No, I’m not a prophet. But since people regularly ask me, “Will Social Security and Medicare still be around when I retire?” let’s explore that question.
One of my clients lives abroad. I only see him about once a year. At our last visit, I was shocked at how much he’d trimmed down. “You’re not half the man you used to be!” I quipped.
I suspect that’s where we’re headed with Social Security and Medicare—a sizable reduction in benefits. If so, very few will be pleased.
Back in their 2009 annual report, the Social Security and Medicare Trustees warned us, Medicare would run out of “trust fund assets” in 2017. Clearly, that didn’t happen.
Now they tell us that Social Security can pay in full retirement income benefits until 2034. Medicare should be okay until 2028 (remember, it was going to run out in 2017…).
Years ago, Nobel Prize-winning economist Milton Friedman diagnosed the problem with these programs when he listed the four ways we spend money. (Friedman wasn’t referring to these two programs, but I think you’ll see the connection.)
1. Spend your own money on yourself.
When you do this, you are both thrifty (it’s your money, remember?) and value-conscious (you want your money’s worth). When spending your own money on yourself, you are motivated to be very careful about how and how much you spend.
2. Spend your own money on someone else.
This is gift-giving or charity. When using your own money on behalf of others, you are incentivized to be thrifty. Even if you give extravagantly, you want good value from that large expenditure. Who wants to spend their hard-earned money on a sub-standard gift?
3. Spend someone else’s money on yourself.
Think about business trips vs. vacations. Most business travelers tend to splurge on meals and rooms when spending company money. (That’s why the travel industry loves business travelers.) Yet even though you’re spending someone else’s money, you insist on quality. You spend more, but you also demand more. Your focus is not on what you spend, but on what you are getting.
4. Spend someone else’s money on someone else.
Here the incentives for wise economic behavior have all but been removed. You are spending someone else’s money, so where’s the incentive to be thrifty? And you are spending it on someone else, therefore your concern for quality is reduced, if not gone.
This fourth option is the inevitable result of most government spending. That’s not to say some government spending isn’t needed…or carried out wisely. I’m simply speaking to natural human tendencies, which affect any such program.
Back to Social Security and Medicare—and the question of what their futures look like…I don’t expect massive government SOPMOOP (“spend-other-peoples’-money-on-other-people”) programs to voluntarily get their fiscal act together.
It will likely take an external crisis. Maybe the rest of the free world will decide the U.S. is no longer the safest place for their savings dollars, due to our out-of-control unfunded promises.
Should that happen, interest rates would rise to attract the money back. That means our cost of borrowing would rise, and our SOPMOOP problem would get even worse.
So, do I think Social Security and Medicare will be there for you? I do. These programs are deeply entrenched in our culture and politics. Eliminating them would be nearly impossible.
But look for them to be smaller…maybe half the SOPMOOP they are today.
You probably have other financial questions you wonder about. Make sure you’re asking all the important ones. Email me at bmoore@argentadvisors.com and I’ll send you my free list of “30-Something Questions for People Who are 60-Something.”
Argent Advisors, Inc. is an SEC-registered investment adviser. A copy of our current written disclosure statement discussing our advisory services and fees is available upon request. Please See Important Disclosure Information here.
