Medicare's Got 8 Years Left - What Can We Do? Financial Advisors' Daily Digest

by: SA For FAs


Medicare insolvency is now quite near at hand. Why do we never manage to fix the problem?

Laurence Kotlikoff: Dodd-Frank, and reform of D-F, have not removed risks to the financial system.

Charlie Bilello: Buy in May and stay invested.

When you’re scanning the news, usually, the headline and opening sentence are all you need to appreciate what is going on. But in an article in yesterday’s New York Times on the continuing erosion of Medicare and Social Security, it was the last sentence that was most revealing.

First, the headline: “Medicare’s Trust Fund Is Set to Run Out in 8 Years. Social Security, 16.” Even those who have seen headlines like this hundreds of times, and who are thus a bit jaded, were likely jarred to see how near into the future is the solvency crisis. That could be the next president’s crisis, if the incumbent wins re-election, or if he does not but his successor does. Next, the lead sentence:

The financial outlook for Medicare’s Hospital Insurance Trust Fund deteriorated in the last year, and Social Security still faces serious long-term financial problems, the Trump administration said on Tuesday.”

Reading further, we learn that that deterioration entails depletion of the Medicare trust fund three years earlier than the 2029 date projected in last year’s annual trustees’ report – a report performed by actuaries and economists, not political appointees.

The main body of the article notes that Social Security’s date with insolvency remains as reported last year and reports that Medicare’s sharp deterioration is the result of reduced program income and increased outlays, a bad combination. It also brings in the opposing perspectives of Republicans and Democrats.

But the real kicker is this, the final paragraph:

The trustees of the two programs - the secretaries of the Treasury, Labor and Health and Human Services and the Social Security commissioner - normally unveil the annual report at a news conference. But none of the four attended the press briefing this year.”

Memo to Washington: When you have devastating news to report, you have to do it in person. One doesn’t fire an employee or divorce a spouse on the phone or via e-mail, despite the unpleasantness. Being present is a way of bearing the pain with those who are affected, which may include challenges to the proposed change that you must consider or deflect.

But this no-show approach is cowardly, given the importance of these programs in the day to day lives of Americans. Social Security spending represents about one-fourth of the federal budget, and Medicare 15%. The programs are on track to insolvency, so one would expect some sort of plan. Long-time readers understand that this column eschews politics. Frankly, it’s easy to keep this nonpartisan because both parties share responsibility for allowing this problem to become the cancer that is. Both have been no shows.

I don’t presume that little ol’ me can solve a problem that has eluded legions of policy wonks for decades, but I will offer the observation that the biggest obstacle to addressing our looming insolvency crisis is that too few Americans have skin in the game. Every special interest group is organized to get one or another economic benefit without regard to the effect it has on the larger commonwealth. Some who demand increased Social Security benefits may not have to pay any increased general taxes because of a current tax structure in which most taxes are paid by the wealthiest Americans. And in exactly the same way, the wealthiest Americans are concerned with keeping their taxes from rising and are indifferent to what their Social Security benefits will be because of their similarly negligible impact on their overall financial condition. Because politicians placate their own voters, what we end up with is a system that rotates different tribes into power while ignoring the general welfare.

Yes, the two political parties do occasionally trot out plans that might solve problems – when they’re in the minority. Once they attain majority, they usually evade taking the risks that will immediately return them to the minority. If one of the parties took the required initiative to restore Medicare and Social Security to fiscal balance, it would instantly lose senior citizens and many voters in the center, and hence its governing majority.

Exactly for that reason, the best policy ideas will never fly. Bipartisan, blue-ribbon commissions go nowhere; paralysis has only deepened in recent decades. The most realistic solutions to the country’s deepening socioeconomic crisis will mean nothing until we return, gradually, to more of a general-welfare mindset, where raising or cutting of taxes is felt by everybody, where changes in national programs impact everybody.

A balanced budget amendment would also be a huge help. Not a few economic and legal experts poo-poo the idea on various technical grounds, but I apply the same reasoning I do in discussing personal finance, which is that it’s a matter of developing good habits. Balanced budgets are anathema to politicians because using resources to pay down debt is tantamount to a political garbage disposal; monies cannot be used to buy votes. But when you have bureaucrats whose job requires them to seeking fiscal balance year after year, fiscal responsibility becomes culturally ingrained. And thus getting to an important substantive goal, like Medicare solvency, may be more quickly accomplished through boring procedural changes in the way taxes are assessed and budgets maintained.


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