The Urban Institute recently published some intersting analyses regarding the two main Federal entitlement programs, Social Security and Medicare.The Institute’s work found that for every dollar that is sent to the Social Security Administration, the average American can expect to get about $.90 in return in Social Security benefits. Hardly a robust retirement investment vehicle and if you combine the current bad returns with the looming insolvency of the program, that return might actually get worse in the future as the political class cuts benefits to keep the whole Ponzi scheme solvent. Not good news.
However, it gets a lot worse when you look at Medicare, the primary health insurance option for retiring Baby Boomers. The Institute’s economists, Eugene Steuerle and Stephanie Rennane, also provided some of their results from their analysis of the financial state of Medicare:
– They used as their baseline example a two earner household earning an average combined wages of about $89,000 a year.
– If this couple retired in 2011 they would have paid about $114,000 worth of Medicare taxes in their lifetimes.
– On average, though, they can expect to receive $355,000 worth of medical services, defined as anything from medical prescriptions to hospital care. Thus, this couple will get three times the amount of medical worth vs. what they paid into the system, with the shortfall being paid for by younger generations of Americans.
– Medicare covers 46 million retired Americans today but by 2030 or so it will have to cover 80 million Baby Boomers.
– In that time, the number of workers paying into the system to support these retirees will drop from 3.5 payers for every retiree to only 2.3 payers per retiree.
Very sobering numbers, numbers that cannot be sustained long term since working Americans will be more and more heavily burdened to financially support ailing retired Americans.
The Institute’s results also point out the very serious misperception most Americans have with regard to Medicare and Social Security. The government agencies administering Medicare and Social Security have not set up little personal bank accounts for each of us that contain the money we have sent Washington. The money we have sent Washington over the years has been spent long ago in Social Security checks sent to current and past retirees and to cover medical bills of retirees. The government has not been collecting and saving the personal wealth you sent to them in your name, it has spent it. Thus, the term, Social Security Trust Fund, is a misnomer. The only thing you can trust in is that any money and wealth you have sent them is long gone.
This misperception is going to make any cuts and changes to either program very difficult, given this entitlement mentality that we have already paid for our government retiree benefits. It will require leadership, courage, and guts on behalf of the political class to make the changes necessary to rein in costs without substantial reductions in benefits and doing both without either bankrupting the country or putting an incredible additional financial burden on future generations of Americans.
Do we think the American political class is up to the challenge? This is a bunch of people that cannot pass a basic operating budget for basic government functions, instead relying on gutless “continuing resolutions” to fund the government. This is a bunch of people who have not solved a major issue facing Americans in decades such as failing public schools, a lost war on drugs, unsealed borders, skyrocketing national debt, sky high unemployment, etc. This is a bunch of people who consider the legislation that regulates the sound volume of television commercials as a major piece of lawmaking in 2010. This is a bunch of people who ran up Federal budget deficits of $4 TRILLION in just four years even though they vowed in 2007 that no no spending would occur unless existing spending elsewhere in the budget was reduced, in other words even when they try to do something they cannot do it. This is a bunch of people that have shown no ability to understand root causes of problems and then take that understanding to build a comprehensive, integrated, and leveragable solution.
It is clear from the basic reality of the facts listed above that something must be done and be done soon. Several steps from the list below might help to prevent the looming Medicare disaster:
– Step 1 – reduce the size of the Federal government by 10% a year for five years by stripping out unneeded, duplicative and inefficient government operations, freeing up some money for support of Medicare.
Step 2 – substantially step up criminal investigations into the massive amount of fraud that is rife throughout Social Security, Medicare and Medicaid. The government itself admits that almost $100 billion a year is lost to Medicare fraud. Tightening up enforcement and reducing fraud would free up additional money to support these programs.
– Step 3 – allow only American citizens to contribute to political campaigns, taking the influence of PACs, lobbyists, unions, and corporations out of the equation, entities that now have undue influence on our politicians and the laws they write.
– Step 4 – establish a subject matter expert commission of smart Americans to address, understand, and reduce the skyrocketing medical care costs in this nation and do it without politicians and lobbyists. A sub-step in this effort is the repeal of Obama Care which has no chance of success.
– Step 5 – require all politicians in Washington to take and pass a basic course on economics so that they could begin to understand how to think like a problem solver, much like the folks at the Urban Instiute did, analyzing facts, building economic models and understanding root causes.
– Step 6 – is probably the most important step in that it would place term limits on all national political offices. With re-election not an option, our politicians might finally start acting for the good of the country and not the good of their long term political office careers. This step would hopefully also get rid of the current batch of politicians in Washington who have proven their inability to solve any problem and give us a chance of getting people to Washington that can actually solve a problem.
It’s doable but it will take a lot of leadership and foresight to financially fix Federal entitlement programs so that they still provide value to retired Americans without bankrupting the younger generations. The biggest challenge is that the Medicare problem cannot be solved in tiny incremental steps, it will require major structural changes to overcome the realities listed above. Is there a leader out there who has enough political courage to take this dramatic of a step?