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by Gary North, Ph.D.
If you have gone through the short, fast, and utterly humbling exercise of estimating your retirement income, you know for sure what you probably suspected before: you have not saved enough money. You saw the evidence on-screen. A financial calculator drives home this point psychologically because it is so objective. The numbers don't lie. They don't even care. But most people will not go through this exercise. "I don't want to know!" Why not? "Because this knowledge would make me more responsible." People don't want additional responsibility, even though it cannot be evaded. "It can be postponed!" To procrastinators, I say: Perhaps you will someday find comfort in that familiar slogan, "Misery loves company." There are at least 120 million out of 150 million salaried Americans who have rented inner tubes and are now cheerfully drifting toward the same retirement waterfall. They have their iPods playing at 95 decibels, so they don't hear the ever-increasing sound of cascading dreams. They also did not notice the fine-print sign on the shoreline:
This sign did not announce: Warning: The revenue generated by Social Security FICA taxes will be less than the program's annual outflow to retirees, beginning in 2017. Proceed at your own risk. You think I'm kidding? On Social Security's website, we read the following:
There is a link to a document, "The Future of Social Security." I clicked the link. This message appeared:
This message pretty well describes the statistical future of Social Security. Tens of millions of retirees will receive some monthly version of this message: "File not found." Or, to quote Maxwell Smart, "Missed it by THAT much. Sorry about that." With respect to the statistical reality of "Golden Years, Inc." the entire country is under the cone of silence. There is eventually going to be a tax revolt. I wrote about this prospect in "Reality Check" three years ago. The workers/voters are going to say, "No more." Granny is going to get stiffed. If you find this hard to believe, read my original article. You had better start preparing now for the future budgetary effects of this tax revolt. It's going to be a tax revolt against you. No hard feelings. It's nothing personal. "File not found." Who Ya Gonna Call? From Adam and Eve forward, it has been the same story: aging parents have planned to become economically dependent on their sons. But from Cain and Abel forward, there was always a risk of disrupted plans. Then came tax-funded old age pensions. This was the brainchild of Otto von Bismarck. He figured that this program would undercut political support for the opposition Social Democrats. He was right. The idea spread. This year marked the 70th anniversary of the Social Security Act. The program remains widely popular. It is funded by a no-deductions flat tax that no politician challenges, not even the most liberal Democrats. The Federal government needs the "off-budget" money to conceal the real size of its official budget deficit. The Social Security system and its various imitations around the world are all headed for bankruptcy. The experts know this, but deny it in public. Social Security is Cain. The American worker is Abel. We have seen all this before. It turns out badly. This being the case, parents had better regard any financial "aid to dependent adult children" as an investment, the way that Democrats officially refer to higher taxes. Such aid should strengthen the solvency of the recipients. Working Out An Arrangement In Advance For example, parents should not give money to their children to buy a home. Why not? Because a home is a debt-burdened consumer good. Your money should help your children become producers. These days, nobody needs to help a typical American to become a consumer. In the international division of labor, America specializes in debt-funded consumption. "You want more consumption? We're the best in the world!" On the other hand, parents might consider giving the same amount of down payment money to their children so that they can buy an investment rental house, assuming that the children do not live in a housing bubble city. But before signing the check, the parents should read John Schaub's latest book, "Building Wealth One House at a Time." Then they should require their children to read it. Only when the children hand over a written long-term financial plan should any parent sign checks for more than token amounts of money. When there is agreement between parents and children about this plan, parents can more safely write a check. You are responsible for anything you fund. Do not fund anyone else's consumer spending. If you are tempted to give away money with no strings attached, the memory of the following photo may bring you back to your senses: Note: an adult child's divorce will scramble any family's long-term household financial plan . . . including yours. There is a 50% chance that there will be a divorce. Parents had better have a fall-back plan to deal with this, especially if they have more daughters than sons. If I were a parent ready to fork over money to my children, I would give it to a married daughter to purchase real estate in her name. Or I would create a real estate trust, administered by me on her behalf. Or I would create a real estate trust for the grandkids. Sons-in-law should make deals with their parents. Let us assume that parents are ready to provide the down payment for an investment house. They should retain at least one-quarter interest in the ownership. The children should do the shopping and renter-managing. The more work the parents do, the higher their retained interest. This is a joint venture. This is not giving away money. One goal is the same as an outright gift: helping a child financially. But there is an additional goal: building capital for your retirement. Don't ignore goal #2. Guilt-Driven Giving Some grandparents set up trusts to help grandchildren go to college. This is ridiculous. I mean, it is money down the proverbial drain. Any bright high school graduate can earn an accredited college degree in three years for $15,000 if he or she shops smart. (I have written a manual on how to do this.) A teenager can easily afford to attend college by working part time at McDonald's. But there is a catch: he or she has to live at home. Teenagers don't want to live at home. They want boola-boola. To finance this, they expect moolah-moolah. They usually get it. Teenagers want a free ride. Who doesn't? You cannot afford to give away your money for unnecessary free rides. Make sure that the money you give to your relatives is either for real charity or for real productivity. Don't let needless guilt motivate your budget. You cannot afford to finance guilt. You will be hard-pressed as it is to retire in comfort. Every time you write a check to someone who really doesn't need the money, you are weakening the recipient and also weakening your financial future. You are becoming increasingly dependent on the tender mercies of the State. It, too, is going broke. It, too, is funding projects based on guilt-manipulation. It, too, is funding consumption rather than production. But it has an excuse: the consolidation of power. What's your excuse? Conclusion Work out an arrangement for any money given above the usual Christmas gifts and birthdays. There should be some quid in every quo. Each side should understand the mutual benefits expected from the other. Each side should agree to the terms in advance. One-way money creates dependence. This is a bad idea except in cases where the dependence is physical.
Dr. Gary North earned a Ph.D. in history and is one of America's keenest economic analysts and commentators. He supports the Austrian school of economics and is a previous assistant to libertarian congressman Dr. Ron Paul. Visit his website at http://garynorth.com. To subscribe to Gary North's Reality Check go to http://www.dailyreckoning.com/sub/GetReality.cfm If you enjoyed this essay and would like to read more of Gary's writing please visit his website at http://www.garynorth.com or http://www.freebooks.com
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