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Social Security, Medicare, Increasing Deficits: How Will We Manage?

Posted by Larry Doyle on May 15th, 2009 4:29 PM |

The immediate issues of rising unemployment, increased foreclosures, available credit and the like dominate our economic landscape. That said, the mountainous hurdles on our economic landscape – Social Security, Medicare, and the Federal deficit –  are getting larger and more in focus.

This week we have witnessed the following news releases:

Financial Health of Social Security, Medicare Worsens In Past Year as reported by Fox News. 

Given plunging tax revenues due to increased unemployment, Medicare is actually running a net deficit this year. It will become insolvent at this rate in 2017, two years earlier than previously projected.

Given revised projections, Social Security will start running an annual deficit in 2016, a year earlier than previously projected. The fund will become insolvent in 2037, four years earlier than projected.

Does the American populace believe somehow or other a Wizard in Washington will solve the financial sinkhole represented by these two programs?

Are revenues going to miraculously appear to plug the holes in these funds? Don’t count on it. Without an increase in revenues, the government will obviously have to deal with the liability side of the equation. This liability side is only exacerbated by the soaring deficits. It was interesting to hear President Obama acknowledge the price of soaring deficits, that being higher interest rates, this week. As Bloomberg reported, Obama Says U.S. Long-Term Debt Load ‘Unsustainable.’

While Uncle Sam may spend millions of dollars and thousands of man-hours reviewing these programs and expected future costs, as with any debt, there remain three options: default, devalue, restructure.

I do not believe Obama or anybody else believes default is an option. Devaluing the debt is clearly on the front burner of the Fed, Treasury, and throughout Washington. How so? Keep the Fed Funds rate at 0-.25% until we get inflation going. If the “Washington wizards” believe they can control the inflation monster, that will be a miracle.

In regard to restructuring the debt embedded in these programs, I have no doubt we will see this happen on a grand scale. How so and when? In my opinion, given the magnitude of Obama’s plans across healthcare, energy, education, and the economy, he needs to find real savings somewhere.

In my opinion, I expect the future obligations of Social Security and Medicare to be written down during Obama’s first term by excluding payments to individuals whose net worth exceeds a certain limit. What number may that be? I would have to review analysis of demographics and net worth statistics to venture a guess.

This restructuring would be the greatest redistribution of wealth our country has ever seen. Similarly, it would define these programs as nothing more than government sponsored Ponzi schemes.

I see it happening. What do you think?

LD






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