If You Thought Social Security's Finances Were A Myth, You Won't Believe Medicare's Financial Future

Yesterday we reviewed the fact that some politicians and journalists still believe that the Social Security Trust Fund is a reality and not a myth, as outlined in a recent Associated Press article. They still believe that the trust fund actually has real wealth in it, wealth that can be used to dispense Social Security payments for at least another twenty years without raising taxes or incurring more national debt to finance the monthly Social Security payments.

However, we pretty much proved that to be a myth by pointing out the following simple facts:

• Social Security has been in a negative cash flow situation since 2010, i.e. they are paying out more money in taxes than they are collecting in taxes.
• In the 1960s, during the Johnson administration, the political class voted to allow Social Security funds to be intermingled with general tax revenue funds, giving the political class access to our retirement wealth for their own political use, and waste, in the ensuing decades.
• Thus, the excess wealth that had been flowing into the Social Security system no longer exists. There is no pile of money sitting in a vault that can be used to pay out Social Security checks. There are no piles of gold bars that can be converted into Social Security checks. There are no portfolios of Apple stock that can be cashed to fund Social Security checks.
• All that exists in this mythical trust fund is a bunch of government accounting IOUs that the Treasury Department sent over to the Social Security administration, saying that at some point in the future, one wing of the Federal government (Treasury) would go out and collect more taxes, print more money, and/or issue more national debt to pay off another wing of the same Federal government (the Social Security Administration).

That is what is happening today with Social Security's negative cash flow, Treasury is issuing more debt or diverting more taxes to the Social Security program to pay off the plunder of past Social Security surpluses by the political class. There is no trust fund. The crisis is not in 2033, as the article writes about. The crisis is today.

A very bad and depressing situation. But at least with Social Security there is a five step program that could be instituted to fix the situation fairly quickly, and in a financially wise manner, a program that we outlined in yesterday's post. The problem is that it would require courage, leadership, and a complete change of attitude by the Washington political class, a risky proposition given our politicians' past selfish and ineffective behavior. But at least there is a plan to get to resolution.

I am not sure the same can be said for Medicare. Consider some Medicare facts from the same Associated Press article:

• Medicare's hospital insurance fund is expected to run out of funds in 2024, just twelve years from now under current operating and economic assumptions.
• The fund could run out sooner if medical costs escalate at higher rates than assumed or the retiring Baby Boomers require more care than expected, as stated by Medicare's trustees in their report: "Medicare's actual future costs are highly uncertain and are likely to exceed those shown ...in this report."
• As with Social Security's cash flow, Medicare's cash flow is substantially impacted  by high unemployment since with fewer workers working, less Medicare taxes are collected.
• Once the insurance fund is exhausted, Medicare would only pay up to 87% of hospital costs, if that.
• The nation has become so addicted to government funding that even if the government cut Medicare reimbursement levels just a little, the Associated Press article reports: "Alternative cost projections prepared by the trustees' technical experts suggest the Medicare cuts in the health care law would be unsustainable, driving payment rates so low that 15 percent of hospitals, nursing homes and home health providers would be in the red by 2019." Fewer hospitals and nursing homes means less competition which means even higher costs.
• If the trustees' analysis is right and Medicare costs would devastate many hospitals and nursing homes, than Obama Care will be a further failure if allowed to go forward since it assumes that the Federal government will reduce Medicare reimbursement expense by $500 billion.

And what does President Obama want to do to fix this dire situation? According to the article, "Obama says he wants to preserve the existing program and its federally guaranteed benefits." Great strategy, Mr. President. The program is out of control today, will get worse and worse going forward, and you want to keep the status quo with the possible exception of raising the age of eligibility to 67.

Nickel/dime changes like moving the eligibility age two years will not solve the problem. Major public health steps need to be taken in this area, the same areas that need to be addressed as a replacement to the doomed Obama Care effort:

1. Americans need to stop eating as much as they do.
2. Americans need to stop eating the type of foods they eat today.
3. Americans need to exercise more.
4. Americans need to stop smoking.

If these changes can be implemented via a public health crisis control effort, rather than a taxation/bureaucracy/government bungling approach, than Americans could live longer but healthier lives, requiring less health care resources, relieving the pressure on medical costs in this country.

Other Medicare changes must include the following:

• The eligibility age needs to be raised to at least 67, with a hardship exception, to account for the longer expected life spans.
• There needs to be a wealth means test so that those who can afford to carry private health care insurance in their elder years (Warren Buffet, Donald Trump, Bill Gates, etc.) would not be able to enroll in the Medicare program or partake of its benefits.
• Longer term, as with Social Security, the entire process needs to be privatized so that the efficiency of the private market can be used to replace the bloat and waste of the government.
• Experts estimate that Medicare and Medicaid lose about $100 billion a year to fraud and waste. A full court press needs to be implemented today to clean up these government programs and free up resources for those that need the help in old age, not those that defraud today.

Albert Einstein once said: "We cannot solve our problems with the same thinking we used when we created them." Given that these Social Security and Medicare problems are not new and have been evident to most smart Americans for decades, how likely is it that the current crop of politicians in Washington will take the necessary steps to actually make the courageous decisions that are so evidently needed?

Big problems requiring big decisions and big leadership. Unfortunately, we are stuck with small people making small decisions in Washington with infinitesimal leadership skills. To think our political class is not small is truly dealing in a mythical world.


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