Tuesday, March 27, 2012

We Can Work It Out

Do we understand our future?

If there is one thing I would like to see our government take on more than any other issue, it is entitlement reform.  I do not think people understand the incredible benefits to our country of moderate changes to these programs.  Social Security and Medicare are plunged so deeply in demagoguery that the mere mention of repairing these entitlements is met with spending millions making sure you are adequately scared of and confused by the proposal.

What should be done about these programs?  I would vote on phasing both out totally, but I would take any reforms that put entitlements back on a sustainable path.  Below are some of the moderate approaches being debated today.

Social Security:

Raise the retirement age to 70 - Life expectancy has gone from 63 years-old to 78 years-old since the 1930s, yet we have not raised the retirement age even close to that rate (we are gradually moving this up to 67 from 65).  Since a greater portion of this money is being borrowed against or children, let me ask you a question:  Would you retire at age 65 and ask your kids to cover your retirement for 5 years until the government provides you a check?  No, of course not, but essentially by voting for those who do NOT support entitlement reform, you are choosing to let your kids and grand kids pay for your retirement. 

Move to Price Indexing - Currently each new generation retiring gets a bigger real benefit than the previous one. The reason is the benefit is based on wage inflation.  Since average wages have risen faster than the average cost of goods, people on Social Security are getting a bigger real dollar benefit than previous generations.  Thus the actual benefit received keeps going up.  If we just make the purchasing power the same for each generation, we could save massive amounts of money and seniors would continue to do just as well as they are doing now.


Premium Support Model - Simply stated, the proposals I have seen mainly suggest moving to a premium support model, in which workers would get a choice of private health plans or the traditional fee-for-service Medicare option.  Under a plan like this you can choose the average plan which your premiums would be covered or you could choose a more expensive plan and pay more out of your own pocket or a less expensive plan and receive a government rebate.  Basically, the idea is that creating choice allows for better competition which allows for higher care at lower costs.     

Remarkably, the benefits for changing Social Security and Medicare even 10 years into the future (for people 55 and under) would have an immediate and wonderful impact on our economic lives:

1) Reduce Long Term National Debt - Obviously, our current budget (no entitlement changes) keeps shoving our debt burden higher and higher.  Changing just these things will dramatically flatten this curve, and thus the burden your children and grandchildren are left to pay.

2) Increase Dollar Value - Have you noticed that everyday items like food and gas keep getting higher and higher in price.  Much of this can be explained by our weak dollar.  A weak dollar makes imports much more expensive and takes a big bite out of your pocket book.  The cause of a weak dollar is unwillingness of other countries to invest in U.S dollar based securities.  The stronger our long term financial outlook, the more the investor will value the dollar and buy them.  This will strengthen the dollar and reduce inflation pressures greatly lowering energy prices in the process.     

3) Stabilize Long Term Interest Rates - At the same time, a better financial outlook for the United States will increase investment in U.S. Treasuries keeping rates lower.  This means you and your children will find it much easier to pay for a loan for a house or car or college.  I know interest rates are at historic lows right now, but that took a massive financial meltdown to achieve.  These RATES WILL GO UP MASSIVELY as investors start to worry the United States cannot pay its bills and will require a big interest rate premium to support the risk they are taking investing in U.S. debt.

Basically, the only way to increase the value of the dollar AND keep interest rates low at the same time is to reduce long term debt.  Otherwise, you get to choose:  would you prefer your children deal with massive inflation so milk is a luxury item or incredibly high interest rates so they cannot afford a house.    

I do not understand people who pretend to want to help future generations, but do not see the link between reforming entitlements and helping our children.  Could you imagine a country in which instead of stepping out of college and being told that your share of the national debt was $100k, you were told that your share of the surplus was $100k.  Beyond just improving our children's prospects, taking action to secure our future will have dramatically positive implications our current situation.