Government at all levels is in self-deception, delusion, fantasy and as the French say, folie à deux. The perfect storm is not on the horizon; it has descended upon us and is distorting the thoughts and actions at all levels of government and private enterprise. That sounds terribly serious but following are the published facts.
Our current national debt is more than $16.5 trillion. Combined with state and local debt, the total amounts to almost $20 trillion. Our federal government has unfunded liabilities of nearly $123 trillion which nobody seems to worry about simply because funds are not payable currently but will come due in the future. The principal component of unfunded liabilities is unsustainable entitlement debt payable ‘until death do us part.’
Company retirement pension liabilities now report a shortage of about $347 billion to cover benefits. The causes are inflation, the low rates of return on invested savings, longer life and insufficient contributions during the working years. Big companies like UPS, Ford and Boeing have announced deficits in their pension funds.
Remember this critical concept that is probably overlooked by workers, unit managers and even company owners and government officials. ‘A worker in his or her daily toil has to produce more added value to the employer (government or private enterprise) than his/her direct payroll costs, payroll taxes and benefits for the years of employment in addition to all the extended years of retirement benefits.’ If this does not happen, the government entity or private enterprise must ‘borrow’ from current employees to pay benefits to those who are no longer producing value. That is precisely the problem with Social Security today and the reason why the current system of entitlements is circling the drain and is doomed to implode.
Let’s say a worker that starts his/her career job at $20,000 receives a Cost-Of-Living increase of 3% annually. The employee and employer each invest 2.5% of employee earnings into a retirement account and invest the proceeds with a return of 4%. At the end of 25 years, the retirement account has accumulated $141,000 (30 years = $256,000, 35 years = $433,000). The worker retires on 10% of the invested principal or $14,100 per year and the reducing principal continues to earn interest at 4%. The total retirement fund will be depleted in 12.5 years.
At least one member of the family must continue working well into retirement age. By working after retirement, the worker may postpone accepting the annual stipend of $14,100 and allow principal to grow with interest. Assuming federal funds are still available, the retired worker can add the invested retirement funds to social security and/or earned income for the rest of life’s journey.
The amounts of money owed for retirement benefits by both government and private industry may not be available when needed by recipients using current metrics. Unable to maintain their lifestyles, many retired people will have no place to turn for funds for healthcare and other essentials. An important point to remember is that inflation marches on incessantly meaning that the dollars earned, saved and spent buy a little less each year.
The solution to this dilemma is that politicians and business leaders must come to their senses and face reality. The necessary steps to avoid cataclysm are these: Increase the retirement age to 70, extend working life to 35 years, increase employer and employee contributions to retirement plans by at least 50% and remove waste, fraud and duplication.
This perfect (financial) storm is going to spill over, not blow over if we don’t take bold steps in lieu of procrastination and neglect and cope with the malevolent economic options of looming landslide or abrupt avalanche.
– Dick Baynton