The Fiscal Elephant in the Room

WSJ budgetThose 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.