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How to Cry "Wolf Cub" on Social Security and Medicare

Gary North
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Reality Check (Nov. 13, 2012)

The mainstream media never cry "wolf!" on the statistically inevitable bankruptcy of Medicare and Social Security. Instead, they cry "wolf cub."

Robert Powell, the resident retirement economics expert at MarketWatch, has written a standard head-in-the-sand article on the #1 and #2 fiscal killers in the United States: Medicare and Social Security.

It begins with a tip-off to readers about his politics. "Congrats on your re-election! I hope you'll forgive me for not dwelling on your victory and getting straight to the point."

Powell knows that Obama will never read his column. So do his readers. So, the intro is for readers, not for Obama.

With all due respect, it's time for you to tackle this nation's retirement security issues, including Social Security, Medicare, and a host of other challenges that threaten the financial well-being and standard of living of current and future retirees.

Here is the short list: Social Security, Medicare, retirement security, caring for a nation of elders.

It's time for Obama to tackle these, he says. It used to be time for Johnson, Nixon, Ford, Carter, Reagan, Bush 1, Clinton, Bush 2, and Obama in the first term to tackle these issues. But it did not happen. They all played touch football, not tackle. So, it's time. Really. No kidding. He means it.

These are the politically untouchable -- today -- programs that will eventually bankrupt the federal government if they are not abandoned. So, they will all be abandoned. But the author refuses to admit this. His article is designed to persuade us that they will not be abandoned. All such mainstream articles are.

Nowhere does he refer to Prof. Lawrence Kotlikoff's estimate of the present value of the unfunded federal liabilities: $222 trillion.

TRUST FUND FOR DUMMIES!

He begins with an accurate, though irrelevant, statement.

For the past four years, more really, politicians in this country have been kicking the can down the road. They've not had a serious discussion about how to fix Social Security despite years of knowing about a problem that will affect millions of Americans in 21 short years.

What he does not admit is that the Congress has been kicking this can down the road ever since 1983, when the then-technically bankrupt Social Security program was revised by Reagan and Congress: higher taxes by way of a sliding increase in the wages subject to the FICA tax. This was required because President Carter's 1977 reform, which he said would hold until 2000, went bust in six years.

Perhaps a reminder is in order? Come 2033, unless Congress acts, the Social Security Trust Fund will be bankrupt; it will be unable to pay scheduled benefits in full on a timely basis. In fact, come 2033, Social Security would only collect enough tax revenue each year to pay about 75% of benefits.

This is the standard fakery. There is no statistically viable Trust Fund. There is merely a pile of IOUs from the Treasury that the Trust Fund has been cashing in for the last two fiscal years in order to keep making payments. The whole fund is bankrolled by the government. It's just an accounting sham to hide the nature of this Ponzi scheme.

The program is in red-ink mode. This may cease next year because of the expiration of the Bush tax cuts. But the system's cash flow will again go negative by 2016, if there is no recession between now and 2016. The year 2033 is always mentioned by the Trustees because it is so far away politically that it has no impact on voters or Congress.

Why is that we can mobilize armies of people and relief efforts for Hurricane Sandy, but we can't muster up the energy and the will to tackle the Social Security problem?

Answer: because Sandy is chump change compared to Social Security. It's also a one-time event. Finally, the relief efforts are mainly voluntary. The Social Security program is political. It requires Congress to hike taxes.

Here's my advice: Put this on your list of things to do over the next four years. And don't just give it lip service as you did during the campaign. Do it. Figure out a way, just as the Greenspan Commission did back in the early 1980s, to preserve what has become--for better or worse--a much-needed source of income for retirees in this country, even those in the upper income quintile.

No one will take his advice. This can has been kicked down the road for 30 years. This will not change.

NIP AND TUCK

Then comes the standard poppycock these mainstream articles always offer as gospel ("the good news").

Make no mistake about this: The solutions are readily known. A nip here and a tuck there could easily solve this problem now.

If all that is needed is some tweaking, why has Congress avoided making these tweaks for 30 years? Why did the system go belly up in 1983? Why did Carter have to reform it in 1977?

Because the system is flawed at its core. But Powell does not admit this.

For instance, to remain solvent throughout a 75-year projection period, the Social Security trustees recently recommended that lawmakers could: 1) increase the combined payroll tax rate 2.61 percentage points (from its current level of 12.40% to 15.01%); 2) reduce scheduled benefits by 16.2%; 3) draw on alternative sources of revenue; or 4) adopt some combination of these approaches. Others have proposed similar tactics, all of which center on increasing taxes, reducing benefits or some combination of both. Read the Detailed Reports On The Financial Outlook For Social Security's Old-Age, Survivors, And Disability Insurance (OASDI) Trust Funds, by year of publication.

Nothing to it, right? But Congress will not do any of it. Why not? Because the proposed reforms are a form of tax hikes and/or default on payments.

ANNUAL REMINDER: "ACT NOW!"

The longer the "tweaks" are delayed, the larger the problem. But Social Security's cheerleaders tell us every year, decade after decade, that there is no big problem, "if we act now." No one acts now. But somehow the problem remains manageable, according to next year's articles. So, why fix it? It will be manageable next year, too. It always is, according to mainstream media columnists like Powell.

But the longer we wait, the more drastic the problem becomes and the more draconian the solutions will be.

They write this every year. No one believes them.

This is not the boy who cried "wolf." This is the boy who cries "wolf cub, if we act now." We don't act now. But no wolf ever shows up.

But it will. And it will not be alone.

For what it's worth, I don't think we should leave this problem to our children to fix. So, for my children's sake, for your children's sake, and for the sake of all the children of this country, fix Social Security now.

Frankly, it's worth nothing. No one believes him. That is because "itty, bitty wolf cub" stories gain no traction.

MEDICARE

Then he pretends to face Medicare's problems.

Medicare is, of course, a problem much larger than Social Security, especially since the solutions to fixing it aren't nearly as neat. With Social Security there is, for instance, some degree of certainty. We know how much money is coming into the system and how much will be going out and for how many years.

In contrast, as the Medicare trustees said in their most recent report, "Projections of Medicare costs are highly uncertain, especially when looking out more than several decades." One reason for this uncertainty is that scientific advances will make possible new interventions, procedures, and therapies. What's more, the financial outlook for Medicare is also uncertain because some provisions of current law that are designed to reduce costs may not be sustained.

No mention yet of the $222 trillion figure of the present liability of the unfunded liabilities.

The clearest example of this issue, the trustees wrote, is the growth rate formula for physician fee schedule payment levels. The projections in the most recent Medicare trustee report, for instance, assume that, as required by current law, the Centers for Medicare and Medicaid Services will implement a reduction in Medicare payment rates for physician services of more than 30% at the start of 2013. "However, it is a virtual certainty that lawmakers, cognizant of the disruptive consequences of such a sudden, sharp reduction in payments, will override this reduction just as they have every year since 2003," the trustees wrote.

So, the flow of red ink is growing. There will be no reduction. But if there is, some physicians will pull out of Medicare, maybe by retiring. Eventually, rationing will come. The phrase "death panels" comes to mind.

What's more, Mr. President, the health-care reforms enacted so far under your first administration are another, and even larger, source of policy-related uncertainty.

"Given these uncertainties, future Medicare costs could be substantially larger than shown in the Trustees' current-law projections," the trustees wrote. "Growth of this magnitude, if realized, would substantially increase the strain on the nation's workers, the economy, Medicare beneficiaries, and the federal budget."

Correct. So, what is the solution?

But just because Medicare is a big problem doesn't mean we shouldn't search for ways to fix it. In fact, the trustees are urging that reforms be considered.

No mention yet of the $222 trillion. This is not a "big problem." This is an unsolvable problem, except by default. So, default is coming.

SOLUTIONS

He at last arrives at what I call the Shel Silverstein solution. (See it here.)

The good news is that we already know some of the approaches that seem promising and the ideas worth considering. We, of course, know about cutting Medicare costs by reductions in reimbursement rates. And you've already said you want the Medicare Independent Payment Advisory Board to recommend program cost reductions if Medicare spending grows faster than gross domestic product plus 0.5 percentage point, among other tactics.

Plans are cheap. Implementing them is expensive. That is why they are never implemented, except in the middle of a crisis, as in 1983.

What about the $222 trillion?

Others, meanwhile, have proposed reforming Medicare through a premium support model. For instance, there is the Domenici-Rivlin proposal, which would offer seniors the opportunity to choose among comprehensive private health plans offered on a regulated exchange. And congressional Republicans have proposed plans where seniors would use federal funds to purchase insurance on the private market--and the Romney-Ryan campaign made a similar proposal.

These plans, plus $5, will buy a cup of plain coffee at Starbucks.

What about the $222 trillion?

Suffice to say, if we able to find minds bright enough to conceive Medicare in 1965, surely we can find minds bright enough to fix it now.

Then surely it could have been fixed in 1965. Or 1981. Or 1993. Or 2001. But it wasn't.

The wolf is getting larger. He has been breeding. There are lots of cubs.

BE PREPARED

Be prepared. That's the Boy Scouts' marching song.

By the way, others are of the same opinion with respect to Social Security and Medicare. "The large social insurance programs--Social Security, Medicare, Medicaid, Disability and SSI--will have to be restructured in the next four years to deal with the long-term debt," said Michael Hurd, director of the RAND Center for the Study of Aging at the RAND Corporation.

But to restructure them in an intelligent manner, Hurd said we need to know how well are people prepared for retirement among those approaching retirement and among those already retired.

Sadly, people are not prepared. Which leads us to retirement security.

Speaking of the impending disaster, some 53% of Americans are at risk of being unable to maintain their pre-retirement standard of living in retirement, according to a new study published this week by the Center for Retirement Research, underwritten by Prudential Financial.

That means over half of Americans. That means over 50 million households. This means over half the electorate.

The other big problem with retirement in America is this, though I'm not sure you or anyone can solve this problem. Today, defined benefit plans provide 20 cents of every dollar an older American in the upper income quintile receives in retirement income, while 401(k)s and IRAs provide another 20 cents of every dollar. As defined benefit plans go the way of the dodo bird, younger Americans will need to save at least twice as much as they do now to replace the sort of retirement income retirees now enjoy. I don't foresee Americans doing that, so maybe we need to explore some ways to help them spend less and save more.

But they are not saving more. Evidence suggests that they are saving less.

Besides, American stocks have been flat since 2001. Bonds pay almost nothing. Where will the thrifty people get a positive rate of return?

Gold has worked, 2001 to today. So has silver. But mainstream columnists never mention this.

CARING FOR ELDERS

Then there is this: caring for a nation of elders.

Helping young people save is one issue, but helping the growing number of older Americans already in retirement is another issue that will require your attention. Consider: Some 78 million baby boomers in the U.S. will turn 65 at the rate of one every eight seconds for the next 16 years, according to Lou Woolf, president of Hebrew SeniorLife, an affiliate of Harvard Medical School. And by 2030, one in five Americans will be over the age of 65. "Supporting the unprecedented number of seniors entering this 'new retirement' will require more and different services than are available today," said Woolf.

At last! Powell cries "Woolf."

What might those be? Well, research by Hebrew SeniorLife and others shows that the longer seniors can live independently in their own homes or in senior housing communities, the healthier they are and the lower their health care costs. "Expanding community-based supportive services, including home health care and wellness programs, is a major step to supporting seniors in their own homes," said Woolf.

What's more, there is also nowhere near the supply of senior housing across the country to meet the coming demand, according to Woolf. "Supportive housing is critical to keeping seniors healthy, active and socially engaged," he said.

And, while you're at it, you might as well address this on-the-horizon problem--the lack of geriatricians. "There are only 7,000 geriatricians in the U.S.," said Woolf, "and we need 26,000 just to meet the current demand for services."

Who will tweak this?

Who will take care of them?

The lack of geriatricians in the U.S. is so alarming because those over the age of 65 are often the most challenging medical patients; they can't be treated with a single intervention or drug, and every intervention carries additional risks. "We need geriatricians who specialize in treating this age group and focus on allowing seniors to remain as independent as possible for as long as possible," he said.

At zero price, we need just about everything. The question is this: "Who will supply what we need, and at what price?" So far, there is no answer that is consistent with Kotlikoff's estimated $222 trillion present-value deficit.

And lastly, Woolf said, the issue of re-hospitalization is one that cannot be ignored during the next four years.

Of course it can be ignored. Congress is highly skilled at ignoring such issues. The question remains: "Who will pay how much?"

The annual cost of older patients returning to the hospital after discharge has risen dramatically in recent years, he said, noting that avoidable readmissions aren't only costly in dollars, but also in the suffering they cause patients and their families.

Then what is to be done? We must "align incentives." Yes! Of course! It sounds so simple.

Hospitals and post-acute providers must work hand in hand to not only prevent readmissions, but keep seniors healthier and out of the hospital in the first place, Woolf said. "A critical step toward meeting this goal…is through the alignment of incentives. Encouragingly," he added, "these types of programs are already being implemented with the establishment of accountable care organizations," groups of health care providers who coordinate patient care with the aim of improving quality and reducing costs.

Note: there will indeed be an alignment of incentives. It's called default.

Then he mentions this: "Taxes, the deficit, the economy."

To be sure, there are other items on the must-do list. We've got to create a tax code that is simple and fair, that provides incentives for the right type of behavior and investment, and that makes it easy to plan ahead.

Yes! Of course! A fair and simple tax code! Why hasn't anyone thought of this?

Not knowing how much tax you'll be paying on different types of income doesn't bolster retirement security. And yes, we've got to tackle the deficit; that goes without saying. And we've got to get start growing the economy at a clip that helps us bring down unemployment. But I suspect that you'll be working on these items anyway. My suggestion would be to work on the important issues along with the urgent ones.

Good luck and Godspeed.

http://tinyurl.com/PowellWolf

CONCLUSION

Someone pays Powell to write this stuff.

Why?


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