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                                 DOES ‘ENTITLEMENT REFORM’ MEAN GIVING SENIORS LESS?
Currently many young people feel that there’ll be no Social Security when their retirement time arrives. Although a bit too pessimistic, we agree that Social Security will atrophy as a result of ‘reforms’. We counter that by proposing (in previous writings – visit the website) that 21st century children will retire comfortably, if not affluently, if their parents have the foresight to invest $1000 at the child’s birth in a proposed special Social Security investment system.
But what about Medicare?  It is already a more serious problem than Social Security with rabid opponents insisting that seniors pay a significant portion of their own health care costs.
We don’t think any of the proposed ‘reforms’ will please the elderly. We do have suggestions, however, that should free children of the 21st century from fear of their golden years. When parents of newborns visit the Social Security office to sign up ‘junior’, they would be asked for a $100 Medicare trust fund registration fee. If they truly can’t afford $100, they would pay whatever they can, with other sources making up the difference.  With 4.3 million births per year, we would hope 4 million would make the effort to sign up, giving us a trust fund of $400 million.
They would also be asked to set up a simple form Living Will. These instructions would be subject to change when the child comes of age. Those that choose ‘pull the plug’ on life support, if ever that comes to pass, will be making a real contribution to society. And save Medicaid billions in the distant future.
In return for recording a Living Will, I would support a provision for the government to contribute $100 in behalf of each child. This would bring our trust fund to $800 million. The trust fund would be overseen by Medicare but managed by existing hedge and mutual fund companies.
We would expect a constant dollar growth of 8% per year. There would be no withdrawals for at least 65 years. At that time, the fund should be worth about $125 billion in current dollars. My preference would be to let it ‘marinate’ with no dividends paid until the fund exceeds $200 billion. At that point the trustees could begin paying annual dividends from current year earnings that would be used to pay part (possibly all) of each member’s current Medicare premiums.
At some point the fund should be able to pay all Medicare costs for the ‘2012 club’ babies, and, if the investment gods are smiling, even pay nursing home costs. Hopefully, by 2102 (our group are then all 90) the trust fund will be paying all Medicare expense and reducing the pressure on the Medicare system. Even if the 21st century proves to be a poor investment age (unlikely) our trust fund will provide a healthy boost to our beleaguered seniors. History tells us that each century should be a little better than the previous. Technology advances inexorably. Even in our current, ephemeral malaise, the stock market has held up pretty well. There is no downside to our proposal. The original $100 cost will soon be forgotten and in retrospect, be immaterial. The current ‘stroller crowd’ will be the eventual beneficiaries. Health care costs for the elderly will not be their ‘Sword of Damocles’.
 
 
                                          WHO WANTS TO RETIRE A MILLIONAIRE?
A version of the following was published in the Naples Daily News on Sunday, Jan. 29, 2012
 
President Obama says that in America, anyone can become a millionaire.  But we say, everyone born in the 21st century, with a little help from their folks, can retire a millionaire.  Certainly, if you are over fifteen it will be difficult, as always.  But if you are younger, particularly if you are an infant, you can retire with a million dollar nest egg with relatively little effort on your part. Your parents, and possibly your grandparents, will have to make an effort which, depending on their financial situation, will range from no problem to somewhat painful.
In a Social Security supplement approach that we espouse, relatively little legislative efforts, modest implementation costs, and absolutely no changes to traditional Social Security, are required. If your family can simply (or not so simply, if times are tough) invest $1000 for you, at your birth, adding to it periodically until it reaches $2000 by your 10th birthday, it will have a reasonable probability of growing to a million dollars when you reach your 70’s. If the initial commitment falls short of $1000, extra efforts in the following nine years will allow you to catch up by age ten.
If you were born in the 21st century, seventy will likely be the normal retirement age. You might be able to retire early, perhaps at 67, but it will cost you 25% of your normal, age 70 pay out. Your mom retired at 67 with full benefits, but, we suspect Social Security benefits will atrophy over the next six decades. But then, most young people today don’t think it will be around at all. An overly pessimistic view, in our opinion. Note that our reforms require no alteration, whatsoever, to the current Social Security system.
We feel, however, that everyone should have the option of retiring when they please, without being in thrall to Social Security edicts. If, after the initial $1000 is invested, the parents find a way to save $200 a year (for ten years), instead of the recommended $100, retirement at age 60, or shortly thereafter becomes a distinct possibility.
The best way to hedge your bets is to have your Retirement Investment Certificates (RIC’s) pegged to mature in 60 years, at which time the mutual funds therein would be transferred to your IRA and continue to grow until you are ready to actually retire. This program is designed for the 60% of Americans who don’t go to college and probably won’t earn more than $60,000 a year. If it can work for them it should work even better for those that make more.
If our typical youngster goes to work after high school and commits to saving about $1000 a year from her salary through payroll deduction (with investments in small cap mutual funds earning about 10% a year) by her mid-sixties her retirement kitty will be about $1.2 million. Even if she fails to save anything during her working life, her kitty at age 65 will be over $300,000 (again, constant dollars)
In our approach, the individual will, if reasonably prudent during their working life, be able to retire (with a million dollar nest egg), sometime during their sixties. When Social Security kicks in, retirement should truly be the golden years.
 
       
 
 
                                              LET’S REDUCE SOCIAL SECURITY PAYOUT BY 25% (?)
 (A VERSION OF THIS OP-ED WAS PUBLISHED BY THE NAPLES DAILY NEWS ON SEPT. 20, 2011)
 
 

That’s what deficit reduction politicians may be saying (calling it “entitlement reform”) and you didn’t even notice. My daughter can retire with full benefits at age 67. This will be 16% less (as a percent of ‘average’ salary) than I got when I retired at age 67. I guess we’re OK with that. Her daughter will probably have to wait until age 70 to collect full benefits. Economist magazine (April 9, 2011) says the experts are OK with that, too. After all, we’re living longer, we should work longer. If my granddaughter wants to retire at age 67, she’ll receive 25% less than her mother received. And over 40% less than her grandfather.
Those unmoved by this analysis probably earn a healthy income and to them Social Security is a nice retirement bonus. Families earning less than $50,000 a year (about half the population) have Social Security to look forward to, and not much else. Not that the ‘under $50k’ crowd  has much choice. Half of them don’t have access to a 401K, even though, along with IRA’s, 401K’s have proven problematic in bulwarking retirement. Moreover, virtually all pension plans, public and private, are under attack. Money magazine says if you can save $10,000 a year, starting at age 35, you’ll do fine. Therein lies the rub. Only the reasonably wealthy can start saving at 35 and emerge comfortable at 65, 67, or, 70.
The under $50K crowd can’t save much, if anything – ever. The $50-100K cohort can save modest amounts, probably starting at middle age. The real culprit is time. Compound interest is a saver’s best friend, but it cannot accomplish much if you start at 45.
There is an answer for the future, and it is particularly useful to those born in the 21st century. It would require no federal funds, yet could provide a reasonable retirement at age 60, even for someone earning minimum wage. Century 21 children need not be content with envisioning 70-80% of their pre-retirement income, regardless of the paucity of their paycheck. But only if their parents (and grandparents) recognize that if they want their children to retire comfortably, they must accept the obligation to fund each child’s basic retirement, preferably at the child’s birth.
If the parents, grandparents, extended family, friends, and employers can scrape together $1000 during the child’s first year, and the parents commit to adding at least $100 a year to the baby’s account, a healthy, basic retirement will be in place, regardless of the child’s eventual adult earnings.
The savings would be deposited in a special account, and when the balance reaches $500, that amount is automatically transferred to a financial company to purchase a Roth IRA Retirement Investment Certificate (RIC). The RIC will mature in a preset number of years, and cannot be sold prior to maturity. We’ve selected 60 years for our example. The RIC will be registered with and monitored by the Social Security Administration, which will distribute the eventual payout. We suggest the investment be in small cap index mutual funds which should produce at least 10% annual growth. In the 20th century small caps produced far greater returns. Even in our current malaise - 2001 to 2010, small cap funds grew 10%.
In 60 years the initial investment will mature at about $400,000. SSA would dole it out monthly over five years. The payout (in constant dollars) would be about $25,000 a year, considerably more than SS would pay a 70 year old retiree after a life time of modest earnings. Our ‘child’ would have the option of letting the Roth IRA stay invested, working a few more years before deciding to retire with considerably higher income.
When the ‘child’ begins full time employment, hopefully he/she will see the wisdom of investing $1100 in two RIC’s annually; one a  50 year $1000 RIC to produce $200,000 in a lump sum, the $100 toward the eventual $400,000 payout each decade from additional 60 year certificates. If our child  went to work at age 18, retired 50 years later after a lifetime of minimum wages, he/she would retire with annual income exceeding $85,000.
For a more complete description of the plan as well as some thoughts on Medicare reform, please go to the internet at www.entitlementdilemma.com.
To  emphasize: a single, one time investment of $1000 could reward a newborn in 70 years with a ‘check’ for $1 million. Each decade thereafter, another ‘check’ for $1 million would arrive. Of course, we don’t know exactly how much the check will be for, nor precisely how much it will buy. We do know it will be huge compared to the initial investment. Changing peoples’ saving habits is nearly impossible. Changing their perception of their responsibilities is the impossible dream come true.
 
See Also Social Security 2071(Below) 
 
 
           The American Dream: With a Little Parental Help, Everyone Could Retire a Millionaire
  President Obama says any American can become a millionaire. We say, every American can retire a millionaire, at least those born in the 21st century with parents aware of their responsibilities.  If  parents heed my previously published advice, they will take the responsibility for initial funding of their newborn child’s retirement by investing $1000 in the child’s Social Security account. This could grow to a $1 million “nest egg” before age 70. The appropriate investment system, established by special legislation, would monitor the account which, invested in small cap mutual funds, cannot be cashed prior to age 60. We project these funds will grow by 10% a year, which is significantly less than their previous 20th century results. There would be no changes in the present Social Security system. A complete description of the system is contained in the website www.entitlementdilemma.com.
Upon the blessed event, parents, grandparents, extended family, friends, and perhaps, employers would help scrape together the initial $1000. Even if they fall short, a lesser amount would suffice, with the family working hard to add additional funds in the child’s early years. The system also expects the family to add $100 each year to the child’s account. Many children, when they start to earn money babysitting, dog walking or whatever, could assume responsibility for the annual increment. When children begin full time employment it is hoped they will invest an additional $1000 a year in the system, particularly if there is an employer match available.
There are currently 4.3 million babies born every year. We hope upwards of 4 million will register in the Social Security Investment System, System. Registration requires payment of a $100 fee (the ultra poor pay whatever they can afford, as little as $1, with donations available to pay the difference).  The registration fees are placed in a special Medicare Trust, to be invested and managed  by investment industry personnel. The fund should approach $400 million for each year’s registration. We recommend the government match the fee for each registrant. The fund could grow to $200 billion or more when the child reaches age 80. The trustees, 65 years hence, and every year thereafter, would decide how much, if any, of the funds  would be declare a dividend, to be used to  pay a portion (eventually all) of a member’s Medicare premium obligation. We  are confident the fund will pay all Medicare costs by age 90. If the fund does well , all Medicare costs might be paid by age 80, possibly even earlier. Sixty years later about 3.5 million will still be with us (those that don’t quite make it will have substantial estates: their nest eggs would be paid, at maturity, to their heirs). Sixty  years hence, the 2011 babies will almost all have a ‘nest egg’ of at least $500,000 and many who managed to take our advice to add  $1000 a year to their SS investment fund when they begin their career, will have a ‘golden egg’ of over $1 million.
Try to imagine 3.5 million 60 year olds, with maybe 70% having lived paycheck to paycheck for 40 years, receiving 12 monthly ‘checks ‘ of over $6,500 each as a birthday present, with even bigger checks due to arrive each year thereafter. Some, of course, will opt to leave the $80K in a Roth IRA, to continue growing until the recipient decides to actually retire. In any event, the proceeds, averaging over $30,000 (current dollars) for each of five years, will be totally tax free.
It is interesting to note that if the recipient ‘family’ consists of two seniors, they are each due the payoff described, over their 60-65th years. A family that today is reconciled to retiring on a meager Social Security check, could, in 2071, contemplate retirement in their early 60’s with a combined current dollar income of over $60,000, regardless of the paucity of their paychecks.
What might be the impact on society 60 years hence? For starters, at some point there will be over $200 billion injected into the economy. In the second year there would be another $200 billion of new disposable income, the third year, $200 billion of new money, and so on. Eventually, perhaps in 2101, (assuming the life expectancy of 60 year olds in 2071 will be 30 more years) some $3-6 trillion of new ‘cash’ will be injected into the economy every year. If this is not a definition of prosperity, I don’t know what is.
It gets even better.  Our child of 2010 retires in 2070, having been properly funded at birth and educated thereafter, has, since going to work as a barber at age 20, invested  $1100 a year in the system, even as he approaches retirement.  At retirement his nest egg is about $1.250 million. His son, born in 2035, is funded at birth by his dad, and follows in his career as well as investment footsteps. He is on target to retire in 2095, and does so, just three years before his dad passes away at age 88. To delve a little deeper, our retirement nest egg is totally regenerative. That is, if the individual  follows the rules ($100 saved each year toward a 60 or 70 year Retirement  Investment Certificate (RIC), and $1000 each working year in a 40 or 50 year RIC), the total value of the nest egg , once retirement is reached, is regenerated every ten years. That is, a 60 year old, after 40 years  of working and moderate saving, will have one 60 year investment maturing and beginning to pay out, and 6 other 60 year investments maturing in 10,20,30,40,50,and 60 years respectively.  If the retiree dutifully continues to save the requisite $1100 each year after retirement, the value of the total nest egg will stay approximately the same (about $1.26 million).
It follows then, that whenever death occurs, the system will contribute $1.26 million to the estate. But if there is a great breakthrough in life expectancy, our retiree will receive full benefits even when he reaches 150, providing he diligently made the annual $1100 every year, even at age 110.Similarly, if our retiree dies at a more normal age (say 88), his heir(s) will receive a full annual pay out from the estate for the following 40 years (in our example).  In effect, the heir’s retirement  income could basically double.
Think of the societal implications. The concept of the elderly homeless will gradually disappear. The thought that many middle age couples will be providing housing for impecunious elderly parents will also fade away. At a more abstract level, would there not be a positive effect on senior well being? Furthermore, the Medicare Trust fund for each  age cohort will eventually result in Medicare being totally funded by distributions from the Medicare Trusts. At some point, perhaps not until the next century, the government  role in pension systems and old age health insurance will be little more than that of bookkeeper and paymaster. The citizens, with very modest contributions at birth and relatively little more during their working lives, would have set the ultimate system in motion.
And all this can happen if today’s new parents can accept the obligation to fund their newborn’s retirement and arduous though it may be, find the wherewithal to accumulate $1000 in the child’s first year, or at least the first few years, as well as ante up the $100 a year needed to extend the benefits indefinitely. This concept should be easily endorsed by grandparents and perhaps even employers. Convincing parents (and legislators) to assure the American Dream for their children should be well worth pursuing. The American Dream for many seniors, who today, all too often, face an American nightmare.
 
 
 
 
 See Also:  SOCIAL SECURITY 2071  below
 
 
 THE POLITICS OF DEBT, DEFICIT, AND ENTITLEMENT REFORM
A version o f this report was published in the Naples Daily News on Jan. 22, 2012.
 
We are constantly reminded of the horror our children and grandchildren will endure when they are faced with paying off the huge federal debt we have foisted on them. I’m not so sure; when the time comes they may not be particularly concerned. They might be much more apprehensive about the erosion of entitlements: the gutting of Medicare, and the atrophied Social Security.  The vast majority (80% of the population) could have serious concerns about their ability to survive during the alleged “golden years”. Let us first ascertain that it is imperative that we get the deficit under control. Balancing the budget is a prodigious task, yet we must find a way to bring the annual budget deficit down to zero or at least no higher than the rate of inflation. When this comes to pass, and the budget is balanced, (I can’t blame you if you remain skeptical) our children will face a national debt of something around $20 trillion and the task of what to do about it. As I noted above, they will likely do nothing. Certainly there will be an occasional token payment to mollify the masses, but otherwise our citizens and particularly our legislators, would probably care less. Why?
To begin with, in sometime between 24 and 36 years (reflecting inflation of 2-3%) the impact of the debt will be cut in half. That is, we’ll have twice the revenue to pay the debt interest.  From another viewpoint, if we continue to pay 2-3% interest on our treasury bonds, and inflation remains 2-3%, the borrowing will cost the country nothing. But the biggest reason is that no self-respecting politician would ever turn down a chance to spend money. If a surplus is looming, and the vicious tax cutters are held at bay, your loyal representative will claim that while other legislators’ projects are earmarks, the few he has for his district are economic imperatives. After years of malnutrition during the deficit reduction years, the pols will be most eager to ‘bring home the bacon’, to their district and in doing so, insure their re-election for another term.
There is, at present, no clear cut plan to reform Social Security. This is probably because it poses no obvious threat to our nation’s solvency. We have recommended a Social Security supplement system, entirely consumer funded, that would result in the present pension becoming much less relevant for generations born in the 21st century. Once established and, presumably, showing strong gains over a decade or two, the public would become inured with the potential and might become amenable to some form of privatization.
Medicare is quite another issue. The (congressman) Ryan plan purports to change the system from defined benefit to defined contribution. This rather confusing analogy to employer pension systems suggests that the government would contribute less and the consumer, more, to the cost of senior health care. Some aspects of the Ryan plan deserve comment. The means testing portions (i.e. the rich pay higher premiums) could be very useful in protecting our most vulnerable seniors – those earning less than the national median. The prospect of raising the eligibility age from 65-67 needs thorough contemplation.  Our proposed Social Security pension supplement system augers for early retirement – low to mid 60’s in many cases. Not having Medicare available until age 67 certainly puts a chill on early retirement plans. Since the Ryan plan would not go into effect until 2020, it seems that some experimentation in the interim could prove propitious.
The simplest test might be to have the Veterans Administration set up several new hospitals, (or expand existing facilities) to serve Medicaid.  Area residents on Medicaid would be instructed to take their health issues to the designated (under a different name) VA hospital. Once things settle down and positive evidence appears that the VA can deliver quality health care at roughly half the cost of the private system, the local Medicare crowd could be invited to utilize the facility and avoid the 20% Medicare deductible. If this works, the possibilities are endless.
Another effort that might prove useful would be to enact malpractice reform much like the legislation passed by the state of Texas. Additionally, we espouse a trust fund that would begin paying dividends to help retirees with their Medicare premiums after their 65th year and likely would pay all health care expenses sometime between their 80th and 90th birthday. If this system were installed and proved popular during the current decade, we might have a much clearer idea before 2020 of what we should do about escalating Medicare costs.
 
 The following appeared in the Naples Daily News on Dec. 2,2012
 
 
 
 
 
 
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 SOCIAL SECURITY 2071
In 2071, 21st century babies would begin to retire, since most presumably had to wait until age 70. According to the Senate Select Committee on Social Security (May 2010), everything should be pretty much OK in 2075, given a tweak or two to the old S.S. chassis.
But our children and grandchildren, retiring in 60 years or so, will probably not be as well off as we are, thus breaking the cardinal rule that our progeny should do a little better than we did. Median income is unlikely to be much higher than the current $45,000 and attempts to pay down the debt will put inexorable upward pressure on taxes. Health care will continue to be a disaster, in spite of technology and reforms, and much of the burden will fall to the individual.
 Dreary thou this may sound, the reality could be much worse. To begin with, retiring at age 70 may be good solvency strategy for Social Security, it is probably very poor public policy. Before we explain, let’s establish some benchmarks. There are 4+ million babies born in the USA each year. Around age 18-22 most will enter the workforce, say around 3.5 million. At age 65, the 2011 babies will number about 3 million, with 2.5 million actively employed. We currently have about 140-150 million jobs, with probably 160 million wannabee workers. If we force 67, 68, and 69 year olds to work we would be adding over 6 million jobs if all were employed, or adding to the unemployment rate if we fail.
We have long believed that our structural unemployment rate is about 4-5%. We are now close to accepting a rate of 6-7% as the minimum, given the rush to send jobs overseas. They won’t come home anytime soon.  Adding 6 million workers can’t help.
Let’s view retirement from a different perspective. If today we are retiring at 65 or 66, wouldn’t we want our children and grandchildren to retire, if they wish, at age 60? Of course rich people can and do retire very early, but I’m talking about ordinary people wanting or needing to retire early. If they had the wherewithal, I’d wager that a large majority of citizens would opt to retire as early as possible. If half of the 30 million people in the 60-69 age bracket decided to retire we would free up millions of jobs for the younger unemployed and, at least for a while reduce the unemployment rate. No, we don’t expect Social Security to start paying prior to age 70. But we’ll show how to do it; with no Federal cost, and no alteration whatsoever to the present Social Security system.
Social Security is a product of 1930’s thinking, and for a while it was adequate. It was a windfall for early recipients since they had nothing and had contributed very little in payroll taxes. But nearly 40% of all current retirees living on S.S. checks alone (which average $1000 a month), find themselves in the Federal poverty level zone. I’ll wager they receive less, probably much less than the S.S. average check. No senior should have to live on cat food, but no-one is willing to publically address this woeful inadequacy. Those with an interest in senior welfare, like AARP, are threatened by talk of reform efforts like privatization which might help, but might increase individual risk, and would be very expensive in transition. The best they can offer is to implore workers to maximize their IRA and 401K contributions. These programs are also seriously flawed. Poor investment decisions, market fluctuations, and a propensity to access the funds prematurely for perceived family emergencies, have made these savings vehicles less than the ideal repository of retirement funds. Public and private pension plans are under constant attack.
A far worse villain is timing. In our culture young couples have little or no discretionary income, with many living with a mound of credit card debt. Not until the kids are ‘off the payroll’ and out of the house, can they consider a real effort to save for retirement. Of course, most families that earn less than the median income ($45,000) live paycheck to paycheck and can never really save for retirement.
Even a vigorous effort to save, starting in the mid-forties is doomed, for all but the wealthy, to inadequacy. It is much too late for the power of compounding to have any real effect. There is a double whammy in the conventional arena. While you struggle to put money away in your 40’s and 50’s, you are cautioned not to take much risk; you might not be able to recover from a market ‘correction’ as you near retirement age. But a low risk investment means a low interest rate and, therefore, little growth. In our system, your investment in your 50th year is for your income at age 100, and adjustment of risk is not an issue.
If all this were not discouraging enough, there is a new factor that may prove most vexing. If Ray Kurzweil (Time Magazine 2/21/11) is right, our 2011 baby will be contemplating retirement in 2071 with the distinct possibility of living another 80 years, and maybe more. Can Social Security be OK in 2075, (as the committee suggested) if it’s facing infinite payouts? Kurzweil could be wrong in his timing, but unless he is totally wrong, and life expectancy doesn’t increase materially, we are in for an eventual Social Security meltdown.
There is an answer for all these problems, even providing for infinite payout. It requires only a modest financial commitment, no Federal money, but a significant cultural change. Retirement funding can no longer be delayed to age 30 or 40 but must be seeded by age 1. Parents and grandparents must accept the fact that if they wish to assure a reasonable retirement for their scion they must accept the responsibility of funding a child’s retirement at birth. It is not nearly as difficult as it might appear.
Albert Einstein once averred that the most wondrous scientific phenomena he had encountered was compound interest. We can harness it to make our 2011 baby retire early and comfortably. For those who are mathematically challenged we will explain some basic concepts. First is the rule of 72. Divide 72 by your interest rate to see in how many years your investment will double. For example, invest $1000 at 12% and you will have $2000 in six years. A corollary, (you can work it out yourself) is that if your money doubles ten times, you will get 1000 to 1 on your investment. Pull this off and your thousand dollars will be a million dollars. With this in mind we will describe retirement planning in the 21st century.
       Invest in Social Security
To get started, when a child is born, the parents will meet with a chosen financial advisor and set up two accounts. One would be an investment manager to maintain future purchases, the other would be much like a conventional bank savings account, with one notable exception. Like the Hotel California, you can put money in, but can’t take any out. The child would receive a Social Security number and a living will added if the parents agree. The enrollment would cost $100, but funds would be available if the parents cannot afford part or all of the fee. The purpose of the fee will be explained below.
The family would set about to fund the baby’s basic retirement plan. The initial goal would be $1000. Grandparents, extended family, and friends would be encouraged to make a deposit into the child’s bank account rather than send a baby gift. The family would also commit to add at least $100 to the child’s bank account, at each birthday. With doting grandparents, aunts, employers etc. this should not be a difficult task.
Every calendar quarter the bank accounts would be swept and units of $500 sent to the investment advisor for purchase of Retirement Investment Certificates (RIC’s). A RIC is an investment product specifically for Social Security investing. It requires Congressional approval to avoid conflict with the Investment Act of 1940. It is purchased for $500 and has a chosen maturity of 30, 40, 50, 60, or 70 years. It contains approved mutual funds (initially perhaps only small cap index fund shares) and cannot be sold before its maturity date or the owner’s 60th birthday. It would be recorded in the child’s Social Security account, but actually maintained by the investment advisory firm. The process would be totally automated and the RIC would command virtually no commission, and the index funds would have very low expenses, primarily because there would be almost no turnover in the fund until people start to retire, in our example, 70 years hence. Other than some initial programming costs, there would be no appreciable increase in SSA expense.
The RIC’s would have different payout systems: 30, 40, & 50 year RIC’s would pay out 1/12 each month over the year of maturity, 60’s would pay monthly over 5 years, and 70’s, similarly over 10 years. The participant could change the maturity of new investments and possibly change the fund included. Bank and advisory relationships could be changed with relative ease. RIC’s would operate in a Roth IRA mode.
The first $1000 should be invested in two 70 year RIC’s. If the parents wish to encourage the child’s retirement at age 60, they would acquire a 60 year RIC during the child’s first year, and another 60 year RIC before age 5. Note that the $100 a year commitment will result in the purchase of a 70 year RIC every 5 years, indefinitely. What would be the result of all this activity? We’ll assume the small cap funds will grow at 10% annually. We’d like this to be in constant dollars, but that is less likely even though small caps performed better than that over the 20th century. We’ll settle on 7-8% net of inflation which should prove reasonably conservative. Our ‘poster child’ would find the initial $1000 growing to about $1 million when it matures at age 70 (2081).  It would pay out about $150,000 a year. How much will that buy?  About $35,000 (tax free) a year in today’s coin, and pay that out forever (as long as the $100 annual investment is not abrogated). For the early retirees the 60 year RIC’s would produce about $18,000 a year, constant dollars and tax free over the ten year period. Not so high off the hog, but a good base that later savings can augment.
          When children start earning money they can take over the $100 a year responsibility (not a huge burden). When they enter the workforce, they should make sure that $1000 a year finds its way into their bank account.  If they plan to retire at 60, an extra $1000 for the first ten years would seem in order. It is interesting to note that even the most destitute family, if they manage to scrape up $100 a year for each child, can find comfort in the thought that their children could each receive a $1 million retirement package 70 years hence.
         Let’s recap the potential for our 2011 baby. With $2000 invested in year 1, and $100 a year throughout life plus, when entering the workforce, $2000 a year for ten years and $1000 a year thereafter our poster child will retire at age 60 with income over $40,000 a year (constant dollars) for ten years followed by near $80,000  a year, tax free and forever. Even if the child is happy making minimum wage or less as a poet living in a garret, he will retire as we described. And we haven’t even mentioned his Social Security pension.
         Funding retirement for other than newborns is quite possible albeit a bit more expensive. A ten year old, for example, can receive the major benefits by doubling the initial investment. People of all ages can benefit from the $100 a year component, although many would select less than a 70 year maturity. Anyone under thirty can participate with near full benefit by properly adjusting their initial investment.
       People over thirty should initially focus on making sure their children (and grandchildren) participate at the maximum level. For themselves, investing in 40, 50, and perhaps 60 year maturities can give them protection against ‘living to long’. That is, a forty year old buying a $1000, 50 year RIC every year will receive a constant dollar tax free income of about $50,000 a year starting at age 90, and continuing forever. If he doesn’t live that long? He leaves his heirs a very nice estate. In this example, conventional retirement planning need only cover the age 70-90 years. Many seniors live too frugally in fear of outliving their assets, and drop dead at 75. Where’s the fun in that?  With an RIC program, they can live well, comfortable in the knowledge that if they are blessed with long life, new revenue streams will appear.
   MEDICARE
 Medicare’s problems seem impervious to any short term solution. We can provide some long term ideas that are not that difficult to implement. We mentioned an initiation fee of $100 (above) and noted that funds are available for families that have no money. These funds would be provided by modest fees charged to participating banks and financial service firms when the initial RIC was purchased by a new Social Security investor. The initiation fees would be pooled in a trust managed by the SSA. The 2011 Fund, for example, would reach $400 million if most of the year’s newborns sign up to participate in the savings program.
  The trust fund would be awarded, through competitive bidding, to a hedge or mutual fund for investment management. The trust would provide the equivalent of long term care insurance to all enrolled 2011 babies, effective after their 60th birthday. Each year a new trust fund would be brought into existence; the 2012 trust, then the 2013 trust, and even trusts for prior years, but with an adjusted initiation fee. The 2000 trust, for example, might charge a $200 initiation fee, or make the insurance effective after the 70th birthday; whatever makes actuarial sense.       
 We have pegged the funds growth at 8% (constant dollar), less than any self-respecting hedge fund manager would predict, but adequately conservative. By the 60th year, our 2011 trust would have grown to about $60 billion. Long term claims during the following decade would probably be trivial. The fund would be about $125 billion in 2081. 
 When we reach our 70’s, the need for nursing home services starts to grow. At 70, incidentally, you can currently buy long term care insurance (if you are healthy) for about $4000 a year. Your folks put up $100 for you 70 years ago, and that one time premium will cover you forever – literally. We estimate $100,000 per year for nursing home care (high) for an average stay of three years (also high), for a total of $300,000 per claim. If 10% of the two million people alive in 2091 from the class of 2011 eventually need a ‘home’, the trust’s exposure is, therefore, $60 billion. Spreading this evenly over the following 30 years (ages 80-110) costs the trust $2 billion a year – merely a blip. Double our exposure estimate and it’s still trivial - two blips. Meanwhile, our trust fund doubles every nine years (we use ten to be cautious) and by 2091 it will hit $250 billion. At that point we might consider taking over all health care for the two million or so 80 year olds remaining in our 2011 ‘club’. If Medicare/Medicaid need $10,000 a year for health care reimbursement (currently much less than that) the total cost would be $20 billion. No particular impact on our fund. It looks like our fund is moving relentlessly toward a trillion dollars. If that’s not enough, the 2012 fund is close behind the 2011 fund, with 2013 a bit further back. As the Sorcerer’s Apprentice learned in Fantasia, keep doubling and it’s hard to slow down and face the consequences.
        CONCLUSION
 A real message in all these programs is that they can do a great deal of good with very little at risk, even if they seriously underperform. We already noted that the original $100 Medicare fee has long ago become less than trivial; that whatever these funds achieve it would be a tremendous boon to seniors. The same is pretty much true for our retirement savings. The amount at risk, the original $1000 and the annual $100 become inconsequential over time. If at age 40 you find, for whatever reason, you are disappointed with progress to date, you can resort to 20th century retirement saving tactics – thrash about wildly like many did, and most still do – to save enough to retire adequately.
 After all, stocks picked at random during the tumultuous 20th century achieved about 7% constant dollar growth. Don’t you think that a little selectivity and a dollop of professional management should do better than monkeys throwing darts? Even just 2% more and you’ll find yourself awash in riches, and you, or more accurately, your folks, have risked almost nothing.
 The key message of this thesis is not about saving for retirement. After all, our society has a long tradition of not saving until it’s too late. The situation is getting worse: retirement programs are under attack worldwide. The burden of retirement funding is inexorably being shifted to the individual and the funding methods available are totally inadequate for the needs of the 21st century.
 Our thesis is that the responsibility for funding retirement (and old age health care, for that matter), must move from the children (who don’t even think about it until they’re 40) to the parents. This obligation can be met rather easily, but it must be discharged at the earliest possible time, preferably in the year of the child’s birth. A single, one time investment of $1000 plus a commitment to add an additional $100 every birthday will reward the child with a ‘check’ for $1 million on reaching 70 years. Every decade thereafter, indefinitely, another $1 million ‘check’ will arrive.
 Of course, we don’t know exactly how much the ‘check’ will be for, nor how much it will buy. We do know it will be huge compared to the trivial initial investment. If the family can’t come up with $1000, $500 will do quite well. If the family can’t come up with anything, the $100 a year commitment might suffice; the child’s retirement ‘check’ will be only a quarter million. $100 a year is $2 a week, is a couple fewer lottery tickets. Moreover, a conscientious parent can make up for the shortfall by contributing $4 a week until the child starts babysitting.
 I agree, changing people’s saving habits is a near impossible task. Changing their perception of their responsibilities requires totally different positioning, and is quite a different task. 
 
Author's note (8/1/2011) We have recently decided to recommend an initial investment in 60 year RIC's which could remain as Roth IRA's in the individuals own account, and converted to cash whenever the decision is made to retire. Additionally, we feel the Medicare Trust Fund would simply declare annual dividends to offset Medicare premiums starting at age 65, and make no guarantees about paying nursing home costs.
 
 SOCIAL SECURITY 2071 (REPEAT)
In 2071, 21st century babies would begin to retire, since most presumably had to wait until age 70. According to the Senate Select Committee on Social Security (May 2010), everything should be pretty much OK in 2075, given a tweak or two to the old S.S. chassis.
But our children and grandchildren, retiring in 60 years or so, will probably not be as well off as we are, thus breaking the cardinal rule that our progeny should do a little better than we did. Median income is unlikely to be much higher than the current $45,000 and attempts to pay down the debt will put inexorable upward pressure on taxes. Health care will continue to be a disaster, in spite of technology and reforms, and much of the burden will fall to the individual.
 Dreary thou this may sound, the reality could be much worse. To begin with, retiring at age 70 may be good solvency strategy for Social Security, it is probably very poor public policy. Before we explain, let’s establish some benchmarks. There are 4+ million babies born in the USA each year. Around age 18-22 most will enter the workforce, say around 3.5 million. At age 65, the 2011 babies will number about 3 million, with 2.5 million actively employed. We currently have about 140-150 million jobs, with probably 160 million wannabee workers. If we force 67, 68, and 69 year olds to work we would be adding over 6 million jobs if all were employed, or adding to the unemployment rate if we fail.
We have long believed that our structural unemployment rate is about 4-5%. We are now close to accepting a rate of 6-7% as the minimum, given the rush to send jobs overseas. They won’t come home anytime soon.  Adding 6 million workers can’t help.
Let’s view retirement from a different perspective. If today we are retiring at 65 or 66, wouldn’t we want our children and grandchildren to retire, if they wish, at age 60? Of course rich people can and do retire very early, but I’m talking about ordinary people wanting or needing to retire early. If they had the wherewithal, I’d wager that a large majority of citizens would opt to retire as early as possible. If half of the 30 million people in the 60-69 age bracket decided to retire we would free up millions of jobs for the younger unemployed and, at least for a while reduce the unemployment rate. No, we don’t expect Social Security to start paying prior to age 70. But we’ll show how to do it; with no Federal cost, and no alteration whatsoever to the present Social Security system.
Social Security is a product of 1930’s thinking, and for a while it was adequate. It was a windfall for early recipients since they had nothing and had contributed very little in payroll taxes. But nearly 40% of all current retirees living on S.S. checks alone (which average $1000 a month), find themselves in the Federal poverty level zone. I’ll wager they receive less, probably much less than the S.S. average check. No senior should have to live on cat food, but no-one is willing to publically address this woeful inadequacy. Those with an interest in senior welfare, like AARP, are threatened by talk of reform efforts like privatization which might help, but might increase individual risk, and would be very expensive in transition. The best they can offer is to implore workers to maximize their IRA and 401K contributions. These programs are also seriously flawed. Poor investment decisions, market fluctuations, and a propensity to access the funds prematurely for perceived family emergencies, have made these savings vehicles less than the ideal repository of retirement funds. Public and private pension plans are under constant attack.
A far worse villain is timing. In our culture young couples have little or no discretionary income, with many living with a mound of credit card debt. Not until the kids are ‘off the payroll’ and out of the house, can they consider a real effort to save for retirement. Of course, most families that earn less than the median income ($45,000) live paycheck to paycheck and can never really save for retirement.
Even a vigorous effort to save, starting in the mid-forties is doomed, for all but the wealthy, to inadequacy. It is much too late for the power of compounding to have any real effect. There is a double whammy in the conventional arena. While you struggle to put money away in your 40’s and 50’s, you are cautioned not to take much risk; you might not be able to recover from a market ‘correction’ as you near retirement age. But a low risk investment means a low interest rate and, therefore, little growth. In our system, your investment in your 50th year is for your income at age 100, and adjustment of risk is not an issue.
If all this were not discouraging enough, there is a new factor that may prove most vexing. If Ray Kurzweil (Time Magazine 2/21/11) is right, our 2011 baby will be contemplating retirement in 2071 with the distinct possibility of living another 80 years, and maybe more. Can Social Security be OK in 2075, (as the committee suggested) if it’s facing infinite payouts? Kurzweil could be wrong in his timing, but unless he is totally wrong, and life expectancy doesn’t increase materially, we are in for an eventual Social Security meltdown.
There is an answer for all these problems, even providing for infinite payout. It requires only a modest financial commitment, no Federal money, but a significant cultural change. Retirement funding can no longer be delayed to age 30 or 40 but must be seeded by age 1. Parents and grandparents must accept the fact that if they wish to assure a reasonable retirement for their scion they must accept the responsibility of funding a child’s retirement at birth. It is not nearly as difficult as it might appear.
Albert Einstein once averred that the most wondrous scientific phenomena he had encountered was compound interest. We can harness it to make our 2011 baby retire early and comfortably. For those who are mathematically challenged we will explain some basic concepts. First is the rule of 72. Divide 72 by your interest rate to see in how many years your investment will double. For example, invest $1000 at 12% and you will have $2000 in six years. A corollary, (you can work it out yourself) is that if your money doubles ten times, you will get 1000 to 1 on your investment. Pull this off and your thousand dollars will be a million dollars. With this in mind we will describe retirement planning in the 21st century.
       Invest in Social Security
To get started, when a child is born, the parents will meet with a chosen financial advisor and set up two accounts. One would be an investment manager to maintain future purchases, the other would be much like a conventional bank savings account, with one notable exception. Like the Hotel California, you can put money in, but can’t take any out. The child would receive a Social Security number and a living will added if the parents agree. The enrollment would cost $100, but funds would be available if the parents cannot afford part or all of the fee. The purpose of the fee will be explained below.
The family would set about to fund the baby’s basic retirement plan. The initial goal would be $1000. Grandparents, extended family, and friends would be encouraged to make a deposit into the child’s bank account rather than send a baby gift. The family would also commit to add at least $100 to the child’s bank account, at each birthday. With doting grandparents, aunts, employers etc. this should not be a difficult task.
Every calendar quarter the bank accounts would be swept and units of $500 sent to the investment advisor for purchase of Retirement Investment Certificates (RIC’s). A RIC is an investment product specifically for Social Security investing. It requires Congressional approval to avoid conflict with the Investment Act of 1940. It is purchased for $500 and has a chosen maturity of 30, 40, 50, 60, or 70 years. It contains approved mutual funds (initially perhaps only small cap index fund shares) and cannot be sold before its maturity date or the owner’s 60th birthday. It would be recorded in the child’s Social Security account, but actually maintained by the investment advisory firm. The process would be totally automated and the RIC would command virtually no commission, and the index funds would have very low expenses, primarily because there would be almost no turnover in the fund until people start to retire, in our example, 70 years hence. Other than some initial programming costs, there would be no appreciable increase in SSA expense.
The RIC’s would have different payout systems: 30, 40, & 50 year RIC’s would pay out 1/12 each month over the year of maturity, 60’s would pay monthly over 5 years, and 70’s, similarly over 10 years. The participant could change the maturity of new investments and possibly change the fund included. Bank and advisory relationships could be changed with relative ease. RIC’s would operate in a Roth IRA mode.
The first $1000 should be invested in two 70 year RIC’s. If the parents wish to encourage the child’s retirement at age 60, they would acquire a 60 year RIC during the child’s first year, and another 60 year RIC before age 5. Note that the $100 a year commitment will result in the purchase of a 70 year RIC every 5 years, indefinitely. What would be the result of all this activity? We’ll assume the small cap funds will grow at 10% annually. We’d like this to be in constant dollars, but that is less likely even though small caps performed better than that over the 20th century. We’ll settle on 7-8% net of inflation which should prove reasonably conservative. Our ‘poster child’ would find the initial $1000 growing to about $1 million when it matures at age 70 (2081).  It would pay out about $150,000 a year. How much will that buy?  About $35,000 (tax free) a year in today’s coin, and pay that out forever (as long as the $100 annual investment is not abrogated). For the early retirees the 60 year RIC’s would produce about $18,000 a year, constant dollars and tax free over the ten year period. Not so high off the hog, but a good base that later savings can augment.
          When children start earning money they can take over the $100 a year responsibility (not a huge burden). When they enter the workforce, they should make sure that $1000 a year finds its way into their bank account.  If they plan to retire at 60, an extra $1000 for the first ten years would seem in order. It is interesting to note that even the most destitute family, if they manage to scrape up $100 a year for each child, can find comfort in the thought that their children could each receive a $1 million retirement package 70 years hence.
         Let’s recap the potential for our 2011 baby. With $2000 invested in year 1, and $100 a year throughout life plus, when entering the workforce, $2000 a year for ten years and $1000 a year thereafter our poster child will retire at age 60 with income over $40,000 a year (constant dollars) for ten years followed by near $80,000  a year, tax free and forever. Even if the child is happy making minimum wage or less as a poet living in a garret, he will retire as we described. And we haven’t even mentioned his Social Security pension.
         Funding retirement for other than newborns is quite possible albeit a bit more expensive. A ten year old, for example, can receive the major benefits by doubling the initial investment. People of all ages can benefit from the $100 a year component, although many would select less than a 70 year maturity. Anyone under thirty can participate with near full benefit by properly adjusting their initial investment.
       People over thirty should initially focus on making sure their children (and grandchildren) participate at the maximum level. For themselves, investing in 40, 50, and perhaps 60 year maturities can give them protection against ‘living to long’. That is, a forty year old buying a $1000, 50 year RIC every year will receive a constant dollar tax free income of about $50,000 a year starting at age 90, and continuing forever. If he doesn’t live that long? He leaves his heirs a very nice estate. In this example, conventional retirement planning need only cover the age 70-90 years. Many seniors live too frugally in fear of outliving their assets, and drop dead at 75. Where’s the fun in that?  With an RIC program, they can live well, comfortable in the knowledge that if they are blessed with long life, new revenue streams will appear.
   MEDICARE
 Medicare’s problems seem impervious to any short term solution. We can provide some long term ideas that are not that difficult to implement. We mentioned an initiation fee of $100 (above) and noted that funds are available for families that have no money. These funds would be provided by modest fees charged to participating banks and financial service firms when the initial RIC was purchased by a new Social Security investor. The initiation fees would be pooled in a trust managed by the SSA. The 2011 Fund, for example, would reach $400 million if most of the year’s newborns sign up to participate in the savings program.
  The trust fund would be awarded, through competitive bidding, to a hedge or mutual fund for investment management. The trust would provide the equivalent of long term care insurance to all enrolled 2011 babies, effective after their 60th birthday. Each year a new trust fund would be brought into existence; the 2012 trust, then the 2013 trust, and even trusts for prior years, but with an adjusted initiation fee. The 2000 trust, for example, might charge a $200 initiation fee, or make the insurance effective after the 70th birthday; whatever makes actuarial sense.       
 We have pegged the funds growth at 8% (constant dollar), less than any self-respecting hedge fund manager would predict, but adequately conservative. By the 60th year, our 2011 trust would have grown to about $60 billion. Long term claims during the following decade would probably be trivial. The fund would be about $125 billion in 2081. 
 When we reach our 70’s, the need for nursing home services starts to grow. At 70, incidentally, you can currently buy long term care insurance (if you are healthy) for about $4000 a year. Your folks put up $100 for you 70 years ago, and that one time premium will cover you forever – literally. We estimate $100,000 per year for nursing home care (high) for an average stay of three years (also high), for a total of $300,000 per claim. If 10% of the two million people alive in 2091 from the class of 2011 eventually need a ‘home’, the trust’s exposure is, therefore, $60 billion. Spreading this evenly over the following 30 years (ages 80-110) costs the trust $2 billion a year – merely a blip. Double our exposure estimate and it’s still trivial - two blips. Meanwhile, our trust fund doubles every nine years (we use ten to be cautious) and by 2091 it will hit $250 billion. At that point we might consider taking over all health care for the two million or so 80 year olds remaining in our 2011 ‘club’. If Medicare/Medicaid need $10,000 a year for health care reimbursement (currently much less than that) the total cost would be $20 billion. No particular impact on our fund. It looks like our fund is moving relentlessly toward a trillion dollars. If that’s not enough, the 2012 fund is close behind the 2011 fund, with 2013 a bit further back. As the Sorcerer’s Apprentice learned in Fantasia, keep doubling and it’s hard to slow down and face the consequences.
        CONCLUSION
 A real message in all these programs is that they can do a great deal of good with very little at risk, even if they seriously underperform. We already noted that the original $100 Medicare fee has long ago become less than trivial; that whatever these funds achieve it would be a tremendous boon to seniors. The same is pretty much true for our retirement savings. The amount at risk, the original $1000 and the annual $100 become inconsequential over time. If at age 40 you find, for whatever reason, you are disappointed with progress to date, you can resort to 20th century retirement saving tactics – thrash about wildly like many did, and most still do – to save enough to retire adequately.
 After all, stocks picked at random during the tumultuous 20th century achieved about 7% constant dollar growth. Don’t you think that a little selectivity and a dollop of professional management should do better than monkeys throwing darts? Even just 2% more and you’ll find yourself awash in riches, and you, or more accurately, your folks, have risked almost nothing.
 The key message of this thesis is not about saving for retirement. After all, our society has a long tradition of not saving until it’s too late. The situation is getting worse: retirement programs are under attack worldwide. The burden of retirement funding is inexorably being shifted to the individual and the funding methods available are totally inadequate for the needs of the 21st century.
 Our thesis is that the responsibility for funding retirement (and old age health care, for that matter), must move from the children (who don’t even think about it until they’re 40) to the parents. This obligation can be met rather easily, but it must be discharged at the earliest possible time, preferably in the year of the child’s birth. A single, one time investment of $1000 plus a commitment to add an additional $100 every birthday will reward the child with a ‘check’ for $1 million on reaching 70 years. Every decade thereafter, indefinitely, another $1 million ‘check’ will arrive.
 Of course, we don’t know exactly how much the ‘check’ will be for, nor how much it will buy. We do know it will be huge compared to the trivial initial investment. If the family can’t come up with $1000, $500 will do quite well. If the family can’t come up with anything, the $100 a year commitment might suffice; the child’s retirement ‘check’ will be only a quarter million. $100 a year is $2 a week, is a couple fewer lottery tickets. Moreover, a conscientious parent can make up for the shortfall by contributing $4 a week until the child starts babysitting.
 I agree, changing people’s saving habits is a near impossible task. Changing their perception of their responsibilities requires totally different positioning, and is quite a different task. 
 
SOCIAL SECURITY 2071
In 2071, 21st century babies would begin to retire, since most presumably had to wait until age 70. According to the Senate Select Committee on Social Security (May 2010), everything should be pretty much OK in 2075, given a tweak or two to the old S.S. chassis.
But our children and grandchildren, retiring in 60 years or so, will probably not be as well off as we are, thus breaking the cardinal rule that our progeny should do a little better than we did. Median income is unlikely to be much higher than the current $45,000 and attempts to pay down the debt will put inexorable upward pressure on taxes. Health care will continue to be a disaster, in spite of technology and reforms, and much of the burden will fall to the individual.
 Dreary thou this may sound, the reality could be much worse. To begin with, retiring at age 70 may be good solvency strategy for Social Security, it is probably very poor public policy. Before we explain, let’s establish some benchmarks. There are 4+ million babies born in the USA each year. Around age 18-22 most will enter the workforce, say around 3.5 million. At age 65, the 2011 babies will number about 3 million, with 2.5 million actively employed. We currently have about 140-150 million jobs, with probably 160 million wannabee workers. If we force 67, 68, and 69 year olds to work we would be adding over 6 million jobs if all were employed, or adding to the unemployment rate if we fail.
We have long believed that our structural unemployment rate is about 4-5%. We are now close to accepting a rate of 6-7% as the minimum, given the rush to send jobs overseas. They won’t come home anytime soon.  Adding 6 million workers can’t help.
Let’s view retirement from a different perspective. If today we are retiring at 65 or 66, wouldn’t we want our children and grandchildren to retire, if they wish, at age 60? Of course rich people can and do retire very early, but I’m talking about ordinary people wanting or needing to retire early. If they had the wherewithal, I’d wager that a large majority of citizens would opt to retire as early as possible. If half of the 30 million people in the 60-69 age bracket decided to retire we would free up millions of jobs for the younger unemployed and, at least for a while reduce the unemployment rate. No, we don’t expect Social Security to start paying prior to age 70. But we’ll show how to do it; with no Federal cost, and no alteration whatsoever to the present Social Security system.
Social Security is a product of 1930’s thinking, and for a while it was adequate. It was a windfall for early recipients since they had nothing and had contributed very little in payroll taxes. But nearly 40% of all current retirees living on S.S. checks alone (which average $1000 a month), find themselves in the Federal poverty level zone. I’ll wager they receive less, probably much less than the S.S. average check. No senior should have to live on cat food, but no-one is willing to publically address this woeful inadequacy. Those with an interest in senior welfare, like AARP, are threatened by talk of reform efforts like privatization which might help, but might increase individual risk, and would be very expensive in transition. The best they can offer is to implore workers to maximize their IRA and 401K contributions. These programs are also seriously flawed. Poor investment decisions, market fluctuations, and a propensity to access the funds prematurely for perceived family emergencies, have made these savings vehicles less than the ideal repository of retirement funds. Public and private pension plans are under constant attack.
A far worse villain is timing. In our culture young couples have little or no discretionary income, with many living with a mound of credit card debt. Not until the kids are ‘off the payroll’ and out of the house, can they consider a real effort to save for retirement. Of course, most families that earn less than the median income ($45,000) live paycheck to paycheck and can never really save for retirement.
Even a vigorous effort to save, starting in the mid-forties is doomed, for all but the wealthy, to inadequacy. It is much too late for the power of compounding to have any real effect. There is a double whammy in the conventional arena. While you struggle to put money away in your 40’s and 50’s, you are cautioned not to take much risk; you might not be able to recover from a market ‘correction’ as you near retirement age. But a low risk investment means a low interest rate and, therefore, little growth. In our system, your investment in your 50th year is for your income at age 100, and adjustment of risk is not an issue.
If all this were not discouraging enough, there is a new factor that may prove most vexing. If Ray Kurzweil (Time Magazine 2/21/11) is right, our 2011 baby will be contemplating retirement in 2071 with the distinct possibility of living another 80 years, and maybe more. Can Social Security be OK in 2075, (as the committee suggested) if it’s facing infinite payouts? Kurzweil could be wrong in his timing, but unless he is totally wrong, and life expectancy doesn’t increase materially, we are in for an eventual Social Security meltdown.
There is an answer for all these problems, even providing for infinite payout. It requires only a modest financial commitment, no Federal money, but a significant cultural change. Retirement funding can no longer be delayed to age 30 or 40 but must be seeded by age 1. Parents and grandparents must accept the fact that if they wish to assure a reasonable retirement for their scion they must accept the responsibility of funding a child’s retirement at birth. It is not nearly as difficult as it might appear.
Albert Einstein once averred that the most wondrous scientific phenomena he had encountered was compound interest. We can harness it to make our 2011 baby retire early and comfortably. For those who are mathematically challenged we will explain some basic concepts. First is the rule of 72. Divide 72 by your interest rate to see in how many years your investment will double. For example, invest $1000 at 12% and you will have $2000 in six years. A corollary, (you can work it out yourself) is that if your money doubles ten times, you will get 1000 to 1 on your investment. Pull this off and your thousand dollars will be a million dollars. With this in mind we will describe retirement planning in the 21st century.
       Invest in Social Security
To get started, when a child is born, the parents will meet with a chosen financial advisor and set up two accounts. One would be an investment manager to maintain future purchases, the other would be much like a conventional bank savings account, with one notable exception. Like the Hotel California, you can put money in, but can’t take any out. The child would receive a Social Security number and a living will added if the parents agree. The enrollment would cost $100, but funds would be available if the parents cannot afford part or all of the fee. The purpose of the fee will be explained below.
The family would set about to fund the baby’s basic retirement plan. The initial goal would be $1000. Grandparents, extended family, and friends would be encouraged to make a deposit into the child’s bank account rather than send a baby gift. The family would also commit to add at least $100 to the child’s bank account, at each birthday. With doting grandparents, aunts, employers etc. this should not be a difficult task.
Every calendar quarter the bank accounts would be swept and units of $500 sent to the investment advisor for purchase of Retirement Investment Certificates (RIC’s). A RIC is an investment product specifically for Social Security investing. It requires Congressional approval to avoid conflict with the Investment Act of 1940. It is purchased for $500 and has a chosen maturity of 30, 40, 50, 60, or 70 years. It contains approved mutual funds (initially perhaps only small cap index fund shares) and cannot be sold before its maturity date or the owner’s 60th birthday. It would be recorded in the child’s Social Security account, but actually maintained by the investment advisory firm. The process would be totally automated and the RIC would command virtually no commission, and the index funds would have very low expenses, primarily because there would be almost no turnover in the fund until people start to retire, in our example, 70 years hence. Other than some initial programming costs, there would be no appreciable increase in SSA expense.
The RIC’s would have different payout systems: 30, 40, & 50 year RIC’s would pay out 1/12 each month over the year of maturity, 60’s would pay monthly over 5 years, and 70’s, similarly over 10 years. The participant could change the maturity of new investments and possibly change the fund included. Bank and advisory relationships could be changed with relative ease. RIC’s would operate in a Roth IRA mode.
The first $1000 should be invested in two 70 year RIC’s. If the parents wish to encourage the child’s retirement at age 60, they would acquire a 60 year RIC during the child’s first year, and another 60 year RIC before age 5. Note that the $100 a year commitment will result in the purchase of a 70 year RIC every 5 years, indefinitely. What would be the result of all this activity? We’ll assume the small cap funds will grow at 10% annually. We’d like this to be in constant dollars, but that is less likely even though small caps performed better than that over the 20th century. We’ll settle on 7-8% net of inflation which should prove reasonably conservative. Our ‘poster child’ would find the initial $1000 growing to about $1 million when it matures at age 70 (2081).  It would pay out about $150,000 a year. How much will that buy?  About $35,000 (tax free) a year in today’s coin, and pay that out forever (as long as the $100 annual investment is not abrogated). For the early retirees the 60 year RIC’s would produce about $18,000 a year, constant dollars and tax free over the ten year period. Not so high off the hog, but a good base that later savings can augment.
          When children start earning money they can take over the $100 a year responsibility (not a huge burden). When they enter the workforce, they should make sure that $1000 a year finds its way into their bank account.  If they plan to retire at 60, an extra $1000 for the first ten years would seem in order. It is interesting to note that even the most destitute family, if they manage to scrape up $100 a year for each child, can find comfort in the thought that their children could each receive a $1 million retirement package 70 years hence.
         Let’s recap the potential for our 2011 baby. With $2000 invested in year 1, and $100 a year throughout life plus, when entering the workforce, $2000 a year for ten years and $1000 a year thereafter our poster child will retire at age 60 with income over $40,000 a year (constant dollars) for ten years followed by near $80,000  a year, tax free and forever. Even if the child is happy making minimum wage or less as a poet living in a garret, he will retire as we described. And we haven’t even mentioned his Social Security pension.
         Funding retirement for other than newborns is quite possible albeit a bit more expensive. A ten year old, for example, can receive the major benefits by doubling the initial investment. People of all ages can benefit from the $100 a year component, although many would select less than a 70 year maturity. Anyone under thirty can participate with near full benefit by properly adjusting their initial investment.
       People over thirty should initially focus on making sure their children (and grandchildren) participate at the maximum level. For themselves, investing in 40, 50, and perhaps 60 year maturities can give them protection against ‘living to long’. That is, a forty year old buying a $1000, 50 year RIC every year will receive a constant dollar tax free income of about $50,000 a year starting at age 90, and continuing forever. If he doesn’t live that long? He leaves his heirs a very nice estate. In this example, conventional retirement planning need only cover the age 70-90 years. Many seniors live too frugally in fear of outliving their assets, and drop dead at 75. Where’s the fun in that?  With an RIC program, they can live well, comfortable in the knowledge that if they are blessed with long life, new revenue streams will appear.
   MEDICARE
 Medicare’s problems seem impervious to any short term solution. We can provide some long term ideas that are not that difficult to implement. We mentioned an initiation fee of $100 (above) and noted that funds are available for families that have no money. These funds would be provided by modest fees charged to participating banks and financial service firms when the initial RIC was purchased by a new Social Security investor. The initiation fees would be pooled in a trust managed by the SSA. The 2011 Fund, for example, would reach $400 million if most of the year’s newborns sign up to participate in the savings program.
  The trust fund would be awarded, through competitive bidding, to a hedge or mutual fund for investment management. The trust would provide the equivalent of long term care insurance to all enrolled 2011 babies, effective after their 60th birthday. Each year a new trust fund would be brought into existence; the 2012 trust, then the 2013 trust, and even trusts for prior years, but with an adjusted initiation fee. The 2000 trust, for example, might charge a $200 initiation fee, or make the insurance effective after the 70th birthday; whatever makes actuarial sense.       
 We have pegged the funds growth at 8% (constant dollar), less than any self-respecting hedge fund manager would predict, but adequately conservative. By the 60th year, our 2011 trust would have grown to about $60 billion. Long term claims during the following decade would probably be trivial. The fund would be about $125 billion in 2081. 
 When we reach our 70’s, the need for nursing home services starts to grow. At 70, incidentally, you can currently buy long term care insurance (if you are healthy) for about $4000 a year. Your folks put up $100 for you 70 years ago, and that one time premium will cover you forever – literally. We estimate $100,000 per year for nursing home care (high) for an average stay of three years (also high), for a total of $300,000 per claim. If 10% of the two million people alive in 2091 from the class of 2011 eventually need a ‘home’, the trust’s exposure is, therefore, $60 billion. Spreading this evenly over the following 30 years (ages 80-110) costs the trust $2 billion a year – merely a blip. Double our exposure estimate and it’s still trivial - two blips. Meanwhile, our trust fund doubles every nine years (we use ten to be cautious) and by 2091 it will hit $250 billion. At that point we might consider taking over all health care for the two million or so 80 year olds remaining in our 2011 ‘club’. If Medicare/Medicaid need $10,000 a year for health care reimbursement (currently much less than that) the total cost would be $20 billion. No particular impact on our fund. It looks like our fund is moving relentlessly toward a trillion dollars. If that’s not enough, the 2012 fund is close behind the 2011 fund, with 2013 a bit further back. As the Sorcerer’s Apprentice learned in Fantasia, keep doubling and it’s hard to slow down and face the consequences.
        CONCLUSION
 A real message in all these programs is that they can do a great deal of good with very little at risk, even if they seriously underperform. We already noted that the original $100 Medicare fee has long ago become less than trivial; that whatever these funds achieve it would be a tremendous boon to seniors. The same is pretty much true for our retirement savings. The amount at risk, the original $1000 and the annual $100 become inconsequential over time. If at age 40 you find, for whatever reason, you are disappointed with progress to date, you can resort to 20th century retirement saving tactics – thrash about wildly like many did, and most still do – to save enough to retire adequately.
 After all, stocks picked at random during the tumultuous 20th century achieved about 7% constant dollar growth. Don’t you think that a little selectivity and a dollop of professional management should do better than monkeys throwing darts? Even just 2% more and you’ll find yourself awash in riches, and you, or more accurately, your folks, have risked almost nothing.
 The key message of this thesis is not about saving for retirement. After all, our society has a long tradition of not saving until it’s too late. The situation is getting worse: retirement programs are under attack worldwide. The burden of retirement funding is inexorably being shifted to the individual and the funding methods available are totally inadequate for the needs of the 21st century.
 Our thesis is that the responsibility for funding retirement (and old age health care, for that matter), must move from the children (who don’t even think about it until they’re 40) to the parents. This obligation can be met rather easily, but it must be discharged at the earliest possible time, preferably in the year of the child’s birth. A single, one time investment of $1000 plus a commitment to add an additional $100 every birthday will reward the child with a ‘check’ for $1 million on reaching 70 years. Every decade thereafter, indefinitely, another $1 million ‘check’ will arrive.
 Of course, we don’t know exactly how much the ‘check’ will be for, nor how much it will buy. We do know it will be huge compared to the trivial initial investment. If the family can’t come up with $1000, $500 will do quite well. If the family can’t come up with anything, the $100 a year commitment might suffice; the child’s retirement ‘check’ will be only a quarter million. $100 a year is $2 a week, is a couple fewer lottery tickets. Moreover, a conscientious parent can make up for the shortfall by contributing $4 a week until the child starts babysitting.
 I agree, changing people’s saving habits is a near impossible task. Changing their perception of their responsibilities requires totally different positioning, and is quite a different task. 
 
The following was published in the Naples Daily News on Dec.2, 2012
 
 Can Social Security and Medicare Survive ‘Reform’?
I have maintained that unemployment will stay high indefinitely for two key reasons: Globalization, where jobs search the earth for lower pay and, more significantly, technology, which, for some time probably will kill more jobs than it creates. Recently the Chinese automated a complete auto assembly line in Tianjin – all robots. Yet factory workers in China are paid very little- they work for wontons. The cost benefit of these robots must be extraordinarily good if they can effectively replace low wage workers.
Ironically, robots are the greatest deterrent to further globalization. Jobs are coming back to the USA, but not for people, but for robots. With this in mind it seems that our grandchildren face even more daunting obstacles than young people do today. Their focus will be on finding and keeping a good job, receiving proper health care, saving for retirement and confronting old age nursing home costs. Will they anguish about the huge Federal debt we have bestowed on them? Way down on their list of worries, in my opinion. They’ll have to rely on inflation to soften the impact of significant debt.
With all this in mind, we find politicians prophesying doom and gloom and insisting that ‘entitlements’ (Medicare, Medicaid, and Social Security) must be ‘reformed’. Reform to some politicians means getting entitlements off the Federal budget and dumping the burden on the states and individuals. One Medicare approach involves giving seniors a voucher and sending them out to find an appropriate policy. A daunting task for any senior, much less one that is ailing.
Insurance companies may not be venal, but neither are they stupid. They’ll know everything about you. If your grandpa was Charles Atlas, and you run a monthly marathon (in under 3 hours) they will sell you a marvelous policy in exchange for your voucher. Unfortunately, far too many seniors are one hundred and ‘ninety-seven pound weaklings’ and rather unhealthy. Premiums for these folks will range from a modest to a humongous surcharge over the voucher amount. A good analogy is auto insurance. Preferred risk drivers get a great rate, but the price goes up with each accident or speeding ticket. Some people are basically uninsurable (many infractions) and are put in the assigned risk pool, where they pay twice or more the normal rate. Each insurance company must take their proportional share even though they can’t hope to break even.
Unfortunately, a large percentage of seniors will fall into the health insurance assigned risk category because they aren’t healthy and are unlikely to improve. They tend to get older and sicker. Claims that this privatization will cost seniors $6000 a year on average, also suggests that some will pay ‘only’ $3000 more and many (generally older, sicker, and poorer), would pay $9,000 or more.
Social Security is another issue. The Republicans love ‘privatization’ as a way to eventually get SS off the Federal books. This approach has workers diverting part of their payroll tax into an IRA account. There are many objections to this approach, some are mere noise, but one is very significant – transfer costs. If a portion of payroll taxes goes into private accounts, that money is not available to pay current retirees their SS pension. The total cost of this transfer, until all current retirees die off, is somewhere between 3-4 trillion dollars. What are the odds of getting politicians to add $4 trillion to the national debt?
Social Security will gradually atrophy over the next generation or two. We can shore it up by increasing the salary cap. But basically, SOCIAL SECURITY SHOULD BE LEFT ALONE. Unfortunately, however, it doesn’t pay off very well. Too many people rely on SS alone with little else. A low income worker struggles for 45 years to keep body and soul together on $20,000 a year and then retires on $10,000 a year.
We suggest a program that could, with very little effort result in Social Security (plus supplement) paying twice the normal amount. Our supplemental retirement accounts would include the following:
An account, a Roth IRA, could be opened at any time by or for any person, regardless of employment status.
Accounts would be invested in a limited number of index funds, but money cannot be withdrawn before owner’s 60th birthday. The maximum annual investment to an account would be $1000. There would be no limit to the number of accounts an individual contributes to, but a person can only have one account of their own.
The system would have very low expenses and negligible commissions.
The government, spending little tax money, helps the individual achieve, arguably, the best benign investment growth possible.
Example: A couple opens an account for their newborn. They invest (with help from grandparents, extended family, and friends) $1000 and commit to adding at least $100 each year thereafter. If they can’t come up with $1000, any amount will do, but they should make sure the annual deposits add up to $2000 by the child’s age ten. If the parents succeed in achieving the above (and the child continues the $100 a year thereafter), the eventual SS plus supplement pension will likely be twice the normal Social Security payout forever, even for a low wage earner.
The key, of course, is compound interest, which requires a long time to really pay off. In our example, investing for 60 years is key to achieving significant returns. The system we propose is much more involved than what we have outlined herein. It is described, in great detail, on our website. The” 47%” need more than Social Security for a reasonable retirement. Privatization is not a viable answer.
George M. Perry of Bonita Springs is a retired vice president of American Express Financial Advisors (now Ameriprise).Articles on electric cars and a complete analysis of Social Security and Medicare can be found at www.entitlementdilemma.com. His email address is George@entitlementdilemma.com.
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
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