How To Cry ‘Wolf Cub’ on Social Security and Medicare

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by Gary North GaryNorth.com

Recently by Gary North: Boehner Has Obama by the Boondoggles

     

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.

Read the rest of the article

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 31-volume series, An Economic Commentary on the Bible.

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