How to Prepare for the Coming Entitlement Crisis

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
debt crisis 0

In my last two columns, I’ve discussed how the U.S. entitlement system is careening toward bankruptcy. (In technical terms, it is “actuarially unsustainable.”)

Yet millions of Americans don’t want to believe it.

In response to my last column, for instance, Chuck H. posted that Social Security and Medicare “are not entitlements but a return of our investments.”

Dream on, Chuck.

Your tax dollars have not been compounding in a special trust with your name on it. They were paid out immediately to beneficiaries.

(In the private sector this is called a "Ponzi scheme.”)

Every day, 10,000 new beneficiaries become eligible for Social Security and Medicare. In 1945 there were 42 workers per beneficiary. Today there are just three per beneficiary. And in another decade there will be only two.

This is a demographic time bomb.

The Social Security Administration’s own website says, “Due to demographic changes, the U.S. Social Security system will face financial challenges in the near future.”

Talk about an understatement.

Yet politicos in Washington do nothing - and the outlook for Medicare and Medicaid is even more abysmal.

In a recent letter to The Wall Street Journal, former U.S. Navy Seal, Medal of Honor recipient and Democratic Senator Bob Kerrey was blunt:

Every future beneficiary under the age of 45 will choose between a 30% cut in benefits and a 40% increase in their children’s payroll and income taxes...

In the past 100 years, every federal intervention in healthcare has made things better for the beneficiaries, but worse for those paying the bills.

Funny how even relatively straight-talking politicians get more forthright after leaving office.

Yet most still take a backseat to JPMorgan CEO Jamie Dimon, who understands that pro-growth legislation would do a lot to boost the economy, raise revenue and mitigate our problems.

Unfortunately, U.S. businesses continue to suffocate under the world’s highest corporate tax rate - and a mountain of federal mandates and regulations.

In a recent conference call, Dimon said...

I was just in France, I was recently in Argentina, I was in Israel, I was in Ireland. We met with the prime minister of India and China. It’s amazing to me that every single one of those countries understands that practical policies to promote business and growth are good for the average citizens of those countries, for jobs and wages, and that somehow this great American free enterprise system, we no longer get it... It’s almost an embarrassment being an American citizen traveling around the world and listening to the stupid s--- we have to deal with in this country.

Dimon is a Democrat, incidentally. Pro-business individuals on both sides of the aisle recognize the nearly complete dysfunction in Washington these days.

Some readers asked why, if the problem is really so dire, the stock market hasn’t cratered already.

The answer is that investors can see only about nine to 12 months out. Even that view is cloudy, of course, but reasonable people know it’s futile to make economic projections much beyond that.

Still, the numbers don’t add up and can’t be made to. Investors should not conclude that there will be plenty of time to sell before a full-blown entitlement crisis arises.

This is something you plan for in advance.

How? For starters, know exactly where you would sell each security you own. (The Oxford Club facilitates this with a disciplined trailing stop strategy.)

The other even more important step is to make your asset allocation as conservative as necessary. Look at your total percentage of riskier assets - primarily stocks and high-yield bonds - in relation to lower-risk assets like high-grade bonds and cash.

In essence, you want to do a pre-mortem... not a post-mortem.

How conservative should your portfolio be? That depends on your age, your risk tolerance and your time horizon.

Benjamin Graham, mentor to Warren Buffett and other investment greats, had a handy rule of thumb. He said you should never have more than 80% or less than 20% of your portfolio in equities.

The other day a friend told me he was afraid that making his portfolio more conservative would crimp his near-term returns.

He’s right, of course.

Yet our elected misrepresentatives hem and haw while the demographic time bomb keeps ticking.

So expect this approach to limit your upside... until it totally saves your butt.

Good investing,


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