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An economist thinks US is bankrupt: What it means for retirement

CNBC logo CNBC 9/10/2018 Lorie Konish
a man wearing a suit and tie © Provided by CNBC

It's a hot summer day when economist Laurence Kotlikoff sits down for breakfast at a Boston restaurant not far from where he has taught economics for more than 30 years.

The neighborhood feels empty, with many students still gone and other residents presumably enjoying the last days of the season.

But Kotlikoff's dire prognosis for the United States is enough to wake anyone out of even the deepest summer slumber.

"The evidence is in front of our eyes that we're bankrupt," Kotlikoff said. "It's not bankrupt in the future. It's bankrupt right now."

With a calm demeanor and a penchant for discussing complex economic concepts, Kotlikoff, 67, might not stand out from any other Bostonian with strong political views.

Yet Kotlikoff is quite unlike other liberals in that urban Democratic bastion. And his criticism of the government dates back to far before the current controversies that surround President Donald Trump's administration.

For one, Kotlikoff credits Ross Perot — the independent presidential candidate in the 1992 and 1996 elections — as being the only politician to bring the country's true fiscal situation to light. Since then, all other presidents and their administrations have buried that information, according to Kotlikoff.

"Both parties are trying to hide this," Kotlikoff said. "We're in an emperor's new clothes story. Our conversations about the fiscal policy are about the emperor's latest apparel."

Kotlikoff's frustration led him to one conclusion: He had no choice but to run for president.

Kotlikoff mounted two campaigns, in 2012 and in 2016. His economics-based platform left no stone unturned in trying to overhaul everything from banking to education, taxes and Social Security.

"All of these things need to be fixed right away, and they're not being fixed right away," Kotlikoff said.

Success in those campaigns proved elusive, first through an internet third party campaign and then subsequently as a write-in candidate.

It also prompted people — including some in Kotlikoff's inner circle — to ask, "Who does this guy think he is?"

"I didn't think of it as an ego trip," Kotlikoff said. "My ego was not being reinforced by people telling me I was being ridiculous."

But Kotlikoff has not given up fighting.

Much of his attention is now consumed by pushing for individuals' financial rights.

As Kotlikoff tells it, he will not hesitate to call up executives at major financial firms to complain that they are bilking investors by misleading them with erroneous retirement calculations.

It's all part of his latest battle: to give consumers the tools that will empower them to make better financial decisions.

A philanthrophic effort

Kotlikoff's large corner office in the economics department at Boston University overlooks a quiet tree-lined street next to the Charles River.

A wall of shelves is filled with books on economics, and includes multiple pictures of his sons, who are now 28 and 20. On another wall is a whiteboard, which he uses to draw charts as he is talking to support his points.

Kotlikoff had the opportunity to leave the university years ago, when the University of Chicago extended a lucrative job offer. He decided to stay in Boston — the city he loves and where he earned a Ph.D. in economics at Harvard University.

Kotlikoff teaches two courses a year, one for undergraduates and a public finance course for graduate students.

While he devotes his days to the university, he spends nights and weekends working for the company he founded.

The firm, Economic Security Planning, was created in 1993.

Today, it is a small enterprise with a staff that resembles an extended family.

That includes Kotlikoff's sister, who is in charge of marketing and product development. Kotlikoff's eldest son, an aspiring actor living in California, made all the videos for the sites with his former college roommate.

Michael O'Connor, the company's chief Social Security and tax engineer, first contacted Kotlikoff about six years ago to tell him the software was not indexing the alternative minimum tax properly. Their first phone conversation started as an argument over who was right and ended with Kotlikoff hiring him on the spot.

The team also includes O'Connor's son, who is in charge of customer support, and his son-in-law, who serves as chief technology officer.

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Altogether, the company, excluding Kotlikoff, has seven full-time employees, four consultants and one part-time bookkeeper who are based in multiple states.

Its tools include MaxiFi, which works to analyze your spending, saving and insurance to make sure they match your lifestyle and level of wealth. It also looks at other ways to increase the money you take in through Social Security, annuities or retirement savings.

The company also has separate tools devoted exclusively to Social Security claiming decisions and divorce settlements. Admittedly, there are other Social Security calculators available in the market.

The goal, he says, is to keep the prices for his products low. The MaxiFi tool, for example, costs $99 for households to sign up, plus $79 to renew annually.

"If we were trying to make the most money, we might want to double our prices, because that would signal quality," Kotlikoff said.

But Kotlikoff's goal with the company is not profits. In fact, he said, he has not earned any money from the company. If anything, the company owes him, he says.

"I view this as a philanthropic effort on my part because I get to help people," Kotlikoff said.

Growing burden

Consumers will largely bear the brunt of the country's financial ruin, according to Kotlikoff, which is why it is crucial to give them the power to make better financial decisions.

While the United States' official debt is $20 trillion, the fiscal gap is really 10 times larger — $200 trillion. That comes from adding in off-the-book liabilities, including debt that's in the Federal Reserve's hands, Kotlikoff said.

The entire U.S. fiscal operation is 52 percent underfunded, according to Kotlikoff. Social Security is short by 32 percent, he said.

"It's not like the rest of the fiscal operation can bail out Social Security," Kotlikoff said. "So when you look at these numbers, you realize we're Argentina in 1910."

At that time, the South American nation had the fifth highest per capita GDP. In one century, Argentina went from super rich to super poor.

For evidence of how that burden is already getting passed on to individuals, look no further than the student debt crisis.

"Why is that the country is so broke that it can't help young people?" Kotlikoff said. "Why can't we put them through college like they do in other countries? Why can't we give them a decent interest rate on their student loans rather than exploiting them?"

Taking on big firms

Kotlikoff's penchant for using economics to solve real-life financial problems carries over into his personal life.

When a friend on the brink of retirement was planning to take Social Security before drawing money from his 401(k) plan, Kotlikoff persuaded him to reverse his plan. By not taking his retirement benefits early, he could reap thousands of dollars more in benefits in his lifetime.

The software provided by Kotlikoff's company can help answer other questions, like how to time investment withdrawals to lower your tax bill or when to do a Roth conversion on an individual retirement account.

The company aims to compete with traditional financial firms' tools, which typically use a replacement rate for your income.

The disadvantage with this approach, Kotlikoff said, is they usually give you two options to meet those asset levels: save more or put your money in risky investments. Both choices put more money in the firms' pockets, he said.

"They talk about bucketing. They talk about flooring your income," Kotlikoff said. "But what you really want to do is floor your living standard."

The tools at Kotlikoff's company focus instead on your standard of living.

The result is real-time budgeting that can tell you how much you should spend over your life time down to the year, month and week.

The programs also aim to coordinate consumption smoothing — the balance of spending and saving through one's life — with other areas like life insurance and taxes simultaneously.

That means answering big questions, such as how much you will pay in taxes, while simultaneously taking into account your spending and asset income, Kotlikoff said.

The company is also working on tackling on other big decisions, such as helping individuals who are switching jobs compare living standards if they relocate.

Thinking of those questions now can help manage the struggle between spending today and saving for tomorrow, between your current and future selves, Kotlikoff said.

"I know a lot of people who haven't saved, and they just say, 'Well, I'm not going to worry about it. I'm not going to live that long. My mom died early,'" Kotlikoff said. "But you can't count on dying on time."

You also cannot count on the U.S. government, according to Kotlikoff.

The country's grim future may ultimately prompt younger generations to move to other, more prosperous countries where their prospects are better, he predicts.

"People eventually will leave, and then the situation is even worse," Kotlikoff said. "There is a smaller tax base."

In the meantime, individuals need to focus on carving out the best financial futures they can for themselves.

"You have to be aware of this looming problem and save like crazy and work as long as possible," Kotlikoff said.

You also need to be careful about when you take Social Security and how much you spend on housing, he said. Meanwhile, an inflation-indexed annuity can help fill in the retirement income gaps.

As an economist, Kotlikoff sees himself as being in a unique position to help.

"We're like doctors who are studying disease," Kotlikoff said. "We actually have the medicine right here and we know this will fix that disease, but we don't actually tell anybody about it."

Through his company's tools, Kotlikoff hopes to help people combat their financial blind spots.

"My view is not to study people's mistakes, but just to give them the answers," Kotlikoff said.

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