60 Million Baby Boomer Votes Sway the Presidential Election

Inflation

Money spending is a bipartisan problem. It is the politician’s way of buying votes. No one talks about balancing the budget.

Deficit spending – spending more than received in taxes – is inflationary because money is “printed” to pay the deficit. The US Treasury issues bonds to pay the deficit, and most of those bonds are purchased by the Federal Reserve.

The following image summarizes the spending problem:

The current low interest rate of 2.6 percent is heading toward 5 percent, at which point interest expense will become the largest expense. The 2.6 percent interest rate is heading up because it’s a blend of old and new. Old debt is being retired, while current interest rates are 5 percent. Will they go down? Maybe – for a while. The long-term average interest rates on bonds is two percent above inflation. Most of that history does not involve a zero interest rate policy. The rising interest expense is just the effect of rising interest rates – it excludes the very important effect of continued spending. This transition will increase the annual deficit from $2 trillion to $3 trillion – a 50 percent increase.

Current spending each year is $7 trillion. The four largest costs add to $5.3 trillion (76 percent of spending), and are as follows:

Cowboy wisdom advises that when you find yourself in a hole you should stop digging, but there’s no sign that profligate spending will end. That means the only way to stop the hemorrhaging is with increased taxes.

Taxes

There is a tax rate that maximizes tax receipts, and it’s not 100 percent – it’s t* in the following Laffer curve.

University of Chicago Professor Arthur Betz Laffer is an American economist and author who first gained prominence during the Reagan administration as a member of Reagan’s Economic Policy Advisory Board.

Laffer postulated that tax receipts might be increased by reductions in the tax rate because such reductions would bring people out of the underground economy and also reduce the usage of tax shelters. This advice was implemented in President Ronald Reagan’s “Reaganomics,” and it worked to increase tax revenues.

No one knows what the optimal tax rate (t*) is, but the success of Reaganomics suggests that the tax rate in the 1980s was too high. But is it too high now? Or perhaps too low? Raising taxes seems like the logical way to increase tax receipts, but it might do just the opposite. Reducing taxes might actually increase revenues. We’ll find out after tax rates are changed.

The politics are obvious. No one likes the idea of paying higher taxes, but that might be the only way to save Social Security and Medicare.

Social Security and Medicare

Social Security is forecast to pay full benefits through 2035 and Medicare until 2036. The estimated total unfunded liability is enormous.

The official debt is $35 trillion, but the off balance sheet debt is a whopping $219 trillion – more than six times the official number. Social Security and Medicare unfunded liability is $69 trillion, twice the official number.

Boston University Professor Lawrence Kotlikoff has been sounding the alarm in articles and books like The Clash of Generations:

“In The Clash of Generations, experts Laurence Kotlikoff and Scott Burns document our six-decade, off-balance-sheet, unsustainable financing scheme. They explain how we have balanced our longer lives on the backs of our (relatively few) children. At the same time, we've been on a consumption spree, saving and investing less than nothing. And that's not to mention the evisceration of the middle class and a financial system that has proven it can't be trusted. Kotlikoff and Burns outline grassroots strategies for saving ourselves—and especially our children—from what could be a truly catastrophic financial collapse. “

Politicians ignore these warnings and recommended solutions, promising instead to make things worse by increasing benefits without a plan for paying these benefits. “Medicare for all” is a very expensive proposition. It is politically beneficial to ignore the problems, but that will be impossible in 10 years when these systems go broke. Acting now could alleviate the pain, but it would lose votes.

Baby boomers care because they love their children and grandchildren.

Conclusion

These are complicated issues. Everyone needs to listen carefully to the candidates’ platforms and recognize promises that cannot be kept – or worse, could exacerbate the problems. Who will be best for America?

How will we pay for our skyrocketing debt? Will higher taxes help? What will happen to Social Security and Medicare/Medicaid? Who cares?

Should baby boomers care since they might not live long enough to suffer the consequences? After all, Social Security and Medicare are good for another 10 years. Or should baby boomers be concerned about future generations?

What do you think?

See 22 Financial Threats Alarm Baby Boomers for the rest of the scary story. Baby boomers need to protect their lifetime savings.

Ron Surz is president of Target Date Solutions, developer of the patented Safe Landing Glide Path and Soteria personalized target date accounts. He is also co-host of the Baby Boomer Investing Show. Surz’s passion is helping his fellow baby boomers at this critical time in their lives when they are relying on their lifetime savings to support a retirement with dignity, so he wrote a book, “Baby Boomer Investing in the Perilous 2020s,” and he provides a financial educational curriculum.

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