"The Trustees Report - Death Panels may be the Answer"

Sydney M. Williams

Thought of the Day

“The Trustees Report – Death Panels may be the Answer!”

May 17, 2011

That America’s entitlement programs have created an untenable debt situation is well known. That officials have known that January 1, 2011 would be the first day that the baby boomer generation would reach retirement age has been known for at least forty-seven years, when the last baby boomer was born in 1964. Every President since Gerald Ford has been apprised of the consequences of ignoring the distant rumbling of this avalanche. All have chosen to ignore its warnings.

The Trustees report on the status of Social Security and Medicare issued last Friday suggests the day of reckoning cannot be put off much longer. Perhaps it won’t. President Obama created a deficit commission, whose findings he chose to ignore when he presented his initial 2012 budget in February. But that commission’s report is now in the hands of the “gang of six” whose report and recommendations are due out shortly from Congress. Only Representative Paul Ryan has been willing to face the problem head on, and he has been shunned by several of his fellow Republicans who find the prospect of dealing with entitlements potentially hazardous to their re-election prospects.

Standard & Poor’s recently changed their outlook for U.S. Treasury debt from stable to negative. Typically, bond vigilantes would be all over this situation, driving Treasury interest costs substantially higher. Instead Treasuries have rallied since that April date, with the yield on the 10-Year declining about 6% to 3.15%. One reason: the Federal Reserve, as part of its quantitative easing programs, has become the largest buyers of Treasuries. “It’s not a free market,” Stan Druckenmiller was quoted as saying in an interview in Saturday’s Wall Street Journal. “It’s not a clean market. The market isn’t saying anything about the future. It’s saying there’s a phony buyer of $19 billion of Treasuries a week.”

And, of course, all revenues from Social Security and Medicare are invested in U.S. Government notes and bonds. As of yearend 2010, the combined assets of Medicare and Social Security amounted to $2.953 trillion, or about 20.6% of all U.S. debt. QE2 is scheduled to cease in June; Medicare, according to the Trustees Summary Report, had net outflows in 2010 of $36.8 billion. Social Security still had net inflows of $68.6 billion, but the handwriting is on the wall. Having been buyers of Treasuries, these deep-pocketed entities are close to becoming liquidators.

Perhaps the markets are saying that, finally, Washington will get serious about spending – that the catalyst of the debt ceiling flap on top of a depressing report from the Trustees of Social Security and Medicare (that includes the Secretaries of Treasury, Labor and Health & Human Services) and a deficit of record proportions will be enough to cause Congress and the Administration to respond with common sense. Perhaps? As Hamlet might have said, “Tis a consummation devoutly to be wished.”

Nevertheless, the complacency in Treasuries today reminds me of that eerie apathy in the mortgage market in late 2006 and early 2007. On February 26, 2007, I quoted Martin Eakes who was (and is) CEO of the Center for Responsible Lending in North Carolina on the subprime market at that time: “…a quiet but devastating disaster.” Today, the Trustees’ report highlights the problems being faced by both Medicare and Social Security. Aggravating today’s situation is the debt ceiling which is rapidly approaching. It has become a political football, with Republicans using it as a means of addressing spending. Democrats are trying to scare the bejesus out of people, as to the consequences of a technical default, Treasury Secretary, Geithner warned of a “catastrophic economic impact.” Last week Federal reserve Chairman Ben Bernanke suggested, if the debt ceiling is not raised, the markets would experience a crisis similar to the one that followed the Lehman bankruptcy in 2008.

But raising the debt ceiling without addressing spending would be more irresponsible, with consequences far direr than a technical default on Treasuries. In his interview with the Journal’s James Freeman, Mr. Druckenmiller said that markets know the difference between a default in which a country will not repay its debts and a technical default, in which investors may have to wait a short period for a particular interest payment. If we continue down the path we have been on, we risk falling into the former category six or seven years down the road – of becoming Greece. There is not a lot of time. The future, as the saying goes, is now.

Nobody likes to be the bearer of bad news, especially politicians whose next meal is dependent on winning the next election. Acknowledging that reality, toward the end of the Summary Report, trustees Charles P. Blahous III and Robert D. Reischauer write: “Reluctance to resolve the Social Security and Medicare shortfalls is understandable, as doing so involves slowing the growth of program benefits, increasing the age at which individuals become eligible for benefits, or increasing the taxes and premiums that support these programs.” None of which is typical grist for a politician’s mill. But it is my guess that the people are smart enough to know that trees don’t grow to the sky and that money for nothing is not an alternative. Paul Ryan’s ideas may not be dead.

The problems are “good” ones, in the sense that they are products of improvements in healthcare and the fact that life expectancy has been extended. There are solutions that are pretty straightforward, if only politicians, apart from Mr. Ryan (who has now been thrown under the bus by the intellectually peripatetic Newt Gingrich,) would dare confront them: extend the retirement age; provide a “means” test for Social Security; raise deductibles on Medicare, based on income or wealth; increase insurance competition, allowing companies to compete across state borders, and implement tort reform.

Of course there is possibly a more simple solution. Should Sarah Palin’s concern that death panels prove to be a reality of ObamaCare, long term demands on both Social Security and Medicare will vanish. Problem solved.