From Birch Gold Group
The ever-controversial Alan Greenspan was partly responsible for a meteoric rise in the U.S. economy from 1987 – 2006 with low interest rates and market self-regulation.
He’s 92 now, and still has some economic insight to share.
In a recent Barron’s interview, he shed light on the status of U.S. entitlement programs like Social Security and Medicare.
In the interview, he seems to view entitlements in their current state as an “anchor” on U.S. economic growth (GDP):
Entitlements are slowing the rate of productivity growth, and that is a critical factor suppressing GDP growth. Entitlements are mandated, and their volume is largely unrelated to overall economic activity.
He goes on to say it’s “politically incorrect” to talk about the state of the “Trust” that Social Security and other entitlements are drawn from. He also clarified the bleak picture revealed by the Trust actuaries (emphasis ours):
The 2018 report of the Old-Age & Survivors Insurance and Federal Disability Trust Funds [from the Social Security Administration] shows that despite the fact that everyone says we are funding this stuff, the actuaries are saying you have to cut benefits by 25% for [the Trust] to be actuarially sound.
The cost of benefits was higher than taxes collected in the 1980’s and again in 2010. To accommodate for that, the Fed increased the deficit, and by extension the U.S. debt.
That reduction of entitlement benefits is getting closer according to the report Greenspan alluded to in the Barron’s interview. (By the year 2034, in fact).
He also pointed to why he thinks inflation may not be showing up as a problem for entitlement programs like it should be. “It’s latent,” and the inflation stats are “biased upward,” he said.
Then Greenspan revealed some interesting thoughts on Sweden, and how they started pulling their entitlement programs back from the brink in the late 1990’s.
And with U.S. entitlement programs teetering on the brink of chaos, perhaps Greenspan’s ideas are worth considering (he’s known for “mastery of economic data”).
Sweden’s Entitlement Secret – Can it Work in the U.S.?
“Sweden has gone through the same thing we have,” Greenspan told CNBC in another interview.
Since the Fed will probably have to make some unpopular choices to avoid things going bad on their own in the coming decades, maybe Sweden has a possible solution.
In the late 1990’s, the socialist Sweden faced unheard of mortgage rates that soared to 500% for a short period of time. You could easily say their economic system was crashing. Greenspan agreed, saying to Barron’s “it was coming apart at the seams.”
Then Greenspan revealed what he thought was the secret to Sweden’s success for pulling their entitlement benefits out of the gutter.
He said they shifted from a defined benefits program to a defined contribution program (much like a 401(k) for employees). Since the focus shifted from benefits paid to contributions made, Greenspan said the program “by definition is self-financing.”
He then explained the result of this shift for Sweden, and his prescription for the U.S. entitlement deficit in the Barron’s interview (emphasis ours):
Now, Sweden has a productivity growth rate of 1.3% annualized over the past five years—not great, but better [than many other countries.] We need to change the structure of all the various social programs that have a trust fund to them and go to a defined contribution rather than defined benefit.
Obviously, Sweden’s economic structure is tailored to their smaller economy. But the U.S. will have to address the entitlement program deficiency at some point. So perhaps looking outside the status quo should be a consideration.
The actuaries point to “how many years are left” in the Trust funding as a way of saying “everything is okay.” But maybe it’s not okay, because it’s politically incorrect to reveal the actuarial balance, like Greenspan alluded to.
He finished by saying, “We don’t have the capability of maintaining the defined-benefit system.”
Will the Fed catch the inflation problem in time? Will the actuaries stop being “politically incorrect” and solve the Social Security conundrum?
Don’t count on it.
Consider Adding Some “Self-Reliance” to Your Retirement
The only solutions Congress keeps considering involve reducing benefits or increasing contributions to Social Security in the form of taxes while employed.
But with the contributing workforce only increasing by 14 million, and the retiring workforce increasing by 30 million according to Greenspan’s book, the outlook doesn’t look like it will be supportive of standard solutions for much longer.
It seems “too little, too late” for entitlement programs in their current form. And of course, any collapse won’t happen overnight. But unless dramatic changes are made, it’s pretty obvious where it’s all headed.
One way to act now is investing in assets that diversify your portfolio. Consider assets that are known for their stability and protection in times of uncertainty such as physical gold and silver.
Don’t wait until the last minute to add some “self-reliance” to your portfolio.