When Will Prosperity Come Again?


A sustainable recovery can’t possibly come in just a couple of years.


The government won't talk about it nor will most financial journalists, but there are two secrets that will eventually come out in our tax bills.


(1) In www.analyzenow.com  and my books I have often written about the deplorable state of our national savings rate and the fact that people would have to save over 20% of their disposable income for the next twenty years to overcome the lack of savings from the last twenty years.  Apparently that damning statistic is just too horrible for the public to accept.  The average 401(k) now of those between 55 and 65 has only between$50 to $100 thousand savings depending on the poll.  That's not enough for retirement, especially for the many people who won’t get a pension.  In fact, there would be very little left after accounting for uninsured medical costs, future expenses like replacement of a roof or replacing deteriorating automobiles.  These are statistics that have unavoidable consequences as almost seventy million baby boomers start thinking ahead to retirement.


(2)  The second secret may have even bigger consequences.  It's the annual tax obligation politicians have been adding to our future tax payments.   The major contributors are the national debt and entitlements such as Social Security, Medicare numerous civil-servant benefits, etc.  The new congressional bills likely will add many more to the rolls of entitlement beneficiaries--and entitlements increase with inflation.


If we assume that a competitive federal interest rate will be 1.5% plus inflation and a term of 30 years for bonds, we can calculate the amount of the annual payments that our taxpayers will be saddled with for 30 years.  To meet these future obligations, the calculations show that future taxes will have to be about four times today's level of personal income taxes.  Taxes this high would eventually use all personal income and leave practically nothing for consumption or savings.  The only remaining employers would be Federal and State governments.


These numbers do not add the entitlements of a health bill, additional stimulus packages or carbon credits.  Because of the aging of our population there will be fewer people paying income tax at the end of 30 years.  Further, the numbers don't include provisions pledged to bail out the financial sector which are about equal to the current national debt.  (Pittman and Ivy in Bloomberg, 2/9/09)  Nor do they include state and local debts, mortgage debts, credit card debts, automobile loans, and other personal debts which total several times the national debt.


Either the savings shortfall or the deepening of the Federal obligation crisis would force the people to save more, not spend more as both the government and the business segment would like.  We're facing the confluence of a two-decades-old cumulative savings shortfall, higher taxes and the exacerbating influence of an aging population with a smaller workforce.  This will take decades to resolve itself, not years.  There won’t even be a start to solving these problems until the Congress and voters recognize that taxes will have to increase greatly and entitlements will have to be reduced.


Those who will survive best are those who build and maintain significant savings in future years and keep in good physical shape to reduce out-of-pocket medical costs—to say nothing of feeling better.  Saving more will only happen if we understand what is happening, reduce spending and budget to put significant savings into tax-efficient accounts.


Henry K. (Bud) Hebeler