Ticking Time Bomb

Many have lamented that the biggest casualty of this election season (aside from civility), is the short-shrift given to some of America’s most pressing issues, notably the debt, and specifically Social Security and Medicare. (See Investopedia’s Election Center)

Fiscal savants Robert Reich, a prominent Democrat, commentator and former Secretary of Labor under the Clinton Administration, and Alan Simpson, a Republican former senator from Wyoming and fiscal hawk, had much to say about both topics, what needs to be done to fix them and what’s standing in the way at this week’s Schwab IMPACT conference in San Diego.

Simpson, who was appointed in 2010 by President Obama to co-chair the National Commission on Fiscal Responsibility and Reform with Democrat co-chair Erskine Bowles of North Carolina.

The response to their report, which said that America was “going broke and needed shared sacrifice to save itself,” was “everyone ran for the exits.”

“We slaughtered every sacred cow,” Simpson said. “But every person had one issue. ‘You can’t touch that,’ they would say.” He said that there were at least 180 items in the tax code that add up to about $1.1 trillion in entitlements, such as municipal bond tax breaks and mortgage interest deductions. All the organizations favoring those entitlements have building in Washington. “AT&T has 100 lobbyists. How do you think that’ll turn out,” Simpson said, referring to its recently announced $85 billion bid for Time Warner, Inc.

“Out of Control”

The biggest issue, Simpson said, was out-of-control healthcare costs via Baby Boomers that have America paying twice as much for the same health procedures in other developed countries but “get 25% to 50% of the results.” (Related: Passing Boomers Will Leave a Big Economic Wake)

Reich agreed, adding that Medicare costs account for up 18% of the federal budget, which is far more than other developed countries. “And we still have a higher infant mortality rate.”

He said that is it imperative to “get a handle of healthcare costs” and that the “biggest single driver is pharmaceutical costs.” He also cited administrative costs; nurses spend about 31% of their time on paperwork, he said.

In all, the Medicare trust fund is expected to reach a strain point sometime in the early 2030s, Reich said.

Simpson added that one big issue, again, was entitlements. Just whispering ‘means testing’ or ‘needs testing’ and politicians get heat from organizations like the AARP.

When asked what the tipping point will be for healthcare, Simpson said that it could be when America’s creditors start saying “‘we want more money for our money,’” pushing lending costs to unsustainable levels. And when that happens, “the guy who gets hurt. Hosed. Is the little guy.

Fixing Social Security

Both Reich and Simpson agreed that Social Security, while under threat, is fixable, and possibly within the next four years, though whether the political will exists to do so is unknown.

What’s clear is that by 2034 Social Security beneficiaries will get a check for 21% less if nothing is done, Simpson said. (For more on this topic and a fact checking of their numbers, see this article from Advisor Perspectives.)

Reich said there are three ways of dealing with Social Security’s solvency. The first is raising the age of eligibility. When the first person claimed Social Security, the age of eligibility was 65 but the average life expectancy was 61.

The second was raising or removing the ceiling on taxable earnings. And the third is means or affluence testing.

Harsh Climate

Another big hurdle, according to both Reich and Simpson, was the incivility that has come to define political discourse in America.

Simpson noted that “some people believe that Hillary [Clinton] should be wearing an orange jumpsuit” and others think that “you could give Donald Trump an enema and bury him in a shoebox.” (Related: What are Donald Trump’s Chances of Being Elected President?)

Both lamented a lack of willingness to compromise and a tribal populism that comes with that stance.

Simpson said that what America is experiencing is dislike, “but hatred. Which is unacceptable and unknown in this country.” He said that much of it is coming from the House of Representatives. He believes that G.O.P Representatives were so tired of being over a barrel for so long during Democratic control that when they gained power they wanted a measure of revenge. Reich narrows the moment to 1995 when Newt Gingrich became Speaker of the House.

“Populism comes from politicians saying we can fix health care, Social Security, defense, education and more without touching a thing,” Simpson said. “That’s what’s known as a terminological inexactitude. A lie.”