If you’re like me, Social Security & Medicare entitlements have been an ever-present political football. In reality, it can be hard to cut through the noise and gain an understanding of what risks are real and what is political hyperbole.
In some ways, I’m fortunate to have chosen a career path in finance. What I realized was that markets do a pretty good job of weeding out empty political platitudes, and instead place their faith in numbers. Well, I’m alarmed by the numbers.
“Numbers rule the universe.” - Pythagoras
Here’s the Numbers
The Board of Trustees for America’s entitlement programs release an annual report outlining the funds’ reserves and projections for the future. The most recent reports were released this month and the numbers are concerning.
The Social Security Trust is expected to become insolvent by 2034. The Medicare Hospital Insurance Trust is set to use the last of its reserves even sooner, 2031.
I’m determined to avoid the type of melodramatic click-bait peddling that I see so much of today, so I want to be clear that I’m not saying to head for the hills. However, I’m finding it increasingly difficult to see a future where those benefits aren’t funded by out-of-control deficits and money printing. But before I explain what that means for the US Dollar, let’s explore the options.
Is Insolvency Avoidable?
I’m reminded of countless movies where, upon defeat, the villain proclaims they “never had a choice” which is promptly followed by the hero’s retort of “there’s always a choice”. The crux of the issue always boils down to the villain’s aversion to sacrifice. In that respect I wonder, have we become the villain?
What are our choices?
Raise taxes to fund the shortfall
Cut benefits
Raise the retirement age
Fund the shortfall with deficit spending
The first three options will be politically unpopular. Perhaps some mix of tax increases on the wealthy and benefit reduction to the top segment of social security beneficiaries could weave it’s way through the legislative process, but I’m not holding my breath. Even so, this would only be a partial solve.
The US workforce is already clocking more hours than their European counterparts (400 hours per year more than Germans), and the US already raised the retirement age in the not-too-distant past. With that in mind, who’s voting for the candidate proposing we work until age 72?
The final option is increased deficit spending to plug the funding shortfall. As you can see from the chart of annual deficits below, this has been the preferred fiscal solution in the US since leaving the gold standard.
At some point the wave of 73 million baby boomers, who will all be 65 or older by 2030, will weigh on both ends of the system. They won’t be working to fund Social Security and Medicare via payroll taxes, and they’ll also be drawing benefits from the programs.
It seems clear to me that deficit funding of the shortfall won’t be the only choice, but it’s the one we’ll choose. Adding more debt is easy, especially when the reason is supporting our senior citizens. The alternative means a sustained reduction is American quality of life via substantially higher taxes and reduction of retirement benefits.
What Does This Have to Do With the Dollar?
Perpetual deficit spending is only made possible by printing more money. To illustrate the point, consider that if you borrowed all the dollars in circulation, when the debt became due you would owe all the dollars, plus interest. So, you’d have to print more dollars to cover the interest.
When you hear the term “quantitative easing” this is what they’re doing.
The basic reality of our situation is this: The discomfort we will encounter doing what is required to end deficit spending is politically impossible.
Entitlement programs represent the 2nd layer of pressures on the US Dollar. The first layer being the current constraints on the Fed’s ability to reign in inflation caused by under water bank balance sheets (read about that in Part 1). The government’s only option will be more deficits, debt, and money printing.
All these will weaken the dollar over time. I’m not waiving a banner saying “collapse imminent”. I’m saying 10-20 years of erosion.
A Common Sense Defense
As with any prediction, I could very well be wrong. The landscape over the next 10 years could change in ways I cannot see from where I stand today. I consider investments in terms of risks and tradeoffs, and in my view, the risks of monetary weakness in the US over the next 10-20 years is substantial enough for me to take action in my own portfolio.
For me, bitcoin is the most attractive alternative to a weakening dollar system and here’s a few reasons why:
Known supply schedule
Impenetrable network security
Freedom from the increasingly fragile and corrupt banking system
Upside potential far greater than downside risk
Low correlation to other asset returns
Gold or commodities as well as TIPS could offer protections from inflation as well, but they lack the upside potential, portability, and independence offered by bitcoin.
I’d love to hear from you what questions you have about bitcoin and finance, or what topics you’d like me to cover in the future.
Thanks for indulging me as I write about our changing world. I hope you find my perspectives informative and useful.
“If we command our wealth, we shall be rich and free. If our wealth commands us, we are poor indeed.” – Edmund Burke
I find you articles very informative and easy to read for the non-finance expert. Thanks