Those that know me well know that I have been following the entitlements issue for over 15 years. I feel that the leadership of the American Academy of Actuaries has blown it royally over this whole period, and before, through and before the Greenspan commission (his worst legacy). We had a chance to warn the nation, and did not do it. We allowed actuaries who could do the math, but didn’t understand the politics, to write in our journals, and talk to Congress, and suggest that everything would be fine.
Well, things are fine now, and they might be fine for the next president, but they won’t be fine by the 2020 election.
I am talking about Medicare/Medicaid. Unless there are significant changes made, there is no way that we can afford the promises that have been made. The graph from the Wall Street Journal (from this fine article), on the right, depicts spending excluding interest. Including interest payments makes the graph worse, and more so as time goes on. In general, Americans don’t like sending more than 20% of GDP to the Federal Government. By 2020, that will no longer be possible to avoid, unless significant changes are made.
This is the same issue that faces every state in the nation (except Wisconsin) and the Federal Government over their retiree health care programs; they didn’t set aside money for the future payments, but decided to pay-as-it-goes. Now, what choices are there to remedy the situation? Not many good ones:
- Raise taxes significantly.
- Raise the age for Medicare eligibility to 75 or so (don’t phase it in).
- Means-test eligibility (lousy incentives there, as it is for Medicaid)
- Eliminate part D now, while there is no imperative to keep it.
- Create a reimbursement system that forces the creation of a two-tier medical system. For the elderly, it will mean limited help in their waning years. Treatments for expensive prolonging of life will have to come out of private sources. Call it the Federal Elderly HMO.
The likely solution will involve all five policy options in some form. How it works out depends on how much political resistance the elderly Baby Boomers will put up. Another political hurdle: much as I dislike National Health Care, that is a wild card in this mix. That could be the de facto way that limits the benefit payments that seniors receive.
I’m not into doom and gloom. I manage money that is invested in stocks, and I have to look for advantage every day. But we have put off real reform of entitlements for over 25 years, and we continue to do so. Which of our six remaining presidential candidates is willing to talk about reforming Medicare? I haven’t heard any of them go that way; it just loses votes. But when it is hitting us between the eyes twelve years from now, younger people will be incented to vote in politicians that will curb benefits.
My investment implication is this: don’t rely on Medicare existing in its current form past 2020. Plan today for the medical care you will need then. Unless you have a funded private plan behind you, that means saving for the future costs.
Entitlements and CA deficits dont matter until the bond market says so. Fixed income investors have been more than accomadating.
David, wondering your thoughts on how the situation gets addressed. There is no question at all that the equation doesn’t solve, presently. My current thoughts are that (1) taxes go higher – not even up for serious discussion; and (2) so do trade barriers. we trade some protectionism, a la Europe, and reduced overall welfare, for a feel-good “leveling” of some of society’s current inequties. our nation’s most influential demographic, old folks, who vote, are appeased. add to that, perhaps, some guest worker immigration policies. second class citizens earning second-tier wages. on balance, we begin looking a lot more like Europe, reversing the cherished myth of American exceptionalism, and staving off acceptance of the twenty-first being the China Century. Care to comment?
We have guest workers now, so this is not an option. It is already a fact, unless you took over the Unabomber’s digs.
National health care is the only answer. The question is do we have any politicians with enough spine to tell the American people. I am not a believer in national health care but it is the only policy alternative that can limit the spiraling inflation. The prime inflation driver in health care is the large pool of uninsured. The health care for them is included in the charges for those that are insured, therefore the only way to find out what the actual costs are is to have a single payer system. Without that there we will be simply patching the innertube until it’s beyond repair.
I love it when someone says “I’m not a believer in national health care, but…” and then advocates a single payer system. It is hilariously disingenuous to play this sort of rhetorical game. Presumably one is against militarized health care (my name for it, since it will need a police state to implement and enforce it) because of either a conservative distrust of abstract solutions to particular problems, or a classical liberal (Hayekian) rejection of central planning when free choice invariably produces better results.
So principle is jettisoned because politicians have decided that health care is an “issue” (i.e. they see the health care industry as politically weak, and a takeover would increase their power)? Perhaps you could clarify exactly how single payer would contain inflation, assuming that we would experience no degredation in quality of care.