The U.S. Is Bankrupt and We Don’t Even Know It

Laurence J. KotlikoffProfessor of Economics, Boston University

Developed World Has Driven Itself Broke• Pay-As-You-Go Pensions Have Played a Major Role

• So have Pay-As-You-Go Healthcare Programs

• Official Debt/GDP Ratios are Now Huge and Exploding

• Unofficial Debts, Particularly Obligations to Pay Pensions and Healthcare, Swamp Official Debts

• Thus, Most Gov. Liabilities Have Been Kept Off the Books.

The Fiscal Gap Measures a Country’s True Fiscal Condition

• Fiscal Gap Equals Official Plus Unofficial Debt

• Unofficial Debt = PV Spending - PV Revenues

• Forming Un-truncated PVs is Critical

• Developed Country Fiscal Gaps are Gigantic

How Big is U.S. Fiscal Gap?

Answer: $211 Trillion

Source: Author’s Calculations base on CBO’s June 2011 Alternative Fiscal Scenario

Trillions of Dollars

U.S. Is In Worse Shape than Greece and Much Worse Shape than Germany

U.S. Fiscal Gap is 14 Times GDP

Greek Fiscal Gap is 12 Times GDP

German Fiscal Gap is 3 Times GDP

Closing the U.S. Fiscal Gap

Immediate and Permanent 64% Hike in All Federal Taxes!

Immediate and Permanent 40% Cut in All Non-Interest Federal Spending

Closing the German Fiscal Gap

Immediate and Permanent 13% Hike in All Federal Taxes!

Immediate and Permanent 11% Cut in All Transfer Payments

European Countries Have Worse Demographics than U.S, But They’ve Enacted Major Pension Reforms and

Have Direct Control of Healthcare Spending

U.S. Social Security System is In Worse Financial Shape than It’s Ever Been.

U.S. Medicare and Medicaid Benefits Continue to Grow at Unsustainable Rates.

Fiscal Gaps Reflect Postwar Ponzi Schemes

How Does It Work?

• Take Money from the Young, Give to the Old

• Call the Money that’s taken: “Taxes”

• Tell the Young, “Yes, We’re Calling this Money Taxes. But Don’t Worry. You’ll Get These Taxes Back Plus Plenty More in Retirement”

• Result: Produce Massive Debts that Never Show Up on the Books.

The Trouble with Ponzi Schemes

• They Ultimately Fail and Produce Enormous Harm to Those at the End of the Chain Letter

• They Produce Economic Fallout

• The U.S. Ponzi Scheme Has Wiped Out U.S. Saving and Net Domestic Investment and Reduced Real Wage Growth

• This is Precisely What the Life-Cycle Model Predicts

 U.S. Real Social Security, Medicare, and Medicaid Benefits

Per Oldster and Real Output per Person, 1970 -2010

 

U.S. Average Consumption By Age(2011 Dollars)

America’s Real Wage Stagnation

Average U.S. earnings per hour, adjusted for

inflation and excluding fringe benefits, are

no higher today than they were in 1964!

The Situation Is Getting Worse.

U.S. Fiscal Gap Grew By $6 Trillion Last Year!

Congress’ Super Committee is Charged Not with Eliminating the

Fiscal Gap, but With Reducing Budget Deficits Over the Next 10

years by Just $2.1 trillion!

This Is Far Too Little, Too Late

In Focusing on the Official Debt, Not the Fiscal Gap, Congress is Driving in NY with a Map of LA.

Official Debt is Not Theoretically Well-Defined

Depends on How One Labels Government Receipts and Payments

The Infinite Horizon (Not Finite Horizon)Fiscal Gap Is Well Defined

Fiscal Gap is Same Regardless of Labeling

For Decade U.S. Government Has Chosen Labels To Keep Most of

Our Debts Off the Books.

This is Why the U.S. Fiscal Gap Is 22 Times the Official Debt

Thanks to the “Developed” World’s Fiscal Policies and “Trust Me” Capital Markets,

the Global Financial System Remains Extremely Fragile

As We’re Witnessing Today in the

Eurozone, We’ve Set Up Our Financial

System to Ensure that It Fails When

Our Fiscal System Fails.

And We’ve Set Up Our Financial

System to Ensure that It Can Fail

and Bring Down the Economy

and Fiscal System.

Since 2008, Central Banks Have Been

Printing Vast Sums of Money to Deal with

the Ongoing Financial -> Fiscal and

Fiscal -> Financial Crises.

Moral Hazard and Hyperinflation

Are the Two Big Concerns

Europe May Yet Get It’s Fiscal Act

Together, but There Is Great Distrust of

the Greeks, Italians, etc.

As for U.S., Its Political System Is

Completely Deadlocked.

Europe May Yet Get It’s Fiscal Act Together.

But There Is Great Concern About

and Distrust Of the Resolve of

Greek, Italian, and Other Governments.

PIIGS’ Debt Totals 3 Trillion Euros.

If Market Doesn’t Role this Over, ECB Will

Need to Print Even More Money to Buy It

Either Directly or Indirectly.

Developed World Needs a New Financial

and Financial Architecture to Survive

in the 21st Century.

Limited Purpose Banking Is the

Requisite New Financial Architecture

• 100% Equity-Based Mutual Fund Banking

• Cash Mutual Funds Used for Payment System

• Federal Financial Authority Vets/Discloses Securities

• Mutual Funds Purchase Securities at Auction

=> A Financial System that Can Never Fail

We Need to Move Away From

Pay-Go Fiscal Policies

The Purple Social Security Plan

www.thepurpleplans.org

Makes Fiscal Gap Zero

The Purple Social Security Plan 1. Freezes Existing Social Security System by filling in zeros in earnings records for years after the reform begins

2. Requires workers through age 60 to contribute 8 percent of wages to personal security accounts (PSAs).

3. PSA contributions are divided 50-50 between spouses and legal partners

4. The government makes matching contributions to PSAs on behalf of the poor, unemployed, and disabled.

5. All PSA balances are invested in a global market-weighted index fund of stocks, government bonds, corporate bonds, and

real estate.

6. Between ages 61 and 70, PSA balances for each cohort are gradually sold at market and converted to TIPS

7. Government guarantees PSA balances at conversion equal at least what was contributed adjusted for inflation.

8. PSA participants who die prior to age 70 bequeath unconverted balances to their heirs.

9. Starting at age 62, cohort TIPS pool makes payout to surviving cohort PSA participants based on age 60 PSA balances.

10. Distribution from TIPS pool designed to ensure real payout to surviving cohort members is stable through time.

The Purple Tax Plan The Purple Sales Tax

Replaces personal and corporate income taxes with 17.5% nominal (15% effective) federal retail sales tax.

Taxes all consumption of final goods and services, including services from homes, boats, planes, and cars.

Permits those in economic distress to defer taxes on housing services.

Taxes consumption by governments, non-profits, and businesses as well as households.

Taxes annual consumption above $5 K done abroad, including services from homes and other durables.

Provides a monthly payment (demogrant) to all households based on family composition.

Payment level is set to ensure that those at or below poverty line pay no sales tax on net.

Additional annual payment of $1,000 per child to offset elimination of Child Tax Credit.

The Purple FICA Tax

Exempts the first $40,000 of earnings from the employee portion of the FICA payroll tax.

Eliminates the ceiling on FICA taxation.

Subjects to FICA tax all income from ownership rights derived from businesses in which one works.

Provides earnings subsidy to low-earning households in lieu of refund from Earned Income Tax Credit.

The Purple Inheritance Tax

Eliminates the federal estate and gift tax.

Taxes at a 15.0 percent rate the cumulative value, above $1 million, of all gifts and inheritances received.

Government makes tax deferral arrangements for receipt of illiquid gifts and inheritances.

The Purple Heathcare Plan 1. All Americans receive a voucher each year to purchase a standard plan from the private-plan provider of their choice.

2. Vouchers are individually risk-adjusted; those with higher expected healthcare costs, based on documented medical

conditions, receive larger vouchers.

3. Participating insurance companies providing standard plans cannot deny coverage.

4. Each year a panel of doctors sets the coverages of the standard plan subject to a strict budget, namely that the total cost

to the government of the vouchers cannot exceed 10 percent of GDP.

5. Insurance companies providing standard plans contract with private providers to cover their plan participants.

6. Americans choose doctors and hospitals included in the standard plan they choose.

7. Plan providers compete and provide incentives to improve participants' health and limit bad health practices.

8. Plan providers offer supplemental plans to their participants and cannot deny supplemental insurance coverage to their

participants.

9. The government (federal and state) ends the tax exclusion of employer-provided health insurance premiums.

10. Like all other Americans, Medicare, Medicaid, and health exchange participants are covered by the Purple Health Plan

subject to appropriate transition provisions.

11. The roughly 10 percent of GDP now spent or allocated by federal and state government on these and related programs,

as well as on the tax exclusion of employer-provided health insurance premiums, is reallocated to help finance the

vouchers.