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November 30, 2012

The Real Fiscal Cliff – Not the Puny One in the News Today

Summary:

The unfunded liabilities in Medicare and Social Security represent the real fiscal cliff.

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Medicare and Social Security are in deep trouble — deep trouble. The nominal national debt is puny compared to the unfunded liabilities in Medicare and Social Security. How does $16T — yes “T” as in trillion — compare to $86T? There is a good article in the Wall Street Journal written by Chris Cox and Bill Archer. Click here to read the full article.

Historically, the government has had success in transferring these types of liabilities to the private sector. One way was to deliberately underpay doctors and hospitals under Medicare with the full expectation that those shortfalls would be absorbed by private payers. In my career I had discussions with the Centers for Medicare and Medicaid Services about that very thing. One Centers for Medicare and Medicaid Services official admitted that was part of their strategy. He also said that would continue as long as private payers were willing to absorb the Medicare underpayments to providers. That has worked so far.

Another example was when the government declared that private group plans would be primary over Medicare for workers over age 65. For those of you too young to remember, that was not always the case.

One possible big transfer of Medicare costs to the private sector would be to declare that companies have to offer COBRA for five years or so for every employee age 65 and up who terminates employment. I guarantee you that type of transfer to private companies will be “on the table.”

For those of you benefit managers who are in the first half of your career, you will be facing measures not unlike ones I’ve described here. Brace yourselves.

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