HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
I can say without exaggeration that I have an international readership. Three people in Canada, two in the United Arab Emirates and one in South Korea receive this newsletter.
Social Security is a pyramid, and all pyramids ultimately collapse. Actually, Social Security is a Ponzi scheme; the initial investors are paid off with money from later investors. In the end, the people who are unfortunate enough to come in last will receive nothing. I believe Social Security is an intrinsically-flawed concept and will ultimately go bankrupt. Yet there is no real public will to address the inevitable and no politician appears man enough to take the lead. How will it all end?
I finished A Country of Vast Designs: James K. Polk, the Mexican War, and the Conquest of the American Continent (Merry, Simon & Schuster). In every pole of US Presidents, Polk rates between 8th and 14th. He was the only President to achieve all of his major platform planks: 1) Settle the Oregon question with Great Britain, which extended the US to the Pacific coast. 2) Acquire California and adjacent territories. 3) Reduce the Tariff of 1842, and replace its overt protectionism with a pure revenue rational. 4) An “Independent Treasury” designed to protect federal monies and ensure currency stability. The result was seventy years of unequaled prosperity—until the Federal Reserve was created in 1914.
But always in the background was the issue of slavery. From 1820-1845, the great men of the day, such as Jackson and Clay, were able to keep the lid on. But after the Mexican-American War the issue again came to the forefront; should slavery be allowed in the newly acquired territories? The South had a significant vested interest in slavery; their way of life was built on the slave, a good deal of their capital was slaves, and the Constitution of the United States said it was completely legal. No one was willing to give and there were no leaders of real stature (If you think our current leaders are weak, read about James Buchanan. He was pathetic). Things spiraled out of control and brother fought brother, blood had to be spilled, to settle the issue.
While I was reading this I couldn’t help but think: How will Social Security finally end (NOTE: I am not comparing the morality of the issues, but rather how important they are and the potential difficulties in settling them). Will it be like what we are seeing now in Greece? Wall Street Journal 3/5-6/10. The lead picture, entitled “Greece’s Budget Remedy Is a Bitter Pill For Many”, shows riot police with tear gas and rubber hoses beating demonstrators protesting frozen pensions and increased taxes.
By far the best (and least likely) way the issue will be settled is 1) A leader will emerge who can raise themselves above the fray to do what is best for everyone. 2) Young people, far from retirement age, must accept that promises have been made. Someone currently on Social Security, or within a few years of retirement, cannot be expected to give up the pension they are expecting to receive. 3) Older people must realize they were lucky to receive far more than they paid in and accept that the burden placed on younger generations cannot be maintained indefinitely. Corporations now understand that pensions are best constructed as defined contribution plans rather that defined benefit plans (as Social Security is).
The ideal solution would be where everyone gives something to achieve what is best for the common good. For example: 1) Those now on Social Security would receive benefits, but they would be frozen at current levels, or possibly even decreased. 2) Those between 45 and 64 would receive 5% less per year at retirement (age 64 would receive 95%, age 63, 90%, down to age 45 would receive 5% benefits at age 65 and beyond). 3) In the interim, everyone could open a defined contribution plan (IRA). 4) Those less than 45 would continue to pay in yet ultimately receive no benefits. A) To be truthful, I don’t think anyone in that age group realistically believes they will receive anything anyway. B) Unfortunately, that’s how pyramids work. The last ones in always get hosed. C) But, their payments into the plan would steadily decrease and they would have many years to save for their own retirement. I put the chance of such a logical and orderly solution at 10% or less.
This is why I am not optimistic. 1) Just about everyone knows what is best for them, but how many have the will to do it? Everyone knows smoking is bad but many do it. How many drink more than they should, weigh more than they should, exercise less than they should, keep their vaccinations up to date, save for a rainy day, take on too much debt, etc? Many just do not have the willpower to do what they know is best.
2) In the song “Snoopy Vs the Red Baron” (1966, The Royal Guardsmen, actually a group from Ocala, Florida), they say “In the nick of time, a hero arose”. If one studies history, the heroes usually arise during the conflict, not before it. Prior to the Civil War, Lincoln was a one-term Congressman and Grant and Sherman were not successful at anything. Churchill had Hitler nailed from the beginning (he had read Mein Kampf), but no one listened. Only after Germany invaded and demolished France in May, 1940, did the Brits realize Churchill was the man and made him Prime Minister. In July, 1945, even before the War ended, Churchill was booted out of office. Human nature being what it is, I doubt if the next Great One will arise before the Social Security problem becomes acute.
In the next issue, I will outline scenarios that are much more likely than the orderly one I describe above, and how you can best position your portfolio, especially your retirement accounts, to avoid being hurt too much by the final mess.
RMD
John John, a local real estate agent at Re/Max Boone Realty, puts out a real estate newsletter, from which I will summarize.
Cautionary note: Columbia, Missouri is a small, isolated, relatively stable market (RMD comment: This is often the case in Midwest college towns).
Commercial (Office/Retail). The progression of commercial real estate financing is beginning, but painfully slowly, in this soft economy. The boom of new, speculative, commercial construction from 2002-5 will not be fully utilized until 2012-15.
Investment (Residential). Several factors have coalesced to make this moribund.
Single Family Residential. We have passed through the bottom in Columbia. In the less-than $200K range, it is time to get looking.
Land: Residential lots. You can buy at steeply discounted prices, but you must be willing to wait at least 3-4 years. Commercial land: No turnaround for the next year at least—maybe two. However, if you have holding power, now would be a good time to speculate—for a 5 to 10 year window.
One Old Saw is that an income property is worth 100 times the gross monthly income. Although simplistic, 100 times the monthly rent isn’t a bad number.
Alan Abelson in Barron’s (3/1/10) confirms John’s impressions at the national level. “New-home sales dropped an eye-popping 11.2% in January to 390K units, the lowest ever since they started keeping track…it’s about a million and a quarter fewer sales than at the peak…of midsummer 2005.
To make matters worse, the median home sold for $203K, almost a seven-year low…existing-home sales took a header in January as well, to an annual rate of 5.05M, a 7% drop.
RMD comment: This doesn’t sound like a “V-shaped recovery” to me. Unfortunately, I believe housing, employment and the economy will remain weak for most of this decade.
Follow-up from Issue #93 (2/22/10), discussing how physicians can profit from having an agent.
I noted that Bob Pettit, arguably the greatest forward in NBA history, made between $20-25K per year, and in the current market could make $10M per year.
From son Michael: “The maximum contract of a player (with 10+ year’s experience) in 2010 ranges from $14M-20M. There is no doubt in my mind that Pettit, based on his consistency and production, would garner a league maximum contract. You really underestimated his worth by $10M” (Think of it: Pettit would be making one thousand times what he made in the 60s).
I also related how, 5 minutes after showing up with an agent to help him negotiate a contract with Vince Lombardi, All-Pro center Jim Ringo was traded from the Packers to the Eagles.
I saw Dr Ed Blaine (Distinguished Eagle Scout) last week at a Boy Scout function. Ed was an All-American here at Missouri in 1961, and played on both the Packers and the Eagles (All-Pro in 1964, and in 1969 chosen to their All-time Team). He assures me the story about Jim Ringo is true.
I saw a piece about the results of Obama’s annual physical.
RMD comment: 1) I was really stunned that he smokes!! Although I disagree with Obama’s politics, I thought he was a smart guy (after all, he is a University of Chicago man). 2) Even though his HDL (good cholesterol) is great=62, his LDL is 138. If I were Obama’s doctor, he would be on a statin.
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