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The Power Of Zero Show
20 minutes | Jun 9, 2021
America's True National Debt – Part 2
In Prosperity in the Age of Decline, the authors are predicting that 2030 will be the opening year of the greatest depression since 1930. Dr. Kotlikoff believes that it might not wait until 2030. China is already beginning to overtake the US in terms of GDP. By the end of the century, the US will no longer be the dominant economic superpower. It’s not looking good in terms of projection. For a depression to occur, there would usually have to be an event or collapse beforehand, which is definitely possible. There are too many examples of hyperinflation over the course of history for the proposition that we can just print our way out of our problems to be true. There is still time to correct our mistakes. We need an independent party to run and expose Americans to the truth of the fiscal condition of the country. One of the problems we are dealing with right now is the marginal taxation of the poorest Americans. Roughly 25% of the poor are facing marginal taxes of .70 on the dollar. We need an incentive system that helps people instead of punishing them. There isn’t much political will to change things. Dr. Kotlikoff wrote a bill to force the CBO to do fiscal gap accounting each year and it only garnered the support of eight senators. To right the ship of state, we need to broaden the tax base. Dr. Kotlikoff suggests putting everybody into a 30% marginal tax bracket while incorporating a progressive system so that the poor are differentially helped. With a few other tax structures and some reform of the welfare programs, it would be possible to get the fiscal gap under control. Reforming healthcare should be a major focus. If we could reduce the spending on healthcare to only 14% of GDP, the US would still have a very good healthcare system and be able to reduce spending considerably. Politicians need to be honest about the fiscal condition of the country if there is ever going to be momentum to change. There are a number of ideas being floated that can help reform healthcare and other social programs, but as the years go on, the options become slimmer. Politicians need to get out of the way and let economists propose solutions that can actually help people. Economics brings an entirely different way to bring financial planning to the table when compared with the industry, which is heavily focused on selling more products. Dr. Kotlikoff has a financial planning software tool you can access at maxify.com to help ensure a smooth retirement.
23 minutes | Jun 2, 2021
America's True National Debt – Part 1
The official debt-to-GDP numbers are on track to be 110% by the end of the year, which is nearly a 30% increase over the last decade. The trouble is this calculation doesn’t count unfunded obligations like Social Security. Economic theory doesn’t differentiate between official borrowing and unofficial borrowing. The government has left a number of things off the books in order to keep the public in the dark about the true costs of what they are doing. Fiscal gap accounting puts everything going in and going out on the books and looks at the difference between the two streams. Right now, the US is counting the official debt of one year worth of GDP. This leaves another seven years' worth of GDP that we are not counting which is the real problem. In terms of fiscal gap, the US is in twice as bad a shape as the worst country in the European Union. In absolute numbers, the national debt is closer to $160 trillion than the $22 trillion that is officially reported. One proposed solution from the Modern Monetary Theorists is to simply print 8 years' worth of GDP, but that’s not really an option and would likely result in immediate hyperinflation. The money printed since 2008 is already beginning to have an effect on consumer prices, and printing money is only a temporary solution. Printing money is a form of taxation. While the US needs to collect more in receipts, printing money comes with inflation and that can take on a life of its own. Once people begin to expect a period of inflation, the Federal Reserve can’t do much other than accommodate those expectations. Programs like Medicare are paid in kind. If we try to inflate our way out of our Medicare problem the cost of the program will rise commensurately. When we look at what the government has been doing as a whole, it looks like Modern Monetary Theory has already taken hold. MMT proponents don’t sound like regular economists. They’re actually closer to religious fanatics or political ideologues than economists. The idea behind MMT is that as long as the printed money results in increased economic output we won’t see inflation. In order to judge inflation, we have to look at what would have taken place had the money not been printed. The big danger is a sudden spike in either prices or just the general awareness of the US government’s true fiscal situation. Like going bankrupt, right up until the day you lose everything it can all appear to be working just fine as you continue to spend down your borrowed money. Historically, MMT has not played out well for countries that tried it. The process is like a slow-growing cancer. It may take decades to take its course but the effects will become obvious and pervasive eventually. There are no great choices. To reverse course it would require either imposing a lot of pain on a small subset of people or accepting an environment of permanently high taxes forever.
28 minutes | May 26, 2021
The Coming Depression in 2030: My Interview with Brian Beaulieu
Brian Beaulieu is in the business of predicting economic trends. He’s been forecasting trends for the past 39 years and he’s very transparent about his methods. Brian is politically agnostic and aims to be as objective as possible. He doesn’t make money if the market goes up or down, he makes money by being right. Between March 20th and 28th of 2020, his GDP retail sales forecast came out with a 98% accuracy. When it comes to long-term trends, there are only a few ways they can play out. In terms of accuracy, Brian forecasted the great depression of 2008 and 2009 at the tail end of 2003, so their clients were well prepared when the crash hit. Back in 1987, a month before the stock market experienced a short but rapid decline, Brian warned his clients to get out and saved them from heavy losses. Brian’s team has a unique methodology as well as business cycle theories which help them achieve such a high level of accuracy. By using a system of leading indicators, Brian can forecast major market trends with confidence. Business cycles don’t turn based on old age, but that does produce imbalances which accumulate eventually causing major trends. Overall, Brian and his team have had an average accuracy of 94.7%. It’s not particularly useful to read financial publications when it comes to trying to make predictions. Publications like the Wall Street Journal are in the business of selling ad space and have financial biases. They often look for data that reinforces what they already believe, and if they don’t play that game, then their subscription base dwindles. Financial publications are interested in articles that get clicks, not in predicting the future. Brian knows that he’s not immune to that, which is why he tends to be very dogmatic about his leading indicators. Humans have a tendency to think linearly. Financial behavior has a recency bias and whatever we have experienced most recently has the strongest imprint on us. This leads people to think that next month will look a lot like last month, and next year will look like this one. Most Millennials and Gen Xers have only experienced falling interest rates. Because they haven’t experienced a rising interest rate environment they can’t figure out ways to take advantage of it. If the success of stimulus spending is defined by people receiving a check and thinking fondly of the political process, then the most recent stimulus was indeed successful. Long-term, the stimulus has made the forecasts worse and someone is going to have to pay for it. People are aging, and as a population gets older they spend less and cost more. We are not going to get out from underneath those healthcare costs until 2036. Another issue is that the government has refused to fund Social Security, Medicare, and Medicaid. When interest rates start to rise again, the government is going to find itself in the position of not being able to afford both the mandatory and discretionary items. Most people like to think that rising healthcare costs are due to litigation or the greed of pharmaceutical companies, but the truth is more complicated than that. All these trends are going to line up around the time when the US national debt is so large that it becomes untenable. Advocates of Modern Monetary Theory believe that because we can print our own money that we don’t have to worry about that, but history tends to disagree. What happens when the rest of the world stops lending the US money at the current interest levels? Over the next 8 years, Brian does not expect any politicians appearing with the political will to change the trajectory of the country until it’s too late. Since the inflation from stimulus spending is not immediately present, people are going to believe that they can print money indefinitely with little to no consequences. Even with Covid-19, the level of stimulus hasn’t changed the date of Brian’s prediction. In order to prepare, you need to make as much money as you can in the intervening years and invest in assets that do well when the US dollar is declining. Around 2029, you should flip into assets that will protect you during a period of deflation. The goal is to preserve your cash on the way down, and then in 2036 get ready to begin buying assets and stocks when things get back on the upswing. Mentioned in this Episode: ITReconomics.com
15 minutes | May 19, 2021
The Secure Retirement Act 2.0 – 6 Things You Need to Know
There is a new bill moving through Congress right now that has bipartisan support and is fairly likely to pass in its current form. We can get a good sense of what the bill is intended to do by looking at the title page. The stated goal of the bill is to increase retirement savings, and to simplify and clarify retirement plan rules. Change #1 is that the bill enacts changes to required minimum distributions and does so according to a schedule that depends on how old you are now. This change will affect roughly 20% of IRA owners who don’t need their RMD’s to cover their lifestyle expenses and they will be able to push their RMD’s further into the future. Change #2 involves catch-up provisions for IRAs, and that includes Roth IRAs. This section of the bill indexes IRA catch-up contributions for inflation, which brings them up to par with other retirement investment accounts. Change #3 are age-sensitive changes to catch-up provisions for traditional retirement plans. This change only affects people who are currently between the ages of 62 and 64 and says that starting in 2023 your catch-up provisions for traditional plans go from $6500 to $10000. This provides a narrow window for people who are just on the threshold of retiring but need to make greater contributions. Change #4 requires all catch-up contributions to be made to Roth accounts. Roth IRA’s are so beneficial to people, especially in a rising tax rate environment, that many people believe that at some point they will be taken away, but the truth is that the government loves the Roth IRA. It provides the short-term infusions of cash that the government and politicians desperately need today rather than decades from now. Change #5 is that retirement plan employer contributions can be designated to Roth accounts. Is a rising tax rate environment, this is exactly what we want. With a 30-year time horizon, this will allow us to squeeze the most efficiency out of our retirement dollars. This will probably result in you having to pay taxes on the matched amount, but given the historically low tax rate environment that we are in that’s still a good deal. Change #6 are changes to the penalties for failure to take required minimum distributions. Instead of being penalized by 50% for failing to take your RMD by the required date, the penalty is reduced to 25%. The penalty becomes 10% if you correct that within three years. This sounds like an improvement but it may also mean the IRS is less likely to waive the penalty than they were previously. One of the biggest takeaways from these changes is that the government loves Roth IRAs. They love it because it gives them revenue immediately, during their tenure in office, and we love it because it allows us to take advantage of historically low tax rates before they go up for good. Mentioned in this Episode: H.R. 2954: waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/BILLS-117hr2954ih.pdf Jeff Levine on Twitter: @CPAPlanner
16 minutes | May 12, 2021
The United States' Demographic Time Bomb
With the recent release of the US Census we are getting a picture of the upcoming demographic time bomb facing the country. The 2020 census revealed that there are 331 million US residents, which represents a 7.4% increase since 2010. This is significant since this period is the second slowest rate of growth we have experienced as a country since the Great Depression and roughly half the growth rate we experienced during the 90’s. When you combine the lower birth rate and declining immigration with a rapidly aging population, it indicates that we are entering a period of substantially lower population growth. If it stays this low, it could mean the end of American exceptionalism in this regard. The US population has always outpaced the growth of other developed countries but that’s no longer the case. This means that the US is losing one of its major competitive advantages. The question is why we are experiencing low population growth? Fewer births and more deaths reflect a reality where more people are delaying child bearing and delaying marriage, as well as a rise in drug and endemic-related deaths. The average age of Americans also continues to rise because of this trend. The current birth rate of America is 1.7, which is below the threshold for the replacement rate of 2.1. Historically, the answer to this demographic quandary has been immigration, but we haven’t seen the immigration levels we’ve had in the past. Fewer birth rates in Mexico and a generally improving economy means that the historical source of the majority of immigration is lower than usual. The growth rate of our nation is as tepid as it’s ever been at any point in our history, and we are likely to see a slowdown of economic output as a result. We have more people above the age of 80 than we do below the age of 2. There will come a time when we sell more adult diapers than baby diapers. With fewer people in the country producing fewer goods and services we will see a lower GDP over time. Other countries are facing the same issues and have begun offering incentives to young people to encourage a higher birth rate. From an economic perspective, we are going to have a hard time funding social safety nets and entitlement programs for citizens of the US. Ideally, every generation is bigger than the previous generation. It should look like a pyramid with more younger people at the bottom but the current reality is an inverted pyramid. With 78 million Baby Boomers, there are not enough younger people working to support Social Security, Medicare, and Medicaid. This means that we will need massive infusions of cash to pay for these programs. The only real solution for retirees facing this sort of demographic time bomb is to save in tax-free vehicles. If you’re one of the 95% of Americans that have the majority of their money invested in tax-deferred vehicles, it’s time to take advantage of today’s historically low tax rates. Given Joe Biden’s position on taxation, you probably have until 2030 to get most of the heavy lifting done. 2030 will be a perfect storm. Demographics, underfunded entitlement programs, and economic events will converge and could lead to a depression the likes of which we haven’t seen for 100 years. We cannot ignore demographics because in many ways they describe what the future will look like.
17 minutes | May 5, 2021
The Joe Biden Capital Gains Tax Proposal
This is an apolitical podcast. The goal is to call out fiscal irresponsibility no matter what side of the aisle it’s on. It’s less about politics and more about math. Joe Biden recently came up with a proposal to reform capital gains taxes. The increased revenue that is thought to come from this reform is earmarked to pay for childcare, universal pre-kindergarten education, and paid leave for workers. The state of capital gains taxes currently is that if you are in the 10% or 12% tax bracket you don’t pay any capital gains taxes. It currently sits at 20% for people above those brackets and for people making more than $250,000 per year there is an additional surtax of 3.8%. This puts the baseline for wealthy Americans at 23.8%. When it comes to capital gains tax, there are four different taxes that may come into play. The first is at the federal level, then there are also state capital gains taxes and local capital gains taxes in some parts of the country, and finally the Obamacare surtax. The Biden proposal basically says that anyone who makes more than a million dollars per year would see their federal capital gains tax go from 20% to 39.6%. If you lived in New York City and included the other governmental layers of capital gains taxes, this would result in a total capital gains tax of 58.2%. Residents of Portland, Oregon would be looking at a capital gains tax of 57.3%. This doubling of the federal capital gains tax rate would generate roughly $1 trillion in additional revenue. This proposal will not likely pass through the usual route and would likely have to come through budget reconciliation. In its current form, the proposal will not likely pass because there are Democrats who believe that the tax is too high. Most people see the bill as the initial salvo in the negotiation process and the end result will be somewhere in the middle. Compared to other countries, this proposal would put America at the top of the list for capital gains taxes. If you make more than a million dollars per year, this proposal will likely affect you quite a bit. If you make less than that, you won’t have to worry about it. If you’re concerned about capital gains tax rates, you need to stop accumulating huge amounts of money in your taxable bucket. Raising capital gains taxes is not going to solve our country’s problems. We need to see broad base increases in taxes across the board and dramatic reductions in spending. If you want to protect yourself from the inevitability of higher capital gains taxes, you need to stop accumulating money in your taxable bucket and take advantage of all the tax havens that are available to you. The Roth IRA and Roth 401(k) are great options and allow you to put a lot of money into tax-free vehicles. There are unlimited amounts of money that can be converted to the tax-free bucket with Roth conversions. The LIRP is the great antidote to taxation in the taxable bucket. Someone is going to get your money, you might as well get something useful in exchange for it. There are no income limitations or contribution limits with the LIRP. Whether you make a million dollars a year or not, there are a number of alternatives to situate assets to grow tax-free wealth without having to worry about what’s coming down the pipe with regards to taxes. One of the fundamental issues with these tax raises is that they are always earmarked for some new initiative and never aimed at restructuring or fixing the entitlement programs that are driving the fiscal problems in our country.
25 minutes | Apr 28, 2021
The Case for Replacing Bonds with Annuities
If you want to maximize the amount of money you can safely spend in retirement some economists say that you should sell some of your bonds and replace them with annuities. According to Tom Hegna, there is only one mathematically ideal retirement plan and annuities are a key component. While you are working, a diversified portfolio of stocks and bonds is the most efficient way to save for retirement, but once you retire the rules of the game change and you need to start thinking about distribution. Tax rate risk is not the number one risk in retirement, longevity risk is more frequently cited by retirees as the number one risk they are most concerned about. In retirement, you should not have a lot of bonds in your portfolio. There is a simple guideline that you can use to determine how much income you need to guarantee with an annuity. Look at your lifestyle and subtract your guaranteed streams of income, like social security or rental income, and whatever is left should be guaranteed with an annuity. Everything else goes into the stock market portion of your portfolio. If you have your lifestyle expenses guaranteed, you have the luxury of watching your stock market portfolio recover after a down year. If you have money accumulated in a life insurance retirement plan, you can take tax-free loans out of that life insurance as well. The last thing you want to do is to cover discretionary expenses by taking money out of your stock market portfolio while the market is down. Annuities are a form of longevity insurance. It offloads your longevity risk to an insurance company which can manage better than you can. The alternative is relying on the 3% rule to avoid running out of money in retirement, but accumulating enough money to make that a viable choice is very difficult. Annuities will extend the life of your investments more effectively than a well-allocated balance of stocks and bonds. The bottom line is that bonds and stocks do not mitigate longevity risk and actually expose you to a number of other risks that can threaten your retirement. If you have longevity in your family or anticipate living a longer life, annuities reward you for doing so. The stock/bond approach penalizes you the longer you live. There are instances where you don’t need an annuity. If you have plenty of income to pay for essential expenses there may be no need. You need to cover your fixed expenses with income that will last the rest of your life. However, this approach can spook some investors since the only money left over with this strategy is invested in the stock market portfolio. Social security is an inflation-adjusted income annuity itself and it’s generally best to max it out by not claiming it until age 70. If you want to get an idea of how long you will live, go through the underwriting process of the life insurance retirement plan. The very best annuity you can buy is to delay social security. Replacing the bond portion of your portfolio with annuities runs counter to much of mainstream financial thought but it really is a great strategy for mitigating longevity risk. All these strategies are true, but if you take your guaranteed stream of income from your tax-deferred bucket you can unleash a chain of unintended consequences which can bankrupt your portfolio years in advance. Once taken, income from your tax-deferred bucket is stuck and is exposed to tax-rate risk for the rest of your life. It’s also counted as provisional income which will dramatically increase the likelihood that your social security will be taxed. When there is a hole in their social security and guaranteed income, most Americans are forced to spend down their stock market portfolio. You can end up spending down all your other assets seven to ten years faster this way. Bonds and cash are not a great place to store your money in retirement. If your lifestyle expenses are covered you have the luxury to leave most of your money in the stock market and can take more risk. If you want the dollars that are earmarked for your discretionary expenses to last the full arc of your 30-year retirement, you can’t have a lot of money in bonds. Mentioned in this Episode: The Case for Replacing Some Bonds With Annuities - https://stockxpo.com/the-case-for-replacing-some-bonds-with-annuities
15 minutes | Apr 21, 2021
The Bernie Sanders Estate Tax Plan
Bernie Sanders is heading up the proposals regarding estate taxes, and his proposals are deviating to some extent from what President Biden has campaigned on. Joe Biden’s plan says that the estate tax exemption, which is currently $11.7 million as a single person, or $23.4 million as a married couple, will be reverted back to its 2009 levels. Anything above and beyond those limits would be taxed at a rate of 40% and as high as 45%. Bernie Sanders’ proposal begins at 45% and goes up as the amount being passed on increases. When Bernie Sanders ran for president he proposed a maximum estate tax of 77% at the highest tax bracket but has since toned it down. He is targeting the top .5% of all Americans with this tax and has promised that 99.5% of the American people will not see their taxes go up under the plan. The wealthy already pay a tremendous amount of taxes. The 657 billionaires that are in America will end up owing $2.7 trillion in estate tax under the current tax law, and that money has already been accounted for. Bernie Sanders’ proposal would generate an additional $430 billion in revenue and would be earmarked for additional proposals, not to pay down the existing debt. This is essentially rearranging the deck chairs on the Titanic. It doesn’t change the overall trajectory of the US and does nothing to shore up the programs that are driving all of the debt on the government’s balance sheet. It’s not about what your estate is worth now, it’s about what your estate is worth when you die. You may not have an estate that would be taxed now, but you need to project out what your estate could be worth in the future. Another question is what the estate tax exemption will be at this point. When a country is going insolvent, it looks at quarters to raise revenue to keep itself solvent and that could be the estate tax again in the future. There are ways to mitigate the risk of estate taxes but it requires a long runway and careful planning. It involves shifting money, gifting money, and even loaning money into a trust. The specter of a much lower estate tax exemption means we are going to have to start addressing ways to mitigate tax rate risk when we have 20 to 30 years of runway to be able to position into the right types of accounts.
23 minutes | Apr 14, 2021
The Scourge of Modern Monetary Theory
Modern Monetary Theory (MMT) is a pernicious threat to the Republic and has become a popular theory among left-leaning economists. MMT is less an economical theory than it is a political theory. There are politicians in certain quarters that truly believe that MMT will solve all of our economic problems. They believe that the debt doesn’t matter, printing money has no consequences, and if we want something we can borrow or print as much as we need with no adverse effects. America is already in dire fiscal straits and if we adopt MMT as the prevailing economic policy, it will send the country into a tailspin from which it will probably never recover. MMT says that as long as a country’s debt is denominated in its own currency, that country can borrow as much as it wants. Such proponents also believe that you can print as much as you want with no inflationary consequences. The idea is that the additional money printing will grow the economy, and that will prevent inflation from taking hold. The loudest supporters of MMT come from the progressive wing of the Democrat party, which is the basis for such programs as the Green New Deal, Universal Basic Income, and Free College and Healthcare. The claims of MMT are not only flatly false, they are dangerous. To understand MMT’s appeal, you have to understand the three basic ways you can eliminate debt. The first is by reducing fiscal deficits by either raising taxes or cutting spending. The second is to grow our way out of the debt. Lastly, you can use central banks to print money. MMT proponents will often point to Japan as an example. Japan has a 250% debt-to-GDP ratio so it would seem like a good example of MMT working, but Japan has also taken steps to cut spending, raise taxes, and hold interest rates close to zero for decades. If interest rates ever return to historical levels, Japan, like most countries, would be in trouble. There are certain special qualities that allow the US to continue to borrow at lower rates, the main one being the reserve currency status. Eventually, interest rates will encompass the federal budget of the US government and this could cause a crisis of confidence which could threaten the reserve currency status. MMT advocates deny the existence of that limit and therefore propose to borrow to infinity. They also ignore the history of debt and inflation, with Weimar Germany being a salient example of a country trying to print its way out of a debt problem. At the end of 1923, German currency was worthless with $1 US being equivalent to 4,210,500,000,000 German Marks. Weimar Germany wasn’t the only country to experience hyperinflation. Brazil, Zimbabwe, and Venezuela have experienced extremely high levels of inflation in the recent past, with Zimbabwe’s economy essentially falling apart so completely that the US dollar had to be substituted for their currency. The real mystery is how MMT has such a following despite not having a foundation in reality. The theory has more in common with a moral ideological movement than it does with economics. You can’t borrow in perpetuity, because eventually the people loaning you the money will become skeptical of your ability to pay the money back. Interest rates will eventually rise and inflation will follow shortly after. There are only a few different ways we can solve our problem. We can either cut spending, raise taxes, or some combination of the two. MMT is a dangerous fairy tale that could be more dangerous if it becomes more popular. Mentioned in this Episode: nationalaffairs.com/publications/detail/the-weakness-of-modern-monetary-theory
19 minutes | Apr 7, 2021
The Latest on Joe Biden's Tax Plan
Now that Joe Biden has the pandemic relief bill behind him, he can begin to focus on his tax plan which he heavily campaigned on before the election. Joe Biden’s pledge that nobody making less than $400,000 per year will face tax increases has a small asterisk next to it. That threshold only applies to families, and if you are filing as an individual, your threshold is $200,000, which means it will come into play for a much larger number of people. He is still planning on increasing the taxes on corporations, going up from 21% to 28%. For all intents and purposes, this will be felt like a stealth tax for most people since this will likely result in prices going up. If you make more than $400,000, your tax rate will rise from 37% to 39.6%, but he also wants to cap itemized deductions at 28%. Joe Biden tends to view the current system of 401(k) deductions as unfair to people in lower tax brackets, so he’s also planning on leveling that out. This will ultimately result in getting the 401(k) deduction on the front end. That makes much less sense if you are in the 26% tax bracket or above. You are much better off taking the Roth approach and paying taxes on those dollars today so they can grow tax-free in the future. The arrival of the tax bill is still up in the air until we have more information regarding the vaccine rollout. Social Security is also a major focus for a number of reasons. Biden has discussed some major changes to the taxation scheme for the Social Security Payroll tax to try to shore up the coming shortfall. Social Security was previously projected to be insolvent by 2034 and Medicare by 2026. Those projections have been revised to 2031 and 2022. As a president, they typically try to accomplish their biggest changes in the first 100 days in office, which is why there is such a big emphasis on tax reform so early in Biden’s administration. All these changes are likely to take place this year because of the Democrats only needing a simple majority to make it happen. For those who make more than $1 million per year, he wants to make it so that capital gains are taxed at ordinary income. He has also talked about raising the estate tax rate, which could impact people looking to pass their businesses and wealth onto the next generation. There has also been discussion around eliminating the state and local taxes deduction, but that could be seen as a tax break for the wealthy, which is something that he’s trying hard to avoid. More recently, one of Joe Biden’s big initiatives is a $2 to $3 trillion infrastructure package, which may be combined with his tax legislation proposals. This indicates that any tax increases coming down the pipe are not going to be earmarked to pay down debt or shore up the things that will be driving debt going forward. There is currently nothing in the works to shore up Medicare or Social Security to any real extent or paying down the national debt. Joe Biden is currently contemplating extending the Jobs Act tax cuts implemented by Trump and pushing them back all the way to 2030, at which point they would revert back to 2017 levels. 2030 is likely to be a point of reckoning for America. The country will probably be in such dire straits by then that the government will have to raise taxes across the board on every tax-paying American. Ed Slott believes that the math will force the government to raise taxes on Americans starting next year, but David disagrees. If you raise taxes on mainstreet America before you are absolutely required to do so, you will probably be voted out of office, but that time will come. There is a slim possibility that we will see higher taxes for people making less than $400,000 as Americans begin to recognize that there is just not enough revenue to pay for all the entitlement programs. We will see the tax reform bill over the next couple of months, and it will probably be pushed through budget reconciliation. In terms of the extended tax cuts, assuming they come to pass, you now have nine years to shift your money to the tax-free bucket which could be very beneficial. The lower the tax bracket you are in as you shift money to tax-free, the more money that stays in your pocket, and the longer your retirement savings lasts.
19 minutes | Mar 31, 2021
Busting the Annuity Myths: My Interview with Tom Hegna (Part 2)
If you have a history of premature death or cancer in your family you may still be a good candidate for an annuity. If your spouse has longevity it can still be a good option. Even if you’re not in the best health there are still annuity products with certain features that can still make sense. Some people always want to have control of their money, but they have to realize that an annuity is not giving up control, it’s about taking control over your risk. Annuities give you control over longevity risk, the risk of deflation, withdrawal and the sequence of returns risks. You’re simply taking key risks off the table. The people who buy annuities are the people that want to have control of their future. Annuities are not meant for all of everybody’s money. Most people should put 20% to 40% of their portfolio into annuities. If they did that it would solve most people’s retirement issues. Life insurance is a great bond substitute for younger people, once you’re 65 and above you can replace it with some time of income annuity. The way an income annuity functions inside a portfolio are like a triple A-rated bond with a triple C rated yield and zero standard deviation. This makes them a much better alternative to bonds. Most people don’t realize that they can lose half their money in a government bond because of the risk of interest rates rising, which is a risk that’s not present in life insurance and annuities. You aren’t getting any younger and you can’t take your money with you. This means you are supposed to spend your principal. If you have life insurance in place it allows you to spend your money guilt-free in a way where everyone wins. Annuities are ordinary income, but most people overestimate the amount of capital gains they are receiving. If you’re in a mutual fund or managed money account, a lot of the time it’s actually ordinary income because of the turnover within the fund. When it comes to the stepped-up cost basis the only area that applies is in unrealized capital gains. Most people think the stepped-up cost basis applies to their whole account but they actually paid for it in taxes for all the years they have it. It doesn’t matter whether it’s Republicans or Democrats, both parties spend like drunken sailors. Both parties are spending too much and borrowing to pay for everything. If you look at Modern Monetary Theory closely it only works as long as interest rates are low. Once interest rates start to rise they advocate for slashing spending very strictly which is the source of the problem. We are always willing to take the easy road (spending) but we’re not willing to do the hard things (cutting expenses). It’s hard to predict where the economy is headed over the next ten years because of the crazy amounts of unprecedented money printing recently. 1 out of every 5 dollars in America’s history were printed in the last 12 months. They can keep printing money in the short-term but they can’t do it indefinitely. Tom believes that at some point in the next ten years taxes will go, the market will crash, and there are good odds of another great depression-style event. People need to move from the mindset of building wealth to protecting wealth, and that’s what life insurance and annuities can do. Another interesting point is that in the state of Arizona, the money you put into annuities is protected from lawsuits. Protecting your wealth is more important than building your wealth. Mentioned in this Episode: For advisors interested in learning more about Tom's training materials, go to tomhegna.com/webinars
21 minutes | Mar 24, 2021
Busting the Annuity Myths: My Interview with Tom Hegna (Part 1)
Popular speakers in the financial and retirement space like Ken Fisher and Suzy Orman have made annuities rather unattractive. The major objection has to do with the supposed fees of the product, even though many of the annuity options are not actually fee-based products. Ken Fisher has high fees, just like other investment options like commodities, hedge funds, and real estate. Variable annuities have higher fees than mutual funds but they also come with guarantees, and he’s essentially convincing people to move from those guaranteed products to another high fee fund. People often say they want no fees, but if that was the case they would just put their money into a savings account. It’s not about the cost of the fees. Its about the value you’re getting in return for the cost. Life insurance and annuities are not a religion and don’t require your beliefs. They are both basically risk transfer vehicles. An annuity is essentially a guarantee that you will never run out of money as long as you live. With all the medical breakthroughs that have happened recently, people are living longer lives, which is only increasing the odds of falling prey to the number one risk in retirement. Tom believes that you should spend all your money and leave life insurance to your kids. Leaving your IRA to your kids is not a great vehicle to transfer your wealth. People have been programmed to spend their paychecks while they are working while not touching their 401(k)s and IRAs while they are working, but once they retire they have to switch their mindset. You should use your money to actually enjoy your retirement. Any money that you want for retirement is appropriate for an annuity, especially after the age of 59 and a half. Annuities are not meant for a down payment on a house or your children’s college education, but depending on your goals, annuities can be one of the best places to put your retirement money. If you’re young and want to save as much as possible without losing what you have, an annuity is a great option. It would be possible to purchase a significant stream of money by the time you’re retired and it wouldn’t be that painful if you spread it out over your working years. People need to start thinking about income, rather than accumulating a big pile of money by the time they retire. Tom owns eleven annuities but he has even more in cash-value life insurance. Tax-free income in retirement is going to be vital, and people are not prepared for how much taxes are going to go up in the near future. If taxes go up and the market crashes, there are going to be a lot of people who are going to suffer. Liquidity is not a one time event, it’s a lifetime event. When you buy additional lifetime income you are increasing your lifetime liquidity. Annuities are a long-term plan. That money is not for emergency expenses. The overall strategy is not all or nothing. You can’t put all your money into an annuity or life insurance, they are all part of a balanced portfolio. If you guarantee a portion of your income in retirement by way of an annuity, it will free up the money in your stock market portfolio to continue to perform for you. Life insurance and annuities are permission slips. They give you the ability to spend all of your money and invest more aggressively elsewhere. Tom has been a proponent of investing 1% of your portfolio in Bitcoin which fits right into his overall strategy. Having guarantees in your portfolio gives you that kind of option. In this low interest rate environment annuities are more efficient than normal because the interest rate matters less and less as you get older. You also have to compare the other options. Why be in the market when you can guarantee a 12% payout rate for the rest of your life? Mortality credits are extra money from the risk pool that you get paid the older you are and the longer you live. Because the insurance companies can predict mortality in a large group pretty accurately, they can price the plan differently and afford these kinds of payouts. Mentioned in this Episode: For advisors interested in learning more about Tom's training materials, go to tomhegna.com/webinars
27 minutes | Mar 17, 2021
How to Protect Yourself from Our Country's Fiscal Challenges: My Interview with Van Mueller (Part 2)
The amount of money that we’ve printed over the course of the past year and what we’ll print in 2021 is equivalent to the entire economy of Japan. Van Mueller believes that at some point in the future the US dollar will no longer be the reserve currency, and when that happens the standard of living for Americans will go down almost immediately. Every country is printing money and destroying their currency’s purchasing power, but the US is doing it on a scale that’s unheard of. If you talk with the right specialist, they can show you a strategy where you won’t be hurt by these economic shifts. Leadership is the key missing factor in solving these problems. If we had politicians that were willing to make tough decisions we could salvage our country but those are few are far between, and people need to elect the ones that show leadership. There is no end of the world situation. Eventually, the US will fix everything, either through great leadership or a great calamity. For the people that don’t strategize and plan for the upcoming changes, they will have a lower standard of living. If you want a better standard of living you need to plan now. The debt will never be paid back and we can make a number of assumptions from that. The government will do everything they can to keep interest rates low and there will likely be a ton of volatility in the markets over the next ten years. There are products and strategies that allow you to win in any circumstance, but you have to take the time to build these strategies or these forces will destroy everything you’ve worked for. Studies have shown that 93% of Americans take Social Security to their detriment instead of their benefit. If the goal is to maximize retirement income you should be maximizing your Social Security. There are all kinds of planning opportunities if you understand the right questions to ask. If you really want to know how long you’re going to live, go through the life insurance underwriting process. Almost everyone is willing to have the conversation of how to keep their wealth to their family’s benefit instead of sending it to the government, a hospital, or a nursing home. Based on the math, if you’re married and don’t do any planning, and you have two children, if you both pass away the IRS is going to be the primary beneficiary of your money and not your children. 99% of Americans don’t understand tax law and don’t realize the government’s need for revenue in the future, and if they don’t plan for that there are going to be a lot of people’s hopes and dreams decimated by that. If you’re an advisor, talk to your dry cleaner, your mechanic, and anyone that you know and ask them some simple questions because chances are they have no idea what’s coming. This is the greatest time ever to be an insurance or financial professional. This is also the greatest time ever to own cash value life insurance. There is nothing else that can compete based on what the American government is about to do to people. Mentioned in this Episode: Van Mueller's newsletter and audio training for financial advisors can be found at vanmueller.com
28 minutes | Mar 10, 2021
How to Protect Yourself from Our Country's Fiscal Challenges: My Interview with Van Mueller (Part 1)
The general public should definitely be paying attention to the impact of inflation and what’s driving it. The government has gone to such ridiculous measures printing money that by the year 2029 the government will literally have to print the entire budget of the United States. Instead of inflation, we should be thinking of it in terms of a stealth tax. The M2 money supply is a good barometer for inflation statistics and by 2029 they are expecting the current M2 money supply to exceed $122 trillion, a near ten-fold increase from what’s in circulation today. This increase in the money supply reduces every single American’s purchasing power and constitutes an additional tax over and above the existing taxes. If you can reduce or eliminate your income tax liability, you are offsetting some of the damage of reduced purchasing power. It’s vital to understand that not only is the government going to increase your income tax, they are also going to dramatically increase your stealth tax by decreasing your purchasing power. There are solutions to these situations that allow you to win, not just reduce the pain. The secret is in taking action before these problems can impact you. Truthinaccounting.org was created by accountants to give people an accurate picture of the financial state of the federal and state governments. The situation is bleak with the vast majority not being able to pay their bills already. We will be about $87 trillion in debt by 2029. We are going to have to deal with a new financial world that requires some strategies that protect you from the ridiculousness of government. States and cities are unable to print money, so the only way to pay their bills is to increase taxes, reduce benefits, borrow more money, or a combination of all three. The bailout precedent has already been set, but even if they get a bailout you will still be impacted. Even if the benefit remains, they are going to increase the taxes on it and reduce your purchasing power at the same time. If you add up all the money that the US government has ever printed, you will find thatover 40% of it was printed in the year 2020. They now have an unlimited printing machine that they are going to use regardless of the damage it’s going to do to you, your children, and your grandchildren. The debt we talk about is not even the full picture because it does not include all the unfunded obligations. Most people expect to inherit their money all at the same time, regardless of the taxes they will have to pay. This usually doesn’t end well. Van helps his clients to eliminate the income tax burden completely. It makes much more sense to pay taxes at the grandparent’s historically low tax rates and reposition the money to tax-free now, instead of having to distribute the money all at the same time because of the Secure Act. Covid-19 has changed everything, but nobody knows just how much yet. The latest jobs report indicated that another 792,000 people have filed for unemployment. This means that 49% of all the workers in the US have filed for unemployment since the pandemic began. There are many jobs and industries that are not coming back or will be operating under a completely new paradigm. Even if we taxed every person who made more than $100,000 by 100% it would barely make a dent in the yearly federal budget. 81% of Americans make less than $75,000 a year, so anyone who makes more than that has a major target on their back. The government needs revenue, and they aren’t going to wait. Over the next 25 years there are going to be 140 million Americans over the age of 65 and they are going to need money to pay those people. We don’t have a tax problem, we have a spending problem. It’s easy to blame taxes, but if we spent what we brought in and lived within our means we would be in a completely different scenario. The trouble is no one has the political will to say no. Mentioned in this Episode: Van Mueller's newsletter and audio training for financial advisors can be found at vanmueller.com
23 minutes | Mar 3, 2021
"From Forever Taxed to Never Taxed": My Interview with Ed Slott (Part 2)
Some people have a concern about the implications of the tax arbitrage they could be receiving if they just waited. This is the key to the Roth plans and Life Insurance vehicles that Ed described. The big myth is that you will be in a lower tax bracket when you retire. If you let your IRA just continue to grow, at age 72 the plan will be out of your control, and you will be forced to take the money out at the prevailing rates, whatever they are at the time, for the rest of your life. For married couples, there is another problem they don’t think about, and that’s that one spouse usually dies first. This means the surviving spouse becomes a single taxpayer again. This means they will have the same assets and income but at much higher rates. If you don’t pay the taxes now, there will always be uncertainty. If you lock them in now, you will never have to worry about taxes again. Most retirees don’t suddenly begin spending like rock stars. If your single child inherits a million dollar IRA, they are going to be forced to realize it as income over the course of 10 years when they are probably at their highest earning potential, at a period of time when they can least afford to pay the taxes. If you don’t need some of your money in retirement, doing a Roth conversion on that money is like a gift to your children and grandchildren. You can give them a tax-free account which can be coupled with a tax-free life insurance plan to maximize the benefits. We are in a period of historically low tax rates, and in a rising tax rate environment, it only makes sense to pay the taxes now and get the money moved to tax-free. Yet 90% of all retirement dollars are in tax-deferred accounts. Most people believe that tax rates are on the rise, yet still have the majority of money in tax-deferred accounts. The secret to having more later is to pay the tax now. All the good things in life you pay for upfront, but it’s the bad things that you defer that end up costing you. If you take care of the problem early, you have less to worry about. Like spending money on dental care, waiting until the very end makes the problems more painful and more expensive. Covid has led to people running to their estate planners. It has put more attention to making sure people have a plan in place in case they die or get sick. When you combine that with the additional $3 trillion dollars in debt the US government has accumulated, we are going to have to face the day of reckoning much sooner than we thought. Just like stocks, with taxes we should buy low and sell high. Right now taxes are low, and they may never be this low again in our lifetime. A good analogy is like paying off the mortgage to your house. When you finally make that last payment and own your house free and clear, it’s a great feeling. You can get that same feeling by paying the taxes now and owning your investments tax-free forever. You can do everything right when it comes to your IRA. You can build and save and invest well, but if you don’t protect it, all your family will remember about you is that you blew it. The people with the most money want the best trained advisors. Ed has several opportunities for advisors to learn how to help people keep more of their money and other tax planning technologies. All people want larger inheritances, more control, and less tax. You control your rate and which advisor you work with. Only invest with an advisor that invests in their education. The problem with the tax rules in the tax code is that they are rigid and unforgiving. You need to get the right answer the first time. Mentioned in this Episode: The New Retirement Savings Time Bomb by Ed Slott can be pre-ordered on Amazon here: https://www.amazon.com/gp/product/B07TSZSSY5/ref=dbs_a_def_rwt_bibl_vppi_i0
28 minutes | Feb 24, 2021
"From Forever Taxed to Never Taxed": My Interview with Ed Slott (Part 1)
Ed Slott has a new book coming out called The New Retirement Savings Time Bomb. It’s the updated version of the original book written 20 years ago where the time bomb was the tax building up in your IRA account. If you didn’t know how to plan, you could be hit twice and lose up to 80% and 90%. Some of the Estate taxes have gone away since then, but there are other new threats to your retirement savings than ever before. Congress always needs money, and they will always go for the lowest hanging fruit, which is your retirement savings. It’s like a deal with the devil, getting those deductions on the front end with the hope that you will be in a lower tax bracket. This assumption is where the danger lies. The Secure Act has ironically made your retirement savings less secure. The biggest threat is the elimination of the stretch IRA and the estate implications. Every plan needs to be reviewed and revised, maybe scrapped altogether for different thinking entirely. Congress needs money, which means tax rates are going to go up and that people will have less money in retirement. What is driving the need for these huge infusions of cash? Deficits and debts are the issue. The government has been recklessly spending for decades, and now it’s only increased with the effects of Covid-19. When most people think of compound interest, they think of how Albert Einstein is the 8th wonder of the world. It’s great when it’s working for you, but awful when compounding is working against you. Compounding debt is the real issue. The math doesn’t discriminate. The math bears it out that we will never see tax rates as low as they are today. We need a more stable and secure plan for the future. The history of tax rates shows that we could return to where rates were as high as 90% for the top tax brackets. You may only have one more year to take advantage of these historically low tax rates. People have to realize that they are in control of their tax rates. Taking advantage of the current low tax rates is the best tax planning you can do. Always pay taxes when the rates are the lowest. That may mean paying some taxes now, but you have to remember that taxes are a bill that won’t go away. The concern about losing out on compounding interest when converting to a Roth IRA is a myth. If you are truly comparing apples to apples, there is no loss when using the same rates of return and taxes, but if rates go up, then everything changes. When rates go up, everything tax-free becomes more valuable. When you have money in your IRA, it is accruing to the benefit of the IRS. When you convert now, you are claiming your portion of the money, as well as the future interest. Taxes have to be paid for. It’s not if, it’s when. Why not pay them while they are on sale? Even in the worst case scenario, by converting now you lock in a zero percent tax rate for the rest of your life, which is not a bad consolation prize. After the Secure Act, using a trust to protect your money after death is no longer viable. Regardless of what happens with tax rates, this is going to become a huge burden for a number of people, and this makes a permanent life insurance policy even more attractive. People don’t care about the vehicle. They want the results. They want low taxes, larger inheritance, and post death control, and a permanent life insurance plan that fits the bill. Mentioned in this Episode: The New Retirement Savings Time Bomb by Ed Slott can be pre-ordered on Amazon here: https://www.amazon.com/gp/product/B07TSZSSY5/ref=dbs_a_def_rwt_bibl_vppi_i0
17 minutes | Feb 17, 2021
An 8-Year Extension on Middle Class Tax Cuts?
Joe Biden’s tax proposal has serious implications for anyone attempting to use the Power of Zero paradigm for their retirement planning. We know that the current tax cuts enacted by President Trump will remain at their current levels for the next five years and will revert to what they were in 2017 starting January 1, 2026. This tax sale gives us a historic opportunity to take advantage of low tax rates when we are executing a shift between the tax-deferred and tax-free buckets. If you wait until 2026 to shift that money, the tax brackets will go up and it will cost you significantly more. The Democrats won the runoff elections in January which have created an opening for Joe Biden to bring about the tax initiatives that he campaigned on. Joe Biden wants to raise taxes on anyone making more than $400,000 per year. Not only that, but you will pay a FICA tax on any dollars above the $400,000 mark of 14%. Right now, Joe Biden has to go through the budget reconciliation process to effect a permanent tax cut, but he can use the same process to extend the current tax cuts. For all intents and purposes, Covid has thrust us into a recession. This means that Joe Biden will not likely raise taxes until 2022. Joe Biden could create a tax cut that would last for 8 years essentially extending the Trump tax cuts for another 3 years. For people making less than $400,000, their tax brackets would stay historically low almost until 2030. This gives you 8 years to get your shifting done and allows you to spread out the burden even more. David calculated the benefits of an additional 3 years when shifting $1.5 million to the tax-free bucket. The difference is an 11% difference in taxes that you would have to shift the money in a shorter time period. This won’t be a great deal if you make more than $400,000 or if you are planning on shifting enough money to put you above that threshold. The reality is that tax rates are likely to be much higher in 2030 and beyond. Even if the dates are pushed back, it only kicks the can further down the road. When taxes are on sale, every year counts. As of Jan 1, 2018 you are on the clock. By keeping tax rates low for middle America the day of reckoning is a bit further away, but the fix will have to be much more draconian. Joe Biden is not fixing the root of the problem. In order to balance the budget by raising the tax rates on everybody, tax rates would have to go up to 49% across the board. Simply taxing the top 1% is not enough in order to get the revenue we need to right our financial ship. The tax base has to be broadened and everyone will have to pony up eventually. David believes that Joe Biden will work through the budget reconciliation to extend the Trump tax cuts by the end of 2021, despite that it’s the opposite of what we need to do to fix our financial situation. If you’re looking to get into the zero percent tax bracket this will be a great opportunity to stretch out your tax burden over a longer period of time. The Covid stimulus and vaccine are the priorities right now, but once those are dealt with he’s going to start tackling tax reform.
11 minutes | Feb 10, 2021
Financial Planning Changes and Updates for 2021
There are some basic updates and thresholds you need to be aware of if you’re interested in implementing the Power of Zero strategy. The first change is that your standard deduction went from $24,800 to $25,100. This may not seem like a big deal but does mean that you can have a larger amount of money in your IRA by the time you’re 72. The Roth IRA rules are not being changed at all, despite other account types having their thresholds changed. There haven’t been any dramatic increases within the tax brackets yet, just the usual adjustments to keep up with inflation but there are still numbers you need to pay attention to, particularly where the 22% and 24% tax brackets start. The 24% tax bracket is still the sweet spot within the tax code. It’s only 2% more than the 22% tax bracket but allows you to convert nearly an extra $150,000. In the grand scheme of things when we are trying to protect ourselves from the impact of tax rate risk the 24% tax bracket is an important tool. The Roth income limit phase-out range has shifted slightly, this means that when you reach the top of that range your ability to contribute to a Roth IRA reduces commensurately. If you exceed that range your options include a backdoor Roth or a LIRP. As we go forward into 2021 you are likely to see changes to the deductibility of your 401(k). Joe Biden plans to level the deductibility around 26%, which means that at higher levels of income the 401(k) becomes less attractive and you should forego that deduction and put that money into your Roth 401(k). You are likely to see a change in the marginal tax rate for people making more than $400,000 per year. In an article by the Committee for a Responsible Federal Budget, they did some studies that showed that at a certain level of tax will depress economic growth. It appears that the Biden administration may have taken their cues from the study. For example, if you live in California and add up all the taxes proposed by the Biden administration (39% Federal, 13% State, 3.8% Obamacare surcharge, +14% New Biden Tax Increase) it approaches the threshold that studies show directly impacts the economy. We are also likely to see forgiveness of federal student loan debt up to $10,000. Other people are lobbying for up to $50,000 of student loan forgiveness. If you have $10,000 or less in student loans, avoid making payments on those loans until the Biden administration confirms their plans over the next 6 months or so.
15 minutes | Feb 3, 2021
Changes to Section 7702 -- An LIRP Christmas Miracle
Due to low prevailing interest rates, the federal government has restricted the ability of industry experts to show the robust rates of return that LIRPs are capable of. When the Consolidated Appropriations Act was passed in the final hours of 2020 it amounted to a Christmas miracle, and it will be immensely positive for LIRPs and will position them to thrive in an environment of low-interest rates. Section 7702 is the section of the tax code that governs the tax treatment of life insurance and it hasn’t been changed in decades. The tax limitations within the section are calculated by asking a simple question. Namely, at what premium level will the policy stay in force based on the life insurance expenses and assumed interest rate? Baked into the 7702 code was the assumption that your cash value would grow at either 6% or 4%, depending on premiums. When you put money into a life insurance policy, there is a relationship between how much money you can contribute and the death benefit that you are purchasing. This is because the IRS wants to define how much tax benefit you can get, this was directly affected by the assumed interest rates. On page 4923 of the Consolidated Appropriations Act that was passed at the last moment of 2020 we find a hard coded rate of 2% for 2021 and a floating rate based on prevailing interest rates in 2022 and beyond. This essentially means that you are going to be able to put considerably more money into a life insurance policy for the same death benefit. The expenses of these life insurance policies are relatively fixed, which means you are incentivized to put in as much money as you can to maximize your return. For people between 40 and 55, the amount you can contribute has increased anywhere from 60% to 100% with triggering a modified endowment contract which would result in the distributions becoming taxable as regular income. The end result is that LIRPs are going to become more efficient going forward. Bobby Samuelson runs some calculations in his article to illustrate the differences between the past regulations and the recently passed act. Using the new 2% hard coded interest rate, the scenario illustrates that you could contribute significantly more money while still maintaining the preferential tax-free treatment, while also increasing the rate of return. This allows you to also increase the distributions over the life of the program. Because of this act, all policies will now have more efficient cash value growth, which means the LIRP will be an even more attractive alternative to those who are using it as an accumulation and distribution tool. Other countries will eventually stop loaning the US money as we experience a sovereign debt crisis, which means that interest rates won’t stay low for very long. The long and short of it is we should feel better and more optimistic about LIRPs now than we ever have. The ACLI and Finesca were primarily responsible for the new act by persuading legislators to lower the hard coded interest rate and linking it to prevailing rates in the future. This change will not affect any existing LIRPs that are currently in force but there is still some uncertainty regarding whether increasing the death benefit of an existing policy will be affected by the new legislation. This is great news for anyone who has a LIRP or is considering one to maximize their tax-free benefits. Mentioned in this Episode: https://lifeproductreview.com/2021/01/05/257-the-section-7702-christmas-miracle
23 minutes | Jan 27, 2021
My Interview with Former US Comptroller General David Walker (Part 2)
Things may seem bleak when you look at the numbers, but there are solutions that we can implement that could help our situation and ultimately prevent the worst outcomes when it comes to the national debt. David Walker’s book was divided into three parts: a wake up call, a call to action, and a way forward. He has a number of solutions that he’s proposed that meet six principles. Any solution would have to be: pro-growth, socially equitable, culturally acceptable, have mathematical integrity, be politically feasible, and have meaningful bipartisan support. We have to agree that the real metric to measure is debt-to-GDP and we need to get it to a sustainable level within a reasonable period of time. We also have to recognize that this can’t be done one reform at a time and needs to be addressed as a package. Medicare seems like the hardest nut to crack because it is tied to demographics and health care costs grow faster than inflation, which prevents the US government from printing their way out of the problem. Most Americans agree regarding gradually increasing the age of retirement over several years which was done in the 1980s Social Security reform package. Increasing the the taxable wage base cap and adjusting the benefits paid out (e.g., higher replacement rate for lower income and somewhat lower for higher income individuals) are reasonable solutions for Social Security. When it comes to healthcare there are a number of more complex issues to deal with. The first is that the US government has overpromised on healthcare. Government needs to determine a reasonable, affordable and sustainable level of healthcare that should be available to everyone and government needs to have a budget. Government will do more for the poor, disabled and veterans. The US is the only country on the Earth that doesn’t have a budget for healthcare, which is one of the reasons that there are so many healthcare horror stories in the US. If interest rates simply return to 2003 levels, the cost of servicing our current debt quintuples. Interest rates are not going to stay low, they are going to go up. The only question is how much and how fast. David Walker believes that we will not default on the debt because federal debt is guaranteed by the U.S. Constitution. The responsibilities of the federal government envisioned by the founders took up 97% of the budget in 1912. This has fallen to 29% of the budget, and was declining as of 2019. The higher the debt-to-GDP goes, the higher that taxes are likely to be, and the lower the level of economic growth we are likely to achieve. The longer we wait to solve the problem, the higher that taxes are likely to go as well. The biggest deficit the United States has is a leadership deficit. We have too many people living for today and not enough people focused on how to create a better tomorrow. The two party system is part of the problem. 43% of voters are unaffiliated, and are largely unrepresented. It ultimately falls onto the President to make this issue a top priority. We need a mechanism that engages the American people in unprecedented ways and sets the table for tough fiscal choices in Congress (e.g., a Fiscal Sustainability Commission), and the sooner we do it the better off we’ll be. President Biden needs to deal with this problem because we only have one President at a time and one bully pulpit where the message can really make an impact. We need a number of political reforms because today we have a Republic that’s not representative of, or responsive to, the general public. David recommends redistricting reform, integrated open primaries, ranked choice balloting, campaign finance reform, and 12-year term limits. Career politicians are not what the US needs. It’s not what the founding fathers intended and it’s one of the many things that we need to change to revitalize our republic. On a personal level, we need to focus on our families and our clients. We can’t control what happens in Washington but we have to take steps to hold our elected officials accountable as much as we can.
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