On Feb. 4, 2011, Federal Reserve Chairman Ben Bernanke gave a dire warning in a speech before a gathering of top financial policy reporters at the National Press Club in Washington, D.C.
“The two most important driving forces for the federal budget are the aging of the U.S. population and rapidly rising health care costs,” Bernanke said.
He warned the costs of caring for the rapidly growing population of seniors in the U.S. will be an unsustainable burden for the budget and a constant impediment to economic recovery. As 10,000 baby boomers a day started turning 65 on Jan. 1, 2011, the big three entitlement programs, Social Security, Medicare and Medicaid, are all in the red and creating havoc for government budgets at the federal and state levels. This has become the No. 1 economic concern of the Federal Reserve.
Medicaid has especially become a serious problem for the states. It funds at least two-thirds of all spending for nursing home care and is the primary payor for long-term care services in the United States. Unlike Social Security and Medicare, seniors do not automatically qualify for Medicaid at age 65 and instead must qualify based on income and assets at indigent levels.
Many seniors follow a “spend down” path to get rid of money and assets to qualify. Since the economic crisis began three years ago, Medicaid rolls have increased while the available dollars to cover services have decreased. The current situation and future projections are so serious that both the federal chairman and the secretary of Health and Human Services, the body that runs Medicaid and Medicare, issued unprecedented high-profile warnings on back-to-back days in early 2011.
Over 10 million Americans now require LTC annually, and Medicaid is the primary payor of LTC services in the United States. In 2009, Medicaid spent $240 billion on LTC services, accounting for 43 percent of total expenditures. By comparison, $45.6 billion or 19 percent of LTC services was paid out of pocket by the consumer. States spent on average 16 percent of their annual budgets on Medicaid, making it the second biggest budget item behind only education.
A report tracking Medicaid spending going back over the last seven years showed Medicaid underfunded payments for services to all patients by $14.17 every day in 2009, and this alarming underfunding trend will get worse through 2011. The economic crisis has robbed state budgets of funds available to support Medicaid funded programs. As a result, there was a national deficit of almost $5 billion.
Medicare and Medicaid are under so much stress that the cuts are coming fast and furious. The impact of all these aging baby boomers being added to the equation is now described as the “Silver Tsunami.” As this population surge starts looking to these programs to support their costs of LTC, there will be harsh push back from the government. It is simple economics that most people continue to ignore — too many people and not enough money will result in less services and higher hurdles to qualify for government programs.
Alternative solution emerges
According to the NAIC, today there is $10 trillion of in-force life insurance in the hands of 153 million Americans. That is a huge population of asset owners who, for the most, part do not understand their legal rights of ownership and the various options available to them. The insurance industry prices and makes profits from the fact that millions of these people are paying billions of dollars in premium payments for policies that in the end will be abandoned. Too few policy owners possess the knowledge of how insurance works and when their original need for a policy has run its course; the vast majority of owners simply walk away from what may be one of the most valuable assets they own — for nothing in return.