This book covers three themes: 1) a fiscal analysis of the US; 2) a set of related policy recommendations; and 3) financial planning to survive the prospective challenging times. In summary, the fiscal analysis is absurd. The policy recommendations are often quite all right. And, the financial planning is outstanding. Kotlikoff (the main author) does not have a good handle on macroeconomics (poor fiscal analysis). But, the more he drills down to the individual level (financial planning) the more he excels.
Kotlikoff's assessment of the US fiscal problems border on the absurd. He advances that all familiar fiscal measurements like Budget Deficit/GDP or Debt/GDP are completely wrong. And, that the only representative fiscal measure is his own construct: the US Fiscal Gap which he currently calculates at $211 trillion. Kotlikoff artifically boosts his $211 trillion Fiscal Gap in several ways:
... First, he relies on a worst case scenario: the CBO alternative scenario. He wrongly dismisses the CBO baseline scenario as he thinks the latter freezes government spending as if there were no economic growth and no inflation. This is incorrect. The CBO baseline scenario is reasonable and relies on credible economic assumptions of long term GDP growth, inflation, and commensurate increase in Government spending. However, it projects that current laws will be fully implemented. The CBO alternative scenario uses the same economic assumptions, but it assumes that current laws will be tweaked (Bush tax cuts will not expire, AMT to be indexed). Unsurprisingly, the CBO alternative scenario is unsustainable with a resulting skyrocketing US Debt/GDP ratio.
... Second, he discounts future Budget Deficits by a surprisingly low discount rate of only 3%. That is the simplest way to boost his overall Fiscal Gap. Had he used a much more reasonable long term risk free rate of 5% to 6%, his Fiscal Gap would probably be less than half of the $211 trillion.
... Third, his Fiscal Gap beyond 75 years (ending value) accounts for about two thirds of the total. He probably calculates this ending value by taking the last estimated Budget Deficit in 75 years and dividing it by his discount rate minus an estimated growth of such Budget Deficits. By using a growth rate nearly equal to his discount rate, he can generate any huge value he wants.
As you can tell, Kotlikoff can use many levers to create a Fiscal Gap as incredible as he wants. This does not mean this Fiscal Gap measure is representative, or even informative. The opposite is closer to the truth.
Kotlikoff sticking with his flawed Fiscal Gap calculations derives that Greece is in better shape than the US. That's because their Fiscal Gap is only 12 times GDP vs the US' 14 times GDP. Meanwhile, Greece before its most recent Euro Zone bail out had a Debt/GDP ratio close to 300%. It just defaulted on nearly 70% of its Debt (70% write down on all debt held by private investors). Greece is caught in a vicious recession with negative GDP contractions of 7% per year and unemployment of 21%. Its 10 year interest rate on its debt is an unsustainably high 21%. Meanwhile, the US Debt/GDP ratio is still a modest 72%. Its economy is now growing at over 2% per year. Unemployment rate is declining (currently 8.2%) and 10 year interest rates are less than 2%. Last but not least, the US has full sovereign control of its fiscal and monetary policies. Meanwhile, Greece does not, as it has become a ward of the Euro Zone.
Besides his Fiscal Gap, Kotlikoff developed other dissonant macroeconomic constructs. One of them is that foreign exchange levels have no impact on foreign trade flows. Thus, China, in his view, does not manipulate its currency to boost its export to the US. He states that if China would let its currency appreciate by 25% vs the Dollar, it would be associated with a 20% drop in its money supply, lowering its production costs by the same amount so the price of its exports (production costs times FX level) would actually not change! There are several reasons why this principle is false. FX levels are not so directly linked to money supply changes. Also, the 20% drop in money supply, suggested by Kotlikoff, would cause a huge deflationary contraction leading to a potential Chinese Depression. There is no way China could handle the repercution of a 20% contraction in its money supply. Also, another way to demonstrate that Kotlikoff relationship between FX rates and money supply does not hold is how could his model handle a multi-currency world. China has only one money supply that could not possibly manage ten different FX rates with different foreign currencies some being overvalued others undervalued relative to the Chinese currency.
Another of his dissonant concepts is that the household sector is almost solely responsible for the US declining savings rate. But, instead the Budget Deficit has had a huge impact on our nation's savings rate. After all, his Fiscal Gap suggests that too. That's a contradiction.
Kotlikoff's description of upcoming run on Treasuries and related run on banks (depositors to "turn cash into closets full of canned soup") does not make sense. He deducts those from his observations that in August 2011 when S&P downgraded US Debt from AAA to AA+, the stock market dropped by 20%. However, he ommits to mention that at the same time Treasury yield dropped. That's actually the opposite of a run on Treasuries. That is a flight to quality towards Treasuries.
When it comes to his recommendations, they are uneven some bad and some excellent ones.
His plan to fix the international financial system by converting all banks to pass through entities like mutual funds is problematic. It would eliminate credit formation. Without that, an economy stalls. Forget economic growth and rising living standard.
His health care plan is the Paul Ryan plan for all. The voucher system would control how much the Government spends on health care. But, it would not control overall health care costs. Thus, the public would be burdened with a rising portion of health care costs. The CBO analysis of Paul Ryan's plan confirmed that.
His tax plan is excellent. He would replace the income tax by a consumption tax and inheritance tax with provisions to make them progressive. It would raise more Government revenues more efficiently than the current tax code.
His plan to privatize Social Security is very good. The payroll tax would be 8% invested in a broadely diversified set of indices across numerous asset classes of stocks, bonds, and real estate. The investment allocation would be very conservative with 60% allocated to bonds (this may be a bit too high). And, the Government would guarantee a return equal to inflation so anyone's Social Security retirement (SS) account would at least maintain its purchasing power. At retirement, such SS account would be annuitized so the retirees would not bear anymore investment risk when they can least afford it.
Both Kotlikoff and Burns contributed to the excellent financial planning sections. The entire chapter 12 on the subject is outstanding. Their recommendations to avoid Wall Street and any professional advisors and save the money to invest yourself is excellent. They suggest you stick to index funds and invest in several different asset classes. They suggest just three or four such index funds that cover efficiently the entire investment world. Those index funds typically charge only 0.15% of assets or only one seventh of actively managed funds. Yet, the index funds deliver superior results.
The authors recommendations on retirement (chapter 13) are very interesting. They suggest plenty of ways of reducing costs and increasing income including selling a home, renting, moving to a lower cost State or even country.
As reviewed this book is really uneven. Unfortunately, Kotlikoff's fiscal and macroeconomic fallacies brought the average down. If the two authors had just focused on where they excel (financial planning, retirement strategies), it could have been an excellent book.
