237: Shifting Gears and Rethinking the Boundaries of Retirement with Richard Haiduck copy

Casey Weade: Larry, welcome to the podcast.

Laurence Kotlikoff: Great to be with you, Casey.

Casey Weade: Well, Larry, I'm excited to have someone with your background here on the podcast. And this isn't my first introduction to you. I think my first introduction to you was actually in the movie, Power of Zero, where you had a conversation about reducing taxes today is equivalent to raising taxes on future generations. And I loved some of your takeaways that you had in the book and you have such a wide range of knowledge but I can't wait to dive in. And, Larry, I really want to start with this. So, I was actually unaware and I asked a few other individuals if they were aware of this and they weren't as well. So, at first, I felt like maybe I was out of the loop but apparently you had a presidential run in 2012 and 2016. I never even was aware of that.

Laurence Kotlikoff: Well, yeah, unfortunately. So, if you were, the press were not too interested in covering me. If I had a billion dollars, I might have been able to win possibly. But the main reason I ran was I felt that economists had a lot to say about how to fix the economy, every different aspect, Social Security, taxes, health care, the banking system. We just had a big bank financial crisis. How do you get these institutions fixed so that the education so the country can grow like it has in the past and fulfill its dream? So, I felt compelled to run really to state what the right platform should be because we have no economist in Congress, 535 members, no economists, no Ph.D. economists for sure. Maybe a few of them majored in economics in college. So, it's like they were trying to build a bridge across the Hudson River and there's not by themselves without a single civil engineer. You know, the thing's going to crash in the water at some point. So, the first time around there was an online platform. It was very easy. It's called Americans Elect, but they folded so my campaign folded. The second time, I had to run as a write-in candidate and I had to go around the country with all staff paying money to get people, to get the registration going, and also to get people to sign to have my signature counted because Mickey Mouse can't be elected in this country even if he gets all the votes because he's not registered. Anyway, I was registered. I could have officially run. I was trying to say I'm taking this seriously but the main thing I was doing was to put together about a 100-page platform, which I turned into a book which is on my website. It's called You're Hired! It's not You're Fired, but it's You're Hired! It's a free download at Kotlikoff.net and it says exactly what I think, but it's more than what I think. It's what other economists collectively think because I interviewed a lot of people or I talked to them. I formerly put interviews in the book but I said, "Let me talk to the top health economist and see if they agree with what I have in mind. Let me talk to the top tax economists when it comes to tax reform or Social Security reform. Let's think about how that should be done, not just me, but talking to other people." So, this is the consensus view of how economics as a profession believes we should be fixing these institutions. It's very easy reading. And so, President Biden could read it. President Trump could have read it if he could read, if he had the time to read it. He didn't but it's there. Okay. So, I feel like that was the reason I ran and it was useful exercise.

Casey Weade: So, it sounds to me like you never really expected to win, right? You urged your supporters to never send you a penny and you're going against, as you said, billion-dollar budgets. So, you couldn't expect to win.

Laurence Kotlikoff: Well, I thought maybe just PR, the social media would take off, and then I wouldn't need any money. And that was my angle. Don't send me money. Just spread the word and that we could win without money. But the media thought it was a big joke because they weren't able to sit down and read the ideas or focus on the ideas. They wanted to focus on the fights between Trump and the other people, the ad hominem, all that stuff, all that crap. I wasn't into that. I was into, "Gee, Social Security is $53 trillion underwater. It's two-and-a-half years of GDP. The official debt is one year of GDP. We've got two-and-a-half years of GDP." And that's the statement in the Social Security Trustees report, which is probably going to come out today or tomorrow, the latest report. And it's going to continue to show an enormous unfunded liability, which means that everybody's Social Security benefit is in danger, current retirees in the extreme, although it would be political suicide to cut their benefits. But also, young workers may have to pay higher taxes dramatically higher, like a third higher to get this thing under control. Imagine you're now paying 12.4% of your pay, Casey, every month to this system to pay benefits to me. I'm older, a little bit older than you. How would you like to pay a third more? Make that 16.3%. Do you like to lose 4% of your pay for the rest of your life to pay my bill? Pay for me because we have set this up as a Ponzi scheme starting under Eisenhower. He really got that going.

So, it's Democrat, Republican. Nixon jacked up the whole Ponzi scheme system dramatically. So, it hasn't just been Democrats, but then the Democrats layered on Medicare and Medicaid, which did fabulous things for healthcare for a lot of people who were not covered but had funded this on the back of our kids and grandchildren. So, you're now facing not just an enormous problem of Social Security, not just an enormous problem of official debt, not just an enormous problem with Medicare and Medicaid but the entire system is underfunded, you know, defense spending. So, to put it all together, if you look at what we do in economics, and I talked about this in this book at You're Hired! to try and say, "Look, here's the problem. We have to fix these institutions to get our house in order, fiscally speaking." And if you look at all the outlays into the future, the government plans, according to the CBO and all the receipts the CBO projects, the Congressional Budget Office projects collecting this, the government, the main budget keeper, number keeper of our country, if you look at the present value difference, it's eight years of GDP. So, it's not money or GDP like the official debt or two-and-a-half years of GDP like Social Security but if you put it all together, including the taxes that are coming in, net of the taxes were eight years underwater, we’re bankrupt. And that's why I ran. I knew we were bankrupt, I knew that we had bridges across the Hudson that we're breaking, and I knew that economists knew how to fix it. And so, that's why I ran.

Casey Weade: Well, I think most of us, I don't think I would be alone in this, but we'd love the concept of having an economist actually running for president of the United States. So, hey, we're going to get this out to a few thousand people. Maybe it will be that opportunity for you to run next time around. Will you run again?

Laurence Kotlikoff: Well, the real thing was I was too young to run last time. So, of course, I'll run again. Let me get your 3,000 listeners to - maybe I should send some money this time.

Casey Weade: Well, I think that would be great. I think you picked up a bunch of supporters already just with saying that Social Security is a Ponzi scheme. You know, I have had that question of past guests before who have this area of expertise in Social Security. I've said Social Security is a Ponzi scheme and they say, "No, it's not a Ponzi scheme." But I love hearing you say that because, to me, it seems like the definition of a Ponzi scheme.

Laurence Kotlikoff: Oh, it's definitely. It's not just Social Security. You can't really tell from the funding of Social Security or anything. You can't tell whether any particular program is a Ponzi scheme because the labeling is amorphous. You can use words that make it look like a Ponzi scheme. But there are some calculations in economics that are free of how you label them. Just like in physics, there are certain measures like space-time that are free of how you measure things, but time and distance are not free. So, economics has that same problem. But when you put everything together comprehensively and we call it the fiscal gap, that's where I got the eight years underwater, eight years of GDP that we're short. In other words, we need to get extra taxes to cover spending to the tune of eight years of GDP. So, we need to dramatically double taxes to pay our bills through time. That calculation is free of how you label and the fact that we're in that boat is prima facie evidence of a Ponzi scheme. It's a combination of all these programs that we've been running.

I mean, think about this. When you cut the taxes of older people and you say we're going to run deficits and then let younger people pay the interest on it and the principal back, that's all part of it, right? When you switch the structure of taxes from older people and younger people, even if there's no deficit, you're still putting more of a burden on younger people. That's all kind of part of a Ponzi scheme that you're burning the young and future generations to benefit the old. Just like in any chain letter, the first people they get the money, make out, everybody else gets stuck holding the bag. So, we're bankrupt. And there's not a decent economist. There's lots of indecent economists who will deny this, who are politically oriented, who don't want to look at numbers and believe and have magical thinking. You've got people on the left this way. You've got people on the right this way. But most economists understand this problem, but very few are actually going to go public because they don't want to get yelled at by their relatives on the left or the right over Thanksgiving. I don't give a damn, okay? My relatives don't yell at me. They actually listen for some reason or we don't discuss economics. Actually, they don't want to discuss economics over Thanksgiving so we don't do it.

Casey Weade: Well, I heard you ringing the warning bell in the Power of Zero back in 2018 and now we've had a little bit more stimulus since then. We've had some more money coming off the printing press. What is your current outlook? How has your outlook changed over the last couple of years since I saw you in the Power of Zero?

Laurence Kotlikoff: Yeah. So, things are worse. We've had this terrible pandemic and we've had the proper kind of response to try and help people that were really hurt worse was to help them with stimulus, with money. But we didn't need to leave the bills for you and the next generation and your kids. We could have said, "Okay. We're going to raise taxes on people that are doing well during the pandemic, people that don't need to go to work physically. They can continue their jobs." There are a lot of people like me who - so should I've been paying a 15% higher tax during this period? Yes. So, that we didn't increase debt-to-GDP to what is now 100% of GDP. If you go back to 2008, it was 35% of GDP, 100% of GDP. That's just official debt. I'm not talking about all the off-the-books, Social Security, unfunded liabilities, the eight years in total fiscal gap. I'm just talking about official debt. We're starting to look like Italy looked back in 2008. Back in 2008 when we had this world financial crisis, everybody was pointing the finger at Italy, saying, "Gee, they're in terrible shape. They have a debt-to-GDP ratio around 100%," and it was 120. It was big. We're there. And now Italy is much, you know, maybe 160% of GDP and some people think that this can just go on but something that can't go on will stop and it will stop very abruptly and badly. There was a famous head of the Council of Economic Advisors who used to say, I forgot, he was under Nixon at this point, he used to say, "Something you can't go on will stop, will end." But what I'm saying is that something that can't go on will stop poorly, just like if you're running and you can't continue to run because there's a cliff in front of you and you go over the cliff, it will stop, but very badly.

Casey Weade: So, the question becomes, when does it stop? I mean, there are some out there that believe that we can outgrow our debt. There are some that say the debt itself is simply irrelevant. You know, can we dig ourselves out of this hole, or is it just too late?

Laurence Kotlikoff: It's pretty darn late. Just like with climate change, it's pretty darn late. We can put on a carbon tax and probably reduce the problem in half but we can't get out from under it. What we're doing now, we need to have a major restructuring of our fiscal side health care reform to lower the spending tax reform, to get the super-rich to pay nothing because they just borrow against their assets. They have all their assets in securities that experience capital gains. They pass them to their kids in the form of a tax-free step-up in basis. So, there's no income taxation of the super-rich at all. These people pay absolutely nothing. This is why Trump got away with paying nothing for years. And how do they live their lavish lifestyle? They just borrow against their assets and they never sell their assets. They leave it to the kids with what's called a step-up in basis for the kids so the capital gain is forgiven. So, we need to fix this and we're not doing it. We need to fix the structure and the level of the spending, bring that down, the overall level. Bring the overall level of taxes up. Get our fiscal house in order. Get that fiscal gap, which is eight years of GDP down to zero. We have to do major things there. We're not doing them. What we're doing is printing money to pay our bills.

We're running up these official, you know, Jerome Powell, the head of the Federal Reserve, is buying up bonds all the time, putting money out there, and the bonds he's buying up are both private and government bonds. So, we're going to have a little dance here between the Treasury and the Federal Reserve such that we end up just printing money to pay for what the government spends. Let me just for a second explain this to you so it's crystal clear. Let's suppose that you, Casey, are the president and you want to get a chicken for lunch. Okay? So, what you do is you have it, but you don't want to tax me, grab the money from me in taxes to pay for your chicken. So, what you do is you have the Treasury sell a Treasury bond to somebody. He hands you some money back in exchange. You take the money and you go buy the chicken. So, now you have the chicken. The same amount of money is out there in the private economy because the money just went from the guy who bought the bond to the guy who sold the chicken to. So, we got the same amount of money out there. But now the Federal Reserve in the next part of this act, the stance, they print up some new money and they go buy that bond.

Now, the net picture here is that the private sector has more money and you have the chicken. This is how we print money as a combined government, the Treasury plus the Federal Reserve combined, prints money to buy you the chicken. And that's what we've been doing. We've been printing money to the tune of a six-fold increase in the amount of money that the Federal Reserve has added to the economy. There's been a six-fold increase since 2008. The statistics are sitting right there on the web at the St. Louis Fed. Anybody can check base money supply six times bigger than it was. So, when you run policies, when you're printing this much money to pay for the chickens, chickens come home to roost and that comes out in the form of inflation. So, countries that are in fiscally unsustainable positions, the first thing they do politically is they resort to printing money, and you see that exactly happening in our country. And then inflation takes off and then the fear of future inflation leads interest rates to rise, and that leads money to circulate more rapidly. And faster money is like more money. It becomes like a hot potato. And now you have the potential for a full-fledged inflation and that ends up as hyperinflation. Now, in our country, we have the kind of basics in place for a six to 12-fold increase in the price level and we're starting to see some prices going up. Now, people will say properly that we're seeing right now with a 5.5% inflation that we've seen over the last year, last 12 months or so, is supply-side, supply chain shortages, which is absolutely true. Lumber and so forth have gone up.

But what happens is where the psychology of inflation is that prices start to go up and then companies will say, "Well, gee, all these other people are raising their prices for whatever reason. Maybe it is supply side. Maybe it is just like a one-off situation, but now is a good opportunity for me to raise my prices because my customers won't be upset. They'll see that all the other prices are going up around the economy or lots of other prices are going up. So, therefore, I'll raise my prices." So, you have this kind of opportunistic price setting. And then the psychology of inflation gets rolling and that leads to money becoming more of a hot potato and you end up with what we saw in the last 22 years in countries that need to continue to print money to pay their bills, you end up with hyperinflation. We had 22 hyperinflations in the last century. In this century, we've seen places like Argentina and if you look at Venezuela today with hyperinflation countries, we're not immune to getting into very difficult times with respect to price increases, to having hyperinflation happen in our country. So, I would be very careful if I were investing in long term, I would not be investing in long-term nominal bonds. If right now you can buy a 30-year Treasury bond, it's yielding 2%, so it's going to pay you back a small stream of dollar bills, and then at the end, it will pay you back your principal, 30 years from now. Now, what happens if the price of a hot dog goes from, you know, when I was a kid, you could buy a hot dog for a quarter. It's now maybe $5. Levis’ hot dog with Grand Central Station probably is $5 if you're lucky, or maybe outside of the street on 42nd Street. What if it's $2,000 thirty years from now when you're getting your principal repaid, which is that fixed nominal amount of money? It's going to be worth nothing in real terms. Your purchasing power is going to get completely wiped out.

Well, in the last year, we've seen people lose 5.4% of their purchasing power on all those government bonds that they're holding, on all the corporate bonds, any fixed nominal security, or if you just hold cash. People lost 5.4% purchasing power. So, let me make this analogy or example. If you're a Delta Airlines pilot, you retired 10 years ago and you have a fixed nominal pension, or a Detroit policeman who's retired. And so, you got a fixed amount of dollar bills coming in until you die in the form of an annuity, a pension. Well, you just lost 5.4% of your pay forever, of your income. Not your pay. You're not working. Out of your real living standard has just dropped 5.4%. Jerome Powell, the Fed chairman, who I think is a terrific person and terrific economist, even though he's not formally trained that way and doing a great job to the extent he can, he'll tell you, "No big deal. It's just temporary." But these people permanently lost 5.4% of their living standard. How can you say it's temporary? It's only temporary if you're going to have the prices go back down, but they're permanently higher. And then he's saying, "Well, they won't go yet higher by another 5.4% over the next 12 months." He doesn't know for sure. He's hoping. He's trying to draw a bone. People are setting prices not to raise prices, but he doesn't know. So, the damage has already been done.

The reason governments print money is to pay their bills and the public gets hit through the inflation tax, which is prices go up and then we lose value on our nominal holdings of assets, our nominal assets, our pensions that are fixed nominal terms, our cash in our checking account, they lose value. So, it's a real transfer, a real tax on the public to pay for those chickens. You know, the bottom line is we've got the chickens to eat and somebody gets to eat them, and somehow the governments engage in a game here where the public gets fewer chickens to eat and the government gets more to eat. And it's through this inflationary tax. Anyway, I can't help but give these lectures because I'm a professor.

Casey Weade: Well, I think we would all enjoy having the Larry Kotlikoff that has a common-sense approach. It does seem like you have some ideas on how this gets fixed. I'm not sure we're going to get a Larry Kotlikoff in the White House. And so, how do you actually envision this?

Laurence Kotlikoff: Maybe you'll be my campaign manager.

Casey Weade: Yeah. Well, give me a call. If you were to pull out a crystal ball and if you had one, what do you actually predict happens in the next five to ten years? Where do you think we actually end up in the next five to ten years? And I want to make sure we get into Social Security because that's such a huge element of this.

Laurence Kotlikoff: Well, I expect higher taxes because we're going to have less spending even - we are, yes, having an infrastructure bill but is that the proper amount of infrastructure? Is it really keeping up with GDP? Probably not. So, we're going to see cutbacks in health care because that's becoming far too important. When we're seeing that in ways that the private sector is seeing higher co-pays, that crappier health insurance policies, and Medicare doesn't cover everything these days. So, we're going to see nickel and diming but fundamentally, we're not going to see the problem fully addressed and we're going to see continued money printing and we're going to probably see inflation get out of control. And then the Fed will probably try and step on the brakes. We'll have another recession, which isn't really going to fix the fundamentals. The fundamentals are you have to do long-term planning, budgeting, and say, "Well, here's all the spending we want to do. Here are all the taxes we've got coming in," and it doesn't match. Any household would take a look finally and say, "We're broke. We have to cut our spending and we have to go out and work more, get more money." We have to have a president who's not living for the next election. He's living for the next generation. I think President Biden cares a whole lot about our kids and the common man, but he's persuaded, surrounded by people that have to tell him things that they'd like to hear or that maybe they think he'd like to hear. They're not telling him the reality of our fiscal position. You know, President Trump, I think that was hopeless too, so anyway.

Casey Weade: Well, a huge part of this is Social Security.

Laurence Kotlikoff: I've lived on both of these guys for a long time.

Casey Weade: Yeah. I'm sure you have. Let's transition to Social Security. You mentioned the word "entitlement programs" and as we get into Social Security, I just want you to settle a debate for me, and that is that a lot of individuals will say, "It's not an entitlement program. Well, it's my money. I'm not entitled to this." It's kind of a silly argument in my opinion. However, I just want to hear it from you. Why do they call it an entitlement program if it's yours?

Laurence Kotlikoff: Words are flexible. I could be speaking French about Social Security and you could be speaking in German about our Social Security system and you could be describing it as an entitlement program. You're certainly paying your Social Security payroll taxes and you have an account and you have an earnings history and your benefits are tied to that. So, that certainly looks like just contributing to a 401(k) and somebody else can say who's speaking in a different language like German, say, "Well, no, it's not really a private account. There's nothing legal. You have no legal ownership over those benefits. Congress can change them at any time. And therefore, congress is just reauthorizing to give you money. You're just being given a benefit." So, that's the sense in which it's an entitlement. You're entitled to it because you're an older American, let's say, or you're a poor American that needs Social Security disability benefits. I think this whole discussion is kind of besides the fact. What we have to really look at is how much our current older people are getting to consume in the end and how much less our current and future kids are going to get to consume because our older people are spending so much, consuming so much? And is this a result of a 70-year policy of having the elderly consume more at the cost of the young and future generations spending less? So, this is a pattern, a policy that's ongoing.

And if you look through time, you see that the consumption of the elderly has risen dramatically relative to that of young people. So, that's exactly what you, if you go back to 1960, the typical elderly household was consuming about 70% of what a 45-year-old house was consuming. Today, they're probably consuming twice as much as a 45-year-old household. Now, why is that? Why did that happen? Well, that has a lot to do with government policy and that has a lot to do with cutting taxes, having tax cuts so that older people get to spend the rest of their lives without paying taxes. And then there's a bigger debt and now we have to pay higher taxes to cover the debt or print more money to roll over the debt, or to use the printing press and then inflation takes off, and the young people end up holding the bag. I mean, you yourself probably have some money in cash. You just lost 5.4% of it this year. How do you feel about that? You know, that's because, in part, because this is a very subtle way in which you're paying me my Social Security benefit. So, in other words, taking this whole big thing, lots of moving parts, and focusing on one thing will miss the entire big picture. The big picture is a process, a transition process where we're taking from the young and giving to the old through a whole lot of different mechanisms through a long period of time. And this will end badly. It will end and it will end badly and it's like having a cancer that's growing. And you go to the doctor and the doctor says, "You've got cancer, but it's not so bad. I'm going to take out a quarter of it today. You'll come back in five years." You come back in five years. It's twice as big. "Oh, it's not too bad. I'll just take out a quarter of it." And this goes on three times. The fourth time you come back and you die on the table because it's taken over several organs or something. That's kind of what we're up to here.

And I have been writing about this for decades. I've written several different books for the public and done these measurements. I started something with my co-authors called Generational Accounting to really understand the burden we're leaving to our kids. I looked at the consumption picture of the young versus the old, looked at this from a lot of different angles, compared our country with foreign countries. European countries are much better long-term shaped than we are. We're in the worst shape of any developed country, fiscally speaking. So, it's no wonder that if you look at our infrastructure, it sucks that bridges are falling down, that we have potholes everywhere and we have tunnels. Drive through the Callahan Tunnel in Boston. It looks like a third-world country. Why is it we're not funding this National Science Foundation properly? Why is it that so many things are not working in this country? Why education is a fifth-rate? Why we have like the 30th ranking in health care for prenatal health care? Why we don't provide pre-K for all the kids in the country? Other countries do this because they have responsible governments who look forward, not just in the next election.

Casey Weade: It seems like we're in a catch-22 then when it comes to our Social Security decision. You've talked about inflation. And so, if we're facing a higher rate of inflation in the future, then it's best that we delay those Social Security payments as long as we possibly can. But then on the other side, you say the system is doomed and Social Security is broke. So, then that says, "Well, we should take it as soon as we can."

Laurence Kotlikoff: Okay. Good question. So, I've been talking about the big kind of national financial picture but if we're talking about individuals, you have to do the best you can do individually. Now, individually, I think the adjustment for Social Security will not happen through benefit cuts, especially for the middle class. And if benefits are cut, they're going to cut whether you take the benefit early at 62 or whether you wait until you're 70 and you get a 76% higher number. So, yes, benefit cuts do tend to make the advantage from waiting until 70 to get a 76% inflation-protected higher benefit for the rest of your life if we're talking about retirement benefits. It does make a little less valuable compared to taking your benefits immediately, but there's still a huge gain from waiting. So, what I would say is for most people, even if benefits are going to be cut, that will probably be the last resort. They might default on US federal debt first, because a good chunk of that federal debt, probably over half right now, is held by foreigners. So, are you going to default on your voters or are you going to default on the Chinese? Going to default on the Chinese, right? Sure. Pure politician. So, I don't see benefits being cut. I see taxes being raised and so higher-income people are going to be facing taxation probably on 100% of the Social Security benefits as soon as they start collecting them. They'll just be treated like regular income. I see payroll taxes being levied on people earning more than $400,000.

Now, one of the big concerns I have in the way we "try and fix these things" and we're always doing too little, too late is that we'll leave people with no incentive to work. Think about somebody who's earning $500,000 a year. Maybe they're highly productive or maybe they got their job from their dad. But maybe they actually are contributing a lot to society and not just buying yachts for their money. Maybe they're giving charity. So, let's make the best case for the rich here. So, now they're going to face like a 40% federal income tax if President Biden has his way of a 14%, well, a 12.4% Social Security tax, 2.7% Medicare tax. There's a high-income Medicare earnings tax next year tax of several percentage points. There's state income tax. This can be as high as 13% in California. When you start putting this all together, you got these people in a 70% tax bracket. And then the sales taxes, which are also a disincentive to work because if I work and earn money and I have to buy something, bingo, I've got to pay the sales tax. I don't get as many peanuts. I go buy the peanuts. So, when you put it all together, what we have in mind here is doing to the rich, the super-rich and the rich, what we're doing to poor people, which is locking them out of the labor market. If you look at the lowest, the poorest 20% of Americans and there's a paper at Kotlikoff.net about marginal taxation of American's labor supply, take the bottom 20%. One quarter of these people are in 70% or higher marginal tax brackets.

When you put together all the things they lose when they work, they lose money because they have to pay taxes, all kinds of taxes. They lose their food stamps. They lose their welfare benefits. They can lose their housing support. They can lose all kinds of different benefit programs. And when combined, that puts them in a very high marginal tax bracket to the point where they have no incentive to work. They're locked into poverty. So, that's the real nightmare here that we have this kind of Byzantine fiscal system that's structurally out of control, not generating enough revenue, and then we engage in fixes which lead people to stop working, which produces even less revenue. So, that's why you need to rationalize the whole thing, lower the spending, raise the taxes, but do it in a way so everybody has the same incentive to work. So, when I ran for president in this platform book called You're Hired, it's free download again on my website, Kotlikoff.net, I talked about how do you get everybody into a 30% marginal tax bracket, rich, poor, middle class. How do you fix all the programs collectively so that everybody has the same incentive to work? And there is a way to do it. It's not that hard because all the solutions that I propose here are 6 to 10 bullets. They're not 50-page proposals. They're very simple. It doesn't take complicated things to get this thing fixed.

Casey Weade: Well, it sounds simple. Social Security is more than, what, eight bullet points. So, there's 2,728 rules. So, what do you say to someone when they ask you, "When should I file for Social Security?"

Laurence Kotlikoff: Well, for a lot of people, for most people it should be you wait until you're 70 to take your retirement benefit. But that might be true for 75% to 85% of the households. But then you have households that are widowed, for example. And you want to decide when to take your widow's benefit versus your retirement benefit. Depending on your situation and your deceased spouse or your deceased ex-spouse's, former spouse's earnings record, it may be best to take the widow's benefit first, the retirement benefit at 70, or it may be better to take your retirement benefit at 62 and the widow's benefit closer to full retirement age or at full retirement age. So, this is where the software that I developed through my company, we have this tool, MaxiFi Planner, which is a full financial planning tool. And then we have this other tool, which is called Maximize My Social Security, which is just about Social Security. That's, I think, $49. I would run that. I would run that no matter who you are, whether you're rich, poor, middle class because we have worked on this tool for 28 years. The company has been in business. We're completely anal. The guy who's programming that part of the code is the former head of research at the Army Corps of Engineers. We have a technical expert in our company who worked for Social Security for 30 years.

So, we have this 2,728 rules so just the beginning of the complexity of Social Security. So, we have the stuff down because we've had people and myself focus on this nonstop. I wrote a whole book with two co-authors called Get What's Yours, which became a New York Times bestseller. It's all about the details. So, I would say read the book. It's only like $5 from Amazon. Buy the software. It's cheap. Do not ask Social Security a damn thing. Tell them what to do because Social Security will half the time tell you exactly the wrong thing. They could cost you hundreds of thousands of dollars with their "advice". They'll tell you things that are misleading or incomplete. Let me give you just a quick example. I met a guy who had pancreatic cancer and you had just been diagnosed about a month before. And I met him at a dinner party, bubbly guy. He says, "I heard you wrote a book about Social Security. I went to Social Security. They said, 'Well, you should take your benefit immediately. You're 68, pancreatic cancer. It's a no-brainer. Let's sign you up.'" He signs up. I said, "I notice your wife's here. Did she work? Did she have an earnings history?" "No. She always stayed home and watched the kids and did other things. I earned all the money." I said, "Did the Social Security folks ask you about that?" He said, "No." I said, "They gave you the wrong advice. What you need to do is go back and tell them you want to withdraw that application because if you wait for two years and don't take a penny, you may not ever live to collect a penny of yourself, but your widow's benefit, the benefit for your wife will be 16% higher. Because she's going to collect your check and your bigger case and you want to make your check as big as possible.”

So, by waiting, you get these things called delayed retirement credits and they're 8% a year. They don't compound but they're 8 a year so right now we're talking 16% higher since you're 68. So, what they did is they didn't think comprehensively, Social Security, about family benefits, lifetime benefits. They just thought about the individual benefits. And you really want to maximize lifetime family benefits. And what one person can do in Social Security affects the other spouse, what spouse can do, and vice versa. So, it's a joint decision. It's very complicated. Even though there are only 13 benefits so our software covers 11, the most important 11 benefits. But most people don't even know about these benefits. You know, they know about the retirement benefit. They don't know if you're divorced, having been married for 10 years, you can get spousal benefits or if you're married and you're watching a disabled child, for example, you can get child-in-care spousal benefits so you can get paid to be home to watch your child. All these benefits are available, all of which have catch-22s. So, that's where the software really - you need to have expert software to get this stuff right.

Casey Weade: You hit on something which is probably the number one way that I find that individuals are making the Social Security decision. They say, "Well, it's all about how long I'm going to live." And we also see the same analysis being done by financial advisors. I'd say the majority of the engineers that I see come in and visit with our team. They've got a spreadsheet and they're looking at it from a break-even standpoint. But you say that the break-even analysis is not the way to evaluate Social Security. Can you explain why that is?

Laurence Kotlikoff: Yeah because none of us is going to die on time. Our life expectancy is an average. It's the average age at which we're going to die. So, we have this big risk, which is how long are we going to live? The worst-case scenario is we live to 100. I'm talking about worst-case in terms of financially worst case. You know, psychologically, it's the best case. Nobody wants to die, basically, but financially, dying right away is the best thing in terms of how much you have to pay for yourself in the future if you're not working, if you're retired. And I'm not encouraging anybody to commit suicide here, just to be clear, okay. I'm just trying to be a hard-nosed economist. Nobody should think about that as a way to deal with their finances. But financially speaking, living a long time is a major risk, and you can't play the averages just like you can't say, "Well, on average, I'm not going to have a car crash so I don't need car insurance. On average, my house is going to burn down so I'm not going to need homeowner's insurance." No. You look at the worst-case scenario. Here, financially speaking, the worst-case scenario is that you don't die on time, which nobody does. You don't die exactly on the average day you're going to die. You die at a very old age. And many, many people are doing that.

So, you may get to 100 or 98. My mom died at 98. So, you want to have a way to insure you against that situation because you have to keep paying for the person and for yourself right up through 98, 100. So, by waiting to 70 to collect your retirement benefit, what you're doing is you're giving up eight years of benefits. That's a price you're paying in order to buy a higher stream of benefits, which is an annuity. So, you're buying an annuity by waiting from the government and it's a safe annuity and it's 76% higher number. It's a big spread going right through retirement, through age 100. Now, that's the best deal going. A lot of people hit retirement age and they say, "Well, I'm going to make a killing on my money in the stock market. I won't take my IRA money and use it now. I'll take my Social Security early." It's completely the wrong mistake. It's a huge mistake. If people ran our MaxiFi software, they would see this was nuts. You can't count on getting a high return on the stock market because it's risky. After you risk adjust the stock market return, it's yielding a negative return. The risk adjustment these days is enormous. Inflation-indexed bonds, which are...

Casey Weade: Can you explain that for a minute, Larry, for those that don't understand how it could be negative risk-adjusted?

Laurence Kotlikoff: So, right now, today, as we talk, if you looked online at the Treasury yield curve, you could just google the Treasury yield curve, real yield curve, you'll see that inflation-indexed bonds. So, these are the bonds that the government sells you that when inflation takes off, they don't just say, "We're going to pay the same amount," but they say, "We're going to pay you 5% more if inflation was 5% higher this year." That coupon payment, that the principal payment 30 years out will be 5% bigger because inflation this year was 5% bigger, was higher, or prices went up by 5%. Next year, if they go up at 7%, we're going to raise that principal payment by another 7%. So, they're called Treasury Inflation-Protected Securities or TIPS and they're yielding over a 30-year period because they're yielding negative 33 basis points, which is they're not even yielding a zero percent return. They're yielding a negative 0.33% return. So, that means that if you invest in these things, you'll know for sure that you're going to end up losing money but you'll have something. You won't have lost your whole shirt. With the stock market, that's an alternative investment, but the fact that these two investments are selling on the financial market simultaneously and one is perfectly safe yielding a negative 33 basis points, and one is highly volatile on average. It's yielding like 6.5% real, but from one year to the next, it can be up an extra 20% or down an extra 20%.

The trade-off is right there, the fact that people are deciding at the margin to not invest in the stock market and to go into the safe thing means that the risk premium is about 6.5%. So, when you risk adjust, if you're comparing Social Security, which is risk-free with the stock market, you have to risk adjust the stock market because it comes with this extra bad thing, which is the risk. So, you have to take the risk out before you do this calculation. So, you have to say to yourself, "Gee, if I think I'm going to count on my IRA doing well, well, I have to worry about the risk," and once you worry about the risk, you have to say, "Well, I have to think about the IRA as being converted into a safe asset and yielding only negative 33 basis points." And Social Security has got this enormous return. It's much, much bigger than negative 33 basis points. It's positive, huge. So, I'm going to take the IRA early. The smart thing to do would be to take the IRA money early, pay off your mortgage, which has a high-interest rate, and then waiting until 70 to take Social Security. So, the software program helps you see these possibilities. And then I realize that most people don't like to run software so I'll just put in another plug here because it's kind of timely. So, I wrote a book recently. It's coming out in January called Money Magic: An Economist's Secrets to More Money, Less Risk, and a Better Life. I've been running the software for so many years with clients and seeing what they've done with it, and I thought it'd be important to encapsulate all the safe ways to have a better financial outcome that people are not aware of because Wall Street, you referenced Wall Street, they're focused on things that are going to make them money.

The reason they focus on life expectancy is they're trying to get people to take their social security early so they leave their IRA money. They're going to try and tell people, "You're going to die on time so it doesn't pay for you to wait to take Social Security. Therefore, take your Social Security now. Give it to us to invest. We'll get these great rates of return for you but we'll also have to charge you fees." They're selling product. This is a con job. This is a bait and switch. And everywhere you look in the way the conventional financial planning works, the way Wall Street is advising people, everything that they do, the way their software is set up, it's all set up to sell product. And we don't sell a single thing in my little software company. I have this on the side. I've been doing this for 28 years. I don't take a salary. I love it because it helps people. And I've got great employees and I have a great little American company, and we actually tell people the truth. And we don't try and sell them something extra and lie to them about their finances. So, that's been my fun project.

Casey Weade: Well, we've leveraged your software for that very reason. And when it comes to the Social Security piece, I mean, this kind of starts off as two separate pieces. So, let's say that someone walks them through your software, someone else's Social Security software, and that they discover that this should be their filing strategy in order to maximize their lifetime benefits. Now, they want to take that information and plug it into, say, MaxiFi or some other piece of financial planning software and they want to start stress-testing them. I think most financial planners, they're using, say, a Monte Carlo simulation or something along those lines to stress test against market volatility. If they're doing a good job of the tax planning side, they're stress-testing against higher taxes in the future. How might someone or what variables might they twist around when it comes to stress testing their Social Security, taking into consideration some of the things you've mentioned, the potential changes to taxes, maybe even inflation adjustments or cost of living adjustments for Social Security? How should they stress test that Social Security benefit?

Laurence Kotlikoff: So, our MaxiFi tool has all the Social Security codes so you wouldn't need to do the Social Security analysis. You could just do it right there in the MaxiFi tool. It's a comprehensive lifetime financial planning tool but it lets you stress test inflation by setting. You can run a profile where inflation in five years goes up for a long time. You can run a profile where Social Security benefits are cut and then see whether the gains you're waiting still make sense. And the program will also try and Robo optimize for you based on any kind of settings that you enter. You can specify payroll taxes rising. You can specify at a personal level like the need to go into a nursing home and think about whether you should buy home health care insurance or nursing care insurance, whether it's worth it, or whether you should try and self-insure. So, it's not really stress testing but when you think about choosing when to retire, you can set up a profile where you retire early versus when you retire later and you can see the price of retiring in terms of how much it lowers your living standard. Every question in economics and personal finance begins and ends with your living standard. Every question that the Wall Street firms, the Fidelities, the T. Rowe Prices, the TIAA-CREFs, all those companies are focused not on your living standard. They're focused on your wealth and you don't care about your wealth once you die. When you're in heaven, you're not going to be really happy because you die with a lot of money. You're just going to be in heaven. You don't need money in heaven.

So, what you really care about is having a high living standard, the highest possible that's safe and sustainable, and that's what the software is really about. And, yes, stress testing is very important because we have these risks coming from the government but also we do run Monte Carlo simulations related to your portfolio. If you're holding a risky portfolio or whatever portfolio you're holding, we show you the ups and downs of your living standard, assuming you're going to adjust your spending every year in light of your living standard, in light of how the market has done. If you have a lot of money in stocks and they all crash this year, our software assumes that you're going to cut your spending in light of that, so that from that point on, you're going to be trying to plan to have a smooth ride from that point on. All the other tools are assuming that you never adjust. Your Monte Carlo simulations are absolutely stupid. They're ridiculous. They have no connection to anything any economist would view as reasonable. We have this complete dichotomy. There's a complete divide between economics-based financial planning, the kind of stuff that's taught in every finance program in the country. If you look at the top 50 finance programs from MIT on down, not a single one of them will spend even two minutes on the financial planning methodology that's being used by hundreds of thousands of financial planners out there working for tens of thousands of major Wall Street firms. We will not spend a minute on that stuff because we know that methodology is not connected to anything reasonable and is all based on product sales.

On their side, the financial planning certificate programs, there's about 20 of them like this Certified Financial Planning Program or the Registered Investment Advisor Program, they don't spend even two minutes talking about the economic theory or economics approach to financial planning, the idea of trying to have a smooth living standard, which is called consumption smoothing that goes back 100 years to the work of Irving Fisher. So, we're not teaching their stuff. They're not teaching our stuff. What do you make of that, Casey? I mean, imagine you had people being treated for medical problems solely by chiropractors who are giving people false elixirs. This would put us back to 1880. That's the situation right now with financial planning in the US. We have people being treated by financial quacks left, right, and center and their advice has no connection whatsoever to they're going to tell you you're going to die, your life expectancy. They're going to tell you they're going to use these Monte Carlo simulations that assume that you're saving the right amount right now until through retirement, which is absolutely crazy because most people are saving totally the wrong amount. They're going to assume that you're going to spend some targeted level that's the wrong amount in retirement. And then they're going to make the third crazy assumption, which is that you're not going to adjust your spending if the market goes up or down right through the end of your days. And then they're going to see whether this plan, your plan that entails three major mistakes, saving the wrong amount before retirement, spending the wrong amount after retirement, never adjusting those three mistakes, that plan fails. What fraction of the time that plan fails? That's their Monte Carlo methodology.

Whether you look at any of these companies' software, they're all doing the same thing. MoneyGuidePro, eMoney, RightCapital, they're all doing things that no economist would view as remotely responsible or sensible. And that's the state of the art. So, this is why I really got into the program. This is why I've been so incensed by this. Even you can feel it. You can hear it in my voice. I'm angry at this industry for conning people, and I'm angry for 30, 28 years now, very angry about the way they've been misleading people. I'm also angry with the federal government and I've written several books about it, and that's why I ran for president. So, I'm trying to do things to make a difference and maybe a small difference for some people but that's what got me into economics. I saw that this profession, this set of knowledge could be used to help people nationally and personally and that's what drove me into economics. The alternative was becoming a doctor. But as I write in this book, Money Magic, the first day of biology talked me out of biology, out of medicine because I couldn't handle torturing this frog that I had to dissect. So, that was that.

Casey Weade: Well, Larry, I think we all love the concept of a presidential candidate that is not out to make any friends, but really puts us all in a better position over the long run. I totally agree with you. I mean, I went through the CFP program. It's all built largely around accumulation and not deaccumulation or generating income that's sustainable over a lifetime. I think out of all of the designations that are out there, there's really only one that's even formulated for retirement income, the Retirement Income Certified Professional designation. You know, Larry, I know the question that everyone wants to ask you right now. You're 70 years old, second marriage in six years, you've been six years married to your second spouse. I think we want to know what is Larry's strategy then. What has been your Social Security, your spouse's Social Security strategy, your ex-spouse's Social Security strategy? Can we hear that from you?

Laurence Kotlikoff: Oh, absolutely. Any question you want to ask me, of course, of my personal finance, happy to answer here later, but let me just say, I want to just kind of modify. I was just on this kind of rift, whereas lambasting the financial industry and I am angry about the financial industry, but the personal financial planners are stuck with these tools, by and large, because that's what they've been told to use and trained to use in their programs. But when it comes to actually helping people, they help people, help a lot because they modify their advice in light of their common sense. And that's what economics is really about, common sense. But back to your question, Casey, so I don't have a beef with financial planners. I don't have a beef with people that have the CFP certificate. I think these people are trying to do their best by the public and I know lots of financial planners who are using those software tools. Many cases are just forced to buy their bigger companies and they're my buddies. So, I'm not here to denigrate anybody who's trying to help people. But personally, I waited until 70 and my ex-spouse, who I was married to for about 28 years, who are close friends with, she's going to wait until full retirement age to take her spousal benefit. And because I waited until 70, she'll get a higher widow's benefit, the highest possible widow's benefit when I pass, the divorce spousal widow's benefit, and my current spouse the same thing. She'll wait until 70 to take her full retirement benefit because she has a bigger earnings record.

My ex-spouse will collect based - it will most likely behoove her to wait because she didn't have much of an earnings record to wait to take her spouse benefits starting at full retirement age rather than waiting until 70. That would be a mistake. Our software would pick that up. And then both will collect off of my record and I could have had four different wives and I was married to for ten years each. They could each collect from my widow's benefit or spousal benefit of my record with no interconnection. One doesn't reduce the other person's benefit. The Congress was smart enough to know that the white males who set this whole thing up didn't want their exes fighting with each other. So, they set it up that way. And there are so many aspects, by the way, of Social Security that are sexist. It's unbelievable. If you get remarried before 60, you lose the potential to get a spousal benefit. And then you can also collect a widow's benefit based on your ex-former spouse but if you wait until 60, when presumably your looks are not as good because we're not looking as good as we get older, generally speaking, and I think that's the general perception. Some people like the looks of older people, but if you wait until 60, then it's okay. Now, you can collect your spousal benefit on your former spouse. Now, you can collect a widow's benefit. So, that's terrible. Why should people have to wait 10 years to be married before they get divorced in order for one of the spouses who's maybe stayed home and watched the kid and let the other spouse get a career going, why should that person have to be married a full 10 years before they can collect a penny based on their ex's work record? This stuff needs to be fixed. I mean, there's a whole slew. There's like 20 things.

I wrote a column. It's in Kotlikoff.net, if you search for 20 sexist aspects of Social Security, there's 20 provisions in Social Security that are highly sexist. It looks symmetric in the way things are written, but when you think about the fact that women bring up children and they sacrifice their careers to do that and they end up with lower earnings histories, in effect, it turns out to be highly sexist, the program, and we need to fix it.

Casey Weade: Well, if your head is spinning after this conversation with Larry in all the different ways to leverage your strategy, stress test your strategy, and just what software to use, I've got a couple of options for you. One, give us a call or visit RetireWithPurpose.com. We'll be more than happy to walk you through Larry's software, MaxiFi, as well as Maximizing Your Social Security benefit, integrating those two softwares together. We'll be happy to take you through that. Maybe you're not ready for that step yet. Maybe you're just trying to get used to the basics of Social Security and make that decision before you take the next step. Well, we're going to give away Larry's book right now, which was titled Get What's Yours: The Secrets to Maxing Out Your Social Security. If you'd like to get a free copy of that book, all you have to do is this. Write an honest rating and review for the podcast on iTunes and then shoot us an email at [email protected] with your iTunes username and we will be obliged to send you out the book for absolutely free. Larry, thank you so much for joining us. You know, I'm really looking forward to hopefully having you back on here in a few months as you launch your next book, Money Magic: An Economist's Secret to More Money, Less Risk, and a Better Life.

Laurence Kotlikoff: Great, Casey. I love to come back.

Casey Weade: Thanks, Larry.

Laurence Kotlikoff: Great talking to you. A lot of fun.