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In 1961, the year I was born, our national debt was $289 billion. Today, it’s $21.1 trillion. We clearly have a problem living within our means.
We also have a problem managing our public pensions and our premiere safety net program, Social Security. Consider the following:
According to Bloomberg, only two states in the union have fully-funded pension systems, South Dakota and Wisconsin. The states with the most poorly funded pension systems are as follows:
- New Jersey: 30.9% funded
- Kentucky: 31.4% funded
- Illinois: 35.6% funded
- Connecticut: 44.1% funded
- Colorado: 46.0% funded
- Pennsylvania: 52.6% funded
- Minnesota: 53.2% funded
- South Carolina: 53.8% funded
- Rhode Island: 55.3% funded
- Massachusetts: 57.5% funded
And according to the Social Security Administration (SSA), the Old-Age and Survivors Insurance (OASI) Trust Fund will be depleted by 2035. Once this occurs, the SSA will only receive enough employment taxes (FICA) to pay for seventy-five percent of promised OASI benefits.
The Fiscal Rubicon Has Been Crossed
America is in terrible fiscal shape. And I don’t see how this dismal situation ends well. We are too delicate to handle even trivial cuts in government spending, too closed-minded to abandon the status quo, and too tribal to muster the trust and resolve necessary for a great national undertaking.
My prediction is that we’ll continue as is until the debt, the dependency, and the cultural decline eventually humble our once mighty economy, and all the false wealth created by all the entitlements, all the cronyism, and all the unrealistic promises suddenly vanishes. As the economist Herbert Stein once put it, “If something cannot go on forever, it will stop.” Or as I like to put it, false wealth only lasts until Atlas shrugs or collapses.
If you’re a forward-thinking, responsible person (i.e, a personal responsibility warrior), you must prepare for the elimination of false wealth. At some point in the not-too-distant future, our politicians simply won’t be able to tax and borrow enough to subsidize the defense of Europe, Japan, Korea, and Taiwan—and ensure the profitability of our largest corporations, and keep Medicare solvent for a steadily aging society, and fix our shoddy infrastructure, and bankroll gold-plated public pensions with built-in cost of living adjustments, and underwrite $100,000 bachelor degrees, and support all the people who have drank, drugged, loafed, fornicated, or video-gamed themselves into uselessness.
Stress-Testing Your Financial Situation for False Wealth
So how does one prepare for the elimination of false wealth?
Simple. Put together a spreadsheet of all the money you get from government sources. Then estimate how much of that money will likely go away once Atlas shrugs or collapses. Finally, determine if your current financial situation can handle the elimination of false wealth. If it can, great. If it can’t, adjust.
Here’s the false wealth calculation for Mrs. Groovy and me (see Table 1 below). We currently get money from two government sources. We get a New York State pension and an Obamacare subsidy.
For public pensions and Social Security, I suggest using the unfunded portion of the various plans to determine the extent of false wealth. New York State’s pension system, for instance, is one of the healthiest in the union and is currently funded at 94.5 percent. This in turn means that 5.5 percent of New York State’s pension system is unfunded. False wealth thus equals 5.5 percent. To account for this false wealth, then, I’m assuming a 5.5 percent cut to my pension benefit. If my pension benefit were from New Jersey, I would assume a 60.1 percent cut. If we were talking about my Social Security benefit, I would assume a 25 percent cut (the cut the SSA will be forced to enact once the OASI Trust Fund is depleted).
A government awash in debt and unfunded liabilities can’t afford to give thousands of dollars a month to people who are income poor but asset rich (i.e., people who don’t need subsidies). When Atlas shrugs or collapses, our politicians will be forced to recognize this fiscal reality. One such program that currently mocks common sense and provides a subsidy to rich people is Obamacare. So at some point in the not-too-distant future, I fully expect Obamacare to be means tested on wealth as opposed to just income. How will this shift to fiscal reality shake out? I have no idea. For the purposes of this exercise, though, I’m using the following net worth levels to define “rich” and assign estimates of false wealth.
- Income poor but asset rich (net worth over $500,000): 50 percent subsidy reduction.
- Income poor but asset comfortable (net worth between $100,000 and $500,000): 25 percent subsidy reduction.
- Income poor and asset poor (net worth < $100,000): 0 percent subsidy reduction.
Table 1 – False Wealth Calculation
| Entitlement | Promised Benefit | False Wealth Adjustment | Realistic Benefit | Difference |
|---|---|---|---|---|
| New York State Pension | $1,643/Month | 5.5 Percent | $1,552/Month | $91 |
| Obamacare Subsidy | $2,394/Month | 50 Percent | $1,197/Month | $1,197 |
According to my calculations, a reasonable accounting for false wealth will mean adding $1,288 to our monthly expenses. That’s the bad news. The good news is that our portfolio can handle that hit.
Check out Table 2 below. Mrs. Groovy and I currently need $16,284 annually from our portfolio to cover the portion of our annual expenses not covered by government sources (pension and Obamacare). That sum is well below four percent of our portfolio’s current value. If Atlas shrugged or collapsed, and Mrs. Groovy and I lost all of our false wealth, we would need $31,740 annually from our portfolio to cover the portion of our annual expenses not covered by government sources. And, happily, this larger sum is also less than four percent of our portfolio’s current value. In fact, if we were unfortunate enough to have a New Jersey pension rather than a New York pension, our portfolio would still be large enough to handle a loss of all that false wealth. Mrs. Groovy and I pass the false wealth stress test with flying colors.
Table 2 – False Wealth Stress Test
| Financial Status | Total Monthly Spending ($3,000 Plus The Obamacare Premium Subsidy) | Monthly Spending From Government Sources | Monthly Spending From Personal Savings | Total Annual Spending From Personal Savings | Is Total Annual Spending From Personal Savings 4% Or Less Than Portfolio Value? |
|---|---|---|---|---|---|
| With False Wealth | $5,394 | $4,037 | $1,357 | $16,284 | Yes |
| Without False Wealth | $5,394 | $2,749 | $2,645 | $31,740 | Yes |
| Without False Wealth – New Jersey Pension Edition | $5,394 | $1,705 | $3,689 | $44,268 | Yes |
Final Thoughts
The false wealth stress test presented here is surely crude. But the concept is real. Just ask the Venezuelans, Greeks, and Russians. When Atlas shrugs or collapses, things get nasty quickly. So beware false wealth. Stress test your financial situation annually. And if you fail your false wealth stress test, adjust accordingly—either spend less, earn more, or delay your retirement.
Okay, groovy freedomist, that’s all I got. I hope this post wasn’t too depressing. To end the week on a more upbeat note, then, here’s another episode of Talking Trash with Mr. Groovy. The spirited banter between me and Mrs. Groovy will surely bring a smile to your face. Peace.
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