Posts tagged ‘Spending’

Ration or Tax: Eating Cake Not an Option

We live in an instant gratification society that would like everything for free ( like my pal Bill Maher), which explains why we want to have our healthcare cake and eat it too. I think George Will said it best when discussing universal healthcare coverage, “If you think health care is expensive now, just wait until it is free.” Look, I love free stuff too, like the rest of us, whether it’s free sausage sample at Costco (COST) or a breath mint at the Olive Garden (DRI). But regrettably, exploding deficits come at a price.

With midterm elections coming up, the issue of healthcare is once again front and center. The majority party feels like a checkbook is a solution to healthcare prosperity. Can you really look me in the eyes and say covering additional 32 million uninsured Americans is going to save us money. The government hasn’t exactly built a ton of credibility with the disastrous train-wreck we call Medicare, which is already carrying 45 million covered passengers.

The minority party hasn’t done a lot better with the layering of the 2006 unsustainable Medicare Part D drug plan. Conservatives are campaigning on “repeal and replace” and that is great, but where are the cuts?

There are only two solutions to our current healthcare problem: ration or tax (read Plucking Feathers of Taxpaying Geese). Is healthcare a right or privilege? I don’t know, but if we want to cover current obligations, or add 32 – 50 million more uninsured, then we will be required to cut expenses (ration) to pay for increased benefits and/or increase taxes to cover additional benefits. I would love to cover all Americans, along with the starving children in Africa too, but unfortunately we are limited by our resources. Writing checks with borrowed money will only last for so long.

How severe are the exploding healthcare costs, which are covering the graying of the 76 million baby boomers? Here’s how Forbes describes the unsustainable Medicare obligations:

The Medicare Trustees tell us that Medicare’s expected future obligations exceeded premiums and dedicated taxes by $89 trillion (measured in current dollars). No, that’s not a misprint. To put that number in perspective, Medicare’s liability is about 5 1/2 times the size of Social Security’s ($18 trillion) and about six times the size of the entire U.S. economy.

 

Not a pretty picture. These estimates look pretty far in the future, but even more bare bone figures arrive at a still frightening $33 trillion. Take a look at healthcare spending forecasts as a percentage of GDP – even the lowest estimates are depressing:

Source: National Center for Policy Analysis via Forbes

In our increasingly flat globalized world, competition between countries is becoming even more intense. We are in a marathon race for improved standards of living, and all these debts and deficits are dragging us down like an anchor tied to our legs. Even without considering other massive entitlements like Social Security, healthcare alone has the potential of grinding our economy to a halt. Politicians are great at promising more benefits and tax cuts in exchange for your votes, but true leadership requires delivering the sour medicine necessary for future prosperity. Before we eat the healthcare cake, let’s raise the money to buy the cake first.

Read more about the Medicare Explosion on Forbes

Wade W. Slome, CFA, CFP®  

Plan. Invest. Prosper.  

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in COST, DRI, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

October 10, 2010 at 11:30 pm Leave a comment

Debt Control: Turn Off Costly Sprinklers When Raining

By living in Southern California, I am acutely aware of the water shortage issues we face in this region of the country. We all have our pet peeves, and one that eats at me repeatedly occurs when I drive by a neighbor’s house and notice they are blasting the sprinklers in the pouring rain. I get the same sensation when I read about out-of control government spending confronting our current and future generations in light of the massive debt loads we presently carry.

I, like most people, love free stuff, whether it comes in the form of tooth-pick skewered, teriyaki meatball samples at Costco Wholesale Corp. (COST), or free government education from our school systems. But in times of torrential downpours, at a minimum, we need to be a little more cost conscious of our surroundings and turn off the spending sprinklers.

Certainly, when it comes to government spending, there’s no getting around the entitlement elephant in the room, which accounts for the majority of our non-discretionary government spending (see D-E-B-T: New Four Letter Word article). Unfortunately, layering on new entitlements on top of already unsustainable promises is not aiding our cause. For example, showering our Americans with free drugs as part of Medicare Part D program, and paying for tens of millions into a fantasy-based universal healthcare package (purported to save money…good luck) only serves to fatten up the elephant squeezed into our room.

Reform is absolutely necessary and affordable healthcare should be made available to all, but it is important to cut spending first. Then, subsequently, we will be in a better position to serve the needy with the associated savings. Instead, what we chose appears to have been a jamming of a massive, complex, divisive bill through Congress. 

Slome’s Spending Rules

In an effort to guide ourselves back onto a path of sensibility, I urge our government legislators to follow these basic rules as a first step:

Rule #1Don’t Pay Dead People: I know we have an innate maternal/paternal instinct to help out others, but perhaps our government could stop doling out taxpayer dollars to buried individuals underground or those people incarcerated in jail? Over the last three years the government sent $180 million in benefit checks to 20,000 corpses, and also delivered $230 million to 14,000 convicted felons (read more).

Rule #2Pay for Our Own First: Before we start spending money on others outside our borders, I propose we tend to our flock first. For starters, our immigration policies are a disaster. As I wrote earlier (read Our Nation’s Keys to Success), I am a big proponent of legal immigration for productive, higher-educated individuals – not elitist, just practical. If you don’t believe me, just count the jobs created by the braniac immigrant founders at the likes of Google Inc. (GOOG), Intel Corp. (INTC), and Yahoo! Inc. (YHOO). These are the people who will create jobs and out-battle scrappy, resourceful international competitors that want to steal our jobs and our economic leadership position in the world. What I don’t support is illegal immigration – paying for the healthcare and education of foreign criminals with our country’s maxed-out credit cards. This is the equivalent of someone breaking into my house, and me making their bed and feeding them breakfast…ridiculous. I do not support the immigration law passed in Arizona, but this unfortunate chain of events thankfully puts a spotlight on the issue.

Rule #2a. – Stop Being the Globe’s Free Police: If we are going to comb the caves of Tora Bora  as part of funding two wars and chasing terrorists all over the world, then we not only should be spending our defense budget more efficiently (non-Cold War mentality), but also charging freeloaders for our services (directly or indirectly). We are spending a whopping 20 cents of each federal tax dollar on defense, so let’s spend it wisely and charge those outside our borders benefiting from our monetary and physical sacrifices. And, oh by the way, sending $400 million to the territory controlled by Hamas (read more) doesn’t sound like the brightest decision given our fiscal and human challenges at home. I sure hope there are some tangible, accountable benefits accruing to the right people when we have 25 million people here in the U.S. unemployed, underemployed, or discouraged from finding a job.

Rule #3: Put the Obese Elephant on a Diet – As I alluded to above, our government doesn’t need to serve our overweight, entitlement-fed elephant more chocolate, pizza, and ice cream in the form of more entitlements we are not capable of funding. Let’s cut our spending first before we buy off the voters with new spending.

There are obviously a wide ranging set of economic, political, and even religious perspectives on the best ways of managing our hefty debt and deficits. I do not pretend to have all the answers, but what I do know is it is not wise to blast the sprinklers when it is pouring rain outside.

Wade W. Slome, CFA, CFP®  

Plan. Invest. Prosper.  

www.Sidoxia.com 

*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, and GOOG, but at the time of publishing SCM had no direct positions in COST, YHOO, INTC, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

June 21, 2010 at 12:30 am 1 comment

Building Your Financial Future – Mistakes Made in Investment Planning

Building Your Dream Future Requires a Plan

Building Your Dream Future Requires a Plan

Building your retirement and financial future can be likened with the challenge of designing and building your dream home.  The tools and strategies selected will determine the ultimate cost and outcome of the project.

I constantly get asked by investors, “Wade, is this the bottom – is now the right time to get in the markets?” First of all, if I precisely knew the answer, I would buy my own island and drink coconut-umbrella drinks all day. And secondarily, despite the desire for a simple, get-rich quick answer, the true solution often is more complex (surprise!). If building your financial future is like designing your dream home, then serious questions need to be explored before your wealth building journey begins:

1)     Do I have enough money, and if not, how much money do I need to develop my financial future?

2)     Can I build it myself, or do I need the help of professionals?

3)     Do I have contingency plans in place, should my circumstances change?

4)     What tools and supplies do I need to effectively bring my plans to life?

Most investors I run into have no investment plan in place, do not know the costs (fees) of the tools and strategies they are using, and if they are using an advisor (broker) they typically are in the dark with respect to the strategy implemented.

For the “Do-It-Yourselfers”, the largest problem I am witnessing right now is excessive conservatism. Certainly, for those who have already built their financial future, it does not make sense to take on unnecessary risk. However, for most, this is a losing strategy in a world laden with inflation and ever-growing entitlements like Medicare and Social Security. There’s clearly a difference between stuffing money under the mattress (short-term Treasuries, CDs, Money Market, etc.) and prudent conservatism. This is a credo I preach to my clients.

In many cases this conservative stance merely compounds a previous misstep. Many investors undertook excessive risk prior to the current financial crisis – for example piling 100% of investment portfolios into five emerging market commodity stocks.

What these examples prove is that the average investor is too emotional (buys too much near peaks, and capitulates near bottoms), while paying too much in fees. If you don’t believe me, then my conclusions are perfectly encapsulated in John Bogle’s (Vanguard) 1984-2002 study. The analysis shows the average investor dramatically underperforming both the professionally managed mutual fund (approximately by 7% annually) and the passive (“Do Nothing”) strategy by a whopping 10% per year.

Building your financial future, like building your dream home, requires objective and intensive planning. With the proper tools, strategies and advice, you can succeed in building your dream future, which may even include a coconut-umbrella drink.

June 3, 2009 at 3:27 pm Leave a comment


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