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Laurence Kotlikoff is a Professor of Economics and Boston University. Professor Kotlikoff is one of the nation’s leading experts on fiscal policy, national saving and personal finance. 

Professor Kotlikoff is the author or co-author of 15 books and he publishes extensively in newspapers, magazines and blogs on issues of personal finance, financial reform, taxes, Social Security, healthcare, deficits, generational accounting, pensions and insurance.

Kotlikoff’s most recent book is The Clash of Generations: Saving Ourselves, Our Kids and Our Economy. We had an opportunity to speak to Professor Kotlikoff about the book and related issues.

Annuity Digest: A recent Credit Suisse report suggests that health spending has essentially been the sole driver of the growth in consumer spending over the past 50 years.  Since consumer spending is a key driver of economic growth in the United States, could the growth in health spending be seen as a positive for the economy?  Could increases in health care entitlement spending be seen as a form of fiscal stimulus and a critical source of growth in a debt-flooded world that is greatly in need of a growth engine?

Professor Kotlikoff: Publicly funded health spending is a transfer payment, so it could be seen as a form of stimulus like a tax cut.

If you think that these policies are really working and we need more of them, then you may advocate stimulus through health spending.

I don’t think they are working.  We are spending money neither we nor our children have and digging ourselves a deeper hole.

The real issue with the economy is what is referred to as a coordination failure.

A coordination failure involves employers who are not hiring because other employers are not hiring.  At the height of the Great Depression President Roosevelt said,“There is nothing to fear but fear itself.”  He was right.  But he should have added that economic fear is contagious, can be very long-lasting, and can be overcome only by coordinating simultaneous hiring by employers.

Were I President, I’d cajole, persuade, urge, beg -- you name it -- medium and large employers to each voluntarily hire 5 percent more workers. Were they to do so, then, voila!, they’d all have new customers, namely the workers that the other employers hired.  

The alternative is spending more money that we don’t have which will ultimately lead to even greater clash of generations than we are now producing by leaving massive fiscal bills to our children.  

Annuity Digest: Could the “glass half full” perspective also be applied to the longevity issue?  There are, of course, liabilities associated with longevity, but isn’t the collective human capital of the elderly also a huge asset that can contribute to economic growth?   

Professor Kotlikoff: I agree. We should not be forcing the elderly out of the workforce.  

I see this happening all the time in my own field.  Very productive economists are viewed as not worth hiring because they are older.

The reality is there are a lot of really good people who might work on a fixed contract for 10 years rather than on tenured-contract basis.

I think age discrimination is widespread and needs to be eliminated.

The elderly need to be treated fairly. But so do the young.  Today’s young are the victims of a six-decade long Ponzi scheme that has produced a massive -- $200 trillion -- fiscal gap in the government’s finances, where the gap is the difference between all future spending, including servicing the official debt, and all future taxes -- all measured in present value.

Annuity Digest: Why have bond markets failed to acknowledge the United States’ off-the-books liabilities and fiscal gap, and what factors are likely to contribute to a change in sentiment?

Professor Kotlikoff: I guess not enough people have read my books!

The real story is that bond traders are looking at what one another are doing.  If they lose on their own they look bad (Bill Gross selling Treasuries is a recent example), but if they lose as part of the herd they’re safe.  

This behavior is one of the reasons we have distorted pricing in our capital markets.

Financial markets mis-price securities all the time.  The bond bubble of the nineteen seventies, the dot com bubble of the late nineties, and the housing bubble of aughts are just three examples of traders missing the boat.  

My advice would be to get out of any medium and long-term nominal bonds right away because these securities are likely selling at their peak.

But I may be wrong.  People are so focused on Europe right now. That issue could linger while the U.S. will likely continue to spend far too much and tax far too little and hope nobody notices.

Maybe the market will wake up when debt-to-GDP hits 100 percent within the next 5 years.  

Trying to get by through borrowing on the cheap will go on as long as it goes on.

Maybe we think we can just print dollar ad infinitum and cover all our bills that way.  But the dollar’s role as the world’s premier reserve currency could change overnight.  At some point the Yuan may replace the dollar just like the dollar replaced the pound.  Indeed, the Chinese are now signing oil deals with Russia and other countries where the payment is in yuan.  This, interestingly enough, was the hypothetical scenario I drew in the prologue toThe Clash of Generations.  

Bottom line -- at some point people will put 2+2 together and realize that the United States is broke.

Annuity Digest: Japan was one of the first countries to have dropped-off the demographic cliff so to speak.  What lessons can the U.S. draw from Japan’s experience over the past several decades?  

Professor Kotlikoff: A key lesson is that they had a banking system that failed and has not been reformed.

The U.S. also has a banking system that failed and has not been reformed. I’ve been advocating Limited Purpose Banking, which involves 100 percent equity-financed mutual fund banking and a government agency to verify and disclose financial securities.  This would eliminate the two key problems with the banking system -- opacity and leverage.

The Japanese would have been better off over the past couple of decades with a limited purpose banking system.

People are pessimistic and continue to be so in Japan because expectations have not changed.  This is probably another example of coordination failure, although it is hard to prove.

We do know there is a very high correlation between business confidence and the state of the economy.

Again, coordination based on fear is very damaging to an economy.

Coordinated hiring of unemployed and underemployed workers is what needs to take place--and quickly.

Annuity Digest: The sections in the book on the natural glide path of retirement spending and the profound impact of personal decisions (versus investing) on retirement spending were fantastic.  It seems unlikely, however, that this information will be heavily promoted by the financial services industry. How can this important message become more widespread?

Professor Kotlikoff: First, thanks very much for the generous compliment.  Unfortunately, Wall Street is not necessarily our friend. But there are many, many things we can do independently of Wall Street to safely and significantly raise our standards of living.

I hope people who need independent and good personal financial advice read the book as well as another of our books, entitled Spend ‘Til the End.

In addition, I have developed financial planning software through my company, Economic Security Planning, Inc., that helps people find safe ways to raise their living standards.  

We have three websites where we market download and online programs to financial planners and households:

At we have a simple version of our lifetime financial planning program -- ESPlannerBASIC, which can be used for free.  You just go to the site, don’t log in, and click Begin Planning. There’s a fun animated video to watch that explains our software.

Money Magazine ranked ESPlannerBASIC the #1 financial tool on the web.  And if you go to and click on Press, you’ll see over 100 articles from the NY Times, the Wall Street Journal, the Washington Post, BusinessWeek -- you name it -- discussing our software. 

I’m particularly proud of two recent products we’ve introduced.  One is called Upside Investing.  When you run our lifetime planner with Upside Investing turned on it builds a floor to your living standard assuming everything you have and put in the stock market is completely lost. But it also shows you the probability of having higher living standards in the future once you begin converting your stock balances to safe assets.

In effect, Upside Investing treats holding risky stocks like gambling in the casino.  When we frequent the casino, we leave our wallets at home and gamble a fixed amount of money.   In so doing we’re putting a floor to our living standard.  And we don’t spend our winnings until we leave the casino.  

The other new product is called Maximize My Social Security.  Deciding when to take Social Security benefits in unbelievably complicated.  If you make the wrong move, you can easily leave huge amounts of money on the table.   Maximize My Social Security takes the guesswork out of the decision.

Annuity Digest: Thanks very much Professor Kotlikoff.

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