First Crucial Step: Social Security, Medicare Reform

Thursday, 09 Jun 2011 08:20 AM

By Jacob Wolinsky

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I previously wrote about the GOP playing with fire by refusing to raise the debt ceiling. However, the federal debt problem is grave, and drastic action is needed soon.

One of the most prominent investors is warning of dangerous consequences if the amount of debt the United States is taking on isn’t cut soon.

Robert Rodriguez isn’t a familiar name. However, his FPA capital fund has returned 15 percent annually over the past 25 years, beating every single stock mutual fund. His bond fund has never posted a loss.

Rodriguez correctly predicted the dotcom bubble in the late 1990s. Additionally, he sounded the alarm on the financial crisis as early as 2005, warning about Fannie Mae and Freddie Mac.

Rodriguez stated in a recent interview that if the deficit isn’t controlled, "I believe that within two to five years we'll have a crisis of equal or greater magnitude of what we just went through."

Rodriguez thinks that the often quoted U.S. debt to GDP at 64 percent is very misleading. If you add in off balance sheet items, Rodriguez thinks the number is closer to 500 percent.

Rodriguez thinks that starting in 2012 we will reach the point of no return.

So what should we do?

There needs to be serious reform of Social Security and Medicare. For Social Security, raising the retirement age and reducing benefits, even by a small percent, will do wonders.

For Medicare, we need to eliminate completely wasteful medical practices. In hospitals, it is routine to do a blood test every day.

Medical malpractice insurance claims raise the cost of insurance significantly. A good doctor can see thousands of patients during their career but might get one crazy patient who sues them, and therefore has to pay sometimes six figures for insurance. This is insanity that only benefits lawyers.

The recent financial reform bill contains over 2,000 pages of new rules for the financial industry, but not a word on Fannie, Freddie and FHA, which buy or insure a whopping 97 percent of residential mortgages. The GOP must come up with a plan to break these entities up and privatize them over time.

While, I oppose the GOP raising the debt ceiling as an attempt to force concessions from the Democrats, there is an alternative. The GOP can vote to increase the debt ceiling but threaten President Barack Obama with a veto on every single bill until drastic action is taken to reduce the deficit.

While many polls show that making any changes to Medicare or Social Security is vastly unpopular, the GOP can learn a lesson from New Jersey Gov. Chris Christie. If politicians do what is necessary and right, they will gain popularity despite going against the polls and what all the pundits say.

The GOP should raise the debt ceiling and then press President Obama hard for some real solutions, which will involve huge changes to the “holy grails” of Medicare and Social Security.

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