By Jerry Lynch, CFP, CLU, ChFC
There has been a lot of buzz surrounding the infamous “Debt Ceiling” and why it is relevant and essential to us in our lives. I want to walk you through these issues and let you know why this is important to all of us.
First, the national debt is more than $14.3 trillion dollars, which is more than our Gross Domestic Product (what we produce as a country). First, you need to understand what a trillion dollars is. A million seconds is 14 days. A billion seconds is 32 years. A trillion seconds is 32,000 years. They may sound very similar, but in actuality they are extremely different. This comes out to $46,000 for each of the 311,603,000 people in the U.S. The U.S. federal government is spending $4 billion a day, money of which we do not have, and this does not incorporate the debt by state and local governments.
Financial planning 101 leverages the basic concept that you should spend less money than you bring in. There are certainly case-by-case situations where everyone has to dip into savings, but the real problem is that the U.S. government really does not have savings. On Aug. 2, we will no longer have the ability to borrow money legally and that is a huge concern. It could potentially shut down the government, raise enormous issues with regard to compensation of government employees, and literally spider its way through the U.S. economy. Thus it is evident that this predicted downfall, as it pertains to borrowing, can become our reality. We have to come up with a tangible solution before it’s too late.
Now let’s take a look at our tax system basics. According to the Tax Policy Center, 47 percent of the U.S. population paid no income taxes in 2009. Also, in 2007, the top 400 super-rich families in the U.S., with an average income of $345 million, averaged a federal tax rate of 17 percent. To understand this, a family earning $70,000 is taxed at a marginal tax rate of 25 percent. This is a blatant illustration of the corruption that exists within the system. Almost half of the population is paying nothing yet still getting services, and the richest people in the U.S. pay a tax rate substantially less than the average citizen. A tax system needs to be fair, competitive with other nations, and give people an incentive to work and make more money.
So many may be thinking what exactly the desirable solution is. I think it is a combination of two things. For one, taxes need to be fairer among each group to ensure each is paying a reasonable amount. I do not believe the 70 percent marginal tax rate that Ronald Regan started with is fair or reasonable, and I think that wealthy families need to pay more than 17 percent. Also, everyone needs to pay something and this even pertains to those at the lower income levels. Of course, their disbursement would be based on a lower threshold.
Second, we need to cut spending in essentially every sector. Here are a few of the major areas of concern and my analysis of the impact they have on our society:
•Social Security: This program was set up to pay people compensation at age 65. This was at a time when life expectancy was 64 years old. Now average life expectancy is in the mid-80s. The dilemma is that the program was never designed to pay people for almost 50 percent of their average working life. This needs to be changed as the times are changing.
•Military: For 2012, we are spending $1 -$1.4 trillion in military costs, which will be more than 20 percent of the entire U.S. budget. In the book The Art of War by Sun Tzu, it is stated, “No country has ever been able to sustain long periods of war.” Sun Tzu writes, “Supreme excellence consists in breaking the enemy’s resistance without fighting.” For purposes of clarification, I will pronounce that I will always support our troops. I just think that if all congressmen had to have their kids serve in the military, the decisions to send troops would be a lot different than they currently are. Our perspective as a nation needs to encompass the bigger picture.
•Social Services: This includes programs such as Medicaid. I have no issue giving someone a hand out when it’s genuinely needed, but I have a problem with people who refuse to help themselves. If someone is hurt and truthfully cannot work, as a society we need to help these people. To pay people who can work is incomprehensible and if nothing else, they should be enforced by law to do something to add value to our society. Otherwise, our economy will inevitably suffer as a consequence.
•Foreign Spending: We spend a massive amount of money overseas, often in areas of the world that despise us or do not support us as a country. Is this the best use of our money and resources in every case? Ron Paul put our spending at more than $1 trillion dollars and that was verified by PolitiFact Truth-O-Meter. This is certainly a vital area of concern that must be re-evaluated from an economic standpoint.
From the small individual to the government, all will encounter certain times when they have to look at their spending and evaluate if they are allocating their expenditures wisely. We cannot spend money that we do not have and every area of spending needs to be reviewed and justified as a realistic cost. A rational, good decision for the economy may still leave some people unhappy at the end of the day. However, as we all know you cannot please everybody, but a just system will attempt to make it as equal as possible for all.
Any time I look at a client who is in financial trouble, the first thing I do is itemize expenses by cost and focus on the most expensive items first. Then, the focus shifts to how they can make more money and grow their wealth stream. For our economy as a whole, there needs to be a combination of changes to the tax system and a reduction of spending on a larger scale. We need to make some concrete choices where everyone is impacted as a collective, and the key is it needs to be fair and reasonable for all.
Jerry Lynch is president of JFL Consulting and has more than 23 years in insurance and financial planning. He has been a regular guest on CNBC, WABC and does regular articles for the Star Ledger. He can be reached at email@example.com.