LTC Bullet:  Entitlement Double Talk

Friday, August 1, 2014

Seattle—

LTC Comment:  To read the major media coverage of the 2014 Medicare Trustees report, you’d think things are looking up for the 49-year-old mega-program. Think again, after the ***news.*** [omitted]
 

LTC BULLET:  ENTITLEMENT DOUBLE TALK

LTC Comment:  Dozens of major-media outlets focused on the “good news” in Monday’s release of the 2014 Medicare Trustees report.  Read the full report here.

For example, the New York Times article by Robert Pear, titled “Gains Seen for Medicare, but Social Security Holds Steady,” began “Medicare’s financial condition improved significantly in the last year, thanks in part to the Affordable Care Act, but the outlook for Social Security is basically unchanged, the Obama administration said Monday.”  The Times article quoted Treasury Secretary Jacob Lew saying “Social Security and Medicare are fundamentally secure.”

The Wall Street Journal’s tone was a little less sanguine in “Medicare, Social Security Disability Fund Headed in Different Directions.”  It reported “Medicare's hospital-insurance program spent less on benefits in 2013 than it did the previous year, despite covering an additional 1 million people” and “Medicare will be able to continue paying full hospital benefits for its elderly or disabled clients without any changes in the law through 2030-four years later than last year's estimate.”  The Social Security disability insurance program is another matter as “it will be able to pay only 81% of benefits starting in late 2016 unless Congress intervenes.”

All in all, it sounds from these articles and many others like them that things are looking up for our country’s biggest entitlement programs.  Hints to the contrary were buried deep in the Times and WSJ articles.  Sixteen paragraphs into the Times’, we find this:  “‘Under current law,’ [public trustee and former CBO director] Mr. Reischauer said, ‘both of these very important programs are fiscally unsustainable over the long run and will require legislative intervention.’”  Eight paragraphs in, the WSJ piece provides a graph showing the Social Security and Medicare trust funds plummeting to zero over the next couple decades.

OK, what’s the whole truth?  Both Medicare and Social Security are already bankrupt.  Their so-called “trust funds,” which account for the programs’ alleged ability to go on paying full benefits for the time being, actually contain no money.  All the cash siphoned from taxpayers into those funds has already been spent on other government priorities.  The trust funds contain nothing but IOUs from the federal government promising to repay the borrowed money.  Yes, those loans are backed up by the full faith and credit of the United States government.  But that guarantee should give you little confidence given the bigger picture.  By any legitimate accounting standard, the United States government itself is bankrupt.

Our national debt stands at $17.6 trillion according to the US Debt Clock.  But that’s not the worst of it by far.  Government unfunded promises of future entitlement benefits are stupendous according to the same source:  $15.9 trillion for Social Security; $21.2 trillion for prescription drug liabilities; and $82.7 trillion for Medicare, a grand total of $119.7 trillion or over $1 million per taxpayer!  Other sources, including the trustees’ report, give lower, more conservative estimates of unfunded liabilities, but they’re still staggeringly high.  No one in possession of the facts and a modicum of economic knowledge believes these debts and promises are meetable.

So, why are we able to keep on keeping on?  A household with massive debt, rapidly increasing debt service costs and insufficient income would quickly become insolvent.  How can the U.S. government go on operating with massive deficits increasing the national debt year after year?  Why is it that families can only borrow so much before they go under financially, but the government is apparently unconstrained by the same economic laws?  The answer, according two books I’ve been reading, lies in federal reserve policy and the gullibility of lenders who have been willing to feed America’s deficit spending beast at considerable expense to themselves.

In a nutshell, the Federal Reserve (the Fed) has forced interest rates down to near zero in order to restrain the cost of servicing the national debt.  Why does the Fed do this?  So the federal government can delay confronting the true magnitude of its obligations.  But why do people (bond buyers) and sovereign nations go on loaning money to the U.S. at such low interest rates?  Habit and misplaced confidence.  The dollar has been the world’s reserve currency.  Historically, investing in the U.S. has been relatively safe.  But all that could change quickly.  Confidence in our ability to repay our debts faltered when the dot.com bubble burst, teetered perilously when the housing bubble popped, swoons every time we approach a “debt ceiling,” and may disappear entirely when the current government spending bubble deflates.

What happens when our lenders lose confidence?  They’ll abandon the debt instruments that enable the government to pay its bills.  To compensate, interest rates will increase making debt service ever more expensive.  If the Federal Reserve keeps pumping money into the system to cover these growing costs, we’ll suffer much higher inflation.  But if it stops printing phantom dollars, we’ll likely face a much more severe downturn than the “Great Recession.”  The Federal Reserve is already balanced on this tightrope, damned if it does and damned if it doesn’t continue its policy of enabling the government’s deficit spending addiction.

As this economic drama plays out, the consequences for our country and our individual economic well-being are extremely serious.  You might want to have a look at these two books:  The Death of Money:  The Coming Collapse of the International Monetary System by James Rickards and The Real Crash:  How to Save Yourself and Your Country by Peter D. Schiff.  I listened to both as audiobooks obtained free from the public library and was sufficiently impressed to purchase hardbound copies to review in more depth.  I also studied Austrian economics (the antidote to the Fed’s Keynesianism) at the Mises Institute last week, so you’ll probably see more on these topics in future LTC Bullets.

Bottom line, if you buy the government’s and the media’s assurances about America’s entitlement safety net, then caveat emptor.