Saturday, April 12, 2008

The Social Security Healthcare Boondoggle

This is an edited reprint of "The Social Security Morass" 7/9/2006

F.D.R got Social Security going during the Great depression. If you examine the original idea, it wasn't too bad, only about 8% of the population at that point in time would ever live to collect it. Now over 60% of the population will live to "collect" it.

The Social Security tax is supposed to be deposited into a trust fund. To make the story simple, The Congress has written some IOU's and spent the money. Someone complained about this abuse. The Supreme Court ruled that the Social Security tax was just that, a TAX and the government could do whatever it wished with it.

How about Medicare and Medicaid? Why worry about Social Security, that's a nickel and dime game compared to free health care for the elderly.

There is another one called SSI (Supplemental Security Income). You can draw from this fund if your Social Security check is below poverty minimums. A lot of immigrants in this country legally, over the age of 65, qualify for this program even if they have never worked a day in their life. They are also eligible for Medicare. Imagine, a foreigner can qualify for a retirement pension of about $637 /month ($956 as a couple) with free medical, not bad! If I wait and retire at age 66 I will qualify for $767 per month from Social Security otherwise its $502. Go figure!

All of these benefits are Transfer Payments. The money doled out is spent on consumption. There is no real investment in new enterprises. These funds are being borrowed indirectly from your children before they have even earned it. There is no budget amount set aside for these future expenditures. It’s pay as you go. Doesn't it sound just like an interest only no money down housing loan, such a deal!

We are at a fork in the road, similar to the 1930's. Germany decided to hyper inflate and ruined anyone that had any savings. The US survived with deflation and ruined almost everyone with a bank account.

Will we be able to enjoy our future government retirement benefits? Hint: The tooth fairy doesn’t do seniors. Congress is not going to fix anything that isn’t broke. When it breaks, they want to get credit for fixing it. It’s kind of like a firefighter that moonlights as an arsonist. You get paid for doing something you shouldn’t have done, and get thanked for fixing it.

Copyright 2008 All rights reserved

16 comments:

Anonymous said...

Jim

Absolutely agree. Really anything our Govy does could be categorized as a Boondoggle!

Interesting table at {www.census.gov/population/estimate
s/nation/popclockest.txt) on US population since 1900. During a 7 year span of the Great Depression the population in the US actually decreased 41%! Did these folks die or flee the country? Will be interesting to see if the current depression cycle will have the same effect.

I bring up the topic because the US has doubled its population since 1930. You would think that twice as many people living and working longer would translate into a windfall for SS system if the tax was managed correctly.

Tom

Anonymous said...

Oops... Disregard the 41% decrease figure. I was looking at the wrong column. Population continued to grow during that time just at a slower rate.

Tom

Anonymous said...

Jim I hope this is not out of line too much, but I found a comment by "Independent Accountant" over at his website called "Skeptical CPA"
http://tinyurl.com/3nhqcf
that went as follows:

I consider DW an optimist! In about 1971, Richard Nixon "reformed" social security (SS), purportedly saving it for all time to come. That's not what happened. SS and Medicare are actuarially unsound. Their actuarial deficits are about $9 trillion and $44 trillion respectively. This can't be paid. The only question about them is: how they will be defaulted, through repudiation or inflation. My bet: inflation.
No politician will deal with the SS and Medicare "problem" because none wants to admit what must be done. People will have to go without. Some people will die because society can't afford to keep them alive. Which politician will speak that plainly?
Some history. SS began in 1872. What? Bismark started it in Germany after the Franco-Prussian War, 1870-71, to unify the German people. Bismark chose 65 as the retirement age since few lived to 65. Bismark was no fool. FDR, our ignorant patrician and Harvard man, also selected 65 as our retirement age not knowing why Bismark chose 65, i.e., Bismark made a promise to Germans that would rarely have to be kept.
FDR was such an ignoramus. Germany's economic system collapsed in the 1922-23 hyperinflation. Many blame WWI reparations for this, John Maynard Keynes being the principal proponent, see "The Economic Consequences of the Peace", 1926. I say nonsense. Germany's WWI reparations could have been paid as they were only 3% of Germany's GDP annually. What drove Germany bankrupt was its SS system founded 51 years earlier! Eventually Hitler dealt with his "undesireables". That's how I see it. Which politician wants to admit we face the same choices Germany did in 1922?
The actuarial deficiencies in SS were recognized 30 years ago. I discussed them with a senior SS actuary when I lived in Chicago in about 1978. Really. Peter Peterson wrote about this problem about 20 years ago. I'll have to find the reference.

Sunday, April 13, 2008

-----------------------------------
DW = David Walker, former Comptroller General.

Jim, I thought this fit in pretty well with your post, hope you don't mind.

Anonymous said...

Fund Medicare via Capital Gains tax. Old folks sell their stocks and pay for their medical.

It makes a lot of sense...

Jim in San Marcos said...

Hi Anon 6:57

I welcome others adding information to the blog. My only request is that it not be too long.

I pretty much agree with the first three paragraphs. But you have to take the rest of this guys article with a grain of salt.

Bismark's retirement plan when first passed in 1889 started out at age 70. Later in 1916 it was dropped to 65. Back then 50 was a very ripe old age.

Germany did hyper-inflate, and literally crashed and burned. Within a year they were back in business with a new currency. When the great depression hit everything in the world went to hell. The German war repatriations were payable in gold, so those debts were a very big drain on the German economy. Social Security commitments wouldn't have brought them down in my opinion.

As for FDR, I believe he did the right thing. Only about 8 percent of the population were of age to collect it. With better health care people are living longer and this commitment by the government has turned into a blank check. Plus Congress has added to the plan considerably (a real understatement).

What really parallels the Weimar Republic, is that the politicians couldn't accomplish anything. People lost their faith in Democracy.

So if some President rounds up the Congress and throws them in jail for not doing their duty, what would you do? Celebrate? The thought that scares me, is that jail is too good for them! At that point I wouldn't anticipate any further elections.

Thank you for a very interesting post.

Jim in San Marcos said...

Hi Anon 9:12

Funding with capital gains, that's not very nice for old folks. They have already lost half of their savings to inflation over the last 50 years.

Even if we did go that route, how much would have to be sold to raise the 100K for one open heart triple bypass operation?

If you look at the situation with an analytical eye, you begin to realize that it just can't work the way it is set up for too much longer.

Thanks for your post

Anonymous said...

Thanks Jim
I should have done my homework on this before posting, my apologies.
Anon 6:57

Jim in San Marcos said...

Hi Anon 6:57

No apology necessary. A lot of what I blog about could be wrong also. The author was not afraid to express his opinions. The trouble with history is that it is very complex. You get into trouble when you try to simplify it.

Anonymous said...

jim in san marcos,

you speak about immigrants that have not contributed to medicare getting it, a valid point. but how about that guy who was born in the u.s. and sat on his ass for 30 years and didn't do any work? should he get it?

alsoo, maybe that immigrant didn't pay but I'm sure his children have and will pay plenty of taxes.

Obama speaks about the bitterness that a lot of american live with and you should be careful not to be one of them. usually the bitterness Obama speaks about comes from people who have not done well financially in life and now look for places to put the blame for their own shortcomings. I don't know you personally but from your bitterness, I bet you are not financially well off b/c if you were, you wouldn't post day after day about what our government does wrong. how about posting something that the u.s. is doing right, or is ther no such thing, the darkness in your posts are a mirror image of your frustrations in life I bet.

please, no response necessary, you know the truth and that is enough.

an immigrant

va loan said...

I am sickened by the situation that we have found ourselves in. I feel for so many that have lost their homes and those whose retirement accounts have been reduced drastically. Hang in there.

shankar said...

Any takers for scrapping Social Security/Medicare/Medicaid for people under certain age (say 40) going forward?

Would that make sense?



Shankar

Jim in San Marcos said...

Hi VA Loan

I agree I feel the same,there doesn't seem to be a real solution to the mess. It looks like its starting to get worse. My wife's 401 K just took a 10K hit, and its hard to laugh at that.

Jim in San Marcos said...

Hi Shankar

I don't think that will happen, the only way to get people to pay in to it today is to promise them that they get theirs tomorrow.

Maybe they will put a cap on benefits each person can draw. But when you do that, I becomes more an entitlement to use up.

If you have a pet dog or cat, you understand how health care can affect the family budget. The decision on whether to spend $2,000 to extend your pets life a couple of months is a very hard decision to make.

Your idea makes a lot of sense, but from a political point of view, you wouldn't get re elected

shankar said...

Jim,

Thanks for your comment. I can definitely see that its going to be a political issue.

However, we really need to find a solution to this mess before it engulfs us all. You might be right - we may need a cap.

In addition, we give people (all incomes) flexibility to create/fund Healthcare Savings Account and that could be offset against your Medicare/Medicaid benefits. (Basically, if you have $300K HSA, why do you need Medicare/Medicaid?)

We need someone who can do some straight talking.

Great blog. Keep it up.

shankar said...

BTW, this is not an investment advice, but having read that your wife's 401(k) has taken a $10K loss, I was moved.

Please note that we may start another leg of the bear market which could be quite vicious.

A lot of people out there are fearing stagflation, and I think they are quite optimistic. We will see something quite worse - inflationary recession which will force governments throughout the world to slam the brakes. That may usher us into the next phase of recession - deflationary recession.

You could do some research and figure out which asset classes do the best under various scenarios.

My wife too had her 401(k) in employer-designated plan and I have changed it to self-managed.

Again, not an investment advice.

Shankar

Jim in San Marcos said...

Hi Shankar

Health care and Retirement savings accounts go against human nature. People don't need health insurance until they get sick. They don't need retirement benefits until they get old. They do need a new car every year and lots of toys.

At the present time I see two paths for the government, hyper inflation which would wipe out our savings and give every home owner free and clear title to their home, or deflation, where money in the bank would be king.

This mess is getting worse at a faster rate so the next 3 months could prove interesting.

I think that the key to any investment strategy is diversification and take a personal hand at managing your money.

Thank you for your posts