FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
June 12, 2018
1. Social Security – A Quick Look at the Basics
2. Report Says Social Security Still Solvent, But a Big Change
3. Medicare to Go Broke in 2026 or Even Sooner
4. Conclusions: We Desperately Need Entitlement Reform
Q1 hedge fund letters, conference, scoops etc, Also read Lear Capital: Financial Products You Should Avoid?
Once each year, the Trustees of the Social Security and Medicare trust funds are required to provide a detailed status report to Congress, including financial projections well into the future. The latest reports were provided to Congress last week. There was good news and bad news, as usual.
Today, I will summarize the results of the latest reports on our nation’s largest entitlement programs below. While most Americans pay little attention to these annual reports, this is important information we all need to be aware of – especially this year.
This year, for the first time in 36 years, both Social Security and Medicare will have to begin drawing down their reserves (ie – assets), rather than paying benefits from the interest earned on those reserves. These annual reserve drawdowns will continue every year going forward until those reserves are depleted in the years ahead.
You might want to save this E-Letter in a convenient place where you can refer back to it from time to time. You may also want to share it with family and friends who may ask you for advice about these safety net programs in the future as their solvency status becomes more and more dire.
Social Security – A Quick Look at the Basics
The US Social Security Administration (SSA) is an independent agency of the federal government that administers Social Security, a social insurance program consisting of retirement, disability and survivors’ benefits. To qualify for these benefits, most workers pay Social Security taxes on their earnings throughout their working lifetimes. The claimants’ benefits are based largely on the wage earner’s contributions.
The program was created as part of the Social Security Act passed in August 1935 under President Franklin Roosevelt. In 1939, the Social Security Board merged into a cabinet-level federal agency which has grown immensely since then.
SSA administers the retirement, survivors and disabled social insurance programs, which provide monthly benefits to aged or disabled workers, their spouses and children and to the survivors of insured workers.
The programs are primarily financed by taxes which employers, employees and the self-insured pay, which are then placed into special trust funds. These programs are collectively known as Retirement, Survivors, Disability Insurance (RSDI).
In 2017, about 61 million people, or more than one in every six US residents, collected Social Security benefits. While older Americans make up about four in five beneficiaries, another one-fifth of beneficiaries received Social Security Disability Insurance (SSDI) or were young survivors of deceased workers.
Enough of the basics – let’s move on to last week’s report.
Report Says Social Security Still Solvent, But a Big Change
Basically, this year’s report says, as it has for many years, that Social Security has plenty of money (mostly government bonds) – currently more than $2 trillion – to pay for all scheduled benefits until around 2034, give or take a year or so either way. That is, if the projections are accurate, and they may well be overly optimistic.
The big news in last week’s report was that the Trustees noted that they will have to start drawing down the reserves for the first time in 36 years, rather than paying benefits from interest earned on those reserves. And these drawdowns will continue every year hereafter.
By 2034 the Trustees tell us, rising costs resulting largely from the retirement of Baby-Boomers will have depleted much of the reserves. At that point, projected revenues will only cover about three-quarters of the program’s current benefits.
The clear message of this year’s report, like those of recent years, is that Congress needs to do something well before 2034 to restore long-term balance and continue current benefits.
Unfortunately, that probably won’t happen anytime soon. While everyone on both sides of the political aisle acknowledges there is a big Social Security solvency problem in our future, there is a controversy over how to close the funding gap.
There are essentially only two viable options. The first option is that when the reserves are depleted, there would be a 25% cut in benefits for everyone already on the rolls and new beneficiaries alike. Imagine how that would go over, especially for those who have no other source of income and no possibility of going back to work.
The other option is that Congress could boost payroll taxes by one-third for all workers. While many on the political left prefer this option, it would be a major blow to the economy as working consumers would have significantly less money to spend. Think recession!
Actually, there is a third option which is a bad one, but politicians may consider it anyway when the time comes. That is, the government simply prints the money to cover the funding gap which would cause the federal budget deficits to soar.
I should note that the Congressional Budget Office already projects that the budget deficits will top $1 trillion annually by 2020 without any additional funding for Social Security.
I should also mention that there is precedent for this, even among some conservatives. Think of President George W. Bush’s prescription drug bill, also known as “Medicare Part D,” which appropriated $400 billion in the federal budget to pay for it. So it’s happened before and continues to this day.
While the latest annual report on Social Security was met with the usual “ho-hum,” I continue to believe the projections that it will remain solvent until 2034 are way too optimistic. Now let’s turn our attention to Medicare which is on-course to go bankrupt much sooner.
Medicare to Go Broke in 2026 or Even Sooner
Medicare is a national health insurance program administered by the Centers for Medicaid and Medicare Services of the US federal government which began in 1966 under the Social Security Administration.
Medicare is funded by a combination of a payroll tax, premiums and surtaxes from beneficiaries and general revenue. It provides health insurance for Americans aged 65 and older who have worked and paid into the system through the payroll tax. It also provides health insurance to younger people with some disability status as determined by the Social Security Administration, as well as people with certain serious diseases.
Medicare provides health insurance for almost 60 million Americans, with 85% of them being seniors, at a cost of over $700 billion last year. On average, Medicare covers about half of the healthcare charges for those enrolled. The enrollees must then cover their remaining costs either with supplemental insurance, separate insurance or out of pocket.
Medicare is divided into parts A, B, C and D. Medicare Part A generally covers hospital expenses, skilled nursing and Hospice services. Part B generally covers outpatient services. Part D covers self-administered prescription drugs. Part C is an alternative called Managed Medicare by the Trustees that allows patients to choose plans with at least the same benefits as Parts A and B (but most often more).
Again, enough of the basics – let’s move on to last week’s report.
Medicare’s hospital trust fund is expected to run out of money in 2026, three years earlier than previously projected, the Trustees said in the latest report published last week. The more pessimistic outlook is largely due to reduced revenues from payroll and higher payments than expected to hospitals and private Medicare plans last year.
But the real bad news in last week’s report was that the Trustees noted that they will have to start drawing down the reserves this year, rather than paying benefits from interest earned on those reserves. And these drawdowns will continue every year going forward.
Medicare now spends an average of about $13,600 a year per beneficiary, and in five years the annual cost is expected to average more than $17,000, the report said. The standard Medicare premium paid by most beneficiaries is expected to rise next year by just $1.50 a month, to $135.50 or $1,626 annually. No wonder the program is going broke!
Conclusions: We Desperately Need Entitlement Reform
If we are to believe the projections from the Trustees, Social Security will be bankrupt by 2034 and Medicare by 2026. I believe both will happen even sooner, especially considering that the Medicare insolvency projection just got moved up three years from last year’s forecast.
We desperately need entitlement reform in this country. I think most Americans understand this and realize that we can’t keep exploding our national debt every year. Unfortunately, I have friends and colleagues who tell me I’m wrong – that most Americans don’t understand this and believe the federal government can spend as much money as it wants.
I hope that’s not true, but one way or the other, we’ve got to get a handle on out-of-control entitlement spending. The problem is, no politicians want to touch it. Donald Trump, who probably understands debt better than any president in recent memory, refuses to address entitlement reform.
So do we just continue to rack up record debt year after year until it ends in a crisis? Sadly, it looks that way.
All the best,
Gary D. Halbert
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