Wall Street, New York Tuesday, October 19, 2004 --------------------- - The greatest generation of freeloaders ever
conceived… - The bull market in tax relief comes to a sticky end…
- Roth IRA…a generation of squander…the significance
of 2008…and more!
--------------------- 2008…A FISCAL ODYSSEY
By Eric Fry
The "Greatest Generation," as Tom Brokaw hailed America's
"citizen heroes and heroines who came of age during the
Great Depression and the Second World War," was a
generation that sacrificed much to save the world from "the
two most powerful and ruthless military machines ever
assembled." Unfortunately, this great generation was far
more accomplished at winning wars than imparting moral
values. After winning the Second World War, the greatest
generation married in record numbers and gave birth to the
greatest generation of freeloaders ever conceived - you
know us as the "Baby Boomers."
We boomers readily embraced the prosperity created by our
parents, while eschewing the sacrifices necessary to
achieve it. And as we came of age, the virtues of duty and
self-sacrifice yielded to the ethos of entitlement - an
ethos that the nation's politicians eagerly encouraged.
Gradually, we boomers, aided and abetted by our retirement-
age parents, voted ourselves the greatest-ever array of
unfunded benefits that any government had ever dared to
provide. For so many years have we Americans been voting ourselves
larger benefits and lower taxes that the cumulative
unfunded benefits have become almost incalculable. Perhaps,
therefore, the long bull market in tax relief - launched by
President Reagan - is drawing to a close. Expect the new
bull market in taxation to begin shortly after November 2,
no matter whether the President be named George or
John…or Ralph. The consequences of a new bull market in taxation are
profound and far-reaching. But one very simple question
comes to mind: would it be better to pay taxes now, or
defer them to some distant year when tax rates may be much
higher? Specifically, would it be better to continue
compounding one's savings in a conventional IRA, or to pull
the money now, pay taxes and roll the proceeds into a Roth
IRA? As most Rude Awakening Readers are probably aware, a Roth
IRA facilitates tax-advantaged savings, somewhat like a
conventional IRA. The principal difference being that a
Roth IRA compounds after-tax dollars. Therefore,
withdrawals during retirement years arrive tax-free. In a
world of steadily rising tax rates, paying taxes at today's
low rates - and forfeiting a portion of one's principal in
the process - might be more prudent than retaining all of
one's principal and paying taxes later at much higher taxes
rates. [Editor's note: The option to roll IRAs into Roth
IRAs is not available to those with adjusted incomes above
$100,000.] One can only guess, of course, what future tax
rates might be. But we'd guess they'll be much higher than
today's. "The long-term economic health of the United States is
threatened by $53 trillion in government debts and
liabilities that start to come due in four years when baby
boomers begin to retire." observe Dennis Cauchon and John
Waggoner for USA TODAY. This massive, collective liability
totals an astounding $473,456 per household, dwarfing the
$84,454 each household owes in personal debt. "$53 trillion is what federal, state and local governments
need immediately," say Cauchon and Waggoner, "to repay
debts and honor future benefits promised under Medicare,
Social Security and government pensions." Specifically, the
Social Security liability foots to about $12.7 trillion,
while the present value of existing unfunded Medicare
benefits totals about $30 trillion. For perspective,
America's entire economic output last year was $11
trillion. "Big payments on the debt start coming due in 2008,"
Cauchon and Waggoner explain, "when the first of 78 million
baby boomers qualify at age 62 for early retirement
benefits from Social Security. The costs start mushrooming
in 2011, when the first boomers turn 65 and qualify for
taxpayer-funded Medicare." To satisfy these obligations, according to back-of-the-
envelope calculations by USA TODAY, "Federal taxes would
have to double immediately and permanently…all state
taxes would have to increase by 20% immediately and
permanently. Or, benefits for Social Security, Medicare and
government pensions would have to be slashed in half
immediately and permanently…or, a combination of tax
hikes and benefit cuts - such as a 50% increase in taxes
and a 25% reduction in benefits…savings also could come
in the form of price controls on prescription drugs,
raising retirement ages and limiting benefits to the
affluent." In short, America's lavish entitlement programs are on a
collision course with financial reality. Nevertheless,
despite our fiscal recklessness, we never seem to suffer
any hardship worse than a financial fender-bender -
fleeting episodes of high inflation, currency weakness
and/or economic malaise. Thus far, we have incurred our
massive debts painlessly, thanks to a steady supply of
cheap foreign capital. Foreigners produce and lend; we
borrow and consume; and everyone - approximately - is
happy. A crisis of some sort that triggers a loss of confidence by
investors in the U.S. economy could bring an end to this
cozy global vendor-financing scheme. Our foreign creditors
could, theoretically, refuse to lend at low rates of
interest, denominated in U.S. dollars. But you New York
editor, like most optimists, consider this outcome
unlikely. More likely, in his opinion, our nation will
succumb to an American-style "Eurosclerosis," in which
taxes increase, benefits decrease, health care becomes a
ward of the state and the economy attempts to grow in spite
of it all. "The heart of the problem," say Cauchon and Waggoner, "is
that the Greatest Generation and baby boomers have promised
themselves retirement benefits so generous - and have
contributed so little to financing them - that even the
most prosperous economy in history cannot pay the bill. Consider a married couple who throughout their lives earned
the median income…and who will retire at age 65 next
year…Mr. and Mrs. Median would get a joint Medicare
benefit valued at $283,500, the Urban Institute
estimates…But the couple would have paid only $43,300 in
Medicare taxes (valued in 2004 dollars). Taxpayers lose
$240,200 on the deal. But the Medians' good fortune doesn't
end there. They also qualify for $22,900 in annual Social
Security benefits, which rise annually with inflation.
Present value of the Social Security benefit: $326,000.
Present value of Social Security taxes paid over a
lifetime: $198,000. Net loss to taxpayers: $128,000." Making matters worse, the federal government didn't save
any of the money earmarked for Medicare or Social Security.
"These mythical trust funds are a financial oxymoron - they
can't be trusted and they aren't funded," says Peter
Peterson, author of Running on Empty: How the Democratic
and Republican Parties Are Bankrupting Our Future and What
Americans Can Do About It. Since the trust fund monies do not exist, taxpayers must
come up with the full $609,500 that Mr. and Mrs. Median are
entitled to under Medicare and Social Security. Where do
you suppose that money will come from folks? Hint: It
arrives at the U.S. Treasury every year on April 15. Sometime between now and 2025, when Baby Boomers like your
New York editor reach "retirement age," the U.S. government
will hike taxes, perhaps dramatically. When that inevitable
day arrives, a few Americans will consider themselves
fortunate to have paid their IRA taxes back in 2004. --------------------- Rude Awakening's Quote of the Day… "I don't think the Russian or the French or the Chinese
government would allow itself to be bought. I think it's
inconceivable. These are very serious and important
governments. You are not dealing with banana republics." -- Kofi Annan, October 17, 2004, refuting suggestions that
France, Russia and China had been prepared to ease
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--------------------- Did You Notice…? If USA Today's statistics are to be believed, we rich
Americans are actually poorer than the world's poorest
citizens. Each American family owes $473,456, according to USA
Today's statistics. Clearly, only the richest country on
earth could amass debts of this magnitude. But now that we
have amassed them, are we still as rich as we think we are?
Members of the IMF, the World Bank and other esteemed
financial organizations would shudder in their pinstripes
at the notion of the world's richest nation shouldering
debts equal to five times its GDP. Fortunately, therefore, the "official" U.S. debt numbers
present a far more comforting picture. | 
