Medicare + SS Anxiety27 April 2016

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AccountabilityScenario Updates

Market Update

US Govt Debt

Medicare + SS

Scenario: Debt Cliff

Medicare + SS Anxiety

UPDATED

HiddenLevers

MARKET UPDATE

Market Update

sources: HiddenLevers, USA Today, Int’l Spectator, Economist

1 Commodity Bounce

2016 GDP Winners

India 7.5%Vietnam 6.6%China 6.4%Pilipines 6.3%Malaysia 5.5%Indonesia 5.1%Pakistan 4.8%Egypt 4.0%

3

Apartment Boom

2

Oil +60%

Gold +4%

Oil -52%

Gold -16%

HiddenLevers

GOVERNMENT DEBT

DEBT: US in Global Context

sources: Thompson Reuters, WSJ

• USA = average OECD debtor• Japan still an outlier• PIIGS entitlements weigh

DEBT: Debt to GDP

sources: Peter G. Peterson

DEBT: Medicare + SS as Drivers

1970: 20% of budget = Medicare + Medicaid + Soc. Security2014: 47% big jump due to retiring Baby Boomers2040: 56% = projected allocation (wishful thinking)

source: Peter G Peterson Foundation

HiddenLevers

MEDICARE + SOCIAL SECURITY

healthy population pyramid

Demographics Shift

sources: HiddenLevers, US Census Bureau, Populationpyramid.net,

1960 2000 2040

worker base shrinking

Demographics Shift = Challenge

source: Committee for a Responsible Budget

• As US population ages, worker / retiree ratio is falling

• By 2035 two workers will have to support each retiree

• Leads to payroll tax shortfalls for Social Security and Medicare

Demographics: Labor Force Participation

sources: HiddenLevers, Calculated Risk

Young People

not working

Retirees need to

work still

Medicare + SS: Current Status

sources: WSJ. Social Security + Medicare Boards of Trustees Reports

• SS Trust Fund Depleted in 2034

• After 2034, taxes still pay 75% of benefits

Medicare + SS: Trust Fund Patches Over Time

Source: HiddenLevers, Congressional Research Service, Commonwealth Fund, Kaiser Health News

2010Obamacare

1997 Balanced

Budget Act

1983Medicare Payment Reform

• Medicare has neared insolvency almost once per decade• Governments of both parties have pushed through reforms• Reforms usually combined both cost cuts + tax increases

HiddenLevers

SCENARIO: DEBT CLIFF

GOOD: Demographic Windfall

source: HiddenLevers

Millennials + Immigrants save the system

SS fully funded+

no higher taxes

Labor Force participation rises to

pre-2008 levels

Accelerating GDP growth assumed

Labor force uptick

100% of benefits intact

BAD: Trust Fund DepletedOnly 75% of benefits, based on intact payrolls

source: HiddenLevers

consumer spending tanks

younger Boomers pull assets early

25c of every 1usd is from

SS Trust

UGLY: Payroll Taxes Dwindle

No alternatives put in place by

Congress

source: HiddenLevers

GDP killer lack of

consumption

Automation = job market collapse = no benefits

Capital v LaborAssumes that Capital wins

Japan + Europe facing this now

Scenario: Debt CliffGood:

Demographic Windfall

Bad:Trust Fund

Depleted

Ugly:Payroll Taxes

Dwindle

GDP Growth

-2.0%S&P

-36%

GDP Growth

0.5%S&P

-18%

GDP Growth

3.5%

Strong growth pulls Millennials and immigrants into labor market, funding retiree benefits fully.

The status quo continues, and Social Security benefits drop 25% in 2030s as trust fund is exhausted. Market drops as retirees spend assets.

Automation causes a drop in employment under-mining funding of benefits. Potential for system collapse could roil markets and cause recession.

S&P

+15%

Debt Cliff – Take Aways

Medicare solvency = provider cuts RISK: automation causes payroll tax decline

Don’t conflate Trust Fund + SS depletionPrepare for 25% benefits cut in 2030s