News from Chesapeake Investment Advisors, Inc.

April 2010 Issue 14

Greetings!

Well Spring has officially arrived and we have had the rain showers to prove it. Thankfully, it doesn't rain all the time and as I write this section on Friday Morning, April 2, outside it is just a fabulous Spring morning in Chestertown. It's sunny and warm and this weekend it's supposed to hit 80. Outside my front window and across the street a line of forsythia hedges are shading my whole building a pale yellow. Just beautiful.

Now, on to business, I received quite a few responses from last month's newsletter (besides the normal requests for a return of Duncan's photo) about Medicare. Who knew such a subject would generate such interest? One client correctly noted that I said (in error) that Medicare Part A is free--well, nothing is free and certainly not Medicare--I only meant that when you turn 65, of Part A and Part B, you only have to pay extra for Part B. If you have ever worked you definitely have had to pay for Medicare--Part A included; in fact, you have paid mightily for Medicare throughout your lifetime.

Let's say you are self-employed and make $100,000 per year; you pay $2,900 into Medicare. And unlike Social Security, there is no limit to the wage base that is taxed--so if you're lucky enough to make a million dollars a year, you pay $29,000 just for Medicare. And still it is not enough--Medicare is one of those grossly underfunded entitlement programs that is not only very expensive now, it must be fed exceedingly more money in the future. It will cost our children's children and their children just to pay for our generation's Medicare.

For a real eye opener, read the Trustee's report titled "Status of Social Security and Medicare Programs" at http://www.ssa.gov/OACT/TRSUM/index.html. Just read the summary page--it'll keep you up at night. Here's just one tidbit: ". . . the HI Trust Fund could be brought into actuarial balance over the next 75 years by changes equivalent to an immediate 134 percent increase in the payroll tax (from a rate of 2.9 percent to 6.78 percent), or an immediate 53 percent reduction in program outlays, or some combination of the two. Larger changes would be required to make the program solvent beyond the 75-year horizon."

Pardon me for being so negative, I'm not trying to be on such a glorious April morning--but the bottom line is that Medicare costs are just not sustainable. Stein's Law says, "If something cannot go on forever, it will stop" (Dr. Herbert Stein was an economist, Ph.D University of Chicago--1916-1999). If the cost-trend is not sustainable, then it won't be sustained. Something will need to change--I think it'll be a tax increase and a total redesign of the Medicare platform--someday. Who knows when, but I think it will be when the younger wage earners grow weary and poor paying for the ever burgeoning elderly population. We will have to wait and see.

Marty

For an article on favorite Stein quotes written by Stein himself go to: http://www.slate.com/id/2561/