LTC Bullet: The Entitlement Put

Friday, June 10, 2022

Seattle—

LTC Comment: Eliminating personal risk is morally hazardous especially when government does it. Considerations after the ***news.***

*** STEVE MOSES’S latest published articles:

Long-Term Care Epiphany,” by Stephen A. Moses, Broker World, June 2022

Long-term care’s mortal risk,” by Stephen A. Moses, McKnight’s LTC News, June 6, 2022 ***

*** WILL NY FOLLOW WA CARES down the primrose path of compulsory public LTC financing? Rumor has it New York State may copycat Washington State’s WA Cares Fund program. We asked longtime Center friend Bob Vandy, President of Advisors Insurance Brokers (an Integrity Marketing Group Company). Bob assures us based on advice from a knowledgeable Empire State lobbyist that there is a Senate Bill in NY, but no companion bill in the Assembly. “The legislation’s sponsor is interested in LTC and someone we will engage with in preparation for next session/budget. My NAIFA lobbying contact says ‘all indications are that the bill is unlikely to go any further in this legislative session.’” So rest easy for the time being. In the meantime, if you want to know what New York really should do about long-term care, read Long-Term Care Financing in New York:  How to Save Money While Serving the Needy. ***
 

LTC BULLET: THE ENTITLEMENT PUT

LTC Comment: Human beings evolved to fear danger and to respond with “fight or flight.” Then around the turn of the twentieth century governments took it upon themselves to make private risk go away. They set out to provide collective security instead. We’re living now with the consequences of 100-plus years of that policy. We don’t worry about or plan ahead for the “thousand natural shocks that flesh is heir to” as much as we otherwise would.

Lose your job? Get unemployment insurance. Face a pandemic? Checks will roll in. Get sick? Apply for ObamaCare or Medicaid. Old and sick? Medicare. Broke? Welfare. Old and broke? Supplemental Security Income. Frail or demented? Medicaid LTC. Want college? Get a guaranteed student loan. Can’t pay it back? Ask forgiveness. Do we have a safety net or a hammock in which we’ve fallen asleep?

Are we really better off swapping personal risk, responsibility and freedom for collective security, carelessness and dependency? I don’t think so based on what I see all around me in the modern American polity and culture. The following article is one way of looking at what has happened and why. 

“The Entitlement Put”
by
Stephen A. Moses

For the past two decades, investors profited by “buying the dip.” Whenever stocks were in free fall, the Federal Reserve lowered interest rates and/or bought securities (quantitative easing) to restore the bull market. This Fed policy acted like a put option protecting investors from downside risk. What began as the Greenspan put in the 1990s became the Bernanke, Yellen and Powell puts over time.

This financial safety net encouraged over-investment in stocks, bonds and real estate. It inflated asset bubbles that popped during the dot-com (2001), real estate (2008) and pandemic (2020) recessions. Right now, we’re watching the biggest asset bubble of all deflate with the usual economic repercussions. What’s new this time is simultaneous unusually high consumer price inflation worsening the downturn and hurting the poor and middle class most.

By reducing investors’ risk, the “Fed put” repeatedly distorted equity, bond and real estate markets causing irrational exuberance, malinvestment, and devastating economic consequences. That is no mere coincidence. It is an example of “moral hazard,” the “lack of incentive to guard against risk where one is protected from its consequences.” Moral hazard also operates at a deeper and potentially devastating level in American society.

For example, in 1935, Social Security sent the message that private retirement savings are no longer crucial. In 1965, Medicare assured older Americans they will no longer need to worry about health care. That same year Medicaid removed concerns about paying for long-term care by opening nursing homes to anyone who could not afford them otherwise. Most recently, to combat the pandemic, government borrowed, printed and monetized trillions of dollars to shower benefits and accommodations on people and companies alike.

In a nutshell, government attempted to improve social conditions by eliminating personal and commercial risk but created instead a new culture of dependency with far greater collective peril. This “entitlement put” convinced the public and businesses that the government’s fiscal and monetary high wire act had a safety net that would always protect them from need. But now Social Security and Medicare share $56 trillion of unfunded liabilities. The Fed’s balance sheet has ballooned to $9 trillion. The national debt is 131 percent of GDP. Asset inflation has enriched the wealthy, while impoverishing the middle class. Consumer inflation at 40-year highs may soon complete that process.

Consequently, consumers and companies now face the greatest danger they have confronted since those “progressive” protections began. Boomers start turning 85, the age at which health and long-term care costs spike, in 2031. That’s three years after Medicare becomes insolvent (expected in 2028) and four years before Social Security follows suit (expected in 2035). Of course, Medicaid has no imaginary trust fund to run out. Medicaid is a direct draw on general funds of which the federal government has none extra as it runs a $2 trillion annual deficit. When Social Security and Medicare can’t pay full benefits, welfare programs like Medicaid will have to make up the difference creating more financial strain on the already overwhelmed federal budget.

U.S. companies and their customers are living on borrowed time … and on hollow government fiat money that has run out. Like Wile E. Coyote they’ve overrun the fiscal cliff but have not yet looked down. What should be done?

It is easier to say what should not be done. Do not double down on what caused these problems in the first place, that is, central planning, public financing and punitive government regulations. Most of all avoid big new social insurance programs funded with compulsory payroll deductions that siphon private capital out of the productive economy. That would be greasing the slippery slope we’re already sliding down.

Instead, we need to reemphasize private responsibility and risk management for personal financial, retirement and estate planning. Gradually phase out the big compulsory government programs on which people have become too dependent. Eliminate the moral hazard that has drawn so many into public welfare dependency. In other words, end the entitlement put. If we don’t do this intentionally through responsible public policy changes, ongoing economic default will do it for us anyway.

Steve Moses is president of the Center for Long-Term Care Reform (www.centerltc.com). Reach him at smoses@centerltc.com.