Jerry has talked often on his radio show and at Investor Training Workshops of how Social Security and Medicare are hurtling toward financial insolvency. On June 5th the Medicare Trustees didn’t just confirm the program’s financial woes; they painted it as more bleak than previously thought. That’s because rather than run out of money in 2029 as had been projected, it will scrape bottom in 2026, just eight years away.
The hospital plan running dry. Writer Howard Gleckman in Forbes says that the trustees’ report looks at each component of Medicare: Part A which covers inpatient hospital care, Part B for outpatient hospital care and physicians’ services, Part C Medicare Advantage plans and Part D for prescription drug coverage.
Gleckman makes clear that the portion of Medicare hitting insolvency in 2026 is Part A, the inpatient hospital coverage. This is the component covered…not entirely…by Medicare payroll taxes. In 2017 all of Medicare paid out $710 billion and Part A accounted for 40 percent of that.
Parts B and D are funded differently, by premiums paid by participants that cover a quarter of payouts, and by the government’s general revenue for the rest. If Congress does nothing to reform the finances before 2026, it is likely that Part A will also be covered by general revenue. The will mean large tax increases, even larger deficits than we have now, or both.
Elbowing out all other government cost programs. In a related article, The Weekly Standard reports that the combination of Social Security and Medicare is threatening to crowd out all other government non-defense spending. Already $700 billion of the federal government’s nearly $1 trillion annual deficit is for those two largest government “entitlement” programs. To maintain them and keep all other government budget items for road infrastructure, research and development and staffing of all federal agencies, something drastic will need to be done.
The prescriptions have become predictable and shopworn: raise payroll taxes, means-test benefits according to income, tinker with the Social Security cost-of-living-adjustments. TWS reports that House Speaker Paul Ryan proposed a more drastic overhaul that would allow recipients to choose private plans rather than Medicare direct pay to healthcare providers. But it has not gone much further than an idea.
Fighting, not fixing. The biggest hurdle to Washington fixing the programs, besides the fear of losing the next election for trying to do something, is the partisan fighting over whose fault this is. Liberals have been quick to jump on the Trump tax cuts, but as the Standard points out:
Entitlement programs were racing towards disaster long before the tax cuts. Why? In part, because of huge demographic shifts and the programs’ poor structure. But also because the American economy had hobbled along at 2 or 3 percent growth for a decade. Productivity gains have fallen for even longer than decade. To put it plainly: The Obama-era economy, shackled by punitive corporate taxes and stultifying regulation, was never going to rise to the challenge.
The liberal policies that produced feeble economic growth did more to restrict funding of these programs the last ten years than any tax cut. The Obama suffocating blanket on economic growth, in a way, was a reduction in funding of Social Security and Medicare due to the opportunity lost for a growing economy with growing wages from which the taxes would have come. And yet the liberals decry Trump tax cuts that will grow the economy.
The irony!
One important thing to remember: the trustees’ report moved up the date for when Medicare Part A will become insolvent because previous projections underestimated expenditures and revenues. This is a familiar pattern with federal spending and it would not be at all surprising if the date gets moved up again and again.
Jerry has told listeners to prepare for inflation ahead
Jerry has warned in his book “From Boom to Bust and Beyond” that the federal government will continue to rack up so much debt that it will have to resort to inflationary monetary policy to pay for it in the decades ahead. Already the first stirrings of that inflation are presenting themselves.
Your portfolio is almost certainly not positioned for a return to 1970’s-style inflation, so please contact our office to review your investments today.
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