Tuesday, August 9, 2011

America in Triage

Yesterday the Dow Jones plummeted more than 600 points, over 200 of which came after President Obama tried to reassure the world that the United States should still be considered a AAA credit.  Both the drop and the President's speech came in response to S&P reducing America's rating below AAA.

This shouldn't have been a surprise--S&P had warned it would do so if the U.S. didn't reduce its deficit over the next 10 years by an aggregate amount of at least $4 trillion.  Of course Congress didn't come close to that kind of number--better to let the country go down the tubes with half-assed solutions than to risk their jobs!  Instead Congress and the President trumpeted a deal where only $900 billion would be cut --most of which is back-end weighted--primarily by increasing spending less than planned (!!) with an additional $1.5 trillion of unspecified cuts to be enacted by the end of 2011.  So instead of the $4+ trillion that S&P said would be required for it to consider the U.S. AAA-rated, Congress came up with a very dubious total of $2.4 trillion, most of which will probably never happen.

And Congress and the President have the nerve to question S&P?  Amazing.  Its as if they have absolutely no clue what is at stake for our country.  Which gets me to the title of this post:  America in Triage.

In war, doctors treat the most serious wounds first.  That saves lives.  Wounds that are not life-threatening are treated afterwards.  To save the United States, the same must hold true.  And the biggest wound afflicting our country is entitlements.  To try to fix our budget problems without addressing Social Security and Medicare is like clipping a patient's toenails while he is bleeding to death from a gunshot wound.

Unless we address entitlements soon there really will be no way to save the United States.  This is true for one simple reason--the Baby Boom generation has begun to retire.  On a simplified basis, the math of Social Security should be straight forward:  $-in = $-out.  Historically there has been a surplus of $-in due to the fact that the population and employment were growing.  Unfortunately that excess was used to expand other government spending--it was never saved.  [There is no "lockbox" Mr. Gore.]  Now, due to the tidal wave of approaching Boomers the $-in and the $-out will soon go into significant deficit unless something is done.  And that deficit will dwarf the deficits that now have the world so worried.

Examining the root cause of the coming Social Security deficits (Medicare is saved for a later post) yields a clear solution to the problem.  Social Security was never intended to be a universal retirement plan for Americans.  As such, the age at which people became eligible for it originally was very close to their life expectancy!!  Meaning that while there was a safety net available if they lived long enough, chances were they wouldn't!!  Unfortunately, from the perspective of having a balanced system, life expectancy in the United States has increased far faster than the eligibility age for Social Security, meaning citizens that were expected to die are collecting Social Security for many years more than the actuaries could have guessed.  In a nutshell, that is the entire issue with regard to Social Security.

Understanding that, the solution to this problem is obvious--even France has seen it--raise the age of eligibility until it approaches life expectancy thereby bringing the $-in and $-out back into balance.  In fact, solving the Social Security time-bomb in this way would ignite our economy like no Keynesian prescription ever could.  

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