U.S. Running Out of Money for
Medicare and Social Security

economic slowdownThe Congressional Budget Office (CBO) releases a report every year on the “health” of the largest benefit programs in U.S.

In 2011, the CBO analyzed the budget deficit for Medicare and concluded that the program would run out of money by 2024. In 2012, the CBO maintained that 2024 projection.

The study noted that the U.S. government is doing everything it can to keep health costs in line, which is the reason why the 2024 doomsday timeline was not moved up. The report warns that medication, doctors’ pay and new medical equipment continue to rise in cost, which could worsen the budget deficit and so move up the doomsday timeline.

The news is much worse when it comes to Social Security. In 2011, the CBO stated that Social Security would run out of money by 2038. In 2012—from the report released last week—the CBO now says money for Social Security will run dry by 2035 – three years earlier thanks to a deteriorating budget deficit!

The major reason why the budget deficit for Social Security worsened was that the payouts were 3.6% higher than projected due to the fact that pensioners are compensated each year for the change in the rate of inflation, as reported by the Consumer Price Index (CPI). Since the payout was larger and taxes did not increase, the budget deficit widened.

What could disrupt this projection completely is the budget deficit for the disability program within Social Security. In 2011, the CBO said it was set to be emptied by 2018. In the CBO’s report released last week, the disability program is now set to run out of money by 2016!

The main culprit behind this rise in the budget deficit for the disability program was many more disabled people losing their jobs and, therefore, with this economic slowdown, having no choice but to apply for benefits.

Medicare and Social Security are supported by both employers and employees through taxes. Of course, with the economic slowdown, government revenues have decreased, since fewer people work, worsening the budget deficit.

The government has to spend more money in order to maintain support for Medicare and Social Security, which will ensure that the budget deficits of $1.3 trillion for the U.S. government for the current year will not only be maintained, but will continue to worsen.

Watch out for that stock market rally, dear reader, it is assuming that the economic slowdown will let up and the budget deficits will not worsen—neither event of which I see happening anytime soon.

Michael’s Personal Notes:

What the CBO is not taking into account in its deteriorating projections for the budget deficits in Medicare and Social Security in this country is the worsening of state and municipal pension and Medicaid budget deficits.

The CBO estimates are based on the Federal program and the Federal government’s responsibility to Medicare and Social Security. However, if the states can’t pay for Medicare and Social Security, who is going to take responsibility for these budget deficits?

I have written often in these pages about the crumbling budget deficits at the municipal and state levels.

The CBO is saying that Medicare will run out of money by 2024 and Social Security will run out by 2035, but the Federal government has cut state funding, as both the state and municipalities struggle under this supposed economic recovery.

If the Federal government needs to pay for Medicare and Social Security, it will need to print money, but what recourse do states have if their revenues are not enough to cover these costs?

Let’s take the state of Illinois as an example. This week, it was reported that its backlog of unpaid bills has reached $9.0 billion, with most of its budget deficit related to pensions (source: Bloomberg, April 23, 2012).

There has been a small economic recovery, which has increased Illinois’ tax revenue by 3.9% or $7.0 billion from corporations and individuals in the past nine months. However, this increase in revenue was not enough to offset the losses from the Federal government cutting its financial support to Illinois, further deepening the budget deficit.

With the unemployment rate still persistently high within the economic recovery, tax revenues have not returned to levels seen in 2007, further degrading budget deficits at the state and municipal levels.

The largest revenue generator for municipalities is real estate taxes. The housing market continues to languish and, with home prices not rising, tax revenues drop, which leads to a further decline in budget deficits.

The only recourse left is to raise taxes. With this supposed economic recovery, I wish them luck. Illinois has proposed a three-percent increase in pension contributions from current employees, while the inflation-adjustment increases in pension payments are set to be cut.

California is proposing raising taxes on high-income earners and a small increase in the state’s sales tax. Although the governor is stating that these hikes are to fund education and public safety, The Wall Street Journal is reporting that the revenue from the tax hikes is really being used to fill the large budget deficit in the teachers’ pension fund.

California cut its Medicaid payment rate by 10%, but the California Medical Association sued the state and won. The court agreed with the Medical Association stating that the 10% cut would result in inadequate care to patients, and would actually harm patients who are entitled to a basic level of care.

California is cutting money to Medicaid and raising taxes to fund pensions. However, as the economic recovery has no traction, the budget deficits will continue to worsen to the point where California, and many other states, will visit the White House and ask them for money to fund their pensions and Medicaid. Where will Washington get the money if needs to bailout the states? It will print more money.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average has travelled 1,000 points, 8.3% higher, in the first four months of this year. There is rising optimism in the air about the economy turning the corner, advisors are turning bullish on stocks again, investors are starting to see the stock market as a “good place to put money” again—the exact three things the bear wants to happen.

Since March of 2009, we have been in bear market rally supported by ever-expanding government debt, artificially low interest rates, and an unprecedented increase in the money supply. Take these factors away and we see no structural improvements to the economy. Debt and money printing cannot support a stock market rally forever. The building blocks are in place for the final blow-off to the top for this bear market rally. The risk may not be worth the reward for the majority of my readers.

What He Said:

“The U.S. lowered interest rates in 2004 to their lowest level in 46 years. And what did Americans do with their access to easy money? They borrowed and borrowed some more, investing the borrowed money into real estate. Looking ahead, perhaps the Fed’s actions (of bringing interest rates so low as to entice consumers to borrow more than they can afford) will one day be regarded as one of the most costly errors committed by it or any other banking system in the last 75 years.” Michael Lombardi in PROFIT CONFIDENTIAL, July 21, 2005. Long before anyone was thinking of a banking crisis, Michael was warning that the coming real estate bust would wreak havoc with the banking system.