The Millionaire Retirees Next Door
05.12.2011
Typical retired couples will collect $1 million or more in Social Security and Medicare. This is more than they paid in, and the cost will fall on today's workers..Article Video Comments (667) more in Opinion ».
By JOHN COGAN
Readers may recall the 1950s TV show, "The Millionaire," which portrayed stories of individuals who were given a "no strings attached" gift of money by an anonymous benefactor. Each week in one of the show's opening scenes, a man representing the wealthy benefactor, John Beresford Tipton Jr., knocked on an unsuspecting recipient's door and announced: "My name is Michael Anthony and I have a cashier's check for you for one million dollars."
That TV program is scheduled to return next year as a reality show, and the new recipients will be the typical husband and wife who reach age 66 and qualify for Social Security. Starting next year, this typical couple, receiving the average benefit, will begin collecting a combination of cash and health-care entitlement benefits that will total $1 million over their remaining expected lifetime.
According to my calculations based on government data, such married couples will begin receiving monthly Social Security checks that will, on average, total about $550,000 after inflation. They will receive health-care services paid for by Medicare that, on average, will total another $450,000 after inflation. The benefactors will be a generation of younger workers who are trying to support themselves and their families while paying taxes to finance the rest of government spending.
We cannot even remotely afford to make good on these promised benefits. Although our system of personal liberty, free enterprise and limited government has made us an affluent and upwardly mobile people, we are not yet a nation of John Beresford Tiptons.
The existence of so many million-dollar couples is not the result of elected officials carefully weighing the needs of senior citizens against the financial ability of younger workers to meet these needs. Rather, it is the result of decades of separate legislative actions by both political parties to liberalize retirement and health-care benefits, the sum total of which no one has bothered to calculate.
Social Security and Medicare were the result of natural human impulses to create safety-net programs to prevent poverty in old age and to help needy senior citizens with their medical bills. But the programs are flawed.
In 1978, Congress instituted automatic cost-of-living adjustments for Social Security. That's reasonable. But Social Security's method of automatically increasing benefits to successive cohorts of retirees by more than inflation makes less sense. It means that the average worker who retires this year receives a monthly benefit that is about 23% higher after adjusting for inflation than the monthly benefit received by the average worker who retired 20 years ago. The average worker who retires 10 years from now is, in turn, promised an initial benefit at retirement that is 14% higher after adjusting for inflation than the average worker who retires today.
Under the federal government's fee-for-service Medicare program, every time a senior citizen meets with his physician or health-care provider for a check-up, lab tests or surgery, somebody other than the patient foots most of the bill. That such a program should produce runaway costs is hardly surprising. Over the years, the government has expanded the type of services covered, such as prescription drugs, and it has assumed a greater portion of the program's finances. Medicare premiums paid by senior citizens once covered half of the cost of physician and related services. They now cover one-fourth. Copayments once covered nearly 40% of these services' costs. They now cover only 20%.
To fix Social Security, Congress should start by limiting the increase in benefits of future retirees to the rate of inflation. Congress should then gradually raise Social Security's normal retirement age. Congress should also allow younger workers to invest a portion of their payroll taxes—and create more incentives for them to invest their earnings—in safe, broadly-diversified, stock and bond funds. This would allow younger workers to become millionaires through their own hard work and thrift.
To fix Medicare, we must move away from the current system of fee-for-services and low copayments. First and foremost, copayments should be increased significantly. Medicare recipients need to have more skin in the game if they are to become cost-conscious medical consumers.
The higher copayments can be offset by reducing Medicare premiums and offering more Medicare health plan choices. Rep. Paul Ryan's proposal—to provide fixed annual grants to enable Medicare recipients to buy an affordable private insurance plan—is a fiscally sound way to achieve this outcome. Competition among providers, not government-administered prices and government boards of experts to determine coverage, is the best way to ensure high quality and reasonably priced health care.
Many of the million-dollar couples believe they rightfully deserve the benefits they have been promised. They have, after all, spent all of their working years paying into Social Security and Medicare. And true enough, the typical 66-year old couple and their employers, on their behalf, have contributed nearly $500,000 in payroll taxes (in today's dollars) toward these benefits during their working careers.
But regardless of how much they have contributed, the hard reality is that the federal government has already spent it. No matter how deserving they are, it is younger generations of workers who have to come up with the money.
So today's seniors need to consider how they want the script for "The Millionaire" sequel to be written: There's a knock at the door. We now know that on the other side there's a check for a million dollars. When the door opens, do we really want to see our children, under the commanding gaze of Uncle Sam, presenting us with that check?
Mr. Cogan is a senior fellow at the Hoover Institution and a professor of public policy at Stanford University. He served as deputy director of the Office of Management and Budget during the Reagan administration.
Tuesday, May 17, 2011
Wednesday, May 11, 2011
Hope is Not An Investment Strategy - Blaine Rollins
Guest Commentary: Hope is not an investment strategy
By Blaine Rollins
Posted: 05/11/2011 01:00:00 AM MDT
The Public Employees' Retirement Association of Colorado is responsible for 450,000 current and future retirees, so it would be tragic for PERA's investment assets to run out — not just for its members, but also for the Colorado economy. Unfortunately, our state government leaders have tethered the fortunes of PERA to "return" assumptions they predict will run like Secretariat. By the time they realize that the 1970s super horse can't be matched, it may be too late to avoid disaster.
Municipal Defined Benefit Pension accounting is extremely complex — and easily manipulated. When I recently studied municipal financial accounting, it became clear that I could draw up any end result I wanted, given small changes in the pension assumptions.
The most abused area of municipal pension accounting? The "discount rate" used for future pension obligations. This is the interest rate assumption used to "discount back" all the future guaranteed payments to retirees. Corporations typically use a conservative discount rate to ensure there's no shortfall in the funds that make up an individual's future, defined benefit payments. For example, AT&T uses a 5.8 percent discount rate, Procter & Gamble 5 percent. Municipal pension accounting is more aggressive. Currently, most states are using a 7.5 percent to 8 percent estimate. In Colorado, PERA is at 8 percent. But the probability of making 8 percent per year for the next 30 years on a $38 billion investment fund is slim.
So why do Colorado's elected officials allow such aggressive accounting to be applied to our state's largest liability? Maybe because the PERA plan has outperformed the 8 percent benchmark by 1 percent over the past 25 years. Perhaps, but over the past 25 years the U.S. economy had significant economic tailwinds that were great for stocks and venture capital investments. Also, falling inflation has benefited bonds and fixed payment investments. Those easy gains in bond prices could be a thing of the past as the dollar continues to depreciate and commodity prices move higher. America's debt will cause its economic growth to be more constrained, causing stock and private equity returns to be lower.
Colorado should use pension assumptions that more accurately estimate future liabilities. True, a change in PERA's discount rate from 8 percent on 2009 financials to 5.5 percent on 2010 financials would raise its total pension liability from $56 billion to about $77 billion. And given $37.5 billion in PERA investment assets at the end of 2010, this would put the funded ratio at 48.7 percent, much lower than the 2009 stated funded ratio of 67.2 percent. But it also marks a starting point of conservatism for everyone in Colorado to help ensure that state contributions into the fund remain high enough now that we'll have a funded retirement plan later.
As we say in the investment world, "Hope is not an investment strategy." Betting PERA member retirement plans and Colorado taxpayers' future on a 30-year, 8 percent return assumption is fiscally irresponsible. With no changes to state or member contributions or benefits, it is easy to see how the PERA assets will fall to zero in the next decade. At that point, Colorado will either need to stop all payment to PERA retirees or raise taxes significantly. Both roads could lead to a collapse in the Colorado economy.
Colorado is looking at a $40 billion underfunded pension liability. This works out to be $17,000 per taxpayer should the plan fail. Colorado needs to come clean with taxpayers and admit that this is the true amount of pension debt. State leaders are betting our public employees' future retirement, and all of our personal and business investments into Colorado, that PERA will return more than 8 percent annually for the next 30 years.
I don't want to be the one to tell Colorado teachers they will not get their retirement check because the state's accounting assumption was too aggressive. But as of today, our leaders at the Capitol are making that bet.
Blaine Rollins is a managing director of 361 Capital and former portfolio manager of the Janus Fund.
Read more: Guest Commentary: Hope is not an investment strategy - The Denver Post http://www.denverpost.com/opinion/ci_18035453#ixzz1M4U3eEIN
Read The Denver Post's Terms of Use of its content: http://www.denverpost.com/termsofuse
By Blaine Rollins
Posted: 05/11/2011 01:00:00 AM MDT
The Public Employees' Retirement Association of Colorado is responsible for 450,000 current and future retirees, so it would be tragic for PERA's investment assets to run out — not just for its members, but also for the Colorado economy. Unfortunately, our state government leaders have tethered the fortunes of PERA to "return" assumptions they predict will run like Secretariat. By the time they realize that the 1970s super horse can't be matched, it may be too late to avoid disaster.
Municipal Defined Benefit Pension accounting is extremely complex — and easily manipulated. When I recently studied municipal financial accounting, it became clear that I could draw up any end result I wanted, given small changes in the pension assumptions.
The most abused area of municipal pension accounting? The "discount rate" used for future pension obligations. This is the interest rate assumption used to "discount back" all the future guaranteed payments to retirees. Corporations typically use a conservative discount rate to ensure there's no shortfall in the funds that make up an individual's future, defined benefit payments. For example, AT&T uses a 5.8 percent discount rate, Procter & Gamble 5 percent. Municipal pension accounting is more aggressive. Currently, most states are using a 7.5 percent to 8 percent estimate. In Colorado, PERA is at 8 percent. But the probability of making 8 percent per year for the next 30 years on a $38 billion investment fund is slim.
So why do Colorado's elected officials allow such aggressive accounting to be applied to our state's largest liability? Maybe because the PERA plan has outperformed the 8 percent benchmark by 1 percent over the past 25 years. Perhaps, but over the past 25 years the U.S. economy had significant economic tailwinds that were great for stocks and venture capital investments. Also, falling inflation has benefited bonds and fixed payment investments. Those easy gains in bond prices could be a thing of the past as the dollar continues to depreciate and commodity prices move higher. America's debt will cause its economic growth to be more constrained, causing stock and private equity returns to be lower.
Colorado should use pension assumptions that more accurately estimate future liabilities. True, a change in PERA's discount rate from 8 percent on 2009 financials to 5.5 percent on 2010 financials would raise its total pension liability from $56 billion to about $77 billion. And given $37.5 billion in PERA investment assets at the end of 2010, this would put the funded ratio at 48.7 percent, much lower than the 2009 stated funded ratio of 67.2 percent. But it also marks a starting point of conservatism for everyone in Colorado to help ensure that state contributions into the fund remain high enough now that we'll have a funded retirement plan later.
As we say in the investment world, "Hope is not an investment strategy." Betting PERA member retirement plans and Colorado taxpayers' future on a 30-year, 8 percent return assumption is fiscally irresponsible. With no changes to state or member contributions or benefits, it is easy to see how the PERA assets will fall to zero in the next decade. At that point, Colorado will either need to stop all payment to PERA retirees or raise taxes significantly. Both roads could lead to a collapse in the Colorado economy.
Colorado is looking at a $40 billion underfunded pension liability. This works out to be $17,000 per taxpayer should the plan fail. Colorado needs to come clean with taxpayers and admit that this is the true amount of pension debt. State leaders are betting our public employees' future retirement, and all of our personal and business investments into Colorado, that PERA will return more than 8 percent annually for the next 30 years.
I don't want to be the one to tell Colorado teachers they will not get their retirement check because the state's accounting assumption was too aggressive. But as of today, our leaders at the Capitol are making that bet.
Blaine Rollins is a managing director of 361 Capital and former portfolio manager of the Janus Fund.
Read more: Guest Commentary: Hope is not an investment strategy - The Denver Post http://www.denverpost.com/opinion/ci_18035453#ixzz1M4U3eEIN
Read The Denver Post's Terms of Use of its content: http://www.denverpost.com/termsofuse
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