What’s Up with Medicare?

2010 and 2019—these are 2 very important numbers in your head. The first represents the year where we will start paying out more money than we take in. Those of you who did those rates of change problems in Calculus know that it won’t take long for the money tank for such a system to empty—which brings us that second number—2019, where the Medicare system is expected to be bankrupt. What’s scary is that the current candidates left in the Presidential race aren’t speaking about it.

From the LA Times:

Sen. John McCain of Arizona, the presumed Republican presidential nominee, had little to say when the latest numbers were released projecting Medicare going into the red by 2019 and Social Security following in 2041. The Democratic contenders, Sens. Barack Obama of Illinois and Hillary Rodham Clinton of New York, also sidestepped the issue.

Most of the people who read this are not planning to lean to heavily on Medicare anyway, resorting instead to building a strong 401(k), work benefits plan, or IRA to provide them with the needed funds to handle medical expenses in their old age. At least I hope so. But your parents and grandparents most definitely will. And the Medicare program is in serious trouble, even more so after the Part D prescription plan was added in 2003.

Expect the candidates (except maybe for McCain) to adopt the populist solution:

Tax “The Rich.”

Social Security operating in the red? Tax the Rich.

How about that Universal Health Care? Roll back those tax cuts on The Rich.

How to keep Medicare solvent? You got it.

But no one talks about the outlays (the cost). Rolling back the rich folks’ tax cuts (which means any person, family or business making 200,000+) won’t cover all of this. Which brings us to two solutions: either admit that everyone will have to shoulder an increased tax burden, or admit that some of these programs will unfortunately have to go or benefits will have to be sliced.

Let’s be frank: if the operators of Medicare and Social Security were a private business, investors would be running scared from them. Now imagine if the US Government forced you to own shares in the business… Now I know that these entitlement programs have been around for awhile but they were never meant to fund your retirement—it was simply meant as a supplement to retirement income. At some point some tough decisions will have to be made. Taxes will need to be raised. On everyone. Benefits will need to be cut, especially for younger Americans who have the opportunity to own and fund 401(k) accounts…or IRAs…or start successful businesses—like we always have.

So keep your eye out for Medicare, Social Security, and the coming burden of Universal Health Care. One would hope we can have these things and not pay for them, but if we want them, we will have to pay one way or another.

Your Thoughts?

What’s Hot on the PF Blogs: 5 Hot Links!

- Free Money Finance Warns about Ordering the “Special.”

- Get Rich Slowly has words of comfort on the current economic crisis.

- CNN Money chooses doom instead.

- But not without telling you how to protect yourself.

- And FiveCentNickel tells us how to avoid an audit, so you can get your rebate check.

See you next week. And if you comment there, let ‘em know we linked you there!

Fed Cuts, Bear Stearns, and March Games

Our Stock Market Game has gone on for almost a full year—that was quick, wasn't it? With 15 days left before the end, the market has been tanking, and we have some high fliers and some low-ballers in our game. Percentage gains in one year have ranged from 2.5% up to 32.3%
down (as of today).

IN THE NEWS
Bear Stearns has nearly collapsed, and was snagged by JP Morgan Chase for $2/share, about 270 million. Friday, Bear Stearns was at $30/share. Hope none of you fine folks out there were heavy in banking stocks—well, unless you were holding JP Morgan. However, diversification will get you through this shakeout of the
stock/housing market. What you won't hear much is who's funding this transaction: you think it's JP Morgan chase who's funding the purchase? Nope—the Federal Reserve is funding the purchase of a private company. Not sure if this is the first time it's happened, but I hope it's the last. Businesses, no matter what the size, should be allowed to fail and rise without the intervention of the government or
the Fed.

Speaking of the Fed, they, being the enabling parent to our shaky economy, made another cut this weekend of a quarter-point down to 3.25%. For those of you holding emergency funds in high-yield savings like ING Direct or Emigrant Direct, you should expect your returns to
sink to around 3% or lower.

March Madness is upon us, which means it's time for the obligatory news stories about how much work productivity is being lost.
See

here.

Or here.
Or maybe here.

I think that the complainers are simply (a) worse at picking NCAA pools than the general public, or (b) hitting a popular event while forgetting how unproductive we get on Fridays, the day before long weekends, or when people take smoke breaks or tank after 3pm.

So stay tuned folks. The dollar is weakening, we may be in a recession, and this time next week, your brackets for March madness will be in disarray. Relax. All these things shall pass—and be
corrected for the better.

What Won’t Work in the Economic Slowdown Ahead

So the word on the street is that we’re taking it on the chin economically. The dollar is falling, there is talk of banks failing, gas prices and the price of goods are up, and the stock market is tanking—it’s fallen below the 12,000 mark as of this writing. The federal government and the Federal Reserve are trying several options to get us on the right track, but I don’t think it’s going to work. Let’s look at some of the numbers:

- Taking profits of oil companies won’t work. There is talk of reviving the windfall profits tax and repealing subsidies from the oil companies. Ultimately, the amount of money they pull in pales in comparison to the government’s operating budget. Oil prices at the pump are determined further up the chain. The President cannot control oil prices—the prices are set by OPEC, which some argue is a cartel (and I really don’t disagree there very much). Besides, chances are that a large segment of Americans who own a 401(k) retirement plan profit from the oil companies revenues anyway. Taking away profits probably will hurt more than help.

- Cutting Interest Rates won’t work. The Federal Reserve will be meeting soon and is expected to cut interest rates again for the 5^th time this year. What this does is makes it cheaper for banks to lend money to each other. Unfortunately, it also discourages investment in our dollar (money markets). A good example of this is the interest rate you get at your ING Direct account. Notice how it falls when the Fed cuts rates? Many people choose to move their money to a currency with a higher return on interest. When people leave the dollar, the value falls because the market will be flooded with low-interest dollars—which means it would take more money to buy things.

- Creating Money Won’t Work. The Feds also just made $100 million dollars and injected it into the market. Not because of increase in labor output or anything logical. The stock market and credit lenders needed more money to bail out their bad lending decisions and so the Feds pressed “print,” and sent the money to the banks. That does NOT improve the dollar. It’s like giving everyone a million dollars—people would be a whole less likely to work, productivity falls, and so does the worth of your money.

- Giving out $600 Checks to everybody won’ t work. We’ve talked about that here.

So, the obvious question is: What will work?

I can’t say what will work with any confidence except let the problem work itself out. It sounds callous, but I think it’s the best solution. Sometimes, it’s better to just fall rather than trying to do everything to prevent injury because you can potentially make it worse. Many people got into houses they cannot afford. These folks should be willing to (a) downgrade or (b) consider renting again until they have to funds to truly get into a house.

The government, if they do decide to borrow money, should probably focus on infrastructure improvements. As for the interest rate cuts--they should remain reasonable and not in response to when Wall Street stomps their feet. Rates have been cut several times this year, and we’re not even through the first quarter yet as cuts are expected to continue. I’m not ready to embrace Ron Paul’s Gold Standard idea yet, but I may look into it.

Check's In the Mail in May - Your Plans?

The Stimulus and the Response

President Bush and the Congress has signed the Welfare for Everyone er, Economic Stimulus Package that will go out to some 150 million Americans starting in May. Most taxpayers will receive $600 if you earned more than $3,000 in 2007, $1200 for married taxpayers, and $300 per child under 17, according to the package details. Here are some more details via WhiteHouse.gov that you probably didn’t know:

- For 2008. Taxes on the first 6,000 you earn ($12,000 for married couples) will not be taxed (previously the tax rate was 10% ). Your adjusted gross income should be less than $75,000 ($150K for couples), including salary and bonuses to receive the full check. Phase-outs begin above these income levels.

- The total spending will be to the tune of $100 BILLION+. Most of us don’t understand the concept of how much money $100,000,000,000 is, but it is a lot of money being sent out to Americans.

So, why is the government doing this? Besides it being an election year and the slowing of the economy, the government seeks to try to soften the blow to the economy by giving you a cushion of cash to fall on. The theory is that if you give people money, they will go out and spend it on American Products that will directly affect the US Economy.

Is it a great idea? I don’t think it’s the best idea, considering some of the news on the ground about how people actually plan to spend their checks. From a Bloomberg article we find that Americans have other plans rather than spending the money on the good old USA:

The stimulus plan Congress approved this month may provide less of a jolt to the U.S. economy than intended, as most Americans plan to save rather than spend their tax rebates, a Bloomberg/Los Angeles Times survey shows.

Only 18 percent of respondents said they will spend their rebate on purchases, while slightly more than three in 10 said they prefer to use the money to pay off debt, and a third said they'll pocket it.

``People in Washington assume that about 40 percent of the money will be spent,'' said Douglas Elmendorf, a senior fellow at the Brookings Institution, a Washington-based research organization. ``Much less would be disappointing.''

I bet it would be. Do "People in Washington" lose consciousness after they enter the Beltway?

There are so many things in this little snippet that I find rather surprising. Less than 20% plan to spend the money—which, honestly, I have to see myself. Expect a huge “Economic Stimulus Sale” Blitz from US companies in May and June to compete with consumers' discipline to save and pay off debt. Then, consider the fact the most of the products you’ll be buying—clothing, computers and other high-end electronics, go to other countries, most likely China. I'm not going to lie to you--I'm blessed to be in a fairly decent spot financially, and that check is going to a splurge purchase--I got my eyes on a new TV or an airline ticket for my family's summer family reunion. I bet I'm not alone.

Lastly, remember that the US Government doesn’t have billions of dollars stored up in a bank somewhere to dole out when times get bad. They will most like follow the China Boon Economic stimulus plan, which is described below:

1. Borrow money from China for the US Economic Stimulus Package and give to Americans to spend.

2. Americans spend money at companies that send most of the profits back to China.

3. The US Government pays back the original money, with interest.

Sound good? Well, it’s probably the most likely scenario. I’d be pleasantly surprised if we use our Federal government check to pay off debt and save for later. The Feds would be happy if you spend the money. Personally, I think the best option would have been to spend the money on improving our Country’s infrastructure and educational pursuits. It would have taken longer to make an impact, but I think we would be better off than we would in say, 6 months from now when we find out the economic stimulus package didn’t go according to plan.

See you next week.