And that's in large part because our feckless representatives in Congress are either too stupid or just plain too scared of what We the People as voters would do if they exercised some fiscal responsibility and genuine leadership. Either way it's shameful.
As the latest example, of which there are many, let's take the highway funding shortfall and connect that to the pension underfunding that's so prevalent throughout America today. Then let's throw in the prevailing and likely fictitious investment rate of return assumptions used by many pension funds (due to low inflation and low interest rates available to pension investment managers) on fixed income investments such as bonds.
The simple math result is that higher pension contributions are needed to adequately fund currently promised future pension obligations of the various funds.
For example, assume that a pension fund assumes it will earn 8% on its investments and that, for the sake of simplicity, those investments are equally divided between fixed income such as bonds and stocks. A 50-50 split would necessitate an equity rate of return of 10% accompanied by a fixed income rate of return of 6% to arrive at the blended assumed rate of return of 8%.
If that fixed rate of return on bonds is changed to 4%, however, as a more reasonable assumption would be (due to low inflation and low long term interest rates), the blended return would be 7% annually (10% for stocks and 4% for bonds).
And if the future return on stocks is assumed to be a more realistic 8% (instead of 10%, again due to low inflation and low future economic growth), a 4% return on bonds would result in an overall blended rate of return of 6% (8% on stocks and 4% on bonds).
That 6% assumption would be more realistic but undoubtedly would play hell with pension funds and their financing requirements over the next several decades.
Since a 6% assumed rate of return would dramatically increase required pension contributions in order to maintain the same promised benefit levels that are being promised to future retirees today, the masterfully misleading (if not outright lying) government gurus propose that we encourage pension plans to artificially keep the assumed rate at 8% by pretending that bonds will earn more than they will actually earn over the next ten or twenty years. And lower future pension contributions too. But why would our government gurus do such a thing?
The answer is simple -- to fund the highway bill, at least on government paper?
Got it? Of course not. It's just the government playing games again with money we don't have in order to continue to make promises about the future that we can't keep by allowing us to keep paying taxes that aren't high enough to pay for the future promised benefits. In fact, the promised benefits for future entitlements (that are already dangerously underfunded) will become even more unaffordable and unrealistic as baby boomers continue to retire in record numbers and fewer people are at work and funding those benefits.
Accordingly, Congress merely assumes that what won't happen will happen for its own fictitious score keeping purposes, then declares its actions fiscally responsible, thereby keeping taxes on gasoline low and avoiding a taxpayer revolt.
And that, my friends, is just one more reason why financial literacy is such a huge issue in our fiscally irresponsible America of today.
Government game playing continues unabated due in large part to the fear of politicians that We the People will vote them out of office if taxes are increased (Republicans) or government spending is decreased (Democrats and oldsters), herein referred to as takeaways. Thus, over time members of Congress avoid takeaways in order to get more votes, which they like at election time, and We the People avoid tax increases and spending increases, which we like. Everybody's happy, at least for the short haul. And the future is neglected, as are the best interests of our kids and grandkids.
And the great bulk of those spending increases are automatic and already legislatively built into programs such as Social Security, Medicare, the old age portion of Medicaid (such as nursing homes) and so forth. Throw in growing interest on an ever growing government debt and the financial catastrophe lies directly ahead.
In that regard, a reasonable and frightening projection on the estimated change in government spending between 2012 and 2023 in inflation adjusted dollars reveals the following priorities of future government spending as mandated by current legislation. Of the total projected growth in government spending over the next decade, 66% will be attributable to Social Security, Medicare and Medicaid (excluding children), 37% will be for interest on government debt and ONLY 2% will go for children. 9% less for defense and 4% more for 'other.' The kids get ONLY 2% of the total increase. Of course, they don't vote.
{If you are interested in learning more about our nation's financial plight and the shortchanging of future generations by automatically piling up government debt today and in the future, a good read is the short book "Dead Men Ruling" by Eugene Steuerle. The cited table on future spending appears on page 91.}
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In any case, This Road Work Made Possible by Underfunding Pensions presents yet another example of why politics sucks and why We the People need to wake up asap or sooner if possible, because until we do wake up, the politicians certainly won't. They will continue to play the reckless games they are accustomed to playing, and the fiscally irresponsible hole we've been digging for our kids and grandkids will only get deeper and deeper and deeper:
"The Federal Highway Trust Fund is expected to run out of money in August. So, naturally, Congress is debating a temporary fix that involves letting corporations underfund their pension systems.
Of course, we could replenish the fund by raising the federal gasoline tax, which is its primary source of financing. . . . But increasing gas taxes is unpopular, so Congress hasn’t done so since 1993, which means that the tax on gas has actually fallen 39 percent over the last 21 years after you adjust for inflation. Instead, Congress has used a series of gimmicks and shifts to keep the fund solvent as highway construction costs have risen.
The latest proposal, which passed the Republican-controlled House Ways and Means Committee on Thursday, works like this: If you change corporate pension funding rules to let companies set aside less money today to pay for future benefits, they will report higher taxable profits. And if they have higher taxable profits, they will pay more in taxes over the 10-year budget window that Congress uses to write laws. Those added taxes can be diverted to the Federal Highway Trust Fund.
Unfortunately, this gimmick will also result in corporations paying less in taxes in later years, when they have to make up for the pension payments they’re missing now. But if it happens more than 10 years in the future, it doesn’t count in Congress’s method for calculating budget balance. “Fiscal responsibility,” as popularly defined in Washington, ignores anything that happens after 2024.
Letting companies underfund pensions so they pay more taxes is a dumb idea, but it’s not a new one: A similar strategy was part of the last bipartisan highway bill, which passed in 2012. The new proposal would simply extend the underfunding that was already allowed in the 2012 bill for a greater number of years.
This idea has come up in the last few years because pension costs are heavily driven by interest rates — and lower rates mean higher costs. When rates are low, as they are now, the government tells companies to set aside more money to pay for future pension benefits because they can’t count on high returns on safe investments to cover pension costs. Some companies have complained that “artificially low” interest rates are forcing them to actually overfund their plans. The 2012 highway bill and the new proposal give companies relief on that front, letting them fund their pensions based mostly on a historical 25-year average of interest rates; essentially, they’re being allowed to calculate the cost of promising pension benefits on the basis of investments — safe, high-yielding bonds — that were once available to pension funds but can’t be found today.
This is wishful math. Low long-term interest rates are not artificial; they reflect an expectation that the Federal Reserve will keep rates unusually low for a long time, and that economic growth will be relatively weak and uncertain. That, in turn, means that returns on safe investments like bonds will continue to be below historical averages, and that corporate pension funds still won’t get the safe, high returns they used to enjoy. If companies are allowed to put less money into their pension funds in that environment, the funds will deplete over time, and the companies will just have to pay more later — unless they go bankrupt, in which case a federal agency (the Pension Benefit Guaranty Corporation) will be on the hook to pay retirees....
And that’s something everybody in Congress knows: The hunt for “pay-fors” — deficit-cutting measures to offset things like replenishing the Highway Trust Fund — is not so much about keeping the economy strong. It’s more about being able to announce that the Congressional Budget Office said your plan wouldn’t raise the deficit over the next 10 years. That works even if, as with the latest Republican proposal, you take all the added corporate tax revenue over the 10-year window to keep the Highway Trust Fund solvent for just five additional months. Yes, even if we run with this gimmick, Congress will be back in January, trying to find a way to claw the fund out of insolvency again. . . .
If you define “fiscal responsibility” solely in terms of whether the federal budget deficit grows or shrinks over a 10-year window, you can reach the conclusion that the foregoing plan serves the goal of “fiscal responsibility.” Which only goes to show that politicians in both parties have settled on an insane definition of “fiscal responsibility.”"
Summing Up
Politics sucks.
And that goes for both Depublicans and Remocrats. {I can't see much difference between the vast majority of members of both political parties, including the "Tea Party," if I look at what they do instead of listening to what they say.}
All of We the People need to wake up and take control of a situation that's out of control and has been for a long time now.
We need to do it for the sake of our kids and grandkids.
It's simple math.
That's my take.
Thanks. Bob.
run for president you da man..
ReplyDeleteLen