Professor Kotikoff told attendees at the World Pension Summit in Amsterdam the U.S. needs to make immediate dramatic changes to taxes and spending, including pension return if it wants to get its debt under control. He added, the official debt figures are misleading.
According to Kotikoff, the U.S. has a fiscal gap of 14 times the GDP at $211 trillion, and the official debt of the U.S. is $10 trillion. He added that Greece has a fiscal gap of 12 times its GDP. Kotikoff argues that economic sustainability calculations need to be based on fiscal gaps rather than official debt figures. In order to close the gap, he suggests “an immediate and permanent 64% hike in all federal taxes or an immediate and permanent 40% cut in all non-interest federal spending,” including cuts to state retirement provisions.
He continued, “The U.S. Social Security system is in worse financial shape than it has ever been…U.S. Medicare and Medicaid benefits continue to grow at unsustainable rates as the population lives longer. European countries have worse demographics in some cases than the U.S., but they’ve enacted major pension reforms and have direct control of health care spending.
“Current systems in many cases reflect post-war ponzi schemes by taking money from the young to give to the old and call the money [that was] taken taxes. They then tell the young that we are calling this money taxes, but not to worry as you’ll get it back plus plenty more in retirement. The result is that as we are calling these taxes, we produce massive debts that never show up on the books.”
Kotikoff said: “Ponzi schemes ultimately fail and produce enormous harm to those at the end of the chain. They have produced huge economic fallout. The U.S. Ponzi scheme has wiped out U.S. saving and net domestic investment and reduced real wage growth."
According to Kotilikoff, the U.S. national saving rate went negative in 2010 for the first time since 1983, and in the same year the fiscal gap rose by $3 trillion.
Kotlikoff also predicted to PLANSPONSOR that Greece will default in January if it moves away from the Euro.
He added, "The developed world needs a new financial architecture if it is to survive the 21st century. We have a system that is under cardiac arrest and we are sticking on band aids—what is needed is to operate. We need to move away from pay-as-you-to fiscal systems, including with pensions, in order to survive."