Raising taxes or scaling down Social Security and Medicare benefits are two ways to preserve those benefit programs for future retirees, said William F. Sharpe, Nobel laureate and professor of finance at Stanford University in Palo Alto, Calif., speaking at the Investment Management Consultants Association’s 2008 Spring Professional Development Conference in New Orleans.
Mr. Sharpe noted that Social Security currently costs Americans approximately $14 trillion per year, which is equivalent to the gross domestic product.
“Social Security is not broken. The problem is that we should have been putting money into the pot,” he said.
Mr. Sharpe noted that under the current Medicare structure, hospitals, doctors and prescription drugs cost the country $34.4 trillion, $34 trillion and $17 trillion for the “infinite horizon,” a forecasting model used to describe the indefinite future, according to the 2008 Annual Reports of Trustees of Social Security and Medicare.
If the GDP over time were to increase $1.3 quadrillion in the infinite horizon, and $99.2 trillion is needed to be spent on a yearly basis to cover Medicare and Social Security costs, then taxes need to be increased by 7% or benefits need to be cut in order to for the government to continue to provide benefits.
“Advisers better plan on your clients paying higher taxes before or after they retire or getting smaller benefits,” he said. “You probably have to deal with both [problems].”
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