Medicare Insolvent By 2026, Social Security By 2035 – ValueWalk Premium

Medicare Insolvent By 2026, Social Security By 2035

FORECASTS & TRENDS E-LETTER

by Gary D. Halbert

April 30, 2019

Q1 hedge fund letters, conference, scoops etc

Medicare

stevepb / Pixabay

GDP Much Stronger Than Expected in First Quarter

IN THIS ISSUE:

  1. 1Q GDP Rises 3.2%, Strongest Showing in Four Years
  2. Why the Economy Greatly Exceeded Expectations
  3. Implications For Fed Monetary Policy Going Forward
  4. Medicare Insolvent by 2026, Social Security by 2035

1Q GDP Rises 3.2%, Strongest Showing in Four Years

The US economy has a tendency to lag in the 1Q following big holiday spending, but not this year. While there have been widespread predictions that the economy was slowing down and the recovery might be ending, the latest GDP report put all that to rest.

The Commerce Department’s Bureau of Economic Analysis (BEA), the arbiter of Gross Domestic Product, released its first estimate of 1Q GDP on Friday. According to the BEA, 1Q GDP rose 3.2% (annual rate), following 2.2% in the 4Q of last year. The BEA’s advance estimate of 1Q growth greatly exceeded the pre-report consensus of 2.3%.

[For newer readers, the “pre-report consensus” is based on surveys of economists taken by The Wall Street Journal, Bloomberg and others ahead of significant economic reports. It is always noteworthy to see if the actual report comes in above or below economists’ expectations.]

The better than expected growth in the 1Q was driven by solid inventory investment, stronger exports, lower imports, state and local spending and to a lesser extent, consumer spending. Spending by states and localities jumped 3.9% in the 1Q after falling by 1.3% in the 4Q.

Not everything in the GDP report was so rosy, however. Consumer spending rose only 1.2% in the 1Q, after healthy growth of 2.5% the previous quarter. Business investment also slowed, to 2.7% from 5.4%.

For all of 2018, the US economy grew at almost 3% for the first time in years – rising 2.1% in the 1Q, 4.2% in the 2Q, 3.4% in the 3Q and 2.2% in the 4Q. For all of 2018, the US economy grew to a new record level of $20.5 trillion. GDP is the sum of all goods and services produced in the US each year. Apprx. 70% of GDP is made up of consumer spending.

Despite the much stronger than expected growth, inflation remained low in the 1Q. Inflation, as measured by the Personal Consumption Expenditure Price Index, fell to a 1.4% annual rate in the 1Q, down from 1.9% in the 4Q. The stronger than expected GDP number amidst continued low inflation has implications for Fed monetary policy going forward – more on that below.

Why the Economy Greatly Exceeded Expectations

The acceleration in growth in the 1Q is all the more remarkable considering the doom and gloom that surrounded the first-quarter outlook in December. Before the new year began, the Atlanta Fed’s “NowCast” model projected only 0.5% growth for the 1Q.

You will recall that the yield curve inverted briefly earlier this year, and that set off widespread talk of a looming recession (which I debunked herein). Then there was the partial government shutdown which added to concerns about the economy. At the same time, it was clear the global economy was slowing down.

Despite all these headwinds, US economic data improved steadily as the quarter progressed. US retail sales surged 1.6% in March, the fastest pace since late 2017 and well above the pre-report consensus of 1.0%. Durable goods orders leaped 2.7% in March, the fastest pace in seven months. And business investment perked up last month after a slump late last year.

The question is whether this surprising growth rate can be sustained going forward. Most forecasters I’ve read since the report came out on Friday believe the most likely answer is no. Most suggest that GDP is likely to dip below 3% in the 2Q and 3Q. But I must remind you that these same forecasters did not see this strong 1Q number coming.

In summary, GDP growth in the 1Q was very impressive. The economy is still ploughing ahead despite the persistent pessimism that has been exacerbated by the Fed’s abrupt and mysterious abandonment of policy normalization (raising interest rates). And speaking of the Fed, let’s discuss how the strong economic growth might affect monetary policy.

Implications For Fed Monetary Policy Going Forward

The Fed Open Market Committee (FOMC) which sets monetary policy is meeting today and tomorrow. You may recall that back in January the FOMC surprised the world when it said the Committee would be “patient” regarding further increases in the Fed Funds rate.

Not long after, Chairman Powell went a step further saying there would likely be no interest rate hikes this year. And he stated that the Fed would end the unwinding of its balance sheet in September. These were significant policy changes prompted by the Fed’s view that the US economy was slowing down.

This led to widespread calls for the Fed to cut interest rates this year. You may recall that I disagreed with the “rate cut crowd” in these pages and predicted that the Fed would not cut interest rates this year. Now, in light of Friday’s much stronger than expected GDP report, the Fed is even less likely to cut rates this year.

I expect the Committee to take no action on the Fed Funds rate tomorrow when the FOMC meeting ends and keep the word “patient” in its formal policy statement. Unless something unexpected happens, I don’t expect the FOMC to change the Fed Funds rate at all this year.

One last note on the Fed: You may recall that President Trump was reportedly thinking of nominating economist Stephen Moore and businessman Herman Cain to the Fed Board of Governors. Last week, Cain withdrew his nomination for consideration amid heavy criticism. Moore, one of my favorite writers, remains in the running but is also under fire from those on the Left who despise him for his conservative views. We’ll see what happens.

Medicare Insolvent by 2026, Social Security by 2035

The financial condition of the government’s bedrock retirement programs for middle- and working-class Americans remains shaky, with Medicare pointed toward insolvency by 2026, according to a report last week by the government’s overseers of Medicare and Social Security.

It paints a sobering picture of the programs, though it’s relatively unchanged from last year’s update. Social Security would become insolvent in 2035, one year later than previously estimated.

Both programs will have to eventually be overhauled to avert significant benefits cuts should their trust funds run dry. Neither President Donald Trump nor Capitol Hill’s warring factions has put politically perilous cost curbs on their to-do list, just like others in past years.

The report is the latest update of the government’s troubled fiscal picture. It lands in a capitol that has proven chronically unable to address it. Trump has declared benefit cuts to the nation’s signature retirement programs off limits, and many Democratic presidential candidates are calling for expanding Medicare benefits rather than addressing the program’s worsening finances.

Many on both sides actually agree that it would be better for Washington to act sooner to shore up the programs, rather than wait until they are on the brink of insolvency and have to take more drastic steps.

“The programs that millions of Americans pay into and expect to have in the future are going broke — driving up federal spending, growing our deficits, and crowding out other priorities in the process. We cannot afford to ignore this reality any longer,” said Arkansas Rep. Steve Womack, the ranking Republican on the Budget Committee.

But potential cuts such as curbing annual inflation increases for Social Security, hiking payroll taxes or raising the Medicare retirement age are so politically sensitive and toxic that Washington’s power players continue to choose to ignore the problem.

Instead, Social Security is expected to declare a 1.8% cost-of-living increase for 2020 based on current trends, program officials say.

Last week’s report by three Cabinet heads and Social Security’s acting Commissioner, urges lawmakers to “take action sooner rather than later to address these shortfalls, so that a broader range of solutions can be considered and more time will be available to phase in changes while giving the public adequate time to prepare.”

If Congress doesn’t act, both programs will eventually be unable to cover the full cost of promised benefits. With Social Security, that would mean automatic benefit cuts for most retirees, many of whom depend on the program to cover basic living costs.

For Medicare, it could mean that hospitals, nursing homes and other medical providers would be paid only part of their agreed-upon fees.

In a glimmer of good news, Social Security’s disability program is now estimated to remain solvent for an additional 20 years, through 2052. But that misses the bigger problem: Social Security would run out of reserves by 2035. And remember, these are just estimates that change every year and may not be remotely accurate.

As an indication of Medicare’s woes, it would take a payroll tax increase of nearly 1% (0.91%) to fully address its shortfall or a 19% cut in spending. Medicare’s problems are considered more difficult to solve, as health care costs regularly outpace inflation and economic growth.

Social Security is the government’s largest program, costing $853 billion last year, with another $147 billion for disability benefits. Medicare’s hospital, outpatient care, and prescription drug benefits totaled about $740 billion in 2018. Taken together, the two programs combined for 45% of the federal budget, excluding interest payments on the national debt.

These are massive future problems facing the country, but sadly no politician wants to address the critical issues on their watch.

Best regards,

Gary D. Halbert

SPECIAL ARTICLES

1Q GDP: Built For Speed, But is it Built to Last?

Fed Likely On-Hold For Rest of Year

Gary’s Between the Lines Blog: Is America Running Out of Workers? Good Question!


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