More Than $1 Million per Taxpayer Owed – and Climbing

It seemed tragic back in October 1981 when the federal debt reached $1 trillion. How would we ever pay back $1 trillion?

The real tragedy, though, is what’s happened since then

In early December, the federal debt is expected to exceed $20 trillion. More troubling, though, other unfunded U.S. government debt obligations now total $107 trillion, according to the U.S. Debt Clock.

The cost of unfunded liabilities is difficult to estimate. Unknowns such as future interest rates, inflation, population growth and mortality rates must all be considered, so estimates range from around $80 trillion to more than $200 trillion. These unfunded liabilities come from programs we’re written about in recent weeks – Medicare, Medicaid, Social Security and government pensions.

Economics professor Antony Davies and James R. Harrigan, CEO of Freedom Trust, noted recently in U.S. News & World Report that total U.S. government debt exceeds even the approximately $120 trillion in debt you get by adding the federal debt to the cost of unfunded liabilities. They estimate the total at $135 trillion.

“U.S. state and local governments officially owe $3 trillion and have another $5 trillion in unfunded liabilities themselves,” according to U.S. News & World Report. “Federal agencies and government sponsored enterprises owe another $8 trillion, which is not included in the federal government’s numbers.”

To paraphrase the late Senator Everett Dirksen, a trillion dollars here, a trillion dollars there, and pretty soon you’re talking about real money.

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Medicare Is Already Broke

Last week we noted that the Social Security system is going broke. Medicare, though, which provides for the health of America’s seniors is already broke.

With 77 million baby boomers retiring, and a $716 billion reduction in future funding of Medicare thanks to the Affordable Care Act (Obamacare), Medicare may be in an even more precarious financial condition than the Social Security system.

Trustees for the Social Security system are also trustees for Medicare and wrote in their recently released annual report that Medicare Part A, which helps pay for hospital care, home-health services following hospital stays, skilled nursing and hospice care for the aged and disabled “fails the test of short-range financial adequacy, as its trust fund ratio is already below 100% of annual costs, and is expected to stay about unchanged to 2021 before declining in a continuous fashion until reserve depletion in 2029.”

Medicare Part B, which pays for physician, outpatient hospital, home health and other services, and Part D, which subsidizes drug coverage, are financed from premiums and general revenues, so they are currently adequately funded, but their costs are expected to rise steadily. So higher taxes and higher premiums will be needed to support them.

The federal government spent $595 billion on Medicare, in the 2016 fiscal year, but adding on the cost of premiums and other funds collected brings the total cost to $699 billion.

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Social Insecurity: Another Reason We’re Going Broke

Except for recent contributions, all of the money that you’ve contributed to the Social Security system throughout your lifetime has already been spent.

That’s because Social Security is a pay-as-you-go system. Contributions from people working today go to people who are retired today. Your contributions will be long gone by the time you retire.

And, depending on your age and whether the folks in Washington can get their act together, there may not be enough money available for you to cash in when you retire.

Going Broke

While the Social Security system currently is solvent, trustees of the Social Security system’s two funds, which support retired and disabled workers, project in their recently released annual report that the funds will be depleted in 2034. As trustees of the programs noted, the funds “fail the test of long-range close actuarial balance.”

Trustees project that annual benefits paid out will exceed the Social Security taxes workers and employers pay beginning in 2022.

And the trustees may be overly optimistic. The Congressional Budget Office, which tends to make rosy predictions about government programs, estimates that the funds will be depleted by 2030. After that, the amount Social Security pays out every year will exceed what it takes in by more than $400 billion.

“Current benefits for retirees already exceed the system’s payroll-tax receipts,” Martin Feldstein wrote in The Wall Street Journal. “Benefits are therefore payable under current law only by drawing on the so-called trust fund, an accounting record of previous Social Security surpluses.”

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The Appeal of Bonds

“We must all suffer one of two things: the pain of discipline or the pain of regret or disappointment.”

                   Jim Rhon, entrepreneur/motivational speaker

As fixed-income investments, bonds are all about income. Cash flow will be consistent, based on the bond’s coupon, until the bond matures. Each day that passes, the bondholder is accruing income and shortening the bond’s maturity, even though those changes aren’t reflected in the value of their account.

The risk in bonds is in their price, which fluctuates. Bond prices are affected by many factors, including interest rates and inflation. When interest rates increase, yields increase, too, and bond prices generally move in the opposite direction.

With interest rates rising, many investors are concerned about the impact that will have on the price of their bonds, but the Federal Reserve Board has already said that rates will remain below normal levels for years to come. It’s doubtful, for example, that the yield for a 10-year Treasury will exceed 3% anytime soon.

In addition, inflation will likely remain low for some time. The U.S. inflation rate has dropped from 2.7% in February to just 1.6% in June.

And while changes in price matter, most of a bond’s return comes from its coupon. Recognize that it’s all about cash flow and you’ll understand why bonds are a safer investment than stocks.

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Socialism’s Promise: Medicaid for All

For an example of how government entitlements always expand and never contract, consider what’s been happening to Medicaid.

Designed to provide health coverage for low-income and disabled Americans, Medicaid was signed into law in 1965 during the Johnson Administration.

Today, Medicaid ranks second only to public school education as the largest budget item in most states. Nationally, Medicaid spending now exceeds a half trillion dollars a year ($574.2 billion in FY 2016).

The true cost is higher, though. Both Medicaid and Medicare pay providers significantly less than what they receive from private payers – and Medicaid pays about two thirds of what Medicare pays. That means less access to healthcare, since one in three physicians refuses to see Medicaid patients. It also means non-Medicaid healthcare costs need to be higher to subsidize Medicaid.

Initially, Medicaid covered 4 million Americans. This year, it’s projected to cover 73.5 million Americans. In spite of the more than $20 trillion spent on the War on Poverty over that period, Medicaid enrollment from year to year has almost always increased, regardless of the overall health of the economy. It has also increased even though the poverty level has remained about the same – about 15% of the population.

But the worst is yet to come.

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Unfunded Pension Liabilities Reach $7 Trillion

The mean average amount saved for retirement by all working-age families in the U.S. is just $95,776, according to a new report from the Economic Policy Institute. The median average – that is, the average for those in the 50th percentile – is just $5,000.

That’s tragic, as it means that many Americans will be unable to afford to retire. At the same time, they are on the hook to pay unfunded liabilities for government employees as they retire.

Most private-sector employees have “defined contribution” plans, such as 401(k) plans, which are self-directed. Employers typically provide matching funds, but if you don’t contribute, you get nothing. Which is why many have saved little or nothing.

In contrast, employees in the public sector often have “defined benefit” plans, which are traditional pension plans. Defined benefit plans, as the name implies, guarantee a set amount throughout a person’s retirement years.

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The Peter Pan Economy

Lowering interest rates is not necessarily a bad thing. It can make borrowing cheaper, which – at least in theory – will stimulate business investment. It can weaken the dollar, making American goods cheaper abroad. It can lower payments on the federal debt.

The problem with lowering interest rates is that eventually they have to be raised again. If rates were to remain at zero indefinitely, the Federal Reserve Board could not lower them to stimulate the economy during a recession, unless it created negative interest rates, which cause a whole new set of economic problems.

And history says a recession is likely to come sometime soon. The current recovery, which has frequently been described as anemic, celebrated its eighth anniversary in June. Now in its 97th month, it is the third longest recovery on record. The average recovery since the end of World War II has been 58 to 61 months.

While the length of the recovery may not determine how long a recovery will last, when unemployment drops low enough to spur inflation, the probability of a recession climbs. And unemployment is allegedly at a 16-year low of 4.3%.

“Expansions, like Peter Pan, endure but never seem to grow old,” according to Fed economist Glenn Rudebusch.

But the current expansion has much more in common with Peter Pan. It’s a fairy tale. And the Fed has run out of fairy dust.

The Fed’s Conundrum

The conundrum the Fed faces is that as it raises interest rates so that it will be able to drop them in case of a recession, it may actually cause one.

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The Fed’s Abnormalization Plan

The Federal Reserve Board has issued an addendum to its “Policy Normalization Principles and Plans” for reducing its bulked up $4.5 trillion portfolio, but there’s nothing normal about unloading $4.5 trillion in bonds.

That’s a lot of bonds.

The Fed’s policy, which virtually no one has read since it was issued in November 2014, is an update of its 2011 normalization policy, which no one read. It crams quite a few words into a single page, which we would summarize by saying that the Fed hopes to unload as much of its bond holdings as it can without causing the bond market to collapse.

Fed Will “Cease or Commence”

In case you don’t believe me, here’s a sample paragraph: “The (Federal Open Market Committee) expects to cease or commence phasing out reinvestments after it begins increasing the target range for the federal funds rate; the timing will depend on how economic and financial conditions and the economic outlook evolve.”

Note the “cease or commence.” In other words, the Fed will either stop buying bonds to keep its portfolio close to $4.5 trillion or it won’t. Talk about commitment issues!

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U.S. the Leader in Addressing Climate Change

With 195 countries signing on, the Paris agreement has been touted as a “global action plan” designed to save the world from climate change.

So the recent decision by President Trump not to sign on was, according to former Secretary of State John Kerry, “walking backwards from science and backwards from leadership on behalf of polluters and fringe ideologues.” He added that it “may be the most self-defeating action in American history.”

Oh really? For perspective, it’s worth taking a look at energy usage, both globally and in the U.S.

U.S. vs. Germany

Environmentalists, politicians, journalists and assorted do-gooders typically point to Germany as a model of environmental consciousness, given its heavy reliance on renewables, such as solar and wind power. The U.S., meanwhile, is the bad guy, achieving success with a highly industrialized economy at the expense of the environment.

So it’s worth comparing Germany’s carbon dioxide emissions with those of the U.S. Which country has done more to reduce carbon dioxide emissions in recent years?

The United States has. According to the U.S. Energy Information Administration, carbon dioxide emissions (CO2) fell 12% in just 10 years, from 2005 through 2015. Emissions fell by another 1.7% in 2016, according to the EIA.

Meanwhile, in Germany, CO2 emissions increased by 0.9% in 2016, according to energy research firm AG Energiebilanzen e.V., as growth in energy consumption outstripped the country’s reduction in coal use and increase in renewable energy sources. AGEB even blames the extra day created by leap year as one of the reasons for the increasing emissions (it didn’t stop the U.S. from decreasing emissions, though).

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24 Million Losing Health Insurance? Not Really.

The Affordable Care Act (ACA), as The Washington Times noted, is “a public policy flop of epic proportions.”

It is costing much more and insuring far fewer Americans than projected, while adding a huge government bureaucracy to the healthcare system, which was heavily regulated even before the ACA. Even though every American must either purchase health insurance or pay a penalty, many are choosing to pay the penalty instead. In spite of heavy subsidies, the number of Americans insured under the ACA is millions short of the number projected.

The Congressional Budget Office (CBO) forecasted In February 2013 that 26 million Americans would be insured through the ACA by 2017. Instead, only 10 million Americans are insured through the ACA – in spite of government subsidies and penalties requiring enrollment.

Meanwhile, new research from the Health and Human Services Department shows that, on average, premiums in the individual market have more than doubled since 2013 in the 39 states where Obamacare exchanges are federally run.

In spite of sharply rising premiums, insurers are bailing on the ACA (aka Obamacare), because they are losing money on it. Blue CrossBlue Shield of Kansas City, for example, has just withdrawn its Obamacare plans for Kansas and Missouri, citing losses of $100 million. In many markets, Americans who use the federal exchanges to purchase insurance have only one insurer from which to purchase insurance. In some cases, insurers have withdrawn completely.

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