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Friday, May 15, 2009


social insurance fallout of depression

the quite wise david merkel on the recent update on the finances of medicare and social security.

I’ve always felt that Social Security and Medicare have had optimistic economic assumptions. It does not surprise me that the year that Social Security revenues are exceeded by expenses has moved in by one year, from 2017 to 2016. Medicare, we are already exceeding revenues in 2008 and now.

Given that these social insurance programs invest only in US government debt, on an accounting basis, it makes sense to unify their balance sheets with that of the US government. Once we unify the balance sheets, it is easy to realize that the negative consequences will come when expenses exceed revenues, not when the funds go to zero. When expenses exceed revenues, the US government will either need to tax or borrow more in order to make ends meet. [or cut services, as merkel then outlines. -- gm] ...

If the Federal Social Insurance schemes (Social Security, Medicare, Veterans Pensions, Old Federal Employee Pensions) and most State Pensions and Elderly Medical Care are going to pay off, taxes will have to be raised significantly. That will be one nasty political fight, which might result in the death of certain sacrosanct laws governing the inviolability of pension promises to state employees, and perhaps Federal employees. Also note, you can raise tax rates, but if it harms the economy, you will get less taxes.

The Federal Government will try to borrow its way out of the problem, until foreign creditors finally rebel, realizing they are throwing good money after bad. After that, taxes will have to be raised, or promises abandoned/reduced.

For underfunded private defined benefit and retiree healthcare plans, they will likely be terminated, and lesser benefits paid. All three of the legs of the modern retirement tripod (social insurance, savings, and pensions) are under threat as the era of debt deflation progresses.

A year can teach us a lot. 2008 showed us the limitations of our economy. Future years will show us the limitations of the power of our governments. Conditions for prosperity can be created, but prosperity can never created by governments. That is up to the culture of those governed.

as alea pointed out earlier this week, federal government receipts are down 34% from a year ago. several states -- notably including california, which applied for access to TARP rescue funds this week -- are already on the brink of fiscal collapse and awaiting federal largesse. the treasury is also attempting to support $700bn in capital transfers to the banking sector; as well as staking the seriously undercapitalized FDIC against the oncoming wave of bank failures and whatever exposure it faces as a result of the PPIP; and -- its most important duty of all -- sustaining aggregate demand by fiscal stimulus to prevent a much greater crash in monetary aggregates, cash flows, deposits, GDP and assets that would significantly increase the absolute size of all its other obligations. have i left anything out? yes, as it turns out -- merkel highlights that medicare has gone cash-flow-negative, though social security will follow only at a distance of some years.

UPDATE: follow up from merkel.

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There's no reason for Social Security to be impacted by this crisis, and as numerous articles have pointed out, it's in fine shape for the forseeable future. A small gap in payouts vs. revenue-40 years from now-can easily be overcome by raising the ceiling on income brackets liable for Social Security taxation.

Medicare is in very real trouble, as is the entire health care system, and single payer or a robust public option is the remedy for that ill.

The Revolt of the Elites-in sacrificing the programs that build middle class prosperity, so they can prop up their neo-liberal religon for a few more years-will not be tolerated.

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anon, i think we're going to find that -- with tax receipts in a hole with little prospect for sudden recovery -- both SSA and medicare move with surprising speed toward greater difficulty.

i agree with you about the relative position of the two, but both aspects of social insurance will be revisited. my hope is that SSA is better funded by congress, as a significant number of people are simply not disciplined enough to provide for their own long-term well-being. i further suspect the reality of medicare is that either a european-style single-payer universal system must emerge or congress will have to implement explicit price controls on medical products and services. either one will involve taking on some very powerful special interests, but the insurers at least are increasingly falling under the control of the govenrment.

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