Ed's Ink: Hoping To Retire Someday? Understanding Social Security Woes & Evaluating Possible Solutions

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Ed's Ink

The newspaper headlines and reportage couldn't be clearer. Both Social Security and Medicare are headed toward the brick wall of insolvency.

Recently, the annual report from the trustees of Social Security and Medicare shows both programs are suffering from fiscal woes that must be addressed fast and successfully.

Social Security will spend more money this year than it takes in for the first time since 1983.

Everyone knows the United States had a baby boom after World War II.

Today, many baby boomers are retiring (estimated at 10,000 people per day) and beginning to collect both Social Security payments and Medicare benefits.

In 2017, Social Security and Medicare was 42% of total federal spending. But economists estimate Social Security and Medicare costs will soon skyrocket and consume an increasingly higher percentage the total federal budget.

The Harsh Realities

Without drastic changes, the Social Security Trust Fund is now expected to be depleted within 16 years, going bust by 2034.

Things are even worse when it comes to Medicare's Hospital Insurance Trust Fund (Part A) – which is projected to run out of money by 2026, much earlier than expected.

Some predict older Americans will probably collect their full benefits. But younger generations seem less likely (at this point in time) to receive what's due them.

Others are more optimistic but not without significant benefit reductions to current and future recipients.

Mark Miller at Reuters.com says "… Even if nothing is done, Medicare would be able to pay out 91% of promised benefits in 2026, while Social Security could pay out 77% in 2034."

Better than nothing. But we can expect any attempt at cutting entitlements – or even slowing their growth – will be bitterly resisted.

Sweden tossed out its incumbent Liberal government for proposing entitlement program limits; Silvio Berlusconi, Italy's Prime Minister, was kicked out of office for a similar offense.

Greece, France, Spain, and other countries all experienced varying levels of civil unrest when entitlements – even fraudulent ones – were put on the chopping block or became candidates for downsizing.

It still remains to be seen however whether U.S. Congress can get itself to do anything so unpopular.

It should be mentioned – indeed, emphasized – the entitlement issue is a political hot button in all developed countries.

What's the solution? Not an easy question to answer.

We’ll hear more and more these next few years about raising taxes (especially the current cap of $124,400 on payroll taxes), raising the retirement age by a few years, implementing a "means test" which translates into reduced benefits for people who don't need them.

What Else Can be Done To Maintain Social Security and Medicare?

The short answer to this is quite simple. Increase government revenues and decrease government costs.

The hoped-for purpose of this dual strategy is to increase the monies available to fund Social Security and Medicare among other entitlement programs.

In the past, the strategies employed by past administrations have centered on increasing taxes and printing more money to pay for shortfalls in government revenue relative to expenses.

Increasing taxes reduces discretionary spending or disposable income. People simply have less money to spend. The result of this is that economic growth deteriorates.

Printing money eventually translates into inflation which decreases the purchasing power of the middle-class.

The result? Economic growth deteriorates.

But if more revenues are brought into the government through increased job growth… and government expenses are reduced without damaging performance, more monies are available to meet entitlement obligations of all kinds.

The Trump administration has already significantly increased government revenues and job growth via its economic policies of pro-growth tax cuts, pro-growth energy policies, eliminating job killing regulations, and the like.

Indeed, rosy forecasts of a possible 4.5% GDP growth abound.

Now attention is being focused on making government agencies more effective. The administration hopes to achieve permanent cost cuts, that is, eliminating result-less government spending.

If done correctly, the yearly deficit and the accumulated public debt (i.e., the sum total of past deficits) will be dramatically reduced.

A practical example explains better than any theoretical discussion why the above assertion is true.

Federal Reserve economists predict interest rates on the accumulated public debt of more than $20 trillion will dramatically increase in the near-future.

Indeed, by some estimates, interest payments on the accumulated public debt could approach $1 trillion per year.

Get rid of the debt, and that $1 trillion could be used to fund Social Security and Medicare. That's our point!

Digging Deeper

The government agency reinvention process inevitably results in a list detailing activities and government programs that should/must be strengthened. These should be placed at the top of list.

Next, a list of government activities and programs which can be deemed unproductive and obsolete is constructed. These activities and programs become candidates for abandonment.

Abandoning the things that don't work, never worked, and the things that only marginally perform releases resources (i.e., monies and people) to fund/work/concentrate on the things that should be strengthened.

Finally, a list should be made of those government activities and programs that should be refocused or done more cost-effectively. This involves rethinking the mission and purpose of every government agency and its respective bureaus.

According to Peter F. Drucker, reinventing government agencies does not mean taking a hasty hatchet in order to downsize.

Drucker called this "amputation before diagnosis" and brilliantly illustrated that without a thoughtful plan, downsizing inevitably destroys performance, but without decreasing the yearly deficit.

But if a structured plan is crafted and properly executed, said Drucker, "We can expect a tremendous increase in government performance, in quality, in-service… But (also) a substantial cost savings – sometimes as much is 40 percent of the total agency budget…

…In fact, rethinking government agencies could produce enough savings to eliminate the federal deficit within a few years…"

Just to be clear: President Reagan reignited economic growth through tax cuts (which worked wonderfully and produced, in the final analysis, a 19% increase in tax revenues – however, he did not stop the deficit and accumulated public debt (i.e., the sum total of past deficits) from growing.

From varying media sources, we believe the Trump administration is well aware of this fact and realizes government agency expenditures must be made more cost-effective.

Summary & Conclusions

There's no denying both Democrat and Republican government leaders over the past 35 or 40 years have preferred to "kick the can down the road" rather than fix Social Security and Medicare.

But tomorrow always arrives. And even the mightiest of nations are in trouble because yesterday's leaders dared not to take the risk or responsibility of re-examining and remedying what many label "the entitlement crisis."

Social Security and Medicare should be maintained at their current level of payouts.

But that won't be possible unless other issues involving our exploding accumulated public debt and expected gigantic increases in the yearly deficit are thoroughly and thoughtfully dealt with.

Major policy decisions cannot be made in a vacuum. Effective decision-making is determined by the simultaneous interaction of many or variables. All factors must be considered.

Trade-offs must be made. No nation has infinite resources. Once a comprehensive plan is constructed, then, and only then, can trade-offs be recognized and acted upon.

Once the Social Security and Medicare problems are understood and/or partially experienced, many will have an "aha" moment and perhaps reevaluate their existing mindsets about a range of issues.

No one knows what the total solution to the Social Security and Medicare problem will turn out to be.

But if the task of solving the problem is done purposefully, responsibly, with knowledge and forethought, we are near-certain all will end well.