HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
In the last issue I stated that I believe Social Security is an intrinsically-flawed concept. In this issue I will provide scenarios on how I think it may finally end. Unfortunately, it will not be pretty, viewer discretion is advised.
We are told that the Social Security Trust Fund is currently in a “surplus”. That is not true!! Social Security does currently take in more than it doles out, but the excess is just put into the general pot and immediately spent (The Treasury currently owes the Trust Funds almost $5T, i.e., the real deficit is 50% higher than the “official” number). Contrary to popular belief (delusion), there is no bank account sitting somewhere with your name on it with the hard-earned money you paid into Social Security just waiting until you retire. Every penny has been spent. Your benefits in the future (if there are any) will be from of money collected at that time.
You also must understand that the Social Security issue cannot be viewed in isolation. The US will run a deficit this year of about $1.4T. Even this is an underestimate, because it does not count the surplus sent over from Social Security (vida supra, means see above). Our government is spending about $4B per day more than it takes in.
As stated in the last issue, I do not believe our people or our leaders have the will to adequately address the issue before things completely fall apart. This means that in the interim all sorts of inadequate (but costly) steps will be taken.
1) Just as rivers flow downstream (as the group “The Angels” say in their song “Til”), income taxes will go up, this year or next at the latest. This means that any money you have in a “pre-tax” retirement account, such as an IRA, 401K, etc, is instantly worth less.
2) Social Security taxes will be raised and/or the limit subject to the taxes will be increased. This has already been done many times and will be done many times more.
This will keep things at bay for a little while, then:
3) There will be a means testing and the “rich” will lose their benefits. Do not be surprised if “rich” just happens to be exactly whatever you have. I intend to start my benefits the instant I am eligible because when the means test comes my benefits, and the benefits of most of those who take this letter, are toast.
4) The minimum age to receive benefits will be increased.
5) Then the benefits themselves will be taxed and no longer indexed to inflation, and the limits on what you can make and still receive benefits will be increased.
6) Maybe there will be no limit at all; every penny you make could be taxed. They may even add SS tax to interest, dividends, and capital gains (What a way to redistribute income. Then it could be called Socialist Security).
But the government’s general financial condition will continue to worsen. The deficits will represent an increasing proportion of GDP and the interest on our debt (currently 5% of outlays) will represent an increasing proportion of the entire budget (Barron’s Roundtable member Marc Faber thinks this number could be 30-50% in 10 years). Interest rates will rise, the US will finally lose its AAA credit rating and its privilege of being the world’s reserve currency. It is estimated there will be another $10T in deficits in the next 10 years.
Now things will start to spiral quickly downward and two things will happen.
First, the dollar will lose more and more purchasing power because the government will try to “inflate away” the debt (as they have been doing for years).
Second (and this is the real point of this and the last letter), I believe there is a real chance (which I put at somewhere between 10-25%) that the government will become so hard-pressed for funds that they will just confiscate wealth. By far the easiest target is the money currently in retirement plans—your IRA, 401K, etc., the money you worked so hard to save. Note I made this point in the first edition of my book, which appeared in 2005. By the way, this also applies to 529 and similar plans to save for college (and don’t think Roth IRAs are immune either). All such structured plans are ill-liquid and “hostage” to future laws, and the government knows to the penny how much you have. Remember: Whenever the government makes the rules, they can change them at any time
Sound far-fetched? Newt Gingrich and Peter Ferrara wrote a piece posted on Investors.com (2/17/10) entitled “Class Warfare’s Next Target; 401K savings”. They note Business Week reports the Treasury and Labor Departments are asking for public comment on “the conversion of 401K savings and IRAs into annuities or other steady payment streams”. They say “In plain English, the idea is for the government to take your retirement savings in return for a promise to pay you some monthly benefit in your retirement years”.
This is very, very serious stuff. If the government is even talking about it, they are considering it. Here are my recommendations.
1) Do not rely on the government for anything: Social Security, Medicare, anything. Consider whatever you might receive to be “gravy”.
2) Gold is eternal wealth. Your core position should be US minted gold coins kept in your personal possession (at the safe deposit box). Paper money can be (and is) manipulated; gold cannot (Although it could be confiscated, as Roosevelt did in 1933. More on that at a later time). Marc Faber (see above) suggests you should be purchasing some gold each and every month.
3) It is standard teaching to keep money in retirement accounts as long as possible to take advantage of the tax benefits As stated above, I have questioned that “wisdom” since I began my financial writing, and this subject is the exact reason why. If you have been maximizing your contributions to structured accounts, yet save little else, if the draconian measures described above come to pass, you could be “hurtin’ for certain”.
If taxes go up (they will, Mr. Obama has pledged they will) and there is any hint that the above measures are even a faint possibility, you will be far better off to systematically drain your retirement accounts (it will hurt because of the tax bite) so your money is under your control, and further from the reach of the government.
Roosevelt (both of them), Wilson, Johnson and Obama say the government is your friend. Washington, Adams, Jefferson, Madison, Franklin and Jackson say it isn’t. Who do you believe?
RMD
The “Whitey Herzog Rule”
Dorrel Norman Elvert “Whitey” Herzog was not only a great manager; he was also an Impresario, a judge of talent, the baseball equivalent of Red Auerbach. Herzog once related how he was shooting a commercial for TV. They had done 6 or 7 takes, but the producer wasn’t satisfied and wanted to do more. Herzog said (essentially) “that’s the best I can do, we are finished”.
In Issue #14 (4/16/07), and in my book The Physician’s Guide to Investing, I emphasize that a physician is an executive. One requirement of an executive is that they must stay focused on the primary objective. They must be able to determine what is significant and what is not worth their time.
I have found this a tremendous time saver; when I have completed something, I move on. This analogy/example is especially useful to limit the time spent answering questions. I recently participated in a survey for my Alumni Association. I answered several questions on one particular subject but the lady wanted more details. I said “Ma’am, that is my answer. What is your next question?
We have all had patients who just keep asking the same questions over and over. Just say “Sir or Madam, that is the best I can answer your question” and move on.
The other day I saw Christian Cantwell at a local restaurant. I went up, introduced myself, and shook his hand. Cantwell won the silver medal in the shot put in the 2008 Olympics in Beijing. There are more than six billion people in the world; only one person threw the shot put farther than he did.
Cantwell is 6-6 and 330 lbs. I have never seen a man with such shoulders, chest, arms and back.
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