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TMFPostOfTheDay (< 20)

The Giant Sucking Sound



February 14, 2012 – Comments (1)

Board: Macro Economics

Author: yodaorange

The giant sucking sound is your assets being pulled into the US treasury. Increasingly, I am thinking that we METARites might not be focused on the most important investment theme. We are concerned with improved returns relative to benchmarks or in some cases absolute returns. As we witness the Greek’s deal with getting their budget closer to balance, should we spend more time considering when/how the US will do the same?

With a broad brush, for purposes of this post let’s stipulate that METARites are in the upper 50% of income and/or assets. As the US deals with the wide budget deficit, I am thinking that METARites are going to be called on to help out. Kind of like Willie Sutton and banks, METARites are where the money is located.

If you profusely save, prudently spend, and/or have good investment returns, you are ripe for the picking. So far, none of this is news to METARites. What prompted this post was an excellent article in today’s New York Times entitled: “Even Critics of Safety Net Increasingly Depend on It.” The writers went to Chisago County, northeast of Minneapolis which they portray as typical of the Midwest US.

The story interviews people from a broad range of ages and backgrounds. The essential point is that all of these folks:

a) Believe the government should spend less and tax more

b) Are NOT aware of how much personally they or their families are getting from Uncle Sam

When the writers point out how much they receive from Uncle, several of the folks are shocked/surprised and brought to tears. While this is not surprising to METARites, there are a few facts and figures in the story that might be new to you. A few highlights:

Dozens of benefits programs provided an average of $6,583 for each man, woman and child in the county in 2009, a 69 percent increase from 2000 after adjusting for inflation. In Chisago, and across the nation, the government now provides almost $1 in benefits for every $4 in other income.

Almost half of all Americans lived in households that received government benefits in 2010, according to the Census Bureau. The share climbed from 37.7 percent in 1998 to 44.5 percent in 2006, before the recession, to 48.5 percent in 2010.

The trend reflects the expansion of the safety net. When the earned-income credit was introduced in 1975, eligibility was limited to households making the current equivalent of up to $26,997. In 2010, it was available to families making up to $49,317. The maximum payout, meanwhile, quadrupled on an inflation-adjusted basis.

But Medicare’s situation is even direr because a worker earning average wages still contributes only $1 in Medicare taxes for every $3 in benefits likely to be received in retirement.

A woman, who was 45 in 2010, earning $43,500 a year, will pay taxes that will reach a value of $87,000 by the time she retires, assuming the money is invested at an annual interest rate 2 percentage points above inflation, according to the Urban Institute analysis. But on average, the government will then spend $275,000 on her medical care. The average is somewhat lower for men, because women live longer.
Mr. Qualley, who owns a tattoo parlor in Harris, north of North Branch, said some of his customers paid with money from government disability checks.

“They’re getting $300 or $400 tattoos, and they’re wearing nice new Nike shoes that I can’t afford,” he said, looking up from working a complicated design into the left leg of a middle-aged woman. “I guess I shouldn’t say it because it’s my business, but I think a tattoo is a little too extravagant.”

There is a lot more to the story and the graphs are particularly insightful. I highly recommend every METARite take the time to read it. I think it helps define the budget challenge the US faces:


There are many implications for METARites, most of which are not news. Two that I think are significant are:

1) ROTH IRA’s probably should NOT be used. ROTH’s have been great for people in low tax brackets. I have recommended them often for students with part time jobs, where the parent/grandparent would fund the ROTH. In those cases, the taxes due were zero when earned and presumably will be zero when the money is withdrawn 40+ years down the road.

I suspect that Congress at some point in the future will find ROTH withdrawals as a rich source of taxes. It would likely be means tested something like social security is today. Clearly this is not going to occur today or tomorrow, but in 10 or 20 or 30 years, it seems more likely IMO.

2) Regular IRA’s/401k’s/403b’s are likely to be “confiscated” in one form or the other. They will not call it confiscation, but probably just implement some method of getting out sized tax revenues. There is a pretty famous professor, Teresa Ghilarducci that has published several papers and testified before congress that 401k’s should be “confiscated” (My word, not hers BTW) by Uncle to help subsidize retirement funding for the less fortunate. She says: ‘The rich and poor alike deserve secure and adequate retirement income after a long working life.”

Teresa Ghilarducci website:

BOTTOM LINE is that METARites or anyone else with significant assets and/or income in retirement is going to pay a lot more to support the less fortunate. If you spend a lifetime building up a significant nest egg looking forward to a comfortable retirement, you might be sorely disappointed.

Maybe we should be spending more time working on legally “hiding” our assets. (And NO, I am not suggesting Cayman Island type accounts.) Maybe we have to be house/farm rich and cash poor. Or maybe we have to use more exotic trusts to attempt to get around Uncle’s hand.

I would not expect anything dramatic in the next few years, but with a multi-decade timeframe, I think I am starting to hear a giant sucking sound. Where is Ross Perot when you need him?



1 Comments – Post Your Own

#1) On February 14, 2012 at 1:35 PM, Jim2B (< 20) wrote:

A much easier and insidious way of accomplishing the same goal is inflation.  Inflation harms those who save and helps those in debt - which is exactly the stated goal of the current administration.

It may come as no surprise that this is EXACTLY what the current administration has done in regards to monetary policy through various "quantitative easing" measures it has taken.  My predictions is that we'll see more of this very behavior.

It allows Obama to increase the $$ amount of benefits to his constituents and contributors while actually reducing the amount of benefit actually given.  The people who this harms will mostly not associate this bad monetary policy with the person who inflicted it upon the country.

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