Tag Archives: Boomergeddon

Turning 62: Take the Social Security and Run?

retirement

Not me!

by James A. Bacon

I turn 62 years old today, and one of the few perks of advancing age is the prospect of collecting Social Security. I, like thousands of other Baby Boomers who turn 62 every day, face the decision whether to start pocketing Social Security now, wait until full retirement at 66 or delay taking benefits even longer in the expectation of bigger checks down the road.

The conventional wisdom is that it makes sense to wait to 66, or even older if you can, because each year you delay, your SS benefits increase by roughly 8% to compensate for the actuarial reality that you’ll have one year less to collect before you die. If you’re in good health and expect to live longer than average life expectancy for male 62-year-olds — 83.8 years — delaying retirement is an especially good idea.

But what if you don’t have faith in the system to deliver on its promises, as I do not? What if you share the widely held belief that, barring heroic action by Congress, that the Social Security Trust Fund will run out by 2030? If the trust fund runs dry, the system can pay out no more than it brings in through payroll taxes, or about 75% of current promised levels.? Should we adopt the attitude of take the money and run? Get what’s yours while you can?

It’s a big decision, so I punched some numbers into a spreadsheet to see how the Retire-at-62 scenario compares to the Retire-at-66 scenario. (The numbers below are rough estimates only, not official Social Security Administration estimates.)

SS_payout2
This chart compares the cumulative payout under a Retire-at-66 scenario receiving $2,000 per month or $24,000 per year compared to a Retire-at-62 scenario of $1,500 per month or $18,000 per year.

Waiting until 66 means no Social Security income for the first four years. During that period, you’d end up a cumulative $72,000 in the hole. But then, beginning at 66, your annual payout would be roughly $6,000 per  year higher. You’d whittle away at that $72,000 hole until, at age 77, you broke even. After that, you’d be ahead of the game by increasingly large margins each  year.

Then comes Boomergeddon. Around 2030 — the left vertical line — the trust fund runs out of money and Uncle Sam reduces the payout to what it brings in through payroll taxes, or about 25%. (The actual number would vary, depending upon economic and employment conditions.) In one sense, you’re screwed — you’re getting less than promised. But you’d be screwed if you retired early, too. You’d still be ahead of the game compared to retiring at 62 — just by a smaller margin, ahead by only $4,500 per year instead of $6,000 per year.

If you live until 83.8, your life expectancy at 62 years old today — the right vertical line — you’d still be ahead. If you’re healthier and more long-lived than average and live past 83.8 — and half of all males do — then the cumulative payout surpasses the early retirement scenario by an increasingly large margin.

This calculation does not take into account inflation, but that’s a non-factor because the Social Security program adjusts the payout each year to reflect the higher cost of living. Neither does it take into account the time value of money. A dollar earned in 2015 is much more valuable than one earned in 2030. That’s especially true if you actually save your money and earn a return on your investment. But most people (including me) don’t anticipate saving money during retirement; they anticipate spending down some or all of their savings. They view Social Security payments as income to be spent. Thus, the time value of money really has no application here.

What if, as I argued in my book “Boomergeddon,” Uncle Sam changes the payout in a Boomergeddon scenario to make Social Security even more of an income-redistribution engine than it already is? People living on the margin, say $1,000 a month, live a marginal existence as it is; they would truly suffer if their payments were cut when the trust fund is exhausted. There is a high degree of probability that politicians would give low-income households smaller cuts and take the balance out of the hides of higher-income households. But that still doesn’t change the bottom line that most middle-class Americans would be better off retiring at 66 — they would be better off by a smaller margin. Anyone with a lick of sense would anticipate the possibility of changes to the payout formulas and adjust their lifestyles accordingly, but the prospect of Boomergeddon shouldn’t change the decision when to retire.

The critical variable influencing your retirement-age decision is your health. If you have diabetes, untreated hypertension, a high risk of cancer or other health threats, you have worse odds of making it to 83.8 years old. Even then, you’re not necessarily well advised to take the money and run. The break-even year is 77. If you live older than 77, you’d still come out ahead delaying your retirement.

For many people, the discussion is purely academic. If you’re working a full-time salaried job, it probably makes sense to continue working, generating income and letting your Social Security retirement benefits gain value. But there are plenty of sixty-plus people who have lost their jobs, find themselves working part-time or have fluctuating free-lance incomes for whom that Social Security income might look pretty good. Those would be well advised to think carefully before making the leap.

Boomergeddon Watch: Debt Visible and Invisible

debt_ratios2by James A. Bacon

Now that the United States has driven down its annual budget deficit to less than $500 billion a year, there is a widespread temptation to think that we’re out of the fiscal woods. By some fiscal measures, actually, we are performing better than a lot of other countries. I found this McKinsey & Company report to provide a fascinating perspective. Since the Global Financial Crisis of 2007,  the U.S. has added less to its total debt (household, business and government combined) as a ratio of its economy than any developed country but Germany and Norway.

Our relative prudence reflects two main countervailing trends: public profligacy and private thrift. American households have shed much of their debt, either through restrained spending or through bankruptcies, foreclosures and write-offs. But public spending has surged. In effect, we have shifted the risk of over- indebtedness from private balance sheets to public balance sheets. We are at less risk of a consumer-driven recession than we would have been otherwise, but at greater risk of a more systemic, Boomergeddon-style meltdown.

And it’s not as if we’re immune to excess indebtedness in other countries. We’re part of a global economy. If other countries go bust and spending collapses, our exports suffer and our growth slows (as happened this past quarter). If other governments start defaulting on debts, the shock is transmitted through banks and bond markets in unpredictable ways. If economic instability leads to political instability in a key global player like China, we could experience disruptions to supply chains.

Debt is a wonderful thing when the economy is growing and everyone can make their interest and principle payments. It’s a wretched, nausea-inducing thing when the economy tanks. One way to protect ourselves is to make sure we know how much debt is out there, and where it is. Government-issued bonds are a matter of public record and highly visible. But there’s a lot of debt stashed away in economic development authorities, colleges and universities, and other quasi-governmental institutions that we pay less attention to.

Meanwhile, according to Governing magazine, municipalities are increasingly turning to bank debt, which is less transparent. According Governing‘s Liz Farmer, localities are required to report bank loans in their annual financial reports, but such information often doesn’t surface until a year after the fact. And bank borrowing is soaring.

Over the past five years, banks have nearly doubled their municipal holdings to $425 billion in securities and loans, up from $225 billion at the end of 2009, according to a Moody’s report. The practice is becoming so prevalent that muni analysts indicate it’s contributed to the slower pace of new bond issuance over the same period.

The [Municipal Securities Rulemaking Board], which is charged with protecting investors, municipalities and the public interest by promoting a fair and efficient municipal market, can’t do its job it if doesn’t have all the data. …. The terms of these loans can directly affect bondholders. … For example, some loan deals require that a bank loan be paid back first in the event that a government can’t pay all its bills on time. That means that future bondholders’ investments could be less protected than they realized.

Is anyone keeping track of this data for localities in Virginia? Do we have the faintest clue how much debt is backed directly or indirectly by local governments? Are our finances as conservative as we think they are?

Am I the only one who’s worried?

Yes, Boomergeddon Still on Track

obamaby James A. Bacon

President Barack Obama seemed pretty darned impressed with his economic and fiscal stewardship of the United States during his State of the Union speech last night. “We’ve seen the fastest economic growth in over a decade, our deficits cut by two-thirds, a stock market that has doubled, and health care inflation at its lowest rate in 50 years,” he crowed.

Let’s unpack that statement. Yes, we have seen the fastest economic growth in ten  years — which is a real indictment of the economic growth before the last two quarters. The last time we had economic growth this strong was… yikes!… during the George W. Bush presidency!

Yes, our deficits have been cut by two-thirds. The FY 2014 deficit was “only” $483 billion — one-third the $1.4 trillion deficit in in FY 2009. Unfortunately, the deficit is still massive by historical standards, and the Congressional Budget Office (CBO) expects the deficit to start climbing in FY 2016 to nearly $1 trillion by 2024.

Yes, the stock market has doubled. That’s one thing we truly can credit Obama’s economic policies for. The Federal Reserve Board’s zero-interest rate policy, pursued with the full backing of the administration, has pushed the stock market to record highs. As a small-time stock investor, I’m grateful. I’m sure America’s millionaires and billionaires are grateful, too. The poor and middle class, not so much.

Yes, health care inflation is at its lowest rate in 50 years. Of course, that has absolutely nothing to do with Obamacare, as many assume. The cost curve in health care started bending before Obamacare was implemented, and the slowdown in increasing costs mainly reflects private-sector strategies: (a) efficiencies gained by the consolidation of the hospital industry into health systems, and (b) the shifting of private-sector plans of costs to employees, in effect forcing them to exercise more diligence as health care consumers. To quote PWC:

Doctors and hospitals are adopting standardized processes that offer the prospect of better value for our health dollar. At the same time, consumers are starting to price-shop for health services and put new demands on the delivery of care. Over one-quarter of employers have a high-deductible health plan as their highest enrolled medical plan in 2014—the highest percentage ever. With more individuals making healthcare purchasing decisions, value and price are the new mantra.

Ironically, the federal government, which pays for Medicare and Medicaid, is the biggest beneficiary of these changes. Because health care is the biggest single driver of expected deficits, “bending the curve” of health care inflation could make a big difference over the long term. Let’s just be clear where those cost savings are coming from.

So, is the U.S. still headed to Boomergeddon? The spending discipline imposed by sequestration has made a difference. My prediction, made in 2010, of fiscal calamity by 2025 to 2027 now looks excessively pessimistic. Calamity may be forestalled until 2030 or so.

Only a fool would think the U.S. is out of the fiscal woods. The CBO says that, without major policy changes, built-in structural deficits will grow relentlessly from hereon out. The projection goes out only ten years, but by year eleven, the deficit likely will be running at 1 trillion annually. Meanwhile, we have unresolved problems looming like the Social Security Disability Insurance trust fund running out of money next year, triggering a 20% cut in benefits to the disabled. Congress likely will shore up the program by reallocating funds from the Social Security Old Age & Survivors Insurance fund, but that will accelerate the day when both funds run out of money — in 2030.

In effect, that means we have 15 years to fix the largest and most critical component of the U.S. social safety net. It is theoretically possible to restore the Social Security system to health if we make a series of tweaks that make a difference over a long period of time. But the longer we wait — and it doesn’t look like anyone is in a hurry to act — the bigger and more politically painful those tweaks will have to be.

The U.S. is deep into one of the longest (though weakest) economic recoveries in its history. Another 10 years of steady economic growth would be unprecedented. There will be another recession. Hopefully, it won’t be nearly as calamitous as the last one, but it will drive deficits higher. The reversal of Federal Reserve Bank’s quantitative easing will have an impact, too. The Fed has been handing over nearly $100 billion a year in profits, resulting from its purchase of long-term bonds and its manipulation of interest rates, to the U.S. Treasury. As interest rates resume their climb, that source of pain-free deficit reduction will evaporate. Meanwhile, it’s becoming increasingly evident that our precipitous withdrawal from the Middle East is not sustainable from a geopolitical perspective. We would like to walk away from the Middle East but al Qaeda and ISIS don’t seem to want to walk away from us. There will be considerable pressure for defense spending to increase.

Without dramatic corrective action, we’re still heading to Boomergeddon. I would expect a major fiscal-financial crisis around 2030 when the combined Social Security trust fund runs out. With a divided government in Washington, D.C., there’s no chance of getting that corrective action over the next two years. After that? Who knows.

At Last, a Chance to Address Fundamental Issues

Image source: Congressional Budget Office

Image source: Congressional Budget Office

by James A. Bacon

With yesterday’s elections, the Republican Party has taken control of the United States Senate and padded its lead in the House of Representatives, assuring a markedly different political dynamic in the two years ahead. The big question on everybody’s minds is, “Can Republicans govern?” Or will we see two more years dominated by Ted Cruz trying to shut down government?

My sense is that Republicans are very serious about governing, certainly more serious than was outgoing Senate Majority Leader Harry Reid, the one-man algae bloom who rendered the Senate a dead zone for new legislation over the past four years. Republicans are likely to pass a passel of new laws. The question then will be, “Is President Barack Obama serious about governing?” Will he  work with Congress or will he veto everything that comes across his desk?

While the last four years have been a big battle over nothing, rest assured that the next two years will grapple with issues of fundamental importance. As the United States hurtles toward Boomergeddon, Republicans will tackle budgetary issues that Obama has been studiously avoiding since he disavowed the recommendations of his own Bowles-Simpson budget-balancing commission. The issues will be debated in a way they haven’t been for far too long.

This year, the budget situation looks relatively benign. Economic growth is puttering along and the Congressional Budget Office (CBO) projects that the deficit will shrink to its smallest size since 2007, equivalent to about three percent of the economy. That’s roughly equal to the rate of economic growth, so the national debt, while growing, is not growing as a percentage of the economy. But the CBO does not expect this balmy scenario to last. Says the CBO:

The pressures stemming from an aging population, rising health care costs, and an expansion of federal subsidies for health insurance would cause spending for some of the largest federal programs to increase relative to GDP. Moreover, CBO expects interest rates to rebound in coming years from their current unusually low levels, raising the government’s interest payments. That additional spending would contribute to larger budget deficits—equaling close to 4 percent of GDP—toward the end of the 10-year period spanned by the baseline, CBO anticipates. Altogether, deficits during that 2015–2024 period would total about $7.6 trillion.

That sounds bad but not Boomergeddonish. But there’s a big caveat. At some point, says the CBO, government spending crowds out economic growth in the private sector.

The large amount of federal borrowing would draw money away from private investment in productive capital in the long term, because the portion of people’s savings used to buy government securities would not be available to finance private investment. The result would be a smaller stock of capital and lower output and income than would otherwise be the case, all else being equal.

Translation: Under the current policy framework, as government spending crowds out the private sector, economic growth will slow. Slower economic growth reduces tax revenues, which increases budget deficits. I’m not certain, but I don’t believe that the CBO cranks that lower economic growth into its long-term budget forecast, which, by its own admission, is highly conjectural and based upon long-term assumptions that likely will not prove to be accurate.

Under a more pessimistic set of assumptions, the federal debt, instead of rising to 111% of Gross Domestic Product by 2039, would reach 180%.

When discussing climate change, Democrats invoke the “precautionary principle.” While we cannot know with certainty that global temperatures will increase by 4° Fahrenheit by the end of the century, as some climate models forecast, the consequences would be so disastrous that we must act to forestall the possibility. I would invoke a fiscal precautionary principle. While we cannot know with certainty that the national debt will approach 180% of GDP within twenty-five years, the consequences will be so potentially disastrous that we must act to forestall the possibility.

Republicans will be animated by the fiscal precautionary principle in the next two years. If past is precedent, the Obama administration will be driven by the desire to protect government spending at all costs. Americans will engage in the most serious debate over the size and scope of government spending, unclouded by distracting side issues, that we have seen in a generation.

Chart of the Day: Virginia’s Aging Population

aging

This graph comparing Virginia’s age between 1980 and 2013 comes from Luke Juday’s latest post over on the Stat Chat blog, published by the demographics shop the Weldon Cooper Center for Public Service. I urge you to check out the opening chart in his post to see an animation of the changes year by year. It’s fascinating to watch the bulging Baby Boomer generation crawling up the age ladder.

I would love to see a projection of Virginia’s demographic profile over the next 20 years. We would see the big Boomer blob move up, out of the workforce and into retirement age. The implications of that massive shift cannot be over-estimated. Virginia’s working-age population won’t be increasing in size — indeed, it probably will begin shrinking within a decade. Extrapolate that trend nationally, and you’ll understand why the Congressional Budget Office (CBO) maintains that the structural U.S. budget deficit — “only” $583 billion this year, according to the Obama administration’s updated forecast, will march relentlessly higher within a few years as the growing ranks of seniors put increasing stress on the Medicare, Medicaid and Social Security programs.

America still faces a Boomergeddon scenario, although we may have bought ourselves a few years’ grace. The CBO thinks that the slowdown in the growth rate of medical spending experienced since the 2007-2008 recession is a lasting phenomenon and will slightly bend the spending curve downward — enough to keep the Medicare Part A trust fund solvent through 2030. In February, the non-partisan budget shop had projected that the trust fund would run out of money in 2025, reports the Wall Street Journal.

The good news is that Congress has five more years to dither and procrastinate about reforming Medicare. The bad news is that Congress probably will take full advantage of that five years before making hard choices.

– JAB

How the Feds Are Detroitifying the Country

Detroit is becoming a verb, to Detroitify, which is morphing back into a noun, Detroitification.

The noun “Detroitification,” from the verb, “Detroitify.”  The verb “Detroitify,” from the noun, “Detroit.”

by James A. Bacon

Richard Ravitch worries that more “Detroits” are in America’s fiscal future. Co-author with former Federal Reserve Board Chairman Paul Volker of the “Report of the State Budget Crisis Task Force,” Ravitch argues in the Wall Street Journal today that state and local governments have major fiscal problems, that those problems are structural in nature, not a passing consequence of the Great Recession, and that “the crisis is deepening.”

An advisor to the Detroit bankruptcy judge, Ravitch makes a number of unassailable points: (1) Despite stop-gap measures to shore up employee pension funds, contributions remain below levels needed to meet promises to public employees; (2) the growth in Medicaid costs will continue to outpace state tax revenues; (3) states and cities have been meeting ongoing operating expenses by peddling one-time asset sales; and (4) the federal government, which now provides almost 30% of what states spend annually, “is facing understandable pressure to rein in spending and reduce deficits.”

These things are true, they are widely known to be true, and state-local governments are grappling with them, however fitfully and incompetently. Unfortunately, Ravitch obscures one other very important reason to worry about state-local finances — the fiscal Ponzi scheme of infrastructure investment.

“We are drastically underinvesting in physical infrastructure — roads, bridges, ports, etc. — the necessary underpinning of future growth,” he writes. Thus, in his reckoning, the fiscal crisis is responsible for a looming infrastructure crisis. In point of fact, the problem is the reverse: Excess spending on infrastructure has contributed to the fiscal crisis. The problem is that this over-spending is not widely acknowledged, hence, is not being dealt with.

Interestingly, Ravitch suggests that the federal government, which controls 30% of state-local purse strings, should use its influence to encourage more responsible behavior: “The federal government could condition its continued financial support on states and local governments adopting budget systems that would require recurring expenses to be matched by current revenues.”

That last statement is hilarious on many levels, not the least of which is that the federal government is the last entity on the planet that should be lecturing anyone about matching revenues and expenses. Only slightly less guffaw-inducing is the fact that it is the federal government that has impelled state and local governments to increase spending by dangling the promise of federal funds on the condition that those funds be matched by local dollars — Medicaid is a classic example. For many programs, unlike Medicaid, federal support is temporary, lasting just long enough to build up vocal constituencies and making them almost impossible to dismantle.

Nowhere has this tactic been applied more consistently than in infrastructure spending. The Feds encourage states and localities to build new roads, mass transit facilities, ports, airports, etc. by defraying the up-front capital costs. But local governments and authorities are left with the responsibility to cover ongoing operating shortfalls and, a life-cycle later, to find the money to rebuild or replace the facility. Uncle Sam doesn’t do maintenance. Meanwhile, the state-level accounting for major transportation projects — both highways and mass transit — is so useless that it is impossible for taxpayers and voters to know if any given project augments or diminishes the nation’s net wealth. One can argue that we are maintaining considerable infrastructure — farm roads in rural areas that no longer support farms, for instance — that should have been retired long ago.

So, yes, Ravitch’s big-picture message is well taken. As the headline to his piece says, “More Detroits are on the way.” The crisis is deepening. What’s missing is an understanding that the federal government is a major contributor to the problem. States don’t need the feds to tell us what to do. We need them to back off, tend to its own looming fiscal disaster and stop stimulating the growth of state-local government spending that cannot possibly be sustained over the long run.

Trickle-Down Economics Revealed

Who's laughing now?

Who’s laughing now?

by James A. Bacon

A generation ago, liberals mocked the so-called “trickle-down economics” of the Reagan administration, the idea that creating wealth for the rich would trickle down to the less affluent by way of expanded economic activity. While Reagan himself never used that term, his economic philosophy of tax cuts, tax-code reform and restrained federal spending did work as advertised. The 1980s were a period of great prosperity in which all income groups and ethnicities shared. The irony is that the trickle-down economics is a label more aptly applied to the policies of President Barack Obama. During O’s five years in office, the rich have gotten richer while the poor have fed on scraps. But you’ll never hear the term “trickle down” applied to Obama’s monetary policies.

There are many winners from the low interest rate policy implemented by the Federal Reserve Board with the full support of the Obama administration — most of them wealthy. One group is the “millionaires and billionaires” who benefit from rising stock and bond prices. Another is the owners of mortgages who have refinanced their debt at lower interest rates, in many cases saving hundreds of dollars a month. Needless to say, those with the highest incomes who can afford the most expensive houses benefit the most. The biggest beneficiary, of course, is the federal government, the world’s largest debtor, which saves on the order of $200 billion to $300 billion a year in interest payments on its $17 trillion debt. Finally, there is a modest trickle-down effect in the form of job creation in interest rate-sensitive industries like construction.

Of course, there are many losers, too — a mega-narrative that has gone largely unreported by the mainstream media. One group of losers is small business, which finds it more difficult to gain access to capital (it’s easier for banks to lend to the government). Another group consists of state and local governments whose retirement funds no longer generate the returns they were several years ago and now face chronic fiscal stress as they struggle to make up the difference. Fifteen years ago, for example, the Virginia pension system was fully funded. Today, even after major structural reforms, Virginia and its local governments still owe billions.

Then there are the little guys, especially the Baby Boomers who accumulated modest nest eggs to help support them in retirement. I have fulminated on this topic on and off since writing “Boomergeddon,” frustrated that the issue has drawn so little attention. But a Bloomberg News article published today in the Times-Dispatch (sorry, can’t find the link) shows the full dimension of the problem. Some key points:

A 65-year-old who wanted to pay for retirement with annuities tied to bonds needed 24% more wealth in 2013 than in 2005. National Bureau of economic Research President James Potera calculated in a research paper released in February. …

U.S. Treasury yields are at least 2 percentage points less than what they would be otherwise because of the Fed’s low-rate policies and stimulus programs, said William Ford, former Atlanta Fed president who wrote a 2011 paper estimating the impact on savers of monetary easing. That reduces their income by at least $280 billion annually, his analysis shows.

“The cost of low interest rates are being ignored,” Ford said. “It is killing savers, elderly savers who are living on life savings that have been conservatively invested.”

The Fed is engineering one of the greatest wealth transfers in American history — from the working-class and middle-class to the rich. The stock market has never been higher. Wall Street is doing better than ever. Bankers are still getting their big bonuses. And the little guys with meager savings are watching their pathetic little nest eggs lose value as inflation exceeds the income they can generate.

The extraordinary thing is that Obama then turns around and castigates the economic system for inequalities in wealth — the very same inequalities that he and former Fed Chairman Ben Bernanke (it’s too early to pin any blame on Janet Yellen yet) did to aggravate. Rather than undo the harm he has inflicted, Obama ask Americans to entrust him with even more power to “help” the poor and downtrodden. What I find mind-boggling is that this is not the delusion of a single man — it’s that liberals and leftists have so uniformly and gullibly bought into the delusion. They have become apologists for the very evil, income inequality, that they decry.

I suppose that’s inevitable. The political class always gravitates to “solutions” that entail the accumulation of more power for the political class. In Virginia, liberals’ idea is to expand the Medicaid entitlement, paid for the federal government with borrowed money. Why not? It’s “free” money. But it’s really not. Every billion dollars borrowed by the federal government requires more financial repression and more wealth transfer from savers to favored classes of borrowers, the foremost of which is the U.S. government. The favored classes do not include the poor and middle-class who rack up credit card debt, typically charges around 13% to 15%.

Liberals prattle about “social justice” and lobby for distractions like a higher minimum wage (which raises pay for some and destroys jobs for others) while aiding and abetting the trickle-down economics that leaves America’s less well-off with crumbs. The hypocrisy is almost too much to bear.

Someone Has to Worry about Tomorrow

Mercedies Harris

Mercedies Harris

Mercedies Harris, speaking to the Times-Dispatch, came as close as anyone to summing up what Virginia’s Medicaid debate is all about: “The system is crazy. They have got to stop worrying about what is going to happen tomorrow and deal with the people who need help today.”

The 53-year-old veteran and Waynesboro resident suffers from glaucoma, which, if it goes untreated, likely will lead to blindness. Harris has spent his meager savings, and he’s about to lose the house where he lives with his wife and a step-son who suffers from seizures. He applied for Medicaid but was turned down because he works and his income — $8.88 an hour — is too high. But he would qualify if Virginia expanded the program, as allowed by the Affordable Care Act and as proposed by Governor Terry McAuliffe and General Assembly Democrats.

With the federal government promising to pay 90% of the cost of Medicaid expansion, it is hard to tell someone like Harris — who served his country in the military and, to all appearances, remains a contributing member of society — that, no, we can’t help you. And the idea of letting him go blind, so that he, too, becomes a total ward of the state, seems the height of folly.

Republicans insist that Medicaid must be modernized before expanding the program. To buttress their argument, they have nothing comparable to the stories of real-live people like Harris, just bloodless numbers. That’s why they could well lose the debate and McAuliffe could well get his way. But that doesn’t mean the Republicans are wrong. Someone has to worry about tomorrow.

The nation and the Commonwealth of Virginia cannot continue expanding the social safety net forever. Even after an increase in the federal income tax and even after the budget cuts imposed by sequestration, the federal budget is on a trajectory to hell. Here is the Congressional Budget Office‘s take on the next 10 years:

After [2015] deficits are projected to start rising—both in dollar terms and relative to the size of the economy—because revenues are expected to grow at roughly the same pace as GDP whereas spending is expected to grow more rapidly than GDP. In CBO’s baseline, spending is boosted by the aging of the population, the expansion of federal subsidies for health insurance, rising health care costs per beneficiary, and mounting interest costs on federal debt. By contrast, all federal spending apart from outlays for Social Security, major health care programs, and net interest payments is projected to drop to its lowest percentage of GDP since 1940.

And that’s an optimistic scenario. It assumes that the economy continues to grow in a slow-but-steady fashion without recession for what would amount to the longest business cycle in U.S. history. The longest recorded business cycle lasted less than 11 years. The current business cycle is almost five years old — another 10 years would make it the Methuselah of economic expansions. History suggests that the U.S. will suffer another recession and revenues, prone to wild gyrations due to its highly progressive structure, will plunge. The question then will be, can a president and Congress facing a fiscal crisis in 2024 be entrusted to keep the promises made by the president and Congress in 2014?

Without major policy changes, according to the CBO, the situation in 2024 will be dire: The deficit will exceed $1 trillion in a non-recessionary scenario. (One can only speculate what the deficit would be in a recession; it could exceed the $1.6 trillion-a-year level seen in the dark days of the last recession.) Ten years from now the national debt will blow past $21.6 trillion, interest payments on the debt will run $880 billion yearly, and the Social Security trust fund will be roughly seven years away from exhaustion. While entitlements and interest payments on the debt now amount to 66% of the budget, they will consume 77% in ten years (again, assuming no recession).

If a recession occurs in the early 2020s, the fiscal landscape will be far worse than it was in 2008 when the economy cratered. The United States will be forced either to cut discretionary spending (which includes the vast regulatory apparatus of the federal government plus the military), cut entitlements or cut both. The only way to avoid that fate in 2024 will be to start cutting entitlements sooner, not later. Continue reading

Oops, Long-Term Health Spending Crisis Not Averted After All

miracleThere has been much prattling of late that the cost increases for health care are slowing, that the long-term cost curve for Medicare and in the United States is bending downward and that Obamacare may even deserve some of the credit. Liberals everywhere are hopeful that health care expenditures somehow, miraculously, will not drive the nation into fiscal Armageddon and that no major entitlement reforms are necessary. Meanwhile, contrarians have attributed the slowdown in health care spending to economic weakness caused by the Great Recession and paltry recovery.

Now comes a paper written by Amitabh Chandra, Jonathan Holmes and Jonathan Skinner, “Is This Time Different? The Slowdown in Healthcare Spending,” that says both viewpoints are off the mark. State the authors:

We identify three primary causes of the slowdown: the rise in high-deductible insurance plans, state-level efforts to control Medicaid costs, and a general slowdown in the diffusion of new technology, particularly in the Medicare population.

Moreover, they believe the slowdown, like a similar abatement in healthcare spending in the early 1990s, is temporary. “Our best estimate over the next two decades is that health care costs will grow at GDP plus 1.2 percent; lower than previous estimates but still on track to cause serious fiscal pain for taxpayers and workers who bear the costs of higher premiums.”

Boomergeddon… running right on schedule.

– JAB 

No More Medicaid as Middle-Class Entitlement

Woo! Hoo! Love that Medicaid!

Woo! Hoo! Love that Medicaid!

by James A. Bacon

When legislators debate expansion of Virginia’s Medicaid program in the 2014 session, they would do well to consider the long-term outlook for Medicaid spending. The program already consumes 17% of the state’s general fund budget, and that percentage will grow relentlessly as the population ages.

“Virginia faces an onslaught of frail and infirm elders as the demographic wave of aging baby boomers advances,” warns a new study, “The Index of Long-Term Care Vulnerability: A Case Study in Virginia,” written by the Center for Long-Term Care Reform and presented by the Thomas Jefferson Institute for Public Policy. “Virginia’s risk is greater than most. The commonwealth’s 142,000 citizens over age 85 will more than quadruple by 2050 at a rate (307%), seventh highest in the nation.”

One in five seniors will require long-term care of five years or more. The cost is phenomenally expensive, ranging from $41,000 yearly to live in an assisted living facility to $83,000 a year for a semi-private room in a nursing home (and even more for a private room).

Making the problem worse, Medicaid is evolving from a safety net for the destitute into a middle-class entitlement, as lawyers counsel seniors on how to avoid paying down their estates in order to qualify for Medicaid-funded long-term care. While Virginia eligibility rules are relatively strict, it has loopholes big enough to push a gurney through.  States the report:

Virginia Medicaid has to cope with sophisticated legal techniques used by elder laws specialists to artificially impoverish their relatively prosperous clients in order to qualify for Medicaid. These include the use of promissory notes, Medicaid-compliant annuities, life estates and savings bonds used to shelter or divest often hundreds of thousands of dollars.

The authors quote a Fairfax County Medicaid worker: “Medicaid is a program that pays for pretty much anyone who needs care and knows how to get it, not just for the poor.” Virginia is already a leader in shifting long-term care from institutions to home and community-based services and in using managed care to control costs — two reasons why, in addition to relatively strict eligibility standards, the Commonwealth has one of the most frugal Medicaid programs in the country.

Nevertheless, Virginia still faces horrendous budget increases. The report suggests that legislators reverse the trend of relying ever more heavily upon Medicaid to fund the population’s long-term care needs. The state should restrict Medicaid assistance to the truly indigent by tightening eligibility standards and requiring middle-class and affluent Virginians to fund their own care.

  • Asset spend down. Medicaid requirements should make Virginians spend down their assets before going on public assistance. The state could look at Virginia’s home equity exemption of $536,000, which is higher than most other states.
  • Home equity conversion. More than two-thirds of Virginians own their own homes, which have a median value of $254,600. Reverse mortgages allow people to extract equity from their homes while continuing to live in them. That money could be used to fund home- and community-based services privately.
  • Estate recovery. Where Medicaid does allow people to retain substantial wealth, at the very least their estates should reimburse the program for the cost of their care upon death. The feds haven’t published recovery data since 2005 (based on 2004 data) but Virginia recovered only $777,000 that year, or about 0.1% of expenditures. If it boosted recovery to the 5.8% benchmark in Oregon, it could collect more than $50 million a year.
  • Long-term care insurance. The state does offer a 15% state income tax credit for the purchase of long-term care insurance but it discourages the purchase of insurance by making Medicaid so easy to obtain. Tighter eligibility standards would encourage more people to take out insurance.

While the federal government will pay 90% of the cost of expanding Virginia’s Medicaid program to provide health care to the w0rking-age near-poor, the Commonwealth is in no position to accommodate an expansion of the program without reining in future long-term care liabilities. Taxpayers cannot afford to allow the program to morph into an entitlement for the middle class.