Monday, August 23, 2010

By The Numbers

(text based on my Toastmasters speech)

Anybody know what this number is: 43,021?

How about this number: 13,337,169,671,750?

What if I add $ before each:


If you haven't figured it out, $13 trillion is the current US National Debt (as of 8/17/2010 according to $43,021 number is the debt per citizen of the United States.

Those are pretty big numbers and they are not slowing down in their growth.

So what is the problem with this debt? Primarily our loss of liberty and freedom. We become beholden to the debt holders and to those that continue to buy our debt. The top three holders of our debt are China (21%), Japan (20%), and England (9%). I don't know about you but I don't want to be beholden to China.

So what can we do about this? Quite simply, we have to pay down our national debt and the only way to do that is to change our budgeting ratio... and that is to have more revenue then US federal spending.

So how do we do that?
  • Increase taxes
  • Increase Revenues by stimulating growth
  • Cut Spending
  • Or some combination.

So lets take a quick look at spending and I'm going to want to focus on one item in the budget. The pie chart below (found on Wikipedia ) shows a general breakdown of the 2010 Federal budget. At 19.63% is Social Security; Defense budget comes in at 18.7% of the budget, unemployment, welfare, and pensions are 16.3%; etc... Most of these items get negotiated between the Congress and the Executive branches of government every year but there is one item that doesn't really get touched because it is considered one of the "rails" of politics and that is Social Security.

I want to posit that we have to do something about SS if we want to get a handle on this debt.

SS was established in 1935 by President Roosevelt. The act was an attempt to limit what were seen as dangers in the modern American life, including old age, poverty, unemployment, and the burdens of widows and fatherless children. It was initially setup as an insurance program in which payouts would come out of a built up reserve but the plan quickly built up reserves of $2B which was deemed as too much. So in 1939 an amendment was passed that basically shifted SS into a "pay as you go" system. At the time that made a lot of sense because there where 40 workers per retiree but compare that to 2010 where we are at 3.1 workers per retiree you can understand one of the pressure points.

Another "pressure point" or "problem" has been the changing lifespan of the American worker. Consider that in 1940, of the male population that reached the age of 21, only 53.9% survived to the age 65 and when that population reached 65 their expected remaining lifespan was 12.7 years. For females it was 60.6% and 14.7 years. Flash forward to 1990 and with the advances in medicine and improvements in lifestyle, the percentage of males reaching 65 is now 72.3% and they are living 15.3 years longer. Females it is 83.6% and they are living 19.6 years. There are more workers reaching 65 and those that do are living longer.

From an actuarial perspective, you have a "pay as you go" plan with a decreasing base supporting an increasing number of retired folks... who are living longer. It isn't sustainable.

So what can we do about this?

What I would like to suggest to you all is that we open up to discussions about possible options to address the cost curve for SS. Let's not immediately dismiss suggested solutions but instead put them all on the table for consideration. Some possible solutions that have been proposed by various individuals include:

  • Raising FICA rates.
  • Raising retirement age
  • Phasing out the plan in favor of funded investment plans (401K style).

What ever is considered we all need to understand that the current trajectory is not sustainable. The increasing federal debt levels are putting more and more pressure on our liberties and freedoms.

Some suggested links:

Paul Ryan's Roadmap for Social Security
The Democrat's Plan

Saturday, June 5, 2010

Accounting for the Risks...

While listening to Obama's discussion with the press about BP and the oil spill one part of what he said stood out to me.

The money quote is:
"Given the fact they (BP) didn't fully account for the risks I don't want someone else bearing the costs of those risks that they took."
My immediate response to that statement was "then why the hell are we, the American taxpayer, bearing the costs of bailing out all of these different companies who didn't manage their risks?"

This isn't about the oil spill. That is a terrible event that is being dealt with and is a by-product of our worldwide need for energy.

What I want to bitch about is how our government creates moral hazards all the time with large corporations. If you peruse this list you can see the billions of dollars sent to hundreds of recipients. What exactly did Freddie and Fannie May do to manage their risks? And GM? These companies collectively received $243 Billion in support because they didn't manage their risks properly. They didn't really have to because they knew that the US government would come in and save them so they could afford to take more risks then would normally be allowed.

If we had a more pure capitalistic system in place where government wouldn't bail out a failing company then maybe these companies would manage their risk better and wouldn't have been in a position of failing? At some point, we have to stop continuing to bail out failing companies because "they are too large to fail". If they didn't manage their risk then let them fail.

The same goes for union pension funds and over extended city governments.

So I wish President Obama would apply his stated logic on BP to the hundreds of failing companies and to any future requests to bail out pension funds and city/state governments... but something inside of me says that this is just rhetorical statements on his part to look tough on this oil spill.