Thursday, August 6, 2009

Excerpt from "The Hard Math of Demography"

Whiskey & Gunpowder
Gary’s Note: Our childish inclination to disregard costs will have the predictable outcome of bankrupting our nation. Paying for the extremely aged with public funds will be the straw that breaks the nation’s financial back. Our very own Bill Bonner and Addison Wiggin address the unpleasant reality in the following excerpt from Financial Reckoning Day Fallout.

Whiskey & Gunpowder
By Bill Bonner and Addison Wiggin

August 6, 2009
Baltimore, Maryland, U.S.A.

Excerpt from “The Hard Math of Demography”

Social Security? Not Exactly

The first public retirement pension scheme was created by Otto von Bismarck in 1880 Germany. Fifty years later, during the Great Depression, Franklin Roosevelt followed suit in the United States. As we’ve seen, the number of people expected to reach the retirement age of 65 was not considered to pose a threat to future funding. Life expectancy in 1935, in the United States, for example, was 76.9 for men. Workers relying on the plan for retirement would not receive much each month and were not expected to live long enough to drain the system.

When Social Security was founded, the typical U.S. worker at age 65 could expect to live another 11.9 years. But if today’s official projections are right, by the year 2040 the typical 65-year-old worker can expect to live at least another 19.2 years. If the normal retirement age had been indexed to longevity since 1935, today’s worker would be waiting until age 73 to receive full benefits and tomorrow’s workers even longer.


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In a report called “Demographics and Capital Markets Returns,” Robert Arnott and Anne Casscells argue that the crisis is not in Social Security, but in demographics. “When an entire society ages,” suggest Arnott and Casscells, “…the thing that matters most is the ratio between the workers to retirees. Unfortunately, the aging of the baby boom generation, which is a significant bulge in population, will cause a dramatic increase in the ratio between workers to retirees, one that will put enormous strain on society and cause friction between generations.”

In the United States, as in other developed countries, the unfunded benefit liability for public pensions amounts to 100 percent to 250 percent of GDP. It is a “hidden debt” far greater than official public debt. Unlike in the private sector, these debts are not amortized as expenses over 30 to 40 years. And it may be worth pointing out that under normal conditions economies do not run such crushing deficits. They only do so in crisis mode.

The annual cost of Social Security benefits represented 4.4 percent of GDP in 2008 and is projected to increase to 6.2 percent of GDP in 2034, and then decline to about 5.8 percent of GDP by 2050 and remain at about that level.

A Bubble in Health Care

And to the retiring boomers’ other doubts and insecurities, we might add that U.S. health care costs are expected to rise by 7 percent of GDP over the next 40 years — a rate that is more than twice as fast as other developing nations. The “old old,” — those aged 80 and over — are predicted to rise sharply through 2050 and will dramatically increase long-term care costs as well as disability, dependence, and health care expenses.

In fact, by official projections, in 2030, the U.S. government will be spending more on nursing homes than it spends on Social Security today. “Although people justifiably worry about Social Security,” says Victor Fuchs, an economist who studies the health care industry, “paying for old folks’ health care is the real 800-pound gorilla facing the U.S. economy.” Adding projections for Medicare and Medicaid’s expenditures to those of Social Security could raise the total cost to more than 50 percent of payroll taxes.


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The fiscal kickers of health cost inflation and political demand for more long-term care benefits threaten to raise public spending dramatically in the United States. Between 2005 and the fall of 2008, we spent two and a half years chronicling the efforts of David Walker, the former comptroller general of the United States, and Bob Bixby, executive director of the Concord Coalition, to reign in reform and shore up the Social Security and Medicare systems. The project yielded a feature length documentary film, which earned us a trip to the Sundance Film Festival in January of 2008 and another to the Critic’s Choice Awards in Los Angeles a year later. We published a best-selling companion book of the same title in late 2008. You’re encouraged to delve into the numbers we presented in the film and book. They’re truly mindboggling. But in many ways the project was dated the moment we released it to the public.

The credit crisis that reached a fever pitch developed in 2008 pushed the date of insolvency of these programs ever closer. On May 13, 2009, the Medicare Trustees warned that the fund they tap to pay for beneficiaries’ hospital care will be insolvent by 2017 — two years earlier than trustees had predicted the year before. The program has been paying out more than it collects in taxes and interest since last year, in part due to a recession well underway. Medicare would have to deposit $13.4 trillion — $1 trillion higher than last year’s estimate — into an interest-earning account today in order for the hospital fund to pay its scheduled benefits over the next 75 years. The program’s total unfunded obligation, which includes doctor and prescription drug benefits, is $37.8 trillion. The trustees estimated that in coming years, Medicare spending will rise faster than workers’earnings or the economy as a whole.

Trustees say that while the financial standing of Social Security decreased more sharply than Medicare last year, the health program remains at greater risk of insolvency. The financial difficulties facing Social Security and Medicare pose serious challenges, the report concluded.

For Social Security, the reform options are relatively well understood but the choices are difficult. Medicare is a bigger challenge. Its cost growth can be contained without sacrificing quality of care only if health care cost growth more generally is contained. But despite the difficulties — indeed, because of the difficulties — it is essential that action be taken soon, particularly to control health care costs.

After the revised Social Security and Medicare announcement the world began to wonder: Can the U.S. hold onto its AAA credit rating?

“The U.S. government has had a triple-A credit rating since 1917,” David Walker, now president and CEO of the Peterson G. Peterson Foundation, commented in the Financial Time s following the release of the Trustees report, “but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.

“First, while comprehensive health care reform is needed, it must not further harm our nation’s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.

“Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.”


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Of course, we must note that the whole credit rating biz is…well…corrupt. The agencies that are responsible for dishing out sovereign credit ratings (S&P, Fitch, and Moody’s) are the same ones that left us all out to dry in 2007. (Of course, mortgage-backed securities get a AAA…housing prices never fall!) Rest assured, if Wall Street can buy its way into AAA, Uncle Sam surely can, too.

But even Moody’s is starting to hedge their bets. They’ve since created three subdivisions within their AAA rating: resistant, resilient, and vulnerable…a corporate way of saying the good, the bad, and the ugly. While the United States isn’t in the worst of the bunch, it’s certainly not the best.

Bill Bonner and Addison Wiggin

Parting Shot...
The healthcare debate rages on…but we here in the Whiskey Room maintain our position: the care that you get handed from the government and from the insurance folks will always be sub par. You may be fooled into thinking you’re getting worthy stuff on the cheap — or even free — but the Universe chuckles at you.

Further, as Bill and Addison just explained, trying to expand coverage tends to bankrupt nations. That’s not good.

But despite the evidence we try to present and the lucid arguments we provide here in these pages, some people will cling to their old notions…

I have read Mr Smith's article, and am not impressed.

I support the freedom that people may buy private healthcare when Medicare and other countries' equivalents are insufficient. But in my experience private insurance is a rip-off. Whilst the punter is led to believe that he or she is covered against most catastrophes, in practice the cover leaks like a sieve through which insurers can wriggle out like the worms they are. There are so many exceptions and get-out clauses that the insurers can usually avoid paying. And seriously ill patients are in no fit state to argue their cases. The insurers have their clients over a barrel.

I much prefer the neo-Stalinist National Health Service (NHS) of the UK where I am a citizen. Here, healthcare is mostly free from cradle to grave (apart from spectacles, some dental treatment and a small fixed charge for drug prescriptions for some). The NHS is the third biggest employer in the world (after the Chinese army and Indian Railways), so we pay serious amounts through our taxes. Emergency treatment is excellent, so good that private hospitals do not even try to compete. But those of us who choose private health insurance in addition pay far more than the NHS costs us, and we get less comprehensive cover. Most private insurance is for elective treatment, and they don't cover any chronic complaint, terminal or palliative care. Those more labour-intensive and expensive forms of care fall upon the NHS. The NHS is cheap at the price.

In my view private medical insurers should be so strictly regulated that they have to provide fully comprehensive state-of-the-art medical care for clients until the bitter end. If that were to happen, then governments would no longer need to provide health services.

Of course you prefer you the neo-Stalinist National Health Service! You are from a race of domesticated castrati with cute regional accents, bred to crave the shelter of the state. I honestly don’t mean to insult and neither do I hold it against you.

What I do hold against you is your notion that your “healthcare is mostly free.” Do you think it costs nothing to produce good doctors and have them tend to your every sniffle and scraped knee? There are inescapable costs, but like most you can easily move them off your mental books as long as some other sucker is paying.

And your view that private medical insurers should be forced to give care no matter what also smacks of something-for-nothing-ism. Somebody has to pay for that state-of-the-art care, but as with every collectivist effort, there will be those who seek to get out more than they could possibly put in. “Let the suckers sow; allow me to reap!”

As we’re fond of saying at the Whiskey Bar: we’re not all going to get the same results out of life. Further, you get what you can pay for. Anything else is theft.

Now here’s that disturbing letter from a serviceman and the quality of government care… 

I just want to comment on the reader who wrote saying the Military have a pretty good insurance plan.  I separated from the US Air Force in 2008 after almost 10 years of service and one of the most important factors in my decision was the Military's Health Care.  I'm sure there are some military facilities that offer good care, but my experiences have differed.  I spent my military time pretty much hospital free, except for the occasional flu.  My family's care on the other hand was far from good. 

While stationed in England my son was diagnosed with a rare eye condition know as Coats’ Disease when he was a year old. This diagnosis, however, did not come from the military doctors.  On my sons 1 year check-up appointment the doctor failed to do a thorough examination, missing the abnormality in his right eye.  As time went on my sons behavior started to change.  He wouldn't eat, wouldn't go outside do to the brightness, and was very apathetic.   We took him back to the doctors on several different occasions and they told us that it was probably a stomach virus.  We even pointed out that his right eye was not normal.  It was bright red and puffy.  Again the doctors just said it was a virus.  It was probably about another month before we finally had a referral to see a doctor at hospital in Cambridge, England where he was finally seen by a specialist who concluded he had Coats Disease.  The doctors treated him by performing laser surgery to seal the leaking blood vessels in his eye, which were causing his retina detach. We were then told he would be fine and to schedule a follow up in 6 months.  About 3 months later his retina completely detached and he is now completely blind in his right eye. 

It wasn't until we were out of the service and saw specialist in Sacramento, CA, who examined him and told us that he developed another symptom called Sympathetic Opthalmia, where his body began attacking his good eye to compensate for what was happening in his bad eye.  He ultimately had his right eye removed when he was about 2 1/2 yrs old.  He is now receiving the proper treatment and is back to being a normal healthy boy. 

My point is, because we had no option to choose our family doctor, we received sub-par care from government health care and then received the same treatment with the English healthcare system.  Had we been able choose our own physician this whole scenario could have been prevented or at least care for in a more timely manner.  This is why I object to Obama's Health Care Reform policy.  I for one do not want to see socialized medicine ever again. 

Sorry for rambling on, but I thought it would benefit if people saw a sample of how this system worked.

Your ramble is welcome. The Whiskey Bar sends its regards and all the best to your son.


Your thoughts on rescinding women’s suffrage…

And Whiskey & Gunpowder founder Greg Grillot send me some information that makes our position on drugs “empirical instead of simply dogmatic.”

Please tell me you’ll be here.

Gary Gibson
Managing Editor,
Whiskey & Gunpowder

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