THE ICEBERG AND THE TSUNAMI
The American economy survived a kamikaze attack in 2001. We took the licking and kept on ticking—or sailing along. Then we hit the iceberg called 2008. The Crash of 08 and the Great Recession nearly sank us, but we’re still afloat, though hardly making headway. The good news is that we survived the iceberg…sort of. The bad news is that there’s a tsunami bearing down on us, and the crash of 08 has left us terribly vulnerable. That tsunami is the baby boomer retirement.
First: Iceberg.
Let’s talk iceberg first. The housing bubble and Crash wiped out billions in personal wealth. Remember, the biggest financial asset most folks will ever own is their home. Think of it as the “house account.” You pay the mortgage for years, thereby investing your income into that asset’s equity. Hopefully the value rises, but at least you have the equivalent of a “bank account” with the saved value of your payments. With home values still dropping—they are here in Oakland County, MI—Americans’ one big “account” isn’t an automatic haven for rising wealth or safe savings.
Homes aren’t just the average American’s one big “account.” Housing is the basis of 50% to 70% of local government revenues—including schools. Housing prices = housing values = property tax rates = local government revenue. When those homes dropped 30% in value, the city-village-township-county-school district all lost 30% of their income.
Due to the Headlee Amendment and Prop A, home taxes can only rise 5% or the rate of inflation, whichever is less. So even if house prices were to immediately rebound to bubble levels—which they can’t possibly do—the tax rate/revenue can only rise 5% at most per year. You now see why locals and schools are desperate to contain and roll back their costs—including (especially?) labor.
Next, Tsunami.
On to the tsunami. In 2011 the baby boomers born in 1946 start to
retire. This is the demographic pig in the python.
In 1950, 16 active workers supported each
retiree. Today, it’s 3.3. But 2025, it will be two workers supporting
one retiree. Every married couple will have to pay enough Social
Security taxes to support a senior. This tsunami was long foreseen and
long evaded, avoided, under rug
swept, can-kicked-down (“Granholmed?”) Now it’s just about here.
If government retirement benefits aren’t fully actuarially
funded, they’re just legal Ponzi schemes: the current workers pay the
costs of the retirees. Sure the retirees have face-saving notions about
receiving benefits they paid for. But in reality, they just paid the
benefits of the retirees ahead of them. If they shared those costs
between 16 or 10 workers, now it has to be paid by 2 or 3 actives.
Realistically, there’s no level of taxation that can support Boom
retirees at the current level of benefits.
But what about employer-paid benefits? Same deal. Private sector
pension and retirement benefit schemes crashed already (GM, anyone?) Now
state and local governments—definitely including school districts—are
facing the same demographic crunch; but worsened by the revenue hit
taken from the iceberg. These government units can’t make up the
difference in property tax collections, and will find that there’s
little taxpaying capacity in their communities. Even if they do raise
taxes, that extra revenue disappears into employee benefits and
compensation, and no real value is seen for the citizens.
So there’s the problem: American finances—public and individual--
have been crippled by the iceberg—the crash of 2008, and in a weakened
condition are facing the tsunami of Boomer retirement. Folks, there is
not enough money in America to pay the costs of benefits expected. There
are not enough workers to pay the taxes to pay the costs. There is
certainly not enough money to pay the current public employees the
benefits their unions negotiated for them when times were good and the
home values/property tax revenues were bubble-high. Not and afford
anything else.
So what’s the way out? Two fold. One: local government finances
are now a house of cards. These labor and legacy costs must be brought
down and realigned to the non-government level, before the locals go the
way of Greece. The current levels—much less built-in raises in pay and
benefits-- can’t be afforded. Government finance is as much a bubble as
the home values they rose upon. The air must be let out deliberately
now, to avoid a series of big bang insolvencies sooner than you think.
But the hard fact is America can’t pay the Boomer retirement with
today’s wealth. The answer? We have to grow. We have to grow our wealth
so we can afford the Boomers, as well as a decent life for everybody
else. Between 1980 and 2001 America doubled its number of jobs, even
while losing the old smokestack sectors like steel. We need to grow,
which means we need a dynamic economy, which means that high taxes and
regulation have to get out of the way.
Wave ho! It’s time to cut away the chains and surf the tsunami.
