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2012 May 27 Sunday
Approaching Half Of US Households On Government Benefit

Our ratio of parasite to productive is getting too high.

49.1%: Percent of the population that lives in a household where at least one member received some type of government benefit in the first quarter of 2011.

This will get much worse in future years due to both aging and effects of immigration. Declining per capita income due to rising numbers of Hispanics will cut government tax revenue while increasing the number of people getting taxpayer money for their medical care, child care, food, rent, and other goods and services.

The coming decline in US national per capita GDP is going to cause a US sovereign debt crisis resulting in large cuts to entitlements. Better plan on working more years. Lower your living standard and save more. The rising marginal cost for oil production will make the economic decline even more severe. Marginal costs are already putting a very high floor on oil prices if world oil production is to remain at current levels.

Global inflation might have already pushed the costs of exploring and producing oil from new most expensive projects - known in the industry jargon as the marginal cost of production - above $100 per barrel, according to JBC energy consultancy.

Peak Oil comes when the price of a marginal barrel of oil goes high enough to cause global oil demand to decline. We are getting close to that point. The European currency crisis, demographic problems in the US (see above), and the end of easy fast growth in China are together undermining the ability of the world economy to grow. Without that growth the world economy can't pay continually rising prices for oil.

We live in an era of declining expectations. You can get ahead of that game by adjusting your expectations faster than everyone else does. Expect worse times, lower your living standard, save more, develop a better skill set.

By Randall Parker    2012 May 27 10:22 AM Entry Permalink | Comments (3)
2012 April 29 Sunday
Oil Prices Pull In Social Security Financial Exhaustion Day

Social Security will run out of money sooner because high oil prices are here to stay. So the Social Security trustees are coming around to my point of view. Ah, that sense of satisfaction. But they still have a way to go. When world oil production starts declining the big entitlements programs will run out of money much sooner than the trustees expect.

The trustees of Social Security reported this week that absent reforms, the system will be able to pay full benefits until 2033 — versus 2036 in last year’s report — and three-fourths of benefits after that. One of the reasons for the grim new projection is the increase in oil prices, which the trustees assumed are here to stay and will exert a drag on the economy and worker pay for decades to come. Less pay means less tax revenue for the system.

The editorial writers of the NY Times think smaller tweaks can avert the day of reckoning. But they are still thinking with outmoded assumptions about the potential for economic growth. Innovations are not happening fast enough. Plus, we've got demographic problems. Pew's look at household wealth by race provides evidence for another reason why America is going to become a poorer place: the growing ethnic groups are poorer. So average household wealth is likely to go down along with tax revenues. The demographics of Texas and California show us where the nation is going. We will be poorer.

So I repeat what has become my standard advice: Get ready for harder times. Develop more skills. Spend less. Save more. Buy stuff that lasts longer. Consider moving to an area with more opportunities for advancement.

By Randall Parker    2012 April 29 09:12 AM Entry Permalink | Comments (3)
2011 May 24 Tuesday
Americans In Denial About Medicare And Social Security

Since the majority insists on denying the obvious a US sovereign debt crisis is inevitable.

WASHINGTON — They’re not buying it. Most Americans say they don’t believe Medicare has to be cut to balance the federal budget, and ditto for Social Security, a new poll shows. The Associated Press-GfK poll suggests that arguments for overhauling the massive benefit programs to pare government debt have failed to sway the public. The debate is unlikely to be resolved before next year’s elections for president and Congress.

Bottom line: the Republicans are going to run away from Social Security and Medicare cuts. The US total debt will continue to grow faster than the US economy, and the US won't be able to avoid a sovereign debt crisis.

The US government deficit is about 10% of GDP. Social Security and Medicare outlays are going much higher due to an aging population and medical costs that rise faster than the rate of inflation. In the face of these fundamentals the American people like to tell absurd jokes to pollsters.

In the poll, 54 percent said it’s possible to balance the budget without cutting spending for Medicare, and 59 percent said the same about Social Security.

Democracy begins to fail as soon as the majority figure out they can vote stuff for themselves at the expense of their future selves or future generations.

By Randall Parker    2011 May 24 07:16 PM Entry Permalink | Comments (10)
2011 May 06 Friday
European Social Benefits Become Cuttable

The taboo against cutting welfare state benefits in Europe is crumbling.

In a measure of the shift, Manuel Valls, a presidential hopeful in France’s Socialist Party, challenged party doctrine recently by declaring that it should not make an issue of preserving the 35-hour workweek if French factories have to compete with Chinese factories where the workweek starts at 60 hours and goes up from there. In Denmark, Prime Minister Lars Loekke Rasmussen rattled many in that icon of Scandinavian cradle-to-grave welfare by suggesting Danes should work longer before retiring, to peel back the deficit by $2.8 billion.

The short work days of Belgians, Germans, and Danes are going to run up against a billion Chinese willing to work longer and harder to afford commodities imports. At the same time, aging populations will make ratios of workers to retirees too low to allow early retirements and shorter work days.

Europeans should automate their personal lives to free up more time for paid work. But one of the distorting effects of taxes is to increases the incentives for manual labor for your own personal needs. Since your own labor isn't taxed when you mow the lawn, paint the house, or repair your car the higher your labor is taxed in your job the greater the advantage that do-it-yourselfers gain from doing their own work. In a nutshell: high labor or sales taxes decrease economies of scale by cutting the use of purchased labor and capital.

I expect Peak Oil to precipitate a crisis in the modern Western welfare states that will force a slashing of welfare state benefits. Necessity is a mother.

By Randall Parker    2011 May 06 08:53 PM Entry Permalink | Comments (9)
2010 December 17 Friday
For Raising Retirement Ages

A USA Today editorial argues for raising retirement ages. I see this as necessary and inevitable. Politicians could do us all a favor by acting sooner to give people more time to plan for this inevitability.

So it's notable that inklings of a bipartisan consensus are forming about one highly contentious issue — the age at which workers should be able to collect Social Security benefits.

House Minority Leader John Boehner, R-Ohio, supports gradually raising the retirement age for full benefits to 70 from the current 66. A number of key Democrats, most notably House Majority Leader Steny Hoyer, D-Md., have miffed liberals in their party by saying that some unspecified increase should be on the table.

Since people are living longer they are going to have to work longer. This is already happening. In spite of a huge dip in overall employment the labor force participation rates for 55 and over are rising.

The approaching sovereign debt crisis will force an acceleration in the rise of labor force participation for those in their 60s and 70s. If you want to avoid this for yourself you've either got to get rich or lower your living standard so low you can afford to save more.

By Randall Parker    2010 December 17 12:12 AM Entry Permalink | Comments (3)
2010 October 03 Sunday
Cal Welfare Payments Funding Gambling And Cruises

The Los Angeles Times poked in some California state data on where welfare cash cards get used and found some of the cards get used on cruise ships, in Miami, and on Hawaiian islands. But Las Vegas (lost wages, or lost welfare) is the number one for out-of-state spending destination by welfare recipients.

More than $69 million in California welfare money, meant to help the needy pay their rent and clothe their children, has been spent or withdrawn outside the state in recent years, including millions in Las Vegas, hundreds of thousands in Hawaii and thousands on cruise ships sailing from Miami.

Penny-wise, pound-foolish budget cuts for welfare fraud investigation are making the situation worse.

An anti-fraud unit in Orange County, which won praise from state officials last year for saving the state millions, has since had to slash its budget and lay off 15 investigators, said Paul Bartlett, commander of the county district attorney's Bureau of Investigation. Those cuts saved $900,000 in operating expenses but allowed "an estimated $9.6 million in suspected fraud payments out the door," according to an Orange County Grand Jury report released in May.

For every jurisdiction in America I'd like to know the marginal dollar amount saved per dollar spent on welfare fraud investigation. How many places have a ratio greater than 1? Ditto for Medicare fraud investigation and other forms of investigation of fraud against government. Do governments generally underspend on efforts to prevent fraud?

By Randall Parker    2010 October 03 11:03 PM Entry Permalink | Comments (1)
2010 June 13 Sunday
NY Governments To Borrow From Pension Fund

State and local governments in New York State will borrow money from the state pension fund which they will use to make their yearly payments to the same pension fund. So basically they will pretend to pay their pension obligations.

ALBANY — Gov. David A. Paterson and legislative leaders have tentatively agreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund. And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund — from the same pension fund.

They are hoping that in a few years they'll have a lot more money with which to pay both past and current pension obligations. I doubt it will play out that way. I expect high energy costs to prevent a big economic recovery. So all the governments trying to kick the problem down the road a few years are just setting themselves up for an even bigger crisis in a few years.

Municipal bankruptcies will occur at rates last seen in the Great Depression of the 1930s. Whether governments go into bankruptcy will depend on whether they can cut retirement benefits without bankruptcy. State and local tax increases will be hard to implement because the US federal government will raise taxes to deal with its own dire plight. The people will feel overtaxed just from federal taxes without getting hit harder by state and local taxes.

The states are in deep financial trouble, especially where government employees are allowed to form unions. I expect a migration away from the states which have strong government employee unions.

All the US states have unrealistically high assumptions for rates of return in their pension plans. The extent of their underfunding of their pension plans is therefore far larger than it looks. When Peak Oil causes a sustained economic contraction the size of their unfunded pension liabilities will soar to levels that will force states to declare bankruptcy if they can't cut pension benefits short of bankruptcy. Only one other development would allow them to avoid bankruptcy: hyperinflation. If the federal government inflated away their debts and obligations. But if their retiree pension benefits are indexed to inflation then even hyperinflation might not help them much.

By Randall Parker    2010 June 13 06:33 PM Entry Permalink | Comments (0)
2010 March 21 Sunday
New Health Care Entitlement To Expand US Deficits

In a New York Times Op-Ed Douglas Holtz-Eakin, a former director of the Congressional Budget Office, explains the fantasy financial numbers underlying the Democrats' big health care reform bill. This bill is a fiscal disaster piled on top of the existing much larger fiscal disaster.

ON Thursday, the Congressional Budget Office reported that, if enacted, the latest health care reform legislation would, over the next 10 years, cost about $950 billion, but because it would raise some revenues and lower some costs, it would also lower federal deficits by $138 billion. In other words, a bill that would set up two new entitlement spending programs — health insurance subsidies and long-term health care benefits — would actually improve the nation’s bottom line.

Could this really be true? How can the budget office give a green light to a bill that commits the federal government to spending nearly $1 trillion more over the next 10 years?

I certainly suspected the CBO cost and revenue figures over the next 10 years for something this massive couldn't possibly be plausible. Turns out they're not.

The answer, unfortunately, is that the budget office is required to take written legislation at face value and not second-guess the plausibility of what it is handed. So fantasy in, fantasy out.

In reality, if you strip out all the gimmicks and budgetary games and rework the calculus, a wholly different picture emerges: The health care reform legislation would raise, not lower, federal deficits, by $562 billion.

Please click thru and read the details of this political and financial fraud. It is amazing.

This bill, which at the time of this writing looks set to pass, will accelerate the coming US sovereign debt crisis. Much higher taxes for the middle class and severe cuts in entitlements lie in our future. This bill represents a high point in the push for ever growing entitlements. The overreach of the US government now has reached a point where a sovereign financial crisis is inevitable. That crisis will make the crisis of 2008 seem small in comparison.

Update: More on the fantasy financial numbers:

The 153-page fix-it bill assumes that future Congresses will not only be willing to cut Medicare payments to doctors and hospitals by 21 percent immediately but to cut them even more in the future. No Congress has ever demonstrated any willingness to take such actions, according to Joseph Antos of the American Enterprise Institute (AEI) and formerly of the CBO.

Further, in order to pay back the labor unions for their support, the bill moves the trigger date for a tax on Cadillac health-insurance policies to 2018, per an agreement hammered out with President Obama during closed midnight negotiating sessions at the White House in January. But the lost revenues are made up by indexing the tax on these high-end insurance plans at the rate of inflation (instead of inflation plus one percent), meaning the tax will affect more plans, more quickly.

Update II: The CBO is skeptical of its own health care cost projection.

Update III: BTW, want a health care system more like some European countries? Better hope you do not get cancer.

By Randall Parker    2010 March 21 05:37 PM Entry Permalink | Comments (5)
2009 August 10 Monday
Food Stamp Subsidies Making Americans Fat

Government subsidies for poor folks to buy food are making them fat.

COLUMBUS, Ohio – The U.S. Food Stamp Program may help contribute to obesity among its users, according to a new nationwide study that followed participants for 14 years.

Researchers found that the average user of food stamps had a Body Mass Index (BMI) 1.15 points higher than non-users.  The link between food stamps and higher weight was almost entirely based on women users, who averaged 1.24 points higher BMI than those not in the program, the study found.  For an average American woman, this would mean an increase in weight of 5.8 pounds.

Modest proposal: Make eligibility for the food stamps weight-tested.

The welfare state is making people fatty and unhealthy.

The study also found that people’s BMI increased faster when they were on food stamps than when they were not, and increased more the longer they were in the program.

Former Democratic Party Presidential candidate George McGovern, a big welfare state supporter, might have contributed to the obesity epidemic in another way. See Dennis Mangan's post for the details: The Government's War Against Dietary Fat Caused the Obesity Epidemic. The goverrnment's encouragement of higher carbo consumption and lower fat consumption might be to blame. So then is Gary Taubes right in his book Good Calories, Bad Calories: Fats, Carbs, and the Controversial Science of Diet and Health?

By Randall Parker    2009 August 10 11:33 PM Entry Permalink | Comments (11)
2009 May 31 Sunday
US Economic Growth Shifting To Lower Long Term Rate?

Is the future potential growth rate of America lower than it has been in the last half century?

May 26 (Bloomberg) -- Americans may have to get used to unemployment greater than 8 percent for the first time since 1983 and an economy that won’t grow much beyond 2 percent as a consequence of the lost confidence in consumer credit that shattered financial markets.

By this time next year, “the market will realize that potential growth for the U.S. is no longer 3 percent, but is 2 percent or under,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said in an interview with Bloomberg Radio.

I think this is the same Mohamed El-Erian who left management of Harvard's endowment just before it tanked along with the rest of the market. I wonder if he saw what was coming.

What is important about a slower growth rate: If it happens it is more disastrous than appears at first blush. America's big entitlements programs depend on rapid economic growth to make them able to pay even most of what they (unrealistically) promise to future generations of retirees. Even before factoring in a long term decrease in the rate of economic growth the big US government old age entitlements programs have seen their projections for insolvency moved up this year as has happened in other recent years.

Things have gone from bad to worse for the future of Social Security and Medicare. Social Security will begin to pay out more than the program receives in tax revenues by 2016, a year earlier than expected, according to a recent government report. Trust funds for Social Security are expected to run out completely by 2037, four years earlier than projected a year ago.

Medicare's fund that pays hospital bills for seniors, meanwhile, already is operating in the red and is expected to be exhausted by 2017, two years earlier than projected a year ago.

In the last 7 years Medicare's expected insolvency date has moved up 13 years sooner. Imagine what happens if the recovery from the current recession comes late and slowly.

The current economic downturn, which has eliminated millions of jobs and reduced workers' payments into the system, has further eroded Medicare's hospital trust fund.

The fund's fiscal health is tied, in part, to the economy's health. As recently as 2002, the trustees projected the fund could remain solvent until 2030; five years before that, they had warned of a collapse by 2001, precipitating a rescue by Congress.

Another contributing factor: Bad economic conditions drive people to retire and start collecting benefits sooner.

I expect Peak Oil and a less skilled population will make this picture far worse in the coming years. Bad economic conditions cause retirees to start collecting benefits sooner. This trend could continue for years.

The rate at which the US government is piling on unfunded obligations is not sustainable.

Taxpayers are on the hook for an extra $55,000 a household to cover rising federal commitments made just in the past year for retirement benefits, the national debt and other government promises, a USA TODAY analysis shows.

The 12% rise in red ink in 2008 stems from an explosion of federal borrowing during the recession, plus an aging population driving up the costs of Medicare and Social Security.

You think we've been irresponsible individually? We've been far more irresponsible collectively.

The latest increase raises federal obligations to a record $546,668 per household in 2008, according to the USA TODAY analysis. That's quadruple what the average U.S. household owes for all mortgages, car loans, credit cards and other debt combined.

Barack Obama (peace be upon him) now wants to saddle us with a huge expansion of government spending for medical care for poorer people. This is on top of all the bad news above. He's got the spendthrift nation on a spending bender. The empire is in decline.

Update: Barack Obama also favors an immigration amnesty that will undermine the welfare state by increasing the number of welfare recipients and low earners and low tax payers. The problems of the United States are becoming too large already without more new policies that make them even worse.

Update II: Medicare spending increases combined with a stagnant economy will cause a financing crisis.

The trustees predict a 30 percent increase in the number of Medicare beneficiaries in the coming decade, to 58.8 million in 2018, from 45.2 million last year.

But the projected increase in health costs and the use of medical care is a more significant factor in the growth of Medicare. The trustees predict that average Medicare spending per beneficiary will increase more than 50 percent, to $17,000 in 2018, from $11,000 last year.

The 2010s will be characterized by fighting over pie slices as the pie doesn't grow as fast the demands on it.

By Randall Parker    2009 May 31 11:36 PM Entry Permalink | Comments (5)
2009 January 07 Wednesday
Pension Plan Losses To Depress Corporate Earnings

There's an element of vicious cycle here. The need to pay more into pension plans will lower corporate earnings which will lower stock prices which will lower pension plan values.

Pension plan losses are about to knock out $70 billion of corporate earnings, according to a report by consulting firm Mercer. Huge investment losses have left the funds of the Standard & Poor's 1500 some $409 billion in the red, the firm estimates in a report released Jan. 7. More than fully funded a year ago, these plans have suffered their most precipitous one-year drop in at least two decades, with the average fund now holding enough assets to cover just 75% of promised retirement payouts.

Downturns cause pension plans to become underfunded which then causes corporations to take even bigger hits to make up for losses.

When pension plans are underfunded, companies are required to plow enough additional money into the funds each year to correct the imbalance, a process than can take several years. This year, Mercer estimates that the companies in its study will end up reporting about $70 billion of pension expenses, up from about $10 billion in 2008. That would equate to an 8 percent reduction in annual profits compared with 2007, the most recent year for which companies have reported full annual results, Mercer said.

Of course, defined benefit pension plans are dwindling in number. A growing portion of the US labor force no longer gets a defined benefit pension plan as part of their benefits.

A recent law change raises the bar for companies to keep their pension plans well funded.

As reported earlier, a coalition of large companies that still offer defined-benefit plans is seeking a suspension or delay of new rules that would further drain them of much-needed cash. The Pension Protection Act of 2006, passed after funding dropped following the technology and internet collapse in 2001, requires companies to cover 94 percent of retirement-plan liabilities to be considered fully funded in 2009.

Some companies are taking steps to cut future vested benefits.

Besides paring back risk, more companies will likely consider freezing their defined pension plans, said Adrian Hartshorn, also a member of Mercer's financial strategy group. A frozen pension plan preserves employees' vested benefits but eliminates future accruals. Already, many major companies have taken this step including Motorola Inc. (MOT), BertelsmannAG's Random House Inc. and GenCorp Inc. (GY).

"Some companies will inevitably will take that step," said Hartshorn. "What they need to bear in mind is that even if they freeze it, they will still have legacy assets to deal with."

A long term slowing of economic growth will force more companies to freeze their defined benefits pension plans. My guess is that a combination of demographic problems and Peak Oil will cause the US economy to grow more slowly in the next couple of decades. So I expect pension plan benefits to get cut further.

By Randall Parker    2009 January 07 09:43 PM Entry Permalink | Comments (1)
2009 January 06 Tuesday
Rasmussen Poll Shows Plurality Support Escape From Social Security

More support the right to exit America's government-mandated old age retirement program.

Forty-six percent (46%) of U.S. voters believe working Americans should be allowed to opt out of Social Security to provide for their own retirement planning, an idea not likely to gain much traction with Democrats more strongly in control of Congress.

Thirty-eight percent (38%) are opposed to the idea of opting out, and 16% are not sure in a new Rasmussen Reports national telephone survey.

But if younger people were allowed to escape from Social Security there wouldn't be enough money to pay the older people near or in retirement. The pyramid scheme is already showing the stress of a declining ratio of taxpayers to benefits receivers. Letting some of those taxpayers escape would bankrupt the system.

Bizarrely, some of those people who favor letting people escape also favor taxing more of the income of the people who are still in the system. Keep in mind that the average IQ in America is below 100 and most people with IQs above 100 are innumerate anyway. Then these same people say that those who pay more should get more, thereby defeating any benefit of higher taxes for keeping the system solvent.

A majority of voters continue to agree with President-elect Obama’s proposal for workers to pay Social Security taxes on more of the income they earn each year. Sixty percent (60%) say people should pay Social Security taxes on all or most of their annual income. Twenty-nine percent (29%) disagree, and 11% are undecided.

Sixty-two percent (62%) of voters also say people who pay more in Social Security taxes should receive more in retirement benefits when they retire. Twenty-two percent (22%) are against that idea, with 16% undecided.

Of course, one could argue that forcing people to keep the pyramid scheme solvent is immoral. But if that's the case why raise taxes on upper income people in the first place?

How bad will the Medicare and Social Security burden become on workers? Do workers each end up paying on average $500 per week by 2030 to support retirees? Since most workers can't afford that I'm thinking the upper middle class and upper class will pay much more. But opposition will grow much larger. So benefits cuts will limit how big the burden becomes.

The old age retirement entitlements programs depend very heavily on continued strong economic growth to pay most of what has been promised. But if Peak Oil cuts into growth and sends the economies of the industrialized countries into several years of economic contraction then there'll be no escaping the need to raise retirement ages and cut benefits. Taxes alone will cost too much and lower living standards of the still working even more sharply than the economic contraction caused by declining oil production.

America has other demographic problems that promise to cut living standards as a declining percentage of those in their working years possess the intellectual attributes needed to operate a complex modern economy.

By Randall Parker    2009 January 06 07:56 PM Entry Permalink | Comments (0)
Rasmussen Poll Shows Plurality Support Escape From Social Security

More support the right to exit America's government-mandated old age retirement program.

Forty-six percent (46%) of U.S. voters believe working Americans should be allowed to opt out of Social Security to provide for their own retirement planning, an idea not likely to gain much traction with Democrats more strongly in control of Congress.

Thirty-eight percent (38%) are opposed to the idea of opting out, and 16% are not sure in a new Rasmussen Reports national telephone survey.

But if younger people were allowed to escape from Social Security there wouldn't be enough money to pay the older people near or in retirement. The pyramid scheme is already showing the stress of a declining ratio of taxpayers to benefits receivers. Letting some of those taxpayers escape would bankrupt the system.

Bizarrely, some of those people who favor letting people escape also favor taxing more of the income of the people who are still in the system. Keep in mind that the average IQ in America is below 100 and most people with IQs above 100 are innumerate anyway. Then these same people say that those who pay more should get more, thereby defeating any benefit of higher taxes for keeping the system solvent.

A majority of voters continue to agree with President-elect Obama’s proposal for workers to pay Social Security taxes on more of the income they earn each year. Sixty percent (60%) say people should pay Social Security taxes on all or most of their annual income. Twenty-nine percent (29%) disagree, and 11% are undecided.

Sixty-two percent (62%) of voters also say people who pay more in Social Security taxes should receive more in retirement benefits when they retire. Twenty-two percent (22%) are against that idea, with 16% undecided.

Of course, one could argue that forcing people to keep the pyramid scheme solvent is immoral. But if that's the case why raise taxes on upper income people in the first place?

How bad will the Medicare and Social Security burden become on workers? Do workers each end up paying on average $500 per week by 2030 to support retirees? Since most workers can't afford that I'm thinking the upper middle class and upper class will pay much more. But opposition will grow much larger. So benefits cuts will limit how big the burden becomes.

The old age retirement entitlements programs depend very heavily on continued strong economic growth to pay most of what has been promised. But if Peak Oil cuts into growth and sends the economies of the industrialized countries into several years of economic contraction then there'll be no escaping the need to raise retirement ages and cut benefits. Taxes alone will cost too much and lower living standards of the still working even more sharply than the economic contraction caused by declining oil production.

America has other demographic problems that promise to cut living standards as a declining percentage of those in their working years possess the intellectual attributes needed to operate a complex modern economy.

By Randall Parker    2009 January 06 07:56 PM Entry Permalink | Comments (9)
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