Newspaper Article Written by Ted Provenza

The following article was written by Ted Provenza and appeared in The Baltimore Examiner on September 20, 2007.  The Provenza Group thought you might be interested in Ted's insightfulness.

Financial Tsunami Headed for America?

Every 12 seconds an American turns 65 and that process will continue for the next 15 years, placing an untenable burden on taxpayers whose government is already more than $8.8 trillion in debt -- more than $30,000 per person.

According to James Locheart, former Deputy Commissioner of the Social Security Administration, the fund will begin to pay out more than it will be taking in by 2018, undermining the viability of Social Security. It was originally called FICA, (an acronym for the Federal Insurance Contributions Act) formed in 1946, at a time when the average American life expectancy was 56 and vesting for benefits did not begin until age 65. Life expectancy now is more than 82. However Congress has made very little adjustment for the decrease in mortality or the increase in the number of Americans turning 65 -- making the share of the current debt and future government obligations per family more than $519,000. How will the financial promises of Social Security be honored? I believe that increasing the age for benefits and eliminating the Social Security wage base of $97,500 currently, will go a long way to help shore up this shortfall. More than 50 percent of retired Americans rely on Social Security for more than 50 percent of their monthly income. All this is occurring at a time when more than 80 percent have no pension in the form of the traditional defined benefit plan.

Most Americans now have defined contributions-D/C-retirement plans such as an IRA, 401(k), SEP, Keogh, 403(b), 457, TSP, et al. The advent of the D/C retirement plan has shifted the responsibility for providing lifetime income from employer-sponsored pensions, to the employees themselves who typically receive investment advice from stockbrokers and financial advisors who often have no obligation to act as a fiduciary for their clients. In short, the stocks, bonds and mutual funds in the aspiring retirees’ retirement accounts may not be appropriate investments for providing lifetime income.

With the poor savings habits of younger Americans, and their propensity to take on enormous amounts of debt as evidenced by the sub prime mortgage mess that has sent financial torrents in the domestic and global stock markets, baby boomers may find their stocks and bonds not holding their current values.

So when the massive withdrawals from the stock market begin to occur, where will the cash flow to finance retirement come from? I suggest we consider shifting the burden back to institutions with the financial wherewithal to weather the coming storm. As life expectancy continues to increase, Americans are likely to live much longer than their parents and face soaring medical costs in excess of 15 percent per year. Medical technology will continue to increase. However, there remains no fountain of youth. My in-laws are currently being charged over $19,000 per month for nursing home care, even though they have long since been impoverished. Where is the value in that?

The number of centenarians in the U.S. is growing rapidly, according to a report from the U.S. Census Bureau. During the 1990s, the ranks of centenarians nearly doubled, from about 37,000 counted at the start of the decade, to more than an estimated 70,000 in 1999. And analysts at the Census suggest that this per-decade doubling trend may continue, with the centenarian population possibly reaching 834,000 by the middle of the next century, according to the National Institute on Aging. Today, Hallmark Cards sells over 85,000 100th birthday cards per year, and that number continues to grow.

As the rest of the world begins to realize the economic Tsunami heading towards the US, global financial markets will begin to find less and less value in owning our dollar and therefore our debt. I could easily see the dollar continuing to fall to $1.50 per Euro with oil going to $100.00 per barrel by year end. It is up to each and every one of us to build value in our currency and we do that by working hard and working smart, avoiding waste and not spending money we don’t own.

Now the good news. The United States is still the greatest country on the face of the planet. It continues to remain a desired home for would-be immigrants looking to build wealth and personal security. They realize the enormous potential of our economic system, which remains viable. However, we need to embrace the values of our forefathers by circumscribing our desires within the boundaries of our abilities. In a nutshell, don't buy things you can't afford; pay off your debt, including your house, before retiring; don't spend a nickel unless there is a dime in the bank and realize that “America is the land of opportunity” and not the land of entitlement. We do have fellow citizens who cannot take care of themselves so we should help them; but those who are able should take responsibility for their own welfare. Help us to identify waste, and eliminate it. In most situations, the future remains bright for those who choose to plan their financial future. But the security of your future lies in your ability and willingness to coordinate the four aspects of your financial future; that being legal, tax, investment and insurance planning. This advice must be cohesive, coordinated, unified and seamless. There is an old saying; “It's not what you have, it's what you do with what you have that can make all the difference in the world.”

Till next time,

Ted

Theodore J. Provenza is the managing partner of The Provenza Group, a retirement income planning firm in Owings Mills, Maryland; and branch manager of ING Financial Partners, Member SIPC, and can be reached at Ted@MyCEP.com. Ted is a graduate of the James Madison School of business with concentrations in Economics.

The views expressed by Mr. Provenza are not necessarily the views of ING Financial Partners or __(newspaper)__.