In 2011, Congressman Paul Ryan, the Chairman of the House Budget Committee, introduced a plan which he called “the Path to Prosperity.” It was really the last serious plan to slash runaway federal spending. Ryan forecasted that it would cut the budget deficit by $6.2 trillion over the next ten years and reduce the national debt by $4.4 trillion. Under Ryan’s proposal, the government would give Medicare beneficiaries vouchers for private coverage instead of directly reimbursing hospitals for seniors' care, which it does today. “Obama Care” would also be repealed.
This proposal never really had a chance. The picture above typified the vociferous and hysterical response. It depicted a look-a-like Paul Ryan getting ready to throw Grandma off the cliff.
The same thing happened this election year. President Biden claimed that the Republicans would put Social Security and Medicare on the “chopping block,” while Republicans countered that they wanted to “save and strengthen it.” Moderate Democrat Joe Manchin called for bipartisan reforms: “we must look at the trust funds that are going bankrupt, whether they be Medicare, Medicaid, Social Security.”
Of course, Manchin is correct. Social Security costs have usually been covered by payroll taxes and interest on investments. Until recently, there were more dollars coming into the Social Security Trust Fund than was being paid out. However, in 2021, Social Security benefits paid out exceeded the income from investments for the first time since 1982.
The trustees for the Old-age and Survivors Trust Fund (OASI) have issued its latest report that states the trust fund will completely exhaust its asset reserves by 2034. Should this happen, an across-the-board benefit cut of 23% would become necessary for the OASI to sustain benefit payments through 2096. We believe this shortfall will happen sooner. Social Security benefits are adjusted for inflation and increased on an annual basis. Recipients enjoyed a 5.9% increase in 2022, and will get a historic 8.7% cost-of-living adjustment (COLA) in 2023. That’s great for retirees, but the higher payments from the trust fund means that the trust fund will be drained sooner, and that will hasten the time for when benefit cuts are needed. Indeed, the long-term (75 years) picture is bleak. According to the latest report from Social Security Trustees, the projected long-term shortfall in revenue needed to sustain existing payout levels is $20.4 trillion!
Believe it or not, Medicare is even in worse shape! According to a 2021 report by the Biden administration, the Medicare Hospital Insurance (HI) trust fund will be depleted if healthcare expenses continue to exceed money flowing in. Without new legislation, it’s estimated that by 2026, Medicare Part A may only be able to pay for 91% of the costs it covers today.
Why is this so important? Although President Biden has bragged that he has reduced the budget deficit, the Congressional Budget Office (CBO) estimates that the 2022 budget deficit was a still astronomical $1.837 billion ($6.011 trillion in spending minus $4.174 trillion in revenue). To make matters worse, the CBO also projected a cumulative deficit for 2022-2031 at $12.1 trillion, or an average of $1.2 trillion a year. If you agree with most economists that the current inflation was caused, in part, by too much spending, you should be focusing on ways to dramatically cut that spending. Even more importantly, if you agree with us that the “real existential is an over-leveraged economy that is burdened by a huge and growing debt,” you should be greatly alarmed.
The problem is that more than 65% of today’s federal spending is mandated, in that it pays for the “entitlement” programs like Social Security, Medicare and Medicaid. So, unless our President and the new Congress collectively decide to “throw Grandma off the cliff,” and somehow trim those social programs (which we deem highly unlikely), the focus has to be on the remaining 35% - the so-called discretionary spending programs, which amounts to $1.688 billion in the latest federal budget.
How is that going to work? Total military spending, which includes Defense and the departments of Homeland Security, State and Veteran Affairs, amounts to $943.9 billion or 56% of total discretionary spending. Will military spending really decline under President Biden, who has committed to defending Taiwan if China invades that tiny island, and who is actively supporting Ukraine with advisors and tons of money?
What about interest of the Federal debt? According to the CBO’s latest baseline estimate, the federal government will spend $400 billion on interest payments in fiscal year 2022. That’s equivalent to 23.6% of all discretionary spending! This number is sure to skyrocket with the Federal Reserve aggressively pushing up interest rates, for each one percentage point increase in interest rates will increase interest spending by $38 billion at today’s debt levels. Unfortunately, this spending on interest is going to crowd out the government’s ability to spend money in other needed areas. For instance, right now the government spends more on interest than it spends on Social Security Disability Insurance, food and nutrition, housing and transportation! It’s going to get worse.
What does President Biden want to do about all this spending? Well, in regard to Social Security, his answer is not so surprising: SPEND MORE MONEY! He has proposed a four-point plan, three of which will cost more than it does right now.
1. He wants to switch the current COLA measurement from CPI-W to CPI-E. Since 1984, the CPI-E has been on average 0.2% higher per year.
2. He wants to raise benefits for long-lived beneficiaries by increasing the primary insurance amount by 1% annually from ages 78 through 82.
3. He would boost the special minimum benefit by adjusting it to a rate of 125% of the federal poverty level.
4. He wants to “tax the rich.” Currently, all earned income (wages and salaries) up to $147,000 is subject to the 12.4% payroll tax. Everything above is exempt. Biden wants to reinstate that tax on earned income over $400,000.
Given the high probability that Republicans will control at least the House of Representatives, we think it is a very good bet that the President and Congress will continue to kick the can and delay making a decision on curtailing entitlement spending. In addition, confronted by the twin menace of Russia and China, they will not curtail military spending; and the interest on the huge US debt will continue to mount. With that being the case, it will be hard to curtail inflation, and interest rates should remain high. Gold has probably already bottomed and should move higher; and although equities got a big boost from this week’s lower inflation number, it is hard for us to believe that equities can maintain a strong upward trend.
Federal Spending for United States- FY 2023
Defense: $1,167 bn
Education: $224 bn
Health Care: 1,637 bn
Welfare: $486 bn
Protection: $49 bn
Transportation: $148 bn
General Government: $69 bn
Other Spending: $195 bn
Interest: $396 bn
Pensions: $1,401 bn
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