A Scary Halloween Story

As most everyone likely read in recent headlines, our dysfunctional federal government once again put a seasonal Halloween scare into the financial markets.  Sadly, the recent but temporary defusing of another financial crisis de-jour did nothing but “kick the can down the road” as legislatures set a deadline for another self-imposed crisis when the debt limit is set to expire again on February 7th, 2014.  Stay tuned for that.

While these near-term events are usually top-of-mind for most investors given the potential for immediate impact, I believe these short term budget battles are mere skirmishes when compared to the potential “thermo-nuclear war” associated with the long-term debt crisis facing our nation.  Specifically, I believe investors currently saving for retirement should be much more concerned about the massive and unsustainable entitlement liabilities in the decades to come.  Left unchecked, the numbers say they could bankrupt the nation.

So what are the implications for folks hoping to fund their retirement years?  In a nutshell, I don’t think our nation will go bankrupt in the technical sense of the word.  Good news- right?  Wrong.

While my thesis that our country would avoid a bankruptcy is technically good news, I believe our government will use every trick in the book to avoid this kind of doomsday scenario and because of their dysfunction, will be forced to radically change how entitlements will be paid-out ten or twenty years from now.

The numbers supporting my supposition (as recently published by the non-partisan Congressional Budget Office) are indisputable and in my mind the question isn’t “Will this get fixed?” because it has to.  The real question is “When will this get fixed?” with the direct follow up question:  “How bad will it hurt?” To illustrate, let’s look at some numbers as noted from a good summary article in a recent issue of Barron’s (September 30, 2013).  Given the dizzying volume of statistics, I’ll try to distill this down to a few key points.

Using the “alternative fiscal scenario” which captures the most likely assumptions on economic growth, the CBO forecasts that federal debt as a percentage of our GDP (Gross Domestic Product) will approach 190% by 2038 due mostly to the growth in Medicare and Social Security commitments.  For reference, that fiscal laughing-stock Greece is presently about 163% of GDP (and has 27% unemployment).  The prior peak for Debt-to-GDP in the US?  The run-up to World War II when our debt approached 120% of GDP, before rapidly diminishing after the war ended.

The biggest driver for this is demographics- meaning how our population is trending toward a much higher mix of older people.  Currently, there are about 4.4 working age people (between ages 18-64) for each person over age 65.  By 2038, that ratio will drop to 2.7 to 1.    This means more dollars will need to be allocated for Social Security checks and health care expenses.  Something has to give here.  Either we pay these bills by ignoring others, commitments get reduced or Uncle Sam taxes us more.  Most likely is some combination of those factors.   Unfortunately, as the CBO Director Douglas Elmendorf recently stated at a Sept. 17th news conference, “We as a society have a fundamental choice of whether to cut back on those programs or to raise taxes to pay for them.  So far, we’ve chosen to do very little of either”.

So if this gets addressed sometime within the next few years, great.  The impact will still be felt by all of us but it won’t be as severe.  But the most acute problem is our governments’ abysmal track record of dysfunction (as indicated by the on-going debt ceiling fiascoes) and because of it, I am not optimistic of a rational approach.  In fact, I am more in the camp that our current and future politicians are more likely to procrastinate until the last possible moment, thereby massively increasing the scope of the problem.   They are simply not grown-up enough to take the long-view.

What does our government’s procrastination mean for the family budget now and in the future?  I believe younger “Baby Boomer”, most “Generation X” and all “Millennial” families should be very vigilant with their financial plans and should incorporate conservative assumptions.  In short, we need to focus like a laser on savings, taxes and efficient investment strategy.  Based on some of the secular demographic problems I outlined above, the “ghosts” of slower economic growth, higher taxes and diminishing entitlement outlays (Social Security, Medicare) could be darkening our financial doorsteps in the years to come.

What to do now: This isn’t going to sound like a sophisticated piece of financial advice but, save as much as you possibly can for three main reasons:

1)      I do not believe we will recoup what most of us are currently “investing” into Social Security.  I believe the government will need to cut both in absolute benefits, the age in which one can claim benefits (will be pushed out to age 70 and beyond) and the purchasing power of those dollars will decline due to inflation.

2)      Taxes will go up to help bridge the gap.  The government will have no choice but to address the “revenue” side of the ledger (side note: I love how they call it “revenue”, as if they earned it).  This means “diversifying” your tax liability in retirement years (through Roth IRAs and some insurance products) which could be more “valuable” with higher tax brackets in the future.

3)      Health care costs will continue to rise. I won’t claim to be an expert on the complexities around the health care market but given the government’s insistence on what I think is socialized medicine and the horrific fiscal state of Medicare and Medicaid, I am not optimistic on the long term trend for price or quality of health care.  I believe health care costs in general will go up and quality health care will be even more scarce (translation: priced even higher)

Of course, I don’t know with a 100% degree of certainty what is going to happen but in my role as a family’s financial advisor, I am not comfortable operating under the assumption that our dysfunctional government will somehow turn everything around in time to solve what I think is its biggest crisis facing our nation since World War II.

If I am wrong and the government proactively addresses these massive entitlement liabilities (and minimizes the damage) so be it.  Worst case for my clients would be they will have ample breathing room at retirement and may actually enjoy themselves.  The downside to this? Families will have to tighten their belts and live below their means during their working years.

If I am right about our government and their ability to solve a problem, I fear a much higher percentage of retirees will spend their “golden years” either living with their children or with a lower standard of living (or both).

So to wrap up: factoring in the near term dysfunction and the long-term math behind the demographic tsunami here in the U.S., I have a suggestion for any kid that wants to scare the hell out of someone saving for retirement………… show up at their door on Halloween night dressed as Uncle Sam.


  1. This is a scary story. Personally I feel the downside you mention about a family living below their means during working years is a great point. My family and I live well below our means. We have found that living this way is actually pretty easy and doesn’t require much sacrafice. Hopefully as you have stated you are wrong about the government and we will come out with ample breathing room at retirement.

    I find the information on your website very useful. Recently, based on your recommendation, I have read some of the financial books you have listed and have found them very helpful as well. Thank you.


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