We May No Longer Be Entitled to "Entitlements"

We May No Longer Be Entitled to "Entitlements"
By RANDALL W. FORSYTH
U.K. example suggests cutbacks in government payments to the well-off in the U.S.

AMONG THE MANY INSIGHTS of Robert M. Bleiberg, the late former editor of Barron's (and one of my mentors), was that economic events in the U.K. had an uncanny tendency to presage those in the U.S.

The slide into high inflation that followed the expansion of the state and subsequent plunges in the nation's currencies were a common pattern. Britain's recurring sterling crises preceded the severing of the dollar's last ties to gold under the Bretton Woods system in 1971. Then came soaring inflation and chaotic economy of the 'Seventies.

Margaret Thatcher's election as British prime minister similarly preceded Ronald Reagan's march to the White House. The U.K. led the U.S. in the roll-back of the state, the curbing of union power (the British coal miners, Patco in America), the defeat of inflation and the beginning of the long boom of the 1980s and 1990s.

In the financial crisis of 2008 and the steps taken to counter it, the U.S. also followed the lead of the U.K. TARP originally was targeted for the purchase of troubled assets from banks, which gave the scheme its name. Former Prime Minister Gordon Brown instead proposed government funds be used to shore up banks' balance sheets by injecting capital, and the U.S. government did the same.

If past is prologue, it may be worthwhile to pay attention to what's going on across the pond.

The government led by Conservative David Cameron has proposed to rein in its budget deficit that rose to nearly 10% of gross domestic product—about the same percentage as the U.S.—by reining in some of long-time entitlements that had been nearly sacrosanct in British society.

His Chancellor of the Exchequer, George Osborne, has proposed ending the government's child benefit for upper earners. Currently, all British families, regardless of income, receive £20.30 a week (about $32.28) for their first child and £13.40 for subsequent children, until they reach the age of 19.

Osborne proposes eliminating that subsidy for families earnings more than £44,000 (nearly $70,000.) The move would save some £1 billion a year.

In addition, Osborne proposes that government benefits be capped at £26,000 ($41,000.) That would mean no family could earn more than the average working family income by being on the government dole.

These changes would reverse the long-standing British principle that everyone, rich or poor, be entitled to the same benefits. Cameron now holds Greece as an example of where Britain could be headed if it doesn't break from the past.

Americans would call this "means testing" for "entitlements," the principle that the government funnel benefits for those who truly need them, not everybody. Given the projections of where the U.S. budget is headed, we Yanks seem certain to move in the same direction.

The Concord Coalition, the group that has been sounding the clarion call about the dangers of the deficit for years, cites numbers from the Government Accountability Office that show the main entitlements—Social Security and Medicare—plus interest on the debt will consume 100% of federal revenues in less than 15 years. The Medicare and Social Security funds, which will generate cash surpluses of $10 billion cumulatively in 2012-2014, will plunge deeply into deficit as Baby Boomers retire.

Social Security recipients face the second straight year of no increase in payments in 2011. That may be a harbinger of what retirees will confront. Present projections don't even take into account the record number of leading-edge Boomers who are collecting at the earliest possible age, 62, by necessity as they lose their jobs or are forced into part-time work but still need a full-time paycheck.

Given these trends, is it probable that Baby Boomers will collect all the "entitlements" to which they had assumed they were entitled? Not whether it's fair or efficient public policy, but whether it's realistic.

Bob Bleiberg suggested looking to Britain as an example of what's likely to happen here. Given the sized of the deficit there, everyone is being asked to sacrifice. Mutually shared sacrifice will hit the presumably wealthy who live in high-cost areas the hardest.

That means that those in the cross-hairs need to take steps to protect their standard of living. They have to save and invest more now to ensure more income and assets in the future.

Clearly, those preferences have been expressed in the financial markets by strong demand for bonds. That inclination will likely be a suppressant for equity valuations, all else being equal. And a less lush future for all.