America, We Have a Problem

This article was written with Chris Markowski, the Watchdog on Wall Street. It's part of a series of articles developed under an agreement with to work with a variety of contributors and assist them in delivering actionable investment ideas each week.

David Evanson and Chris Markowski, Spring, 2012

Tick tock, tick tock.

The high priests of the Social Security and Medicare “trust funds” (whatever happened to lockbox?) issued new warnings about the solvency of the “trust funds” they oversee.

The Social Security Disability Insurance trust fund will be gone, depleted, kaput in 2016, which is two years earlier than expected. Thank you, masters of the obvious!

A record 5.4 million workers and their dependents have enrolled since 2008. The increase has been attributed to many people giving up looking for jobs or exhausting unemployment and finding a new way to collect. Data from the Social Security administration shows that the number of applications was up 24% last year compared with 2008. However, the increase in enrollees is not just an Obama administration event. Enrollment has increased 53% over the past decade and has been going up quite steadily since George H. Bush was in office. There is little doubt that despite the broader trend (which has a lot to do with loosened eligibility standards that were put in place by Congress in 1984), the severe recession is really exacerbating the problem. Matt Rutledge, a research economist at Boston Collegezzs Center for Retirement Research, stated in Investorzzs Business Daily: “We see a lot of people applying for disability once their unemployment insurance expires.”

Next shoe to drop: The Social Security trust fund, which goes to retirees, will be exhausted in 2036, two years earlier than projected last year. This, once again, should not be a surprise to anyone who pays any sort of attention to our fiscal situation, because like clockwork, every year, the death date for the lockbox gets moved closer.

The high priests of Social Security stated that the dismal outlook was due to “updated economic data and assumptions.” It does not take a rocket scientist to figure that with the ratio of workers paying taxes in to the system to the individuals receiving benefits continuing to worsen every year, the worldzzs biggest Ponzi scheme is on very shaky ground. The current ratio is 2.8 workers per beneficiary; when the program was started it was 41 to 1. If I were Bernie Madoffzzs lawyer, the defense for my client would have been the Social Security defense, arguing that my client just modeled his “investment strategy” on the third rail of American politics.

Sen. Tom Harkin (D., Iowa) stated in an opinion piece in The Huffington Post: “It might surprise many in Washington, but if you ask hardworking Americans what their greatest economic concern is they donzzt say budget deficits or the national debt. No, what I hear most often from Americans is that they are frightened at the prospect of being financially insecure in retirement.”

Harkin argues that Social Security is all that stands between a comfortable retirement and senior citizens eating cat food. Newsflash: Social Security was never intended to be a retirement plan. When putting together financial plans for our clients, we totally disregard Social Security, because legally (Helvering v. Davis 1937 and Flemming v. Nestor 1960) nobody has a right to it. Plus, I have healthy distrust of government-operated Ponzi schemes that pay an abysmal return.

Even the creator of Social Security, Franklin Roosevelt, knew that changes would have to be made to keep Social Security viable. He stated in a Jan. 17, 1935, address to Congress: “For perhaps 30 years to come, funds will have to be provided by the states and the federal government to meet these pensions.” But after that, he explained, it would be necessary to move to what he called “voluntary contributory annuities by which individual initiative can increase the annual amounts received in old age.”

Any discussion today of reform, as FDR stated would be necessary, draws a vampire-sees-sunlight reaction from the left and either commercials with bulldozers running through senior citizenszz homes or of Sen. Paul Ryan (T., Wis.) pushing Grandma over a cliff.

If Social Security is a ticking time bomb that we have as a nation chosen to ignore, Medicare is of the thermonuclear variety. In 2011, 48.7 million people were covered by Medicare, which is up from 47.5 million in 2010. Math dictates that the program is covering on average an additional 100,000 people a month. The trustee report stated that Medicare took in $273.9 billion in payroll taxes and beneficiary premiums but spent $568.3 billion in medical services. For those without an internal calculator, that is a $294.3 billion deficit. Donzzt worry, be happy — it is nothing out of the ordinary. Since Lyndon Johnson passed Medicare in 1965, it has run a deficit every year except two.

Douglas Holtz-Eakin and Jim Nussle compile some other sobering numbers in an Investorzzs Business Daily column: “Left unchanged, Medicare program costs will continue to escalate, leading to annual shortfalls and a projected cash-flow deficit of over $600 billion in 2020. Between 2001 and 2010, cumulative Medicare cash flow deficits totaled just over $1.5 trillion, or almost 28% of the total federal debt accumulated in the hands of the public during the past decade. By 2020 the cumulative cash-flow deficits of $6.2 trillion will constitute 35% of the nationzzs total debt accumulation. Including interest costs, accumulated Medicarezzs debt will be responsible for over 37% of the debt in the hands of the public.”

America, we have a problem. The problem is not the stupid choices and welfare state that we have been building up for decades. Unless in between funding Solyndra and Solar Trust of America with stimulus bucks, Energy Secretary Steven Chu conjured up a DeLorean with a flux capacitor, those poor choices of the past cannot be undone. Our problem is our inability to be honest in dealing with the reformation of these programs. Would it not be better to give options to our youth so they can prepare for what will inevitably be major cuts to these programs down the road? Come on, people. Even Canada lifted its retirement age by two years! Individuals who are currently receiving benefits or are close to receiving benefits are not affected in any way shape or form by any of the various plans at diffusing this fiscal time bomb, yet that group is used as a pawn in our new American pastime of divide and conquer.

Most of my wifezzs family lives in Greece, and most of them are retirees that live off their government pension. Fiscal reality has hit Greece and their government pensions (their Social Security) have been cut to the bone. There was no warning, no time to prepare, it is done, and life as they know it will never be the same.

Would it not be better to make changes and reform by choice, or by force?

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