America is "fundamentally broke"; inflation means "more federal income tax on [Social Security] benefits"; and the Fed is "a paper tiger" when it comes to determining inflation.
Laurence Kotlikoff, economics professor at Boston University, offered these and other candid observations in an interview with ThinkAdvisor on Oct. 15.
"On balance, benefits are being cut due to inflation for recipients in the middle class and upper-income classes, no question," he says.
Named by The Economist one of the world's 25 most influential economists, Kotlikoff, 70, is particularly worried about "the enormous amount of money" the Federal Reserve has been "printing" since 2008.
"When countries are broke and printing money, you see inflation," and at 6% in the U.S. now, this is "the highest inflation we've had for decades," he says.
Kotlikoff is founder and president of the financial planning software firm Economic Security Planning, offering the online tools Maximize My Social Security and MaxiFi to calculate claiming strategies.
Though the 5.9% cost-of-living adjustment for Social Security recipients that's set for 2022 is the biggest increase in 40 years, it has little muscle, Kotlikoff maintains.
"It's just keeping people even with inflation. Retirees aren't going to get a bonanza from this COLA" because prices continue to rise "dramatically," the Social Security expert argues in the interview.
Further, he explains that because some retirees' Medicare premiums are increasing, they won't see the 5.9% increase reflected in their monthly checks.
As for the Fed, no matter what level of inflation the central bank indicates, it has no ability to "determine inflation except by taking a sledgehammer to the economy," the professor contends.
Kotlikoff, who served on President Ronald Reagan's Council of Economic Advisers, has been a consultant to the International Monetary Fund, along with Merrill Lynch and Fidelity Investments, among other firms.
His good news is the relative certainty, he says, that once President Joe Biden's social spending bill is passed, Medicare will expand to cover dental, vision and hearing expenses.
The bestselling author has a new book to be released on Jan. 4, 2022, called "Money Magic: An Economist's Secrets to More Money, Less Risk and a Better Life" (Little Brown, Spark).
ThinkAdvisor spoke by phone with Kotlikoff, who was calling from Switzerland. He summed up U.S. economic woes succinctly, if not bluntly, when he said:
"The real issue is whether inflation will stay at 6% or move up to 12% and whether the Fed will try to step on the brakes by raising interest rates significantly and whether that will cause a recession."
Here are highlights of our conversation:
THINKADVISOR: What concerns you most about the U.S. economy right now?
LAURENCE KOTLIKOFF: Everybody needs to look at the reality that the country is fundamentally broke, that it's paying money out the wazoo — maybe to be paying its bills; but we're not quite sure.
The key thing that troubles me is that the Fed has been printing an enormous amount of money since 2008.
With our fiscal policy so out of control, it's very hard to tell how much of this money creation is just making money to spend it.
When countries are broke and printing money, you see inflation. And from last October to this October, [we saw] inflation [rise to] almost 6% — the highest inflation we've had for decades. It looks like it's continuing.
I don't see the government explaining, "Hey we've got a fiscal policy that, over the long term, is going to be sustainable; and therefore we don't have to do what 22 countries did in the last century, which was to finance their expenditures by printing money."
What do you think of the 5.9% cost-of-living adjustment [COLA] for Social Security recipients in 2022, the biggest increase in 40 years? Is it meaningful?
No, it's not. It's just keeping people even with inflation. Retirees aren't going to get a bonanza from this COLA. Prices are still going up dramatically. Purchasing power has [dropped] over the last 12 months.
The real issue is whether inflation will stay at 6% or move up to 12% and whether the Fed will try to step on the brakes by raising interest rates significantly and whether that will cause a recession.
Does everything hinge on what the Fed does?
