Facing facts about entitlements

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By Clark Troy

The United States needs to do something about the scale of its forward-looking entitlement obligations, most prominently Social Security and Medicare. At some very basic level, Republicans aren’t making things up, though their claim for example, that Social Security will be “broke” in the immediate future is hyperbole. We can still do things to fix the situation, but the longer we wait, the harder it will be.

The problem is, that it’s political suicide for political candidates to make a big deal out of it. Donald Trump doesn’t want to make it a big campaign issue, nor does Joe Biden, which should tell us something. Those of us who aren’t running for office need to talk realistically about these things to make it safe for those who do need to get elected to follow suit.

Just to help visualize the problem, here’s one of many pie charts available showing how large our core entitlement programs loom within the Federal Budget.

Source: Tax Foundation

The big entitlement programs and other mandatory categories (still larger than normal in 2022 due to continued pandemic programs) crowd all other spending categories out, a problem which has become ever more salient as interest rates and bond yields have risen, making the cost of servicing our debt rise dramatically. So, all the budget wrangling over non-defense discretionary spending just nibbles around the edges of the problem. Moreover, we depend on a lot of that discretionary spending for incredibly important services from which we all benefit. If anyone doubts that, allow me to recommend Michael Lewis’ excellent book The Fifth Risk. We can’t and shouldn’t just cut discretionary programs willy-nilly. Nor can we afford to stop spending on defense, unless we want to just abdicate our position as the world’s greatest advocate for freedom and democracy, however fallible we may be in that role, just as rising actors on the world stage seek to test our resolve at every turn.

So we do indeed need to focus on the programs dominating the budget and what we can do to make them solvent. We Democrats hate the idea of reducing entitlements because we want to help lower-income people and believe that government programs are the best way to make this happen. Fair enough, though we can scarcely deny that there are many devils in the details and few Americans seriously advocate for the state’s taking on full responsibility for its citizens’ material needs. We’ve seen that story play out poorly. But the problem has become that our scorched earth hyper-partisanship has gotten to the point that we fear that if we give the Republicans an inch, they’ll take the entire Lower 48.

But we all know something must happen. Practicing financial planners like me routinely haircut clients’ expected future Social Security benefits when running projections of clients’ ability to fund their stated goals on the assumption that the currently promised benefits will not in fact, be paid. In the absence of a better number, I reduce clients’ projected Social Security payouts (get yours here) by 20%, which the non-partisan Tax Foundation has estimated as the benefit reduction that will be needed starting in 2033 if no changes are made..

Biden wants to raise taxes on only those earning over $400k because he made a campaign promise not to raise taxes on anyone but the very rich. The problem is, that was a stupid promise to make. We all want to foist all our problems off on those wealthier than ourselves because, hey, they’re the rich ones, not us. We’re just getting by. But honestly, and not to pick on the most excellent Taylor Swift, but if a couple of million Americans can shell out on average $1,300 for tickets and other expenses to go see her most recent tour, that speaks to a lot of excess disposable income.

We all know that in fact a lot of Americans, a least the top quarter of the population, is doing fine. More of us should be taxed at higher rates. Or should we be foregoing some benefits from entitlement programs in the future—or both.

Is this an exciting or tantalizing prospect? No, it’s not. But it beats having our status as the world’s most stable and dynamic economy fading into the rearview mirror of history while we encourage our legislators to be rigid ideologues for the sake of… really, what? Updating our cabinets?

The exact mechanics of how this all gets resolved and how broadly the burden is spread across the population can get hammered out in Congress. We need to encourage our legislators to do their jobs by not promising to throw them out for being reasonable.

Clark Troy was born in Durham and educated in the Chapel Hill-Carrboro City Schools, then elsewhere. He is a financial planner at Red Reef Advisors and may be reached at clark.troy(at)redreefadvisors.com. When not working, he reads, plays sports, naps, drinks coffee and plays guitar, not necessarily in that order.

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1 Comment on "Facing facts about entitlements"

  1. After this had gone to press an article came out in the Wall Street Journal which offered lots of statistical corroboration to my point about their being plenty of affluence in America below the top 1%, meaning that the cost burden of entitlements reform can and should be shared broadly by the upper-middle class. Per the Journal’s analysis, about a fifth of all families headed by people aged 55-74 are millionaires. Amongst the college-educated, the proportion is around 45%. Of those, about a third are worth more than $5 million, about a third in the $2-$5 million range. Certainly, there is a lot of wealth tied up in home equity and a smaller portion in illiquid small businesses and farms. But wealth is not entirely concentrated in the top 1% and people don’t need to wealth signal by going to Europe or the Caribbean every year while our public finances are in poor shape. Indeed, the bond market vigilantes may not allow us to forever.

    Here’s the link to the Journal article https://www.wsj.com/us-news/never-mind-the-1-mini-millionaires-are-where-wealth-is-growing-fastest-b1dd2ee7. It will likely be behind a paywall for many, but appears in the print edition of the 10/28-29 weekend edition on page A2 and can be accessed at your local public library.

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