Change We Gotta Believe In

Prior posts on these pages have emphasized the unsustainable trajectory of out of control entitlement programs and deficit spending by this and former administrations. If these massive time bombs are not drastically modified before the fuse gets too short, we may well have a violent backlash. Future generations will realize they are being taxed beyond their capacity to pay to support growing numbers of retirees with Social Security and Medicare benefits as they live well into their 80s and 90s. The stats are available for anyone to look up, so we shall dispense with them here and address the choices going forward.

There are three options:

1. Do nothing, allowing the future to unfold leading to national financial ruin.
2. Kick the can along to the next generation with tax increases and band aid fixes.
3. Fix it now- forever- while the popular inertia is behind the idea.

1 and 2 are already discredited having been practiced over the past 50 years. Buying votes from senior citizens over the past 3 generations and fearing their retribution every other November has brought the system to the breaking point. The third choice is the only realistic path and we may just be witnessing the grass roots support to get it done.

Social Security was passed as a self sustaining government run plan to provide a minimum level of benefits to retirees, many of whom were entering old age destitute from enduring the Great depression. Over the years it was larded with additional benefits, recipients, and the billions collected from payers was squandered on present spending. The money was replaced with government IOUs. The system just went into the red and those IOUs must be covered through additional deficits and borrowing.

The only way to save the system is to ratchet the retirement age up over time to the equivalent of what it was in 1935. If it was a fair age of eligibility then, it is fair now. In 1935 life expectancy was 61.7 and eligibility began at 65. Today the average is 77.8. Using the original formula, benefits should start at just under 82 years of age. Although many seniors would be able to work well into their 70s, expecting them to do so until 82 might not be realistic.

An alternative would be to allow anyone to retire at any age but be eligible for only monthly benefits based on lifetime contributions, and accrued interest divided by the number of months actuarial tables show as additional lifespan. These benefits could be paid until death based on this formula since half the recipients will pass on prior, and half after the expected life years point arrives. The longer one works before retirement, the higher their benefits would be.

Neither of these ideas will be palatable to seniors, but something like this has to be done to save our young and unborn from the consequences of an overly generous and unsustainable retirement program. The follow-on benefit will be that a majority of folks approaching retirement age will be highly motivated to save and invest on their own behalf well ahead of reaching their golden years.

Medicare was passed in 1965 with a promised yearly cost of $500 Million. LBJ purposely withheld internal projections that showed a widening gap between proposed spending and estimated liabilities. As of 2008, the total unfunded liabilities going forward stood at $74 TRILLION! This cannot possibly be allowed to continue on this trajectory. Here again, folks who reach 65 and are expected to live another 15 years on average are being given basically free medical care and prescription medicines at the expense of a shrinking (in relative terms) base of taxpayer support. Compassion for the aged is a wonderful and noble thing, but the word “impossible” is quickly appearing over the horizon. What methods will prevent this catastrophe from engulfing future generations?

One concept would be to structure payable benefits based on paid in taxes and accrued interest as suggested above. Instead of cash transfers or payment of hospital and drug costs, the monthly benefit would be directly paid to a private insurer of the recipient’s choice against the cost of a catastrophic health insurance policy. The recipient would pay the difference monthly between the policy cost and the Medicare subsidy. The beneficiary would be expected to pay out of pocket for routine medical treatment up to so much per year. Over and above that outlay, the policy would kick in – exactly like Health Savings Accounts.

A second idea would be for the government to establish purpose built hospitals in large urban centers specifically to treat seniors who could not afford private care. These would be last resort type options and would probably be about as efficient as the Postal Service. The twin benefits would be that treatment would be cheaper and somewhat limited in quality, but the thought of ending up in such a facility would motivate savings and planning to avoid such a situation.

These are just a couple ideas from which to start discussion. However no such dialogue can possibly start; and these huge problems cannot ever be solved without a tectonic change of leadership in Washington. There may be a loophole in history forming right now that could lead to such a move. The growing rage at the grass roots level, if coordinated and successful, could well bring a flock of principled and courageous new legislators to Congress in November. They would join the remaining battle scarred incumbents who after fighting for their political lives may indeed be ready to do the right things.

Let us hope the power and inertia of the tea party movement does not metastasize into a third party fiasco, but instead elevates strong, fiscally responsible candidates from both parties into office. In the next piece we will offer some suggestions on how to reduce discretionary spending by eliminating expensive and useless programs and subsidies.


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