It’s Worse than I Thought
I will never forget May 19, 2008. That day changed
everything.
I was sitting in a hotel dining room eating
breakfast, getting ready to host a daylong workshop
for a group of financial professionals in Raleigh,
North Carolina, when I just about choked on my
oatmeal. Seriously, it was all I could do to keep from
blowing oats all over the nicely dressed couple
sitting next to me.
The headline caught my attention; the article
invoked the reaction.
I picked up the morning copy of USA Today , and
staring at me in bold print, right there on the front
page, was: Bill for Taxpayers Swells by Trillions.
Stunned, I read on. Here’s what it said:
The federal government’s long-term financial
obligations grew by $2.5 trillion last year, a
reflection of the mushrooming cost of Medicare
and Social Security benefits as more baby
boomers reach retirement.
That’s double the red ink of a year earlier.
Taxpayers are on the hook for a record $57.3
trillion in federal liabilities to cover the lifetime
benefits of everyone eligible for Medicare,
Social Security and other government
programs, a USA TODAY analysis found.
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That’s nearly $500,000 per household.
When obligations of state and local
governments are added, the total rises to $61.7
trillion, or $531,472 per household. That is more
than four times what Americans owe in personal
debt such as mortgages.
The $2.5 trillion in federal liabilities dwarfs the
$162 billion the government officially announced
as last year’s deficit, down from $248 billion a
year earlier.
‘We’re running deficits in the trillions of dollars,
not the hundreds of billions of dollars we’re
being told,
’ says Sheila Weinberg, chief
executive of the Institute for Truth in Accounting
of Chicago.
The reason for the discrepancy: Accounting
standards require corporations and state
governments to count new financial
obligations, even if the payments will be
made later. The federal government doesn’t
follow that rule. Instead of counting lifetime
benefits for programs such as Social
Security, the government counts the cost of
benefits for the current year.
1 [Bold print by
author.]
I was gasping for air. How could this be? I had just
spent the previous decade working on my book Tax12
Free Retirement. Reading. Researching. Writing.
And never once did this fact come up. Not once.
How could I have missed it?
Easy. It was information that wasn’t talked about.
Taboo in the circles of the political elite. These
numbers were clandestine. Buried.
Do you comprehend what this article is saying?
Our budget deficit for 2007 was 15 times worse than
official reports. Yes, 15 times! Even the phrase
“Good enough for government work” can’t come
close to touching this discrepancy.
Let me explain in more detail what this front-page
article was telling the American public. Simply put, in
2007 the U.S. government reported our country’s
“official” annual deficit (the amount we spent above
the income we brought in) to be $162 billion – billion
with a b. However, our “real” deficit for that year was
actually a mind-numbing $2.5 trillion – trillion with a t.
Why the difference? Here comes the really fun
part.
The U.S. government uses a set of accounting
practices different from every other entity in the
country, including state governments. All other
entities report debt on their balance sheet the year
in which they commit to the liability, not just the year
in which the money is spent. Do you see the
difference? It’s major.
For example, let’s say in 2010, Corporation X
commits to a project that is going to cost $20 million
over the next five years. Even though the money
isn’t going to all be spent in 2010, the entire $20
million has to go on that company’s balance sheet
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as a liability, because it is money that will be spent
based on the current year’s decision.
Is it any surprise that the U.S. government doesn’t
play by the same rules? Yeah, that was my reaction
as well.
Here’s how everybody’s favorite uncle, Uncle Sam,
handles the reporting of his debt. He (the U.S.
government) only reports debt in the year that the
money actually leaves the U.S. coffers, not in the
year in which he commits to the liability, creating an
enormous disparity. A disparity so large that, when
you look at our total national debt, this reporting
aberration covers up a figure that is nearly six times
larger than what is currently being reported to the
American public.
Here are the actual numbers. I hope you’re sitting
down.
As of January 2011, the “official” national debt
reported by the U.S. government is $14.3 trillion.
However, our “real” national debt, taking into
account all of our current outstanding liabilities,
stands at a whopping $76.1 trillion
2 – five and a half
times larger than the number the government
officially reports.
Before we go any further, I want to put into
perspective just how big 1 trillion really is.
Near the end of last year, I picked up my oldest
son from school. On the way home he said,
“Dad,
do you want to know how big a trillion is?”
“Yeah,
” I said enthusiastically.
“Okay, guess what year it was 1 trillion seconds
ago?”
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“I have no idea. What year was it?”
“C’mon, Dad, you gotta guess.”
“Uh … 1400?” I answered a bit pathetically.
“Nope! Not even close! It was 30,000 B.C.”
“What? No way!” I said, as I tried to keep my car
on the road. “That’s impossible.”
“Nope. Trust me. It’s right. We did the math in
class today.”
“That can’t be. That seems way too big,
” I said,
wishing I could pull out a calculator right at that very
moment.
And that’s exactly what I did when I got home. And
he was right.
Let me walk you through the simple math I
performed to verify that answer.
Seconds per Day = 86,400 (24 hours X 60
minutes X 60 seconds)
Seconds per Year = 31,536,000 (86,400
seconds per day X 365 days)
Number of Years in 1 Trillion Seconds=31,710
(1,000,000,000,000 / 31,536,000)
Can you believe that? It takes nearly 32,000
years, at 31.5 million seconds per year, to equal 1
trillion seconds. Or another way to look at this is,
you would have to spend $31.5 million a year for
31,710 years just to spend $1 trillion.
The word “trillion” has been thrown around so
much in the last few years that we have become
numb to its vastness.
So, back to our debt – America’s “real” debt
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currently stands at $76.1 trillion. This means that
your personal share of this obligation is just over
$250,000. That is the amount that every American
would need to pay just to meet our current
obligations. (Though by the time you read this book
it will be much, much larger.)
Do you have an extra quarter million just sitting
around under your mattress? A quarter million that
you are eager to give the U.S. government? Does
your 3-year-old son? Does your grandmother? Your
great-uncle?
Every man, woman, and child in America would
have to cough up $250,000, as of the writing of this
book, to expunge this staggering mountain of
obligation. And this number is growing at an
unprecedented rate.
To make matters worse (not that we need to make
them worse), if we calculate this debt based solely
on the taxpaying citizens of the United States, the
amount that each taxpayer would owe blossoms to
over $1 million – each!3
Does that anger you in the same way it does me?
It should. How is it possible that these cold, hard,
facts would remain a secret to the American public?
It should be headline news – every day. And while
I’m not a conspiracy theorist, let’s admit it, we’ve
been lied to.
There is one person in public service that has
been desperately trying to get this message out to
the American people, but no one seems to be
listening. As a matter of fact, it seems that most
Americans have shoved their index fingers so far
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into their ears that their knuckles are touching
somewhere in the middle of their heads.
The person I am referring to is David Walker,
former comptroller general of the United States. For
15 years, and four presidential administrations, Mr.
Walker served our country in different public
capacities ranging from assistant secretary of labor
for pension and welfare benefits to his final position
as comptroller general of the United States.
4
Essentially, he was the nation’s CPA.
What shocks me most about his message, other
than its dire ramifications, is that no one is listening.
Wouldn’t you think that an appraisal from the man
who had to sign off on America’s budget would
warrant our attention? Yet most Americans seem to
choose ignorance.
Here are four quotes from Mr. Walker
5:
“If [our country] were a company, we would be
out of business.”
“Current federal financial reporting and
budgeting provides policy-makers and the public
with an incomplete and even a misleading
picture.”
“As the federal official who signs the audit
report on the government’s financial
statements, it is apparent that our government’s
financial condition is far worse than advertised.”
“We have been diagnosed with fiscal cancer.”
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These quotes are not taken out of context. The
message is clear. We are in trouble, and if America
doesn’t make some quick changes, it will find itself
on its financial knees, because what is yet to come
is only going to exacerbate the already horrific
problem.
Here’s just one of the many reasons why:
In 1945 – five years after the first monthly
payment was issued to a Social Security
recipient – there were 42 workers per retiree. In
1950, the ratio was 16-to-1. In 1960, there were
five workers per retiree. Today, the ratio is 3.3-
to-1, and within 30 years, it is projected there
will be just slightly more than two workers per
retiree. Some economists have labeled Social
Security a pyramid scheme.
6
I find that last sentence a bit amusing, because it
echoes a sentiment that an individual once shouted
from the back of the room at one of my workshops.
It was early in the workshop, and I was speaking
about the pending problems surrounding Social
Security. I was pointing out that there is absolutely
no pot of money sitting anywhere within the Social
Security program that has your name on it. None
indeed. Social Security is a pay-as-you-go system.
Every penny that is taken in each year is spent that
year, including your Social Security tax. You are not
putting money away for you. You are paying for the
individuals currently receiving Social Security
benefits.
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As I was detailing this with the group, a man in the
far back of the room yelled out,
“It’s just a Ponzi
scheme!” Everyone laughed. Including me. His
timing was perfect. You see, I was speaking at a
hotel in downtown New York City to a group of local
financial professionals, and Bernie Madoff had just
been convicted of running the largest Ponzi scheme
of all time. It was fresh on everyone’s mind.
But you know what? I think the person who
shouted that comment was right. Social Security
does operate like a classic Ponzi scheme – a
scheme that just may make Bernie’s swindle look
like a game of Monopoly
®. (To be clear, I am not
saying that Social Security is a Ponzi scheme. I’m
simply saying that the parallels are very interesting.)
Let me give you the definition of a Ponzi scheme.
Simply put, it is a scam that uses the money
received from current depositors to pay back what is
owed to the early depositors. This was the hoax
Charles Ponzi perpetrated on a great number of
people back in the 1920s. He had to keep
generating new investment money from new
individuals because little, if any, of the money he
received from investors was actually ever invested.
He simply used it to fund a lavish lifestyle.
This is not dissimilar to the way that Social
Security works. As I just mentioned, all Social
Security revenue that comes in during the current
fiscal year is spent. However, it may be spent in
ways that you were not aware. While it does cover
benefits for existing retirees, it is also used to fund
other parts of the government’s over-committed
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general budget. Yes, you heard me correctly. The
government spends the money that you pay into the
Social Security system on things other than Social
Security.
The government borrows money from the Social
Security Trust Fund so it can attempt to meet all of
its other current obligations, and then it turns around
and writes a big, fat IOU for what its just borrowed.
Why does it do this? It must, in order to keep the
doors of government open.
When you hear the term “Trust Fund,
” don’t you
think of a huge pot of money sitting somewhere, just
waiting to be used? I do. However, that is not the
case. It is a deceptive choice of words. The only
reason there is a so-called Trust Fund is simply for
accounting purposes, so the government knows how
much it has borrowed from the Social Security
program.
Do you see the similarity to a massive Ponzi
scheme? Social Security takes all the current tax
revenue from today’s taxpayers to cover the
benefits due to the earlier depositors, those who are
now receiving Social Security benefits. The problem
is, as you read above, pretty soon there are going to
be only two workers for every one recipient of Social
Security benefits. As my daughter would say,
“Yeah,
have fun with that.”
Why does all this matter? I’ll give you the answer
in two words – future taxes. If our debt is almost six
times worse than we thought, and the government’s
only source of revenue to combat this debt is
taxation, then what do you think is going to happen
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to future tax rates? And if you don’t think it is likely
that tax rates will go up in the future, simply go back
and review the tax rates in America over the last
century. (See Appendix A for a year-by-year listing
of the top marginal tax bracket all the way back to
1913.)
Did you know that back in the 1940s, the top
marginal tax bracket was over 90 percent? No, that
is not a typo. Over 90 percent! Think about what
that means. It means that individuals paying taxes at
that rate kept less than 10 cents out of every dollar
they earned. Ninety cents or more of every dollar
above that tax level went to Uncle Sam!
How would you like to keep only 10 cents of every
hard-earned dollar? It is possible, you know.
Unlikely, but possible. We have been there before;
it’s just that most people either don’t remember or
weren’t alive to know.
So, does the significance of this debt issue, and its
ramifications, make a little more sense now? I hope
so.
But let me tell you, the best part is yet to come,
because there is a solution for your retirement. A
way you can potentially make future tax rates
immaterial to your retirement savings. A way that
you can get your money out of the tax-wash today
and be able to access it tax-free in the future,
regardless of at what age you want to retire*.
I know you may be thinking,
“C’mon, that sounds
too good to be true,
” but it’s not. This strategy has
been around for decades and is just as real and
powerful today as ever. As a matter of fact, with the
21
introduction of a new product in the marketplace, I
believe the opportunity is better than ever. And this
book, The Retirement Miracle, is going to give you
the details about how this specific product works. I
want you to see all the facts and then make the best
informed decision that fits you, whether it utilizes this
strategy or not.
This is not a one-size-fits-all approach; it is not for
everybody. But for those that see its potential, and
can afford to take advantage of its great benefits, I
have found nothing better.
* Based on current tax law as of this writing.