Q. I have a home mortgage question. I am evaluating a job opportunity in the mid west. My dilemma concerns my personal debt. I have about as much credit card debt (about $50,000) as I do ownership in my house (estimated selling price minus principle left on loan). If I sell my house and use the money I have left after I pay off my home loan to pay off my credit cards, I won't have anything left for a down payment on a new house. Can I roll over some or all of the credit card debt into a new home loan if I move into a new house? If so, how much?
---M.L., Clearlake, TX
A. That's a lot of credit card debt. While there are lenders who will loan more than 100 percent of the purchase price of a new home, it always comes at a price and may not work out. So consider these alternatives:
• Give homeownership a rest. Sell your house; pay off your credit cards, and rent. Unless you are moving to an unusual market, it will probably cost less than owning and you'll have a real incentive to save money rather than spend it. Spending less than you earn is the only way you'll get a future down payment together.
• Get out your calculator and optimize your credit. This means you sell your house, pay off as much credit card debt as you can, and still retain a down payment. With down payments as small as 5 percent, you could get into a house up to $200,000 with a down payment of $10,000. That would allow you to pay off $40,000 in credit card debt. The $10,000 remaining, which might cost $200 a month, will look like a reasonable amount of debt. Remember, one of the things creditors pay attention to is your "back end ratio"--- the percentage of your gross income committed to debt service unrelated to shelter. This includes your car loan, credit cards, student loans, child support, etc. Go over 8 percent of gross income and they start reducing the amount you can borrow for a home. On that basis, each $10,000 of annual income can support about $67 a month in "back end" debt payments.
Q. When you wrote about Social Security and Medicare in a recent column that Priced in today's dollars, the shortfall was $43.4 trillion in 2003 and will rise to $44.8 trillion this year, were you summing over a 25-year (generational accounting) span of time? It was a very sobering article and we agree with you that the silence is deafening by both politicians and retirees such as us.
---J.P., by e-mail from Houston, A. Good question. Generational accounting considers a time period considerably longer than 25 years. Let me tell you why. When Social Security was reformed in 1983, with a major increase in the payroll tax and a future increase in the retirement age, it was based on Social Security projections for 75 years. Completed, Social Security was supposed to be fully funded for at least that long.
What happens, however, is that life expectancies change each year. We lose people who were born long ago who had short life spans. They are replaced by newborns with much longer life expectancies. The average life expectancy starts to creep up, year by year. As expectancies in retirement rise, so do future Social Security and Medicare liabilities.
Today, only 20 years since the last reform, Social Security is as out of balance as it was before the 1983 reform and payroll tax increase.
As a consequence, the best way to estimate the real liabilities of government programs is to use what the Social Security actuaries call "the infinite horizon," a method that looks well beyond the traditional 75-year projection period.
It may seem like a trivial matter but it's not: unfunded liabilities more than double. Taking the shorter measure allows the politicians to make promises that buy votes. But it low balls future costs. With elections every two years politicians (of both parties) have no incentive to deal with the long-term future and its costs.
You can read more about this in April, when MIT Press releases "The Coming Generational Storm." I coauthored the book, my first in nearly 30 years, with economist Laurence J. Kotlikoff, the prime mover in generational accounting.
On the web:
Tuesday, January 12, 2004: What We Can And Can't AffordDescription of The Coming Generational Stormhttp://mitpress.mit.edu/catalog/item/default.asp?sid=3AD4D6F0-800A-4227-A7F5-2290957B14A1&ttype=2&tid=10055
