The big reason for the debt increase, according to the authors, is that our population is getting older while the number of workers is decreasing. They blame this on people getting married late, getting more divorces and having fewer children, as well as on a gradual increase in the average life span.
The authors don't like to talk about deficits. They talk in terms of what they call "the present value of taxes on future generations." Essentially they calculate the taxes on our children in today's money. They use simplified formulas to explain their approach. It requires concentration to follow, but in the end their approach makes sense.
They come up with $51 trillion as the amount that we are in the red hole! Eighty percent of this is due to Medicare and the rest is due to Social Security. The red hole was around $38 trillion before Bush's first 2 tax cuts and the Medicare drug bill that was passed last year. No wonder they call it a generational storm.
According to them, we should be focusing more on Medicare than on Social Security. However, they feel that both need reform. But they are against privatization:
Government-mandated retirement income security means different things to different people, but it surely doesn't mean that Uncle Sam drives Joe and Sally over to the local casino, gives them the same amount of money, points to the slot machines, and says "Good luck securing your retirement."
The stock market is extremely risky."
The 6% or 7% average return that people tout are extremely unlikely. Fees will grab a big bite. Fees are bound to be about 2% or even more. The financial people will make out, but not the average citizen.
The authors approach to fixing Social Security is to have the government - not individuals - invest the contributed funds in a single market-weighted global index fund of stocks, bonds and real estate. Then, when the workers are between 57 and 67 years old, their Social Security balances are gradually sold off and transformed into inflation-protected pensions. Yes, they rely on the market but keep the government in charge.
I'm not sure I like this approach. I need to think about it. But I do love the authors' approach to Medicare. They say that first, we should get rid of the fee for service approach, since it produces lots of waste. Instead they recommend a voucher system. Each participant gets a voucher each year with which to buy healthcare insurance. The amount each participant gets is related to his or her health, a provision that will encourage all insurers to accept very sick people.
Since the authors believe that their recommendations will not be accepted by the political elite, they offer advice to people as individuals. Among them are:
- Save 10-20% of your income
- Get rid of credit-card debt
- Avoid financial planners
- Buy a home and don't use it for borrowing
- Buy I savings bonds and indexed low-fee funds
Although formulas in the early parts of the book are not easy to wade through, the book presents a good picture of our country's debt, how it will hurt our children and what could be done about it. It's worthwhile taking the time to read it.
As for me, I am glad to see that these 2 brilliant economists do not believe in the privatization of Social Security.
