; it is something you work to develop. (Ask my children, I used to be grumpy.)

But, did you ever hear me say that we don’t have problems?  No, you didn’t, and you have no idea of the troubles I’ve seen.  Nor will you, because I don’t allow trouble to define me.  Indeed, part of my job as your advisor is to help identify your troubles and aspirations, to put both into a rational perspective, and deal with them in a positive way.

So, the issue I hear about most frequently from clients is that our federal  government continues to spend irresponsibly—as it has for most of my lifetime.  But, now it’s worse than ever.  As Ben Stein’s economist father, Herb, famously said, “If something can’t go on forever, it won’t.”  But, life will go on;  and here’s the key point—BETTER THAN BEFORE.  That will be true, because it has always been true.  That is my faith.

Still, according to the federal government’s own actuaries, unfunded liabilities for things like Social Security and Medicare and federal employee pensions now exceed $87 trillion. That doesn’t include the official $16.7 trillion national debt.  The population is about 315 million people. Not counting the official $16.7 trillion national debt—and not allowing for cost-of-living adjustments—the average American owes over $275,000 for America’s unfunded liabilities.  (I’m not counting PPACA (Obamacare), either, but that’s an issue for another day.)

Looking at this more optimistically, I realized that if I’m the average American, Uncle Sam owes me $275,000 in future benefits.  So, here is my offer: The government says my life expectancy is another sixteen years.  Pay me now, instead of later.  I’ll even take a haircut.  In lieu of all future benefits, pay me today with a $100,000 Treasury bond with a guaranteed rate of 5% (the long-term historical average) and maturing in sixteen years.

Over sixteen years, I’ll collect $80,000 in interest on which I’ll pay tax at the optimistic rate of 25%.  The Feds will get back $20,000 in income tax payments, leaving a net cost of $160,000 ($100,000+80,000-20,000).  If I don’t live sixteen years, my heirs can either sell the bond in the open market or hold it to maturity.  And, let’s be fair about this:  Give every American citizen the same haircut, with the face amount and the maturity of each person’s bond based on today’s life expectancies.  I haven’t figured out how to treat people born tomorrow and the next day, but…

…I realize that the real solution needs to be a bit more sophisticated than my example here.  Whether my proposal is adopted or not,  you can be sure that something like it—a haircut for virtually everyone—will have to happen at some time, because as Ben Stein’s dad told Nixon, “If something can’t go on forever, it won’t”.  And, that’s really a good thing, because…   

…out of fiscal necessity, I’m convinced that America must and will find a way to return to its founding ideals of self-determination and family responsibility.  The $trillions now committed to a very long list of wasteful entitlements—not to mention countless other stupidly expensive commitments—will be free to flow into privately funded miracle cures and “for profit” space stations; to name just two possibilities. But until then, don’t waste your mental energy on things you can’t control.  Ignore the “news”, if that’s what you have to do, and force yourself to notice and appreciate the good things in your life.  As my first self-help mentor, Earl Nightingale, always advised, “Begin each day with an attitude of gratitude”.  It really is a wonderful world out there—and that’s why I’m always smiling!  mh

Social Security Online

Originally published in Flourishing June 2012

Social Security statements are now sent out only annually to workers age 60 and older.  On May 1, 2012, Michael J. Astrue, Commissioner of Social Security, announced that an online version of the Social Security Statement is now available. 

“Our new online Social Security Statement is simple, easy-to-use and provides people with estimates they can use to plan for their retirement,” Commissioner Astrue said. “The online Statement also provides estimates for disability and survivors benefits, making the Statement an important financial planning tool.  People should get in the habit of checking their online Statement each year, around their birthday, for example.”

In addition to helping with financial planning, the online Statement also provides workers a convenient way to determine whether their earnings are accurately posted to their Social Security records.  This feature is important because Social Security benefits are based on average earnings over a person’s lifetime. If the earnings information is not accurate, the person may not receive all the benefits to which he or she is entitled.  The online Statement also provides the opportunity to save or print the personalized Statement for financial planning discussions with family or a financial planner.*

To view your social security statement online, you must first create an account at:

 

http://www.socialsecurity.gov/mystatement/

 When you arrive at this website, click on the Sign In or Create An Account button.  On the next screen, click  Create An Account.  After agreeing to the Terms of Service, click the Next button.  You will now need to enter your personal information; your name, social security number, date of birth, home address, and primary telephone number.  When you’re finished, click Next.  The next screen will ask you some questions to confirm your identity.  These questions are derived from information found at Experian (the credit bureau) and may contain questions about loans outstanding or insurance you have purchased.  Then click Next again.  You will be asked to create a username and password, and to enter your email address.  You will also need to complete some security questions, so you can still get to your account if you forget your password.  Click Next

Congratulations!  You account is now set up and ready to access.  Click on Next to log in for the first time.  You will need to agree to the Terms of Service one more time then click Next.  After entering your username and password, you will be able to view your statement of benefits.  ab

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* Source:  https://www.socialsecurity.gov/pressoffice/pr/ss-online-statement-pr.html

Web Tips

Originally published in Flourishing January 2012

Are you wondering how working while collecting Social Security will affect your benefits?  Are you having trouble managing all of your monthly expenses?  Perhaps you want to start an education savings plan for your child or grandchild, but are wondering which type is right for you.  To help with these difficult questions, Family Wealth Management LLC has a wealth of resources available to you on our website.

Simply go to http://www.lpladvisorweb.com/michael.harvey/ and click on Downloads in the Client Center drop down menu.  Available to you at no charge is information on retirement plans, long term care insurance, Medicare, Social Security, estate planning, education funding, and much more. 

The information is in easy to view formats, such as PDF and Excel spreadsheets.  Some, like the Monthly Budget Spreadsheet, can even be personalized for your unique circumstances.  Visit our website often, as we’re always looking for, creating, and adding new and useful content to help you manage your money.  ab

The Half-Life of the Welfare State

Originally Published in Flourishing August/September 2011

Social Security is projected to exhaust its trust fund in 2036. Medicare will be out of cash in 2024. Technically speaking.

In reality, both systems are already in the red, because there are no actual assets in those trust funds; only government IOU’s. As Social Security and Medicare begin to pay out more than they take in from payroll taxes, they’ll scarf up virtually the entire federal budget and guarantee a steady increase in our already dangerous national debt. Add to that the current low interest rate environment (0-2%), and ask yourself what happens when we’re paying a more normalized 5% rate on upwards of $17 trillion.  Why else do you think the Federal Reserve is determined to keep rates so low?

Everyone already senses this, of course, but most people don’t yet understand that the current budget crisis heralds the beginning of the end of the Era of Entitlements.  Though Social Security has been around since 1935, the growth of cradle-to-grave entitlements accelerated in the 1960’s and ’70’s, when we decided that we  could subsidize everything for everybody. From education, to housing, to medical care, to food stamps, to the arts and entertainment, to retirement; a consensus of Americans decided that a policy of “from each according to his ability, to each according to his need” would be a fine thing. The wealthiest among us would somehow pay for it all.  Or most of it, anyway.  But it was an illusion. The 2009 Patient Protection and Affordable Care Act  (PPACA) was the last gasp grasp of that philosophy, and because the American people—having finally realized who would really pay—overwhelmingly opposed PPACA, it had to bullied through Congress in the dark of night.  That Act, following hard upon the government-led bums’ rush into housing (1995-2006), and the subsequent $trillions wasted on bailouts and stimulus packages have pulled back the curtain.

So, we’re now intimately acquainted with the life cycle of the entitlement hoax. Benefits, bailouts, and tax breaks are passed by the Congress and millions rush to claim them.  Marginal taxes rates can never be raised fast enough to keep up with an unending stream of entitlement promises without triggering a recession, so Congress makes up the difference with massive deficit spending and an ever-increasing debt burden—and we get a recession, anyway.  The Federal Reserve sops up the government’s debt with an increasing supply of inflationary electronic dollars—until we reach the point where we are now.  Over a (pork) barrel.

The task of our generation, and perhaps the next, is to preside over the dismantling of the voracious entitlement monster we’ve created.  We can now see that it was the unprecedented wealth created by the entrepreneurs, savers, and investors of our parents’ generation that made the welfare state seem plausible. In particular, the post-World War II boom in Americaand Europesupported the fantasy that we were rich enough to afford such an immoderate system of cradle-to-grave entitlements.  But, despite the incredible wealth creation of the past sixty years, the Age of Entitlement is now kaput.  We are living in the Age of Recompense.  Without explanation—since none should be needed—let me just assert that that’s a good thing.  It means that working, saving, and personal responsibility will soon be in vogue, and not just for those formerly willing, but for everyone.  Well, I guess that is the explanation, isn’t it?

The science of Physics tells us that a radioactive isotope decays perfectly according to first order kinetics.  For example, the half life of the Carbon 14 isotope is 57.3 centuries, which means that in 5,730 years, one half of any given quantity of Carbon 14 will have decayed into its surroundings.  By its nature, Carbon 14 is physically unsustainable.

As an extreme, and, therefore, educationally valuable case, consider the PIIGS (Portugal, Italy, Ireland, Greeceand Spain).  Over the last forty years, they were all built on the self-same ideal of cradle-to-grave entitlement; and here they are, begging the world for bailouts.  The entitlement philosophy is economically unsustainable, because compound interest, being mathematically akin to radioactive decay, guarantees that sooner or later entitlements will consume all of a country’s capital, and then destroy its credit, too.  With the demonstration and dissemination of that knowledge provided by the sad spectacle of the PIIGS, the remaining half-life of our own welfare state will not be measured in centuries, perhaps not even in decades.  mh

Of Pawns & Kings

First published in Flourishing May 2011.

Louis XIV was King of France for seventy-two years, and though he was not the worst of Kings, he did lead France to the brink of bankruptcy through his lavish and self-congratulatory spending. Mark Twain famously said that history doesn’t repeat itself, but it rhymes.  Indeed.

We Americans are about to begin a national discussion of that vast, unfunded taxpayers’ liability known as Social Security.  (The discussion is bound to include all entitlements, but for the sake of simplicity, I’m focusing on Social Security.) For that discussion, we can thank President Obama’s National Commission on Fiscal Responsibility and Reform1.  Even the Social Security Administration confirms that sooner is better than later. (See inset p.2)

For the better part of seventy-five years, most people have believed that their Social Security contributions were being set aside for their retirement.  Not for one second did my father believe that his pension checks came from his children’s pockets. But in fact, they did.  The money he had deposited into Social Security had been spent for programs and projects designed to assure an abundance of goodies to a mixed assortment of voting blocks. That process continues unabated and enhanced today.  And, in that process and others of equal deception, we have become a collection of political pawns, bribed and manipulated with our own money.  

Unlike in my father’s time, virtually everyone knows today that there is no Social Security “lockbox”.  There is, instead, an unfunded liability awaiting the American taxpayer of this and succeeding generations in excess of $7.7 trillion2.  That’s just for Social Security, which is itself dwarfed by the unfunded liabilities of Medicare, etc.  I know what Dad would say about that: “Holy smoke!”  But, he was a better man than I am.

I don’t need to tell the readers of this newsletter that one of the most important motivations for private saving and investment is the need to provide for—you’ll forgive the anachronism—old age.  As in my father’s case, one “unintended consequence” of Social Security has been to create the illusion of saving and to reduce the apparent need for disciplined investment in IRA’s, 401(k)’s, and other retirement savings opportunities. Not surprisingly, the rate of saving in the United States has declined precipitously over the past seventy-five years.

The Social Security system has not only served to undercut the motivation to provide for old age and retirement by means of private saving and investment, there is a second “unintended consequence”.  It has also impaired the average American family’s ability to actually do so.  OASDI withholding (7.65% of wages and salaries) is nearly double what the average family spends on gasoline3; and I’m not counting employers’ contributions to Social Security.  Each of these two “unintended consequences” were entirely predictable—and were predicted by free-market economists4—but it gets worse.

Ask yourself this question:  “What if the money paid into Social Security had actually been invested in real, physical capital assets—American business enterprises, for example—instead of taxpayer-backed IOU’s?”  The answer is that in a relatively free economy, that investment really would have been the source of future financial security, just as private savings and investments are today.  Instead, three generations of King Louis wannabes have created a promise to levy unfathomable taxes on future generations, while they consumed the Social Security tax revenue that should have gone into saving and investment.  Now, the future has arrived; and it’s us.
At the most basic level, the coming debate about entitlement reform will serve to highlight a conflict of philosophies.  America was founded on the philosophy of Individualism; of the unalienable right of each individual to pursue his own happiness in his own way, asking only that he use neither force nor fraud in that pursuit.  Social Security—and Medicare, Medicaid, and Obamacare, as well—are premised upon the philosophy of Collectivism or Social Contract6; of subordination of the individual’s freedom to a presumed and so-called “greater good.” 

The scarcely concealed premise of collectivism, though, is that the average individual is too stupid or too lazy to plan and manage his own life; and therefore, he must rely on the government to rescue him.  In practice, we now know, when the power of government intervenes between the real providers—the people whose work, savings, and investments are ultimately to be taxed—and the receivers, “to rely” becomes “to demand”.  This is amply illustrated today by the European PIIGS (Portugal, Ireland, Italy, Greece, and Spain).  Are we next?

The first step in any recovery is to recognize the problem.  With the report and recommendations of President  Obama’s National Commission on Fiscal Responsibility and Reform, we can now see clearly that the consequences of lavish entitlement programs—not just in Europe, but here, too—are the eventual economic destruction of the nation through the undermining of real saving and the compounding of the national debt.  The bond rating agencies have issued their warnings, too.

There is also, I’m sorry to report, the potential for geriatric holocaust.  That will be the result when millions of elderly people—the Baby Boomers, most likely—without savings of their own, wake up to find that their children and grandchildren have grown tired of supporting them; or are simply unable to do so.

So yes, just as the doomsayers tell us, we do face a growing debt threat of runaway inflation and/or worldwide deflationary collapse. But, the doomsayers underestimate the American people.  We’re only beginning to see the nature of the game that’s been played by our King Louis wannabes, and we don’t like being pawns.  Moreover, we won’t submit to the indignity of stealing our grandchildren’s future.  We’re better than that!

The history of American free enterprise informs us that for every human need and desire, a free-market solution will sooner or later emerge, that is better and cheaper than anything that government can provide. And, with the report of the National Commission on Fiscal Responsibility and Reform to prompt and guide us, we’ll soon begin the tortuous process of dismantling and replacing Social Security, Medicaid, Medicare, Obamacare, and other bankrupting entitlements with free-market solutions.  In that process, which will take a generation or more to complete, we’ll reignite the entrepreneurial flame that defines America, and put every adult citizen back in charge of his or her own life.  ….Now, I can hear someone asking, “But, what if…?”

Call me an incurable optimist, or just call me stubborn—I see myself as a student of history: If the federal government defaults on its debt, or if the Federal Reserve creates a runaway inflation, or both;  history tells me that I will—more than ever—want to rely on myself, and on the earnings and resources of America’s great companies, to secure my livelihood and protect my family’s future.  mh

  1. http://www.fiscalcommission.gov/
  2. http://www.heritage.org/budgetchartbook/unfunded-liabilities-entitlements
  3. http://www.creditloan.com/infographics/how-the-average-consumer-spends-their-paycheck/
  4. Man vs. The Welfare State, Henry Hazlitt, Arlington House, 1969.
  5. Leviathan, Thomas Hobbes, 1651.