Frisco Financial Planning LLC

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The cost of entitlement

The latest round of health care reform has produced a pair of bills which promise to not only fix the healthcare woes in this country, but to dramatically reduce the deficit at the same time
(the new plan could reduce the deficit by $138 billion over the first 10 years -- $20 billion more than the Senate bill, according to the CBO forecast).

Excuse me for being cynical, but I've heard this song and dance before:

"In 1967, the House Ways and Means Committee predicted that the new Medicare program, launched the previous year, would cost about $12 billion in 1990. Actual Medicare spending in 1990 was $110 billion—off by nearly a factor of 10."

So why were these cost estimates so far off?  The cost of entitlement.

The estimates failed to recognize or account for the behavioral change that occurs in people when they are promised a no-cost benefit.

"Roosevelt described Social Security as a modest offer to 'give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.'

Look what has happened since then. About 35 percent of Americans rely on Social Security for 90 percent or more of their retirement income. ... And Social Security is only one example. Over the years, the federal government has created a number of social insurance programs -- including the Medicare plans for doctors' visits and prescription drugs -- that provide significant taxpayer subsidies to even middle- and upper-income Americans.

We started these programs as a safety net for our hard-luck fellow citizens, and of course that safety net must remain strong. My point is that programs designed to help the needy should not become enshrined as benefits to which all are entitled. Too many of us who can afford to contribute more to our own well-being are jumping into the safety net instead. That approach is not affordable or sustainable. More important, it's not the American way."

--David Walker, Former GAO chief from his book, Comeback America.

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The inmates are running the asylum: eight ideas to permanently break Social Security

When I saw this headline, 8 Possible Social Security Benefit Changes, I was naively hopeful that fiscal responsibilty had stealthily infiltrated its way into D.C.

Sadly, I couldn't have been more wrong.  The article gives eight possible "improvements" to the program including:
  • Guaranteeing a minimum benefit
  • Reducing work requirements for eligibility
  • Supplementing benefits for low-income single workers
  • Increasing survivor benefits and
  • Providing longevity insurance
Sorry to be such a wet blanket, but since it's common knowledge that Social Security is on a certain trajectory towards bankruptcy, shouldn't we be looking at how to make good on the existing promises rather than promising even more?

Related (courtesy of Wikipedia):

A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned. The Ponzi scheme usually entices new investors by offering returns other investments cannot guarantee, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going...  Knowingly entering a Ponzi scheme, even at the last round of the scheme, can be rational economically if government bails out those participating in the Ponzi scheme. If governments use newly created currency to bail out the scheme victims, the newly printed currency will devalue the rest of the currency in circulation, meaning all holders of that currency will suffer inflation to the currency. However, Ponzi schemes cannot last forever.

"He deprives the leaders of the earth of their wisdom, he sends them wandering through a trackless waste.  They grope in darkness with no light.  He makes them stagger like drunkards."

-- Job 12:24-25

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