Where We're Going Part I, A Shot Across the Bow.

So today I'm going to start talking about Social Security, Medicaid and its impact on investing.

Snore! Boring! Political Graveyard! A strange way to talk about stocks. But stay with me for a moment....If {and I want to stress this is a big fat political if} Republicans do what Democrats have always feared and dismantle what's left of Roosevelt's and Johnson's New Deal and Great Society, somebody ought to ask what comes next.

Now for those that are inclined to get into some large political debate with me on this I say don't waste your time. Because I'm not interested in discussing in here the moral or social consequences or even in the devil's details of what a final plan ought to look like. However, I am interested in what the deal is going to look like that is offered to the Middle Class in order to get them to politically sign off on this.

Make no mistake, anybody who is under the age of 50 should have taken notice the other night at President Bush's press conference when he talked about means-testing Social Security. This is the latest shot across the bow in the Government's attempt to completely retool the social safety net.

Here's basically what the President said. "Those that are paying in the most will get back the least." In politics most issues can be broken down by following the money. In the case of Social Security the money is with that great big chunk of us who live somewhere above the poverty belt and below the coupon clipping set. Because this huge lump of people has not only paid the most into the system but is likely to demand the most from it. A more coherent discussion of this can be found in an editorial written by Paul Krugman over at the the New York Times. You can link it here. http://www.nytimes.com/2005/05/02/opinion/02krugman.html?hp (I don't agree with all of Krugman's conclusions by the way.)

Look here's the problem. The system will at some future point go broke unless it's fixed. And there's no money in the Treasury to do the repair job. Just some big obligations by Uncle Sam to pay out the funds at a future date. That date starts now as the Baby Boomers begin to retire.

Now what's going to happen is those of us under about age 50 are going to wake up pretty soon and realize that the fix is in. All that money we've had taken out of our paychecks over the years-well its not really put away for our retirement. Matter of fact- it really is a tax after all. A 6.2% tax up to a $90,000 ceiling this year. A maximum of $5,449.80 in 2005. Oh by the way, tack onto that the 1.45% Medicade Tax Rate which has no annual limit and is another means-tested program that most of the Middle Class will unlikely ever be able to tap into.

So this is why I'm asking what is the deal going to look like and now I'll tell you what this has to do with investments. Because from my perspective the least painful thing for the Government to do is offer us more of the same. That means more money in 401Ks and IRAs and the like with perhaps better tax advantages. Perhaps an elimination of the estate tax or a lowering of its rates as a sop. Private Accounts within Social Security looks increasingly DOA. Anyway why care how your accounts do if you aren't going to see all the money?

And if I'm right then that money will almost by default eventually find its way into the markets as there are at this point few places besides cash or bonds currently available to put this money away. This would represent an incredible amount of new capital to support equity markets along with a government having a much larger vested interest in stocks' long term results. There's both good and bad in this. Stay tuned.......We'll start to unravel what this means for investors in my next post.

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