Tuesday, August 25, 2009

Entitlements Must Go

The US budget problem is strictly a problem of entitlements. The growing disaster at the state level is a combination of federal entitlement matching and absurb state employee and teacher compensation packages -- especially health care and retirement packages. The hard cold truth is that these entitlement programs -- social security, medicare, medicaid and the Bush prescription drug act -- are not affordable. They will bankrupt the country. They are promises that cannot be kept.

These programs encourage Americans not to save for their old age and not to save for future medical contingencies. As a result, Americans do not save for these things. We have the lowest savings rate in the civilized world -- even now. But, we didn't have a relatively low savings rate before medicare came in the early 1960s and was expanded in the 1970s. Our low savings rate is a result of these entitlements.

The Obama answer is, of course, to ration medicare and medicaid benefits. (That is the ultimate end game of Obamacare). The right answer is to phase out medicare. Let people save for their own future medical needs. Obamacare would force the elderly to live in constant fear that their medical needs will not be met. And the truth is, they will not be met. The money is simply not there and they know it.

None of this should be any great surprise. Asking current workers to provide for twenty years of retirement and medical benefits for other people (the elderly) is ridiculous. People should pay for their own retirement and their own medical needs. That is the only affordable system that works.

The elderly are not poor. But, they are becoming poorer as private savings disappears because of the expectation of government largesse. That expectation will not be fulfilled.

This is a wealthy country, but that wealth can be destroyed by consuming now and paying later. That is what we are doing. Eventually, this shell game will fall apart. The end result is not in doubt. The only open question is how soon the end will come.

Every European country faces exactly the same problem that we do. They are going bankrupt as well and for the same reason. The demographic changes do not permit the ponzi schemes to continue. There is not an advanced economy in the world that is not on a course to bankruptcy. Interestingly, only the Asian countries have resisted the grandiose entitlement schemes of the West. The future for the Asian countries is bright. For the West, things look grim.