The Future of Entitlement Programs

by

John Wright

 

We have heard many times about the pending funding problems for Social Security and Medicare due to the coming of age of the baby boomers. The working population is and will be too small and their incomes/taxes also too small to cover the projected costs of the inverted population pyramid. Various projections have put one program or the other in dire straits anywhere from 2015 to 2030.

These entitlement program problems were identified without useful resolution more than ten years before the collapse of the economy in 2008. It is more than interesting to take another look at them and other related programs now, especially in light of the massive debt taken on by the federal government to bailout banks, Wall St., insurance companies and two of three auto makers Ö and also Fannie Mae and Freddie Mac. And letís not forget the economic stimulus package and FDIC takeovers of failed banks now in excess of 100.

I find myself thinking about an evolution of entitlement benefits over the next twenty years that has to take the massive debt reality into account. Thus, this article is about that evolution. I am also wrapping into my considerations programs such as food stamps, other welfare like unemployment compensation and healthcare that also depend on federal government expenditures (but fundamentally on tax revenues).

My thesis is that these programs will continue to exist and be active. Their value to the general population, however, will change markedly depending on which entitlement program is under discussion. Perhaps this superficial conclusion seems obvious but the interesting part is found in the effects on the general population during the evolution and especially at the endpoints, program by program.

We have additional considerations to think about that will occur in the same timeframe but are not specifically part of any funded federal program. For example, looking at the next twenty years there will be notable impact from global warming that will negatively affect our ability to grow food and to provide adequate water to certain large population centers around the USA. Consider also our future involvement with other nations, notably China, in economic and other areas. Think too about our various wars. These types of things will happen concurrently with the changes to entitlement programs and will most likely influence the evolution of the programs.

A final thought before I begin Ö We can always plan workarounds and sometimes-real solutions for problems or sets of problems where we understand the dynamic interactions between them, provided we have a fundamental and accurate understanding of our resources. It is, of course, the real events and problems of the near future that we know little or nothing about that can derail our plans. I read a long time ago a perfect visual example of that type of problem in one of Ian Flemingís James Bond stories, and I will paraphrase below, as I do not remember the exact wording in the story.

Suppose we are playing pool inside a pool hall and one of us has just hit the perfect shot causing the eight ball to travel at perfect speed directly towards the called pocket. All of us would bet everything we have that the ball would drop as expected. Alas, our limited view in a closed environment has precluded our sensing or awareness that a jet plane is only one second away from crashing into our building and spoiling the shot Ö and killing us. Thus, it is the things of which we are not aware that may or may not be reasonably predictable that will often confound our efforts to succeed. But sometimes we are intentionally stupid pretending that pretty obvious downstream effects from our actions will not undermine our future or our beneficent social programs. An example is the historical perverted use of Social Security funds by the Congress for purposes other than a retirement program.

Here is another example. When we feed impoverished people through foreign aid they reliably reproduce, recreating the impoverishment problem at new levels, unless other factors are engineered in place to avoid repeating the problem, like assuring that structural changes for continuous economic or agricultural improvement are in place and working well. Even then our efforts can fail. The recent earthquake in Haiti brought into focus the extensive poverty in that little country that somehow has a population of nine million people. They are chronically crowded and chronically in poverty. How is it that years of relief efforts from well- intentioned citizens here and elsewhere have not resulted in a good standard of living for Haitians? We delude ourselves. But letís move on to the primary subject of this article.

Okay, we start by considering the value of money. It is obvious that the dollar is being devalued now, and the size and timing of coming devaluations is yet to be known. We donít even know if we can stimulate our economy sufficiently down the road in terms of tax revenues to pay for our massive borrowing from foreign creditors like China. If we canít, we will print money to avoid defaulting on debts, but that action will, at the least, halve the purchasing power of the dollar, in increments of perhaps five to ten percent per year.

We are already experiencing the early stages of this reality, even in the midst of the depression. Numerous pundits whine about deflation of our hard assets like houses instead of looking at the price changes for things we must have, like food. Inflation due to currency devaluation is very obvious there as it is in healthcare costs. To get an earlier look at this reality, reread my article "Looking Ahead" on my web page Ö from back in the year 2005. Pete Peterson was spot on about the future devaluation of the dollar, and so was I in writing about what would happen and how to prepare. I wonder how many of you paid attention?

I want to digress for a moment to correct impressions from the media pundits who are wailing about deflation undermining our economy. First, even if the unemployment rate is truly as high as 25 percent of our labor force, due to shortened work weeks and jobs losses and other people who might seek employment in an improved economy, that means that 75 percent of the labor force is still employed and earning the same amount of money they were before. That means that demand for all products and services germane to the wants and needs of the 75 percent has not decreased. What we see that is wrongly called deflation is certain companies in certain markets chasing the market represented by the 75 percent, for the 25 percent group isnít doing any purchasing beyond essentials. Thus, to maintain profits businesses are competing with each other for the money represented by the 75 percent.

Price reductions are common temporarily because all companies existing in a competitive environment have experienced a fairly rapid drop in their normal market, and those companies need cash flow to survive. The weaker ones, regardless of size, will hit bankruptcy, mostly due to poor financial practices prior to the depression that were debt related and that demanded continued high sales volumes just to generate enough revenue to cover operation costs. The point is that many poorly run businesses should suffer now because they didnít value being financially stable, which truly means no significant long term debt. Their high debt load, both short and long term, became a way of life, and that was stupid.

Where we see apparent deflation is primarily in the housing market, and that only because of an irresponsible fiscal policy that led to a price bubble and the granting of irrational zero equity mortgages to unwary buyers, which in turn supported the building of too many houses relative to the future declining job market resulting from offshoring. If we simply extrapolate housing prices in the 1990ís to a more rational growth we will find reductions simply reflect the bubble and the temporary glut of houses due to the poor job market. Deflation on a grand scale across all goods and services is simply not an issue of importance, for it isnít happening and it wonít happen unless our unemployment rate continued rising to perhaps 40 percent. At that point a lot of businesses go out of business and many discretionary goods that used to be available cease to be sold. I am not losing any sleep worrying about that possibility.

Now letís look at what will happen to Social Security. The way Social Security will be kept on track is that present Consumer Price Index inflation adjustments will be effectively diluted by limiting the inflation adjustments to about one half of the real inflation in each year, which of course reflects the dollar devaluation. The role of Social Security and the definition of its purpose will thus change. It will become a partial piece of our disability and/or retirement income somewhat similar to now, but the percentage it represents of essential income will continuously decline across the next twenty years. Thus, the program will remain intact, all the people will be covered, including all the baby boomers, but the value of the income, while not declining in pure numbers, will be substantially less in buying power. That situation will clearly get worse for individuals dependent on Social Security each year as we experience the next twenty years. Those who will start collecting benefits during the next twenty years and later need to act now regarding savings to supplement or compensate the decline in buying power from what looks superficially to be stable Social Security benefits.

Social Security will certainly not run out of money, regardless of what our various Congresses have done in the past to rape the program. Older people will have been told many years in advance that they are responsible for providing for themselves, to an ever-greater extent, in retirement. This relayed knowledge will give the younger people a lot of years to save, and their current earnings will continue to increase to reflect inflation, but their cost to participate in Social Security will gradually decline on a percentage basis relative to their wages or salaries. Of course, the cost to employers will decline either first or on a similar path. It is a very straightforward problem to solve, and it will be solved as I have just described, for the pain comes on gradually and the process will not be a political football, for little to no legislative action is required to implement it.

What will this mean for older people who must enter elder care facilities? The operators of those businesses will be unwilling and unable to operate with continuously declining real income, so they will not be willing to receive elder people who lack additional financial resources. There will be no compensatory program funded adequately at the federal level, including Medicare or Medicaid, to alleviate that problem. This will be the gradual return of self-responsibility to essentially all citizens. Children will find themselves caring for their elder parents as life used to be for many prior to Social Security.

There is a question that begs to be asked, "Was this realization of the impracticality of future funding for entitlement programs a hidden part of the agenda of the bailouts and stimulus spending, knowing full well the necessity for and the planning of the rapid devaluation of the dollar?"

There is another related question that begs consideration. If the devaluation of the dollar is accompanied with inadequate inflation adjustments to entitlements across a period of ten or more years, doesnít that help to alleviate the problem of illegal immigrants stressing government services and programs, while not contributing or contributing very little to them?

If I took the time to reflect further I would undoubtedly come up with yet more examples of the backhanded benefits of crashing the economy and devaluing the dollar to compensate past legislative crimes, errors and oversights of many kinds. To a smaller extent this devaluation effect happened when Ronald Reagan floated the dollar against foreign currencies back in the 1980ís. You can think about that as I move on to the next subject.

People need to eat. People need shelter. People need clothing. These three absolutes cannot be violated for any significant portion of the population in the USA for any significant amount of time without provoking major civil unrest and/or huge increases in the number of crimes. Now letís be practical. We cannot and will not increase our prison capacities to compensate a potential problem that large. The problem will not be allowed to happen, for it makes no sense economically or politically, nor are our legal services such as courts and police forces equipped to handle a large increase in activity. And if you spend too much money on internal programs like increased numbers of police that represent increased cost to society instead of increased wealth you never recover from the depression.

What does all this mean where the rubber meets the road? The first point is that food stamps will be considerably expanded in availability and worth to the unemployed or underemployed. The old "government surplus" programs that used to supply food to school cafeterias and very low-income people will be reborn to absorb excess agricultural production and to distribute that production as part of the food stamp program. The cost to taxpayers will be the legislated prices and quantities for food that the federal government will pay to the farmers (now primarily corporate entities) in absorbing their "excess" production. The farm subsidy programs that paid farmers not to grow crops to keep prices high will segue into a form of subsidy where the government pays for extra crop production. These steps will be part one of keeping the larger poorer population quiet in the midst of what is, realistically, poverty. Opportunity for good jobs, good income and self-responsibility will have been replaced by the easiest dole out program that government can do. This means also that the recovery from the depression will not have to be as effective in terms of employing all the folks who otherwise need to be employed to survive.

Now, what about the shelter issue? In the old days we had government housing projects to provide homes for poor people, with variable rent. More recently weíve had "Section 8" housing. Think of it as privatizing government housing projects. It sort of worked in that millions had roofs over their heads who otherwise would not. Yet, the housing projects were fairly quickly damaged by the occupants and the overall environment was dangerous due to crime. The primary goal, of course, was met, and that was to get people off the streets. What they did to their housing was up to them and it did not directly affect people outside the housing projects. If they failed to pay their electric bills or heating bills they simply didnít get those services. Water, however, could not be denied under any circumstances.

What about our near future in regard to shelter for poor people? Look to a major return of the housing projects, for there will be major construction as economic stimulus to build them and plenty of ready occupants to use them. Some of this will include renovating existing public housing structures, pulling mothballed but still standing public buildings out of retirement, and finally, renovations to privately held rental units by conversion for public program use. The size of this work will eclipse anything seen in the past, for there is little future need for most of the potential housing project occupants in the working world. They may, however, be used periodically to populate military forces, particularly if we evolve to have major ground conflicts in different areas of the world, as we seem to be doing now with the addition of Yemen to Afghanistan and Iraq. It looks kind of probable, doesnít it? It reminds me of the constant war in the book, "1984."

The more interesting issue is to what extent our overall population will be affected regarding needing housing of that type. In the past the occupants were easy to identify racially. In the future there will be a larger component of White people mixed with plenty of Black people and Hispanic people, with some of them geographically dispersed away from larger cities.

One thing no one likes to talk about and that is the potential future increase in the size of the population receiving food stamps and living in housing projects. Like all dole out programs of the past, this set of programs cannot allow infinite expansion, and that is a most serious problem as the vast majority of the occupants will not easily find jobs to help cover the cost of population expansion through taxes. I believe we will see for the first time in the USA strong stimulus programs to contain population expansion. More on that subject later.

The third identified mandatory issue was clothing. Well, no matter how this issue was addressed in the past it is clear that basic clothing is now as cheap as dirt and providing it to tens of millions of people will not be much of a federal budget consideration. The thing to remember is that all of these people have been marginalized. They do not and will not for the most part participate in the "economy." Clothing them is simply one of three major requirements to keep them from having the necessity to commit crime to survive and in keeping them from participating in other forms of civil unrest, for they can be threatened with potential loss of benefits received.

What I havenít yet said is that the situation for the marginalized people is most likely a permanent "feature" of life in the USA for at least the next twenty to forty years. There will not be sufficient jobs at any known point in the future to absorb these people and to allow them to improve their standard of living, except for the children who, by ability, become educated through government subsidy to become competitive in seeking good jobs and a better life. But the bar is raised ever higher as human knowledge increases. Ever fewer people of all races and ethnic backgrounds become competitive as the knowledge requirements increase, for they are genetically unable to learn the more difficult, essential and advanced subjects in science, engineering and mathematics.

If anything, advancing technology and subsequent automation create ever fewer jobs, indeed they destroy many jobs for our least capable citizens. The only modern exception was the morally bankrupt decision to import illegal aliens to perform slave level agricultural work for slave wages, and that was/is reprehensible. Fewer jobs for the rest of the poor population means there will be efforts to contain population size and eventually to diminish the less capable populations to levels such that they do not pose a budget burden. That is far into the future, but realistically population stasis will be realized in the near term by forced birth control, possibly secretly administered drugs in government surplus food and various medicines that will have a tendency to reduce but not eliminate fertility. If my fondest hopes are realized it will be done ultimately in the most humanitarian way Ö by genetically increasing the intelligence of all of us.

In the interim, donít my projections feel like déjà vu? Isnít this really an expansion of or return to older welfare programs put in place in the 1960ís?

If unemployment compensation coverage continues to be extended, waiting for a return of jobs, does that constitute welfare? At what point can we stop paying unemployment compensation if the job market does not improve significantly and quickly? It should be obvious that unemployment compensation benefits, which are dismally small already, will have to be tapered gradually to zero for any given individual if the period of continuous unemployment goes beyond two years, which is highly likely. Otherwise we will have a completely unsustainable form of welfare for a much larger segment of the population during this depression of unknown duration. Unless the cost is controlled there will be continued increases in federal debt, not reduction, unless income taxes for employed people became punishingly high, and believe me that would be a political football.

All right, I have not discussed healthcare up to this point intentionally. Medicare and Medicaid are obvious entitlement programs that represent major consumption of federal tax revenues, in large part due to uncontained costs for all things medical plus increasing numbers of eligible participants. We have an impossible problem with an expanding population eligible for those programs, continued high cost increases in the supplies and services and a declining tax revenue base relative to the increase in needs and costs. This is obviously a ridiculous situation that cannot be allowed to continue. The compound solutions that will be used to address this situation are unpleasant and you will not hear about some of them in the news.

As it is likely to be passed in watered down form within a month or two by the Congress and signed into law by President Obama, the new healthcare bill will subsidize healthcare costs for our most needy and will attempt to contain health insurance and other medical costs. Odd, isnít it, that having health insurance will be a legal requirement for all citizens? So what do we do if someone doesnít have any insurance, for whatever reason? Deny services? Deny necessary drugs? Put them in jail? Perhaps we will fine them and in the process take from them a chunk of the small amount of money they do have Ö an amount they deemed too important to spend on health insurance. That is a serious dilemma and a destruction of yet another freedom.

One of the reasons Medicare and Medicaid havenít worked as hoped relates to trying to mix capitalism with socialism. Unit cost and volume of services and supplies is adjusted continuously to keep income maximized for healthcare providers by maximizing the submissions for Medicaid and Medicare subsidy payments to the providers. That this disconnects real medical needs from services performed is an atrocity, but it is also a reality. Thus, the federal government must implement measures to limit the overall real cost of Medicare and Medicaid, regardless of increases in the eligible population base, and without recourse for the providers to increase costs annually beyond very small amounts.

Once again, it is fairly obvious how this will be accomplished. Payments for any given service, procedure, drug or device will be limited by failing to increase the caps in proportion to the increases in cost of services. This will relate to inflation in general and not to the history of inflation in the cost of things medical. The idea is, once again, the annual increase in caps will not reflect real inflation. Over time the increase in people eligible for these entitlement programs will not bankrupt the federal government. What will happen is that all insured individuals will pay a continuously larger percentage of their own medical costs directly to providers. Profits will be squeezed due to the inability of the general population to pay present high costs. I am not weeping about the decline of profits as the public has been continuously raped by medical providers of all types, especially pharmaceutical companies and "for profit" hospitals.

In classic capitalistic reality this will limit the income of the providers to what the populace can afford, and thus contain the historically ridiculous medical cost increases and avoid busting the federal budget. What this means to the individual is clear. You will gradually expect less and less from the entitlement program and pay most of the cost of the services you request. You will be able to find services, but the quality may not be very good. For the more wealthy there will be medical boutiques which ignore insurance of all kinds completely and bill the patients only and in amounts guaranteed to make the boutique doctors wealthy. In return they provide absolutely first class service, procedures and materials. So much for the medical entitlements, for the flawed judgment that initiated high medical costs due to Medicare began over forty years ago in the Johnson administration. "Great Society?" Letís get a grip on reality.

Given that we will have different quality levels of medical services for individuals, based truly on ability to pay, it becomes clear that clinics located conveniently to serve the housing projects will dispense cost limited medications and services. The clinics will tend to receive higher provider compensation due to lower cost base drugs and procedures. The meaning and future of this change is completely obvious. If the customers use the service they will not pay much if anything, but the limited variety of drugs and services will make their healthcare program less effective and certainly not state of the art. But it will contain cost.

You will note that at no point do I say that Medicare or Medicaid or federally subsidized healthcare insurance will ever be unavailable. It will be available to everyone, just like Social Security, but the gradual decline in coverage and quality will be accompanied by a significant decline in real cost in tax revenues.

What about companies that provide health insurance for their employees? The paths those companies are taking and will continue to take will make good healthcare plans mandatory, with some options and variable cost to the employee, but generally not to the employer for basic coverage. Once again, the programs will continue to be in place and available but the coverage will not keep up early on with increases in the costs for medical services, etc. The health insurance companies will continue to do business as usual with less interference between patients and providers, for the insurance benefits will be capped by type of medical problem, not by choice of pharmaceutical or medical procedure. This will drive employees to seek the lowest cost medical facilities, procedures and pharmaceuticals consistent with their sense of need and quality.

That these present and coming realities in the USA are not indicative of a decent and affordable medical care environment is truly beside the point. What I have provided is the hard realities that will exist. They are not nice.

Letís take a look at some significant changes that have not been mentioned. For one, automobile ownership or leasing will decline markedly for unemployed or marginally employed people. They will aggregate in the major cities or cluster around farm communities and they will use public transportation, walking and bicycles or mopeds as necessary. Where group transportation for employment is provided via trucks one might call it car pooling on steroids. Simply think about the Hispanic labor pools. This change will represent a decline in demand for automobiles of the level of ten percent or more. There will be an associated though not perfectly correlated decline in the volume of gasoline and oil used. A related change will be the gradual demise of federally mandated busing and the implied cost and time inefficiencies. It will simply be sequentially deleted from different geographic areas that are economically stressed, until at a practical level it will no longer exist.

The general idea is that cost reductions that save tax dollars accompanied by decline in the value of the dollar through expansion of the money supply will be the rescue programs that will save the federal government from loan defaults. Taxes will increase, of course, for the working people. I do not yet have a sense of the real distribution of that cost burden, for our folks in Washington have been uncommonly quiet of late about income tax increases, which we know are unavoidable to reduce the federal debt. Rest assured that major deficit spending will come to an end within a year, unless we have a major war. All program costs that I have identified earlier in this article will be paid, piecemeal and with declining effect, from higher tax revenues and lowered real costs. This, my friend, is the future of the entitlement programs.