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Entitlements: Looming Disaster? (Vol. 45)

mse | Mar 30, 2022

Are we on the ‘Good Ship Lollipop’ or the ‘Titanic’?

What are entitlements? Entitlements are federal government programs that are guaranteed by law but are not guaranteed by the Constitution. Therefore, they can be changed. They also comprise the majority of federal “mandatory” spending which amounts to over 70% of the base budget and growing. 

 

The two biggest programs are Social Security and Medicare. Why are these entitlements? Because we have, by government law, paid some of our income into these programs while we worked (along with some employer matching funds for Social Security and Medicare Part A) and are entitled by law to receive benefits as outlined in the program in the future at certain ages or under certain conditions.

 

The two major programs are Social Security (SS) and Medicare. We need to understand some of the facts about these programs before we reach any conclusions.

  1. Over the life of the programs, more money has been paid in than spent to date. This creates a ‘trust fund’ to be used as needed in the future to pay the obligations promised by the government.  
  2. As noted above, the future obligations are set by the government law, and can be changed by law.
  3. In the early years of SS, there were 15 or more people working for every one drawing benefits, and the fund accumulated some significant balances.
  4. Today there are 2.6 people working for each person drawing benefits, and the fund is depleting as the outlays are greater than the income. This is true for both SS and Medicare. This demographic change has dramatically altered the financial outlook.
  5. As of today, the Medicare fund depletes in 2026, 4 years from now.
  6. As of today, the SS fund depletes in 2023, 11 years from now (and almost every year that date has been moved closer).
  7. When it is depleted, the law requires SS to cut benefits to meet the income available, there are no automatic provisions in Medicare to address this event. Today that cut in SS would be 22%, but likely will be higher by the time it is depleted.
  8. If we pay the benefits as scheduled with no cuts, the present value of unfunded obligations for SS, Medicare and several smaller programs are 70+ Trillion dollars over the next 75 years, according to the published US Government financials for September 30, 2021 (See pages 67-69 of the Financials here).
  9. The medicare challenge is much greater than SocialSecurity (approximately 48 Trillion dollars versus 22 Trillion dollars in unfunded obligations)

 

Said another way, if we pay benefits as promised, the outlays will be 70+ Trillion greater than the Fund balance today plus the income streams available in the future.  

 

We can either:

  1. Cut benefits
  2. Fund the difference with government subsidies to the program (increasing the projected deficits, which currently do not include this additional cost).
  3. Reform the programs so they are self-sustaining for the facts of today and trends of the future (for example, we could raise taxes, change eligibility rules, etc.).

 

Problem, what problem? Seems ok today. But it is not ok in the future, as you can plainly see. And this, my friends, is a problem, and it's the single biggest financial problem we have.

BOTTOM LINE

 

This problem is hidden in plain sight - and we are on the TITANIC. EVERYONE knows it, but it seems like it is political poison to deal with it.   

 

If we the people understand the problem, we will be willing to make reasonable adjustments to make it self-sustaining. It is not painless, but can be done without affecting those on benefits today. And the longer we wait, the more painful the fix will have to be to make it work. 

 

JUST DO IT! DO WE REALLY WANT TO GO DOWN WITH THE SHIP?

 

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