A storm brewing

Posted: May 21, 2005 12:00 AM

Hurricane season starts in a few weeks. ?It?s important that people know this is going to be another above-average season so they can start to prepare,? meteorologist Gerry Bell warned on May 16.

Indeed, be warned. But also be aware that forecasters make the same prediction, year after year. The Tropical Meteorology Project at Colorado State University has issued an ?above average? prediction every April since 1999. Maybe they should change their definition of ?average,? especially since their predictions of ?above average? seasons include 2002, when no hurricanes hit the United States.

Long-term weather predictions are unreliable, of course. What we do know is that, if a storm hits, very few people will be hurt, because almost everyone except journalists will evacuate. Hurricanes give television reporters plenty of chances to prove they?re not smart enough to come in out of the rain.

But there?s a different sort of storm building -- one that we can escape, if we?re willing to take action, but one that we can?t run from. It?s the fiscal disaster outlined in the book ?The Coming Generational Storm? by Laurence Kotlikoff and Scott Burns.

The book explains that the United States is about to get very old. ?Where we had 35.5 million people age 65 and older in 2000, we?ll have 69.4 million in 2030,? the authors write. That?s a big problem, because those older Americans are scheduled to get big payments from the government.

?The amount of implicit debt that Americans need to pay is enormous,? they write. They note that in 2002, economists Jagadeesh Gokhale and Kent Smetters estimated that the total unfunded liabilities of government would be $46.9 trillion in 2004. $7.4 trillion of that is in the Social Security retirement income program, and the other $38.7 trillion will be generated by the soaring costs of Medicare. And that?s before the gigantic 2003 Medicare prescription-drug benefit.

 Kotlikoff and Burns lay out a number of solutions, most of which are politically impossible.

For example, they want to phase out the current Social Security system, replacing it with what they call a ?personal security system.? They want to set up a national sales tax, which they say would start off at 12 percent and gradually decline over the years -- as if any sales taxes ever really decline -- to pay off our remaining Social Security obligations. Good luck getting those ideas through Congress.

They also want to force workers to invest their payroll taxes in a single, government-controlled global index fund. But that wouldn?t work, because it would quickly make the government the majority stockholder in every publicly traded company. Imagine Uncle Sam as the owner of Microsoft, GE, and so forth. Bad idea.

Ironically, the authors have a simpler solution, and one that might actually work: personal responsibility.

We can begin trimming Medicare spending, they write, if every individual would start taking better care of himself (quit smoking, exercise, give up junk food) and start playing a role in his own health care. ?We could realize an $11.7 trillion ?dividend? by being engaged and informed in our health care decisions,? they write. Doing so would start to put a dent in the $38.7 trillion Medicare shortfall.

Personal responsibility would work for Social Security as well.

A recent pamphlet from Lincoln Financial says, ?Fulfilling your retirement destiny. The power is yours.? Those of us with 401(k) plans or IRAs already understand that. Now, we need to extend that power to all workers by allowing them to invest some of their payroll taxes in a Personal Retirement Account.

PRAs would help workers take advantage of compound interest by allowing them to invest over decades. And individual workers, not the government, would own the accounts,. So while every American will have the chance to join the ?ownership society? and build a nest egg for retirement, we won?t have the government taking ownership of every industry.

You?ve probably heard a lot of scary things about PRAs. The Center for Media and Public Affairs recently found that 83 percent of the comments aired on the big three network evening newscasts were negative comments. 83 percent. How?s that for fair and balanced?

But the fact is that there?s really no downside to PRAs, because if a worker wanted to remain in the traditional Social Security system (and thus remain dependent on the government to finance his retirement), he could do so. But it seems unlikely many people would remain in the traditional system, because they?d want control of their own future.

We can build a retirement structure that will withstand the coming generational storm, and PRAs should be the foundation. Let?s get started, before the storm arrives.