The Entitlements Problem

Social Security

Retirement

Social Security, Medicare, and Medicaid make up about 45% of government spending:

2012 Spending
$829 billion — Social Security
$872 billion — Medicare and Medicaid
$1,701 billion (45% of $3.8 trillion total spending) — Total 

Future obligations of the US Government to cover future entitlement payments which have been promised totals about $70.3 trillion. Add that to the national debt of $16.5 trillion and the US Government has total liabilities of $86.8 trillion. Future projected tax revenues don’t even come close to covering the money that is being committed by entitlements.

The Census Bureau projects that by the year 2040, the number of Americans 65 and older will increase from 45 million to 80 million. Paul Ryan has stated that if no changes are made in SS, benefits will need to be cut by 24% in 2023 to keep it solvent.

This is a “demographic time bomb” that will cause an explosion in entitlement spending. Since 2040 is far off, politicians feel comfortable delaying any real reform—kicking the can down the road.

The numbers are staggering. How will the future generations be able to handle such a gigantic load? Any attempt to actually fulfill these obligations will definitely result in a lower standard of living for future American citizens; unless of course Washington finally figures out that something needs to change and bold, meaningful reforms are put in place.

Social Security

Social Security (SS) was started in 1935 and was originally designed to be a backstop, or supplement to retirement savings. Two things have put enormous pressure on SS since that time: Today, the average savings for a person going into retirement is $25,000. Many retirees expect to rely exclusively on SS benefits for their retirement.

Also, Americans have been living longer, stretching the time frame for which SS will be utilized—In 1935 the average life expectancy was 62 years old….today it is 79. Seniors today will take out more than they put in. Their kids will take out less than they put in.

The Social Security Vault is Empty

Because of the US Governments continued and pervasive deficit spending, Congress must periodically raise the legal limit of the debt ceiling in order to continue its deficit spending ways and to pay its bills. The most recent need to increase the debt ceiling was in January 2012. The process for voting to raise the ceiling included much partisan debate and demagoguery. The president stated that if the debt ceiling was not raised, he could not guarantee that seniors would receive their SS checks.

Goodness. How could that be?

What happened to all the billions of dollars of employee and employer paycheck withholdings that were deposited into the SS Trust Fund?

Answer: The money in the SS Trust Fund was borrowed by the US Government since there was not enough “income tax” to pay for all its bills. There are no real assets in the SS Trust Fund vault. If you opened the vault, you would find a nicely printed, non-marketable, $2.7 trillion I.O.U. from the US Government’s “General Fund”.

IOU

IOU

OK. Now we know why the president said SS checks may not be paid: The SS Trust Fund has no money, and SS payments must now be made out of the General Fund. And until the debt ceiling is raised by Congress, no money can be paid out of the General Fund.

Is this legal? Yes.

Is it ethical and moral? NO! Congress approved it, making it legal.

What does the Government say about all this?

Jack Lew is the US Treasury Secretary.

Here is what Lew said about SS: “Social Security benefits are entirely self financing. Social Security taxes are placed in a trust fund dedicated to paying benefits owed to current and future beneficiaries, and will be adequate to pay full benefits for the next 26 years”.

Now, if the SS Trust Fund is ‘entirely self funding’, why are payments dependent on raising the debt ceiling? (By the way, while the January 2012 debt issue was resolved, and SS payments have been made, this entire debate will come up again this summer as the government runs out of money again and debates the issue of raising the ceiling again.)

The Government’s Hypocrisy

In the 1960’s there were certain corporations who failed to make good on their pension payments to retiring employees. In response, Washington enacted the Employee Retirement Income Security Act (ERISA); a law that required the funding, vesting, reporting, and disclosure requirements for all corporate pension plans.

The purpose was to make sure pension fund money would be segregated into a trust fund, and not comingled with other corporate funds: all to insure payments would be make. ERISA compliance is strict and subject to harsh penalties for failure to comply. Contrast ERISA requirements to what Washington has done with our SS funds. This is just one more example of Washington telling us; “do as we say, not as we do”.

What can be done to avoid a SS bankruptcy?

  • People should save more for retirement. (Perhaps even “forced savings” )
  • Age Indexing: people will be required to retire later in life as the age expectancy increases.
  • Means Testing: If someone is rich and doesn’t need SS, they will not receive it.
  • Increased education about the SS system and its problems so that people can make more informed decisions about retirement.
  • Raise the SS payroll tax rate.
  • Reform the Disability Insurance program: Many jobless workers apply for disability when their unemployment benefits expire. Once on the rolls, they tend to stay there. Beneficiaries should be regularly assessed to see what work the can do, and benefits should be contingent on looking for, and taking, such work.

While some of these recommendations seem harsh, what is more horrifying is a bankrupt SS system driven by an irresponsible and inept Federal Government.

Medicare and Medicaid

Medicare and Medicaid have problems similar to Social Security:

The annual costs are staggering and we cannot afford the future liabilities of these programs as they are currently configured. An aging population and rising health costs are inexorably pushing up costs. Obamacare is expected to add to the nations already out of control health care spending. Currently, the US spends about 16% of GDP on health care while other developed countries spend more like 8% of GDP.

Some solutions for Medicare and Medicaid might include the following:

  • Tort Reform: We spend way too much in legal costs.
  • Require hospitals and doctors to disclose and post their prices so patients can be better shoppers.
  • Means testing.
  • Raise the eligibility age.
  • Reward hospitals and doctors for providing good care, rather than lots of it.
  • Streamline claims processing and administration for improved efficiency.
  • A real crackdown on Medicare and Medicaid fraud.
  • Promote “aging in place.” There are many elderly people that could more effectively and efficiently be treated in their own home rather than sending them to a nursing home.
  • Create a new mindset that it is more important to focus on proactively getting people healthy, rather than focusing on who will pay for the sick people.

Photo Source: Flickr/401(K) 2012