Are Social Security and Medicare in Trouble?

hi this is Matthew Crowder from trader

University and today I want to talk

about whether Social Security and

Medicare are in trouble I've been

getting these questions a lot and so I

thought I'd do a video just devoted to

these if you're interested in learning

how the economy really works and how to

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sure to hit that subscribe button so if

we take a look at the US debt clock page

here we can see that the largest budget

items in the US federal budget are

Medicare Medicaid Social Security which

we're gonna be talking about defense

slash war and interest on the debt so

let's take a quick look at these

Medicare Medicaid is the largest of all

these a lot of people sometimes think

that Social Security is but it's

actually Medicare one point two eight

five trillion

this covers hospital hospital coverage

medical insurance prescription drug

benefits if you're 65 or older also

younger people with with disabilities

Social Security is the one that

everyone's heard of for retirees and

their families or for the families of

deceased retirees disabled persons as a

much smaller percentage close to 1.1


obviously defense spending is what it

sounds like point six nine trillion and

I would suggest that a lot of what this

is is just making the world safe not

making the world safe for democracy

necessarily but making the world safe

for the US dollar which is the world

reserve currency you need to have if

you're a world superpower and you have

the world's reserve currency you need to

keep those trade channels open you need

to keep the various straits open keep

the oil flowing and not let the Pirates

take your ships so that would be defense

spending finally this is a very sad one

as well interest on the national debt

three hundred eighty four billion or

0.384 billion now what's interesting and

the reason I add all these up is that if

you add up these for Medicare Medicaid

Social Security defense spending an

interest income or interest expense I

should say on the national debt you end

up with a three point four three

Trillian versus the US government has

only been collecting about three point

two three three point two four trillion

in taxes so you have a situation here

where the four biggest budget items are

greater than than all the tax revenue

that's coming in even after many years

of high capital gains etc and a very

strong rebound in the stock market after

the Kovacic crisis so if we go through

and look at these we can see that these

are basically well they're basically

mandatory items well we'll see what

mandatory means in a minute defense

spending I'm not a huge fan of weapons

and war etc but it does make a certain

amount of practical sense to have a very

strong military if you're a superpower

we can debate whether the US has done

this responsibly I'm not sure that it

has but this is not a budget item that I

expect to see disappearing especially

with the rise of nationalism all these

movements toward anti global ISM and you

know rumblings about war with Russia or

war with China you wouldn't expect this

budget the defense budget to go down in

fact you actually expected to go up

interest on national debt we are not

going to default on our national debt

because we can just print more money

this interest will keep getting paid

obviously at what I would argue is that

Medicare and Medicaid Social Security

these will also not be cut we've seen a

lot of riots in the u.s. obviously for

for different reasons in the last few in

the last few weeks but you can only

imagine what sort of writing you would

get if an entire generation mostly the

baby boomers we're talking about here

we're denied money that they paid into

the system so I think these things are

here to stay US defense spending include

this chart just shows how we spend more

on defense in the next ten countries

defined combined and actually defense

spending as a share of GDP has been

falling over the last few years now we

talked about this term mandatory

spending mandatory spending is another

name for obviously it's spending that


that has to occur under the law and it's

really another word just for entitlement

programs you can may hear entitlement

programs the really big ones as we'll

see our Social Security and Medicare and

they make the bulk of entitlement

spending or mandatory spending account

for nearly 50 percent of the federal

budget as we as we saw now what is

happening the crisis that everyone

always hears about is that beginning

next year the projections are supposed

to be 20/20 and now looks like it will

almost certainly be 2021 and the effects

of kovat obviously probably accelerate

this but the outflows the payments out

of Social Security Medicare it might say

Social Security I'm talking about

Medicare Medicaid as well the outflows

will be greater than the inflows so you

have existing workers paying into the

fund through payroll taxes and then you

have the benefits being paid to retirees

and the most simplest in the simplest

terms they're actually a couple funds

here I'm sort of talking about them all

as one now when you're outflows are

greater than your inflows what you need

to do then is to tap into your reserves

and so Social Security Medicare have a

trust fund of about three trillion so

they're going to need to start drawing

that down this was money that was set

aside it's sitting in US Treasuries and

according to projections which I will

link to this Social Security trust fund

it's actually a number of funds but it's

always recurred to referred to as the

trust fund this will completely run out

by 2035 and at that point

the amount of money that is coming in

will only be something like so I want to

say 75% of the money that's going out

and so Social Security will technically

not be able to pay anyone anymore

retirement benefits or a lot of people

benefits will be cut retirement age will

be raised there all these all these

hypotheses of what would happen here's

the 2020 I guess it's a 2019 report on

Social Security and I will link to this

so you can you can take a look at this

but this Oh a SDI this is the Social

Security trust fund cost is projected to

exceed total income starting in 2021 and

the trust fund reserves will

lying-in though until you become

completely depleted in 2035 now what are

the reasons for this we talked about a

little bit the program was first set up

in 1935 and since then we've had much

lower fertility rates people having

fewer children people haven't below even

the replacement level of children and

also higher life expectancies due to

better medical technology antibiotics

all these things that happened since 19

1935 and so as a result you have fewer

workers because fewer children and then

more retirees so sort of a top-heavy

upside-down pyramid where you need to

support all these retirees with fewer

workers and obviously all the

unemployment caused by kovat these these

COBIT seems to exasperate exacerbate a

lot of these negative trends ageing of

the population we said also especially

due to co vid less payroll taxes being

collected more unemployment in general

also what a lot of people fail to notice

is simply because interest rates have

gone down so much over the last call it

20 years that the fund the trust fund

that truly three trillion dollar trust

fund is actually learn earning less

money than it used to simply because

it's mandated it's required to be

invested in US Treasuries yields have

fallen much lower and so very close to

zero the tenure notice below 1% though

it has rallied a bit the yields of rally

today and so that trust fund is earning

less money here's a great chart of

population predictions for seniors which

which is defined as people over 65

versus people under 18 crossing

somewhere around call it 2032 it looks

like right before 2035 when the Social

Security trust fund is expected to run

out of money now let me show you the way

out of this y-you don't have to really

worry about Social Security or Medicare

being defunded and in order to do that

we have to take a look at how the

government is funding itself right now

it's the federal government in the u.s.

so as we saw the federal government

does not collect enough in taxes in tax

revenues to cover its spending so if we

take a look here US federal tax revenue

this is probably for 2019 over the last

twelve months about three point two

trillion federal spending is now

continuing to go up if we get a couple

more relief kovat relief plans like the

administration is talking about they're

talking about do it another trillion

dollars but even so of this federal

spending is six point three trillion

it's much higher than the tax revenue at

three point to three point two trillion

so what do you do if you don't have

enough money you need to spend it the US

government just like you or me needs to

needs to borrow money so what happens is

Congress goes to the US Treasury and

says we need some money I'm very I'm

simplifying this but trying to make it a

little bit fun so Congress goes the US

Treasury says we need to borrow some

money we need some money because we're

spending we're only bringing in three

trillion and we're spending six trillion

so what the US Treasury does is it sells

US government bonds which are called

Treasuries it sells them at auctions to

the big banks to what are called the

primary dealers or the big banks it

takes the cash from those sales and

gives the cash to Congress the banks get

a piece of paper and may get an IOU from

the government saying I'm going to pay

you some interest I'll pay back the

principal that's what a government bond

is or a Treasury so then get primary

dealers these big big big banks have

these Treasuries on their balance sheets

they own them and they've they've paid

the treasury cash for them so they have

these Treasuries that they need to get

rid of and so traditionally they've sold

them to private citizens I've owned

Treasuries at various points in my life

they sell them to hedge funds they sell

them to foreign investors particularly

Asian investors over the last 20 years

Japanese and Chinese governments in

particular and as we said foreign

governments so it used to be right when

the u.s. went off the gold standard and

everyone went into Fiat Fiat money

European countries used to own a lot of

Treasuries and the European Central

Bank's would buy these Treasuries and

they would hold them as US dollar

reserves there was almost like gold a

modern version of gold but really

less than desirable version of gold but

thereby Treasuries hold them on the

central bank balance sheets then the

Europeans began to do their own thing

especially after the Euro they were less

interested in buying US Treasuries and

so the Asian countries have really taken

over Japan in the 80s and 90s and then

China was brought into the WTO World

Trade Organization 2001 in part is my

belief - so they could really stop up

soak up a lot of these Treasuries

so from 2001 to 2014 we bought a lot of

stuff from China China took those US

dollars that we paid them recycle them

back into US Treasuries bought a lot of

our Treasuries and in that way sort of

sterilized the US debt if you're a US if

you're a government you're selling a lot

of debt you need someone to be a buyer

and so we had all these foreign foreign

investors governments and institutions

foreign banks foreign hedge funds but

mostly foreign central banks that were

buying Treasuries since I believe I want

to say the third quarter of 2014

foreign investors including foreign

central banks have not been net buyers

of Treasuries they've been buying things

like gold instead Russia has been

extremely smart China's been extremely


they stopped buying Treasuries they've

been rolling over their existing

treasury positions but not increasing

them maybe decreasing them slightly and

they've been net buyers of gold instead

but the US Treasury still needs people

to buy these Treasuries and so various

laws have been passed especially in the

wake of the great financial crisis

telling the US banks they have to hold a

lot of Treasuries which is very

convenient if you're a government that

needs to dump your treasury somewhere

u.s. individuals are less I used to hold

a lot of Treasuries in the early 2000s

when they paid about 6%

I had 6% tea bail 6% tenure notes but

now they've been a lot less exciting and

they're less really less exciting to

everyone because the yields are so low

and the stock market has been doing

doing so well so really most Treasuries

since 2014 had been bought by US banks

this is JP Morgan bank of America all

the big other big investment banks

Goldman Sachs and holding them on their

balance sheets also hedge funds do

various risk risk parity strategies and

so they only don't hold a lot of

Treasuries which they can lever up

which they can hold with leverage and

hold them against some mix of equities

etc so instead of foreign investors

buying all these Treasuries it's been

domestic US investors especially banks

big institutional investors hedge funds

pensions etc but what happened is there

have been such high budget deficits

especially over the last four years that

there have been too many Treasuries

issued they've been stuffing them in

every corner that they can they stuffed

the banks full of them they stuffed

private individuals full of them they

stuffed hedge funds full of them and

finally reach the point where they're

just too many Treasuries now hedge funds

when they buy Treasuries they usually

finance it and the big banks offer them

financing but if the big banks

themselves are stuffed full of

Treasuries and actually cannot hold

anymore Treasuries because they need a

certain amount infant super liquid cash

what happens is you have a giant a giant

flood of Treasuries that need to be

stuff somewhere and everywhere there's

no one left to hold them so what

happened as a result of this is

short-term interest rates where'd called

the what's called the repo rate or the

overnight repo rates spiked it went up

to nine or ten percent and this was a

sign that that basically the US

government was issuing too much debt too

much Treasuries no there were no there

were no more foreign investors who could

soak it up there are no more domestic

investors that could soak it up and so

interest rates to hold this stuff spiked

and when you get the repo rate spike and

what that means is that every interest

rate has to move up if you allow it to

stay up so a nine or ten percent repo

rate would mean a 12 or 13 percent US

Treasury ten-year note rate which would

mean you'd have about a fourteen or

fifteen percent mortgage and a 20

percent car loan these sort of numbers

wouldn't work that completely tanked the

economy and so what happened in the

third quarter of 2019 the Federal

Reserve the central bank in the US had

to actually start to step in and start

buying these Treasuries there was no one

else left to buy them there was no one

else in the solar system

everyone had enough of them so the

central bank basically made up some new

money printed new dollars and started

buying Treasuries

we can see this happening in this chart

right here where for 2018 that they'd

actually the US central bank the Federal

Reserve had been selling off their

Treasuries and then you can see that got

to the lows in about August of 2019 and

then when the repo crisis hit they had

to start buying Treasuries and then of

course when the kovat crisis hit they

had to really start buying Treasuries

and when they were letting these

Treasuries roll off their balance sheet

we had a very weak stock market in 2018

whence they started buying Treasuries

again the stock market has really gone

straight up with the exception of a one

or two month crash after Kovic but

basically you essica stock mark is

highly correlated to the US Treasury

that to the US central bank the Federal

Reserve buying Treasuries so no more

domestic buyers no more foreign buyers

no more buyers from outer space and so

the Federal Reserve had to start buying

Treasuries so how does this work why as

we said the Fed creates the Federal

Reserve creates new money out of nothing

just prints new new US dollars in this

case digital dollars buys Treasuries

from the big banks the primary deal

dealers the primary primary dealers buy

these treasures from the US Treasury and

the US Treasury gives the cash to

Congress to spend so this is what's

going to happen for your trade your

Social Security Medicare checks the Fed

is just gonna print new money give it to

the primary dealers who give it to the

Treasury who give it to the US Congress

who will who will spend it on your

Social Security and Medicare tricks I

can't remember maybe these checks come

directly from and they must come from

the Social Security Administration but

either way this money is printed it gets

to Congress or the Social Security

Administration and then is sent to you

in the mail or sent directly to your

bank account so this is a way in which

new dollars they've created out of

nowhere are going into your bank account

and so if you were running things would

you just say to all the retirees well we

don't have enough money we're gonna cut

your benefits you're not even get as

much money out as you paid in of course

you wouldn't say that this is a very

sneaky way you can keep the checks going

there's no politician there's no

Congress person who is going to risk

re-election by cutting Social Security

or Medicare benefits and so we're gonna

have this very sneaky thing where we're

creating new dollars out of nothing and

they are being funneled into the

entitlement programs like Social

Security and Medicare now this is good

for retirees but it is bad it's also bad

for everyone as a whole because you'll

get your retirement checks but they

won't buy you as much purchasing power

of the US dollar will go down as we

print more dollars and this is one

reason I'm so bullish on gold and

especially on Bitcoin now remember these

are mandatory spending programs these

are entitlement programs this money has

to be spent and as I said no one is

gonna risk their political career by

going after by trying to hurt retirees

many of whom are quite wealthy and have

political power and have a lot of free

time to organize for example to keep

people out of office so it's much easier

to do this very sneaky thing that people

don't understand just have the the

central bank print more money use it to

sterilize or monetize the US debt and

give checks to retirees in the context

of this stocks will go up gold will go

up Bitcoin will go up but the question

is will they go up enough to offset the

loss of purchasing power in the dollar

I think gold and Bitcoin definitely well

stocks may or may not but this is a

really long way of saying that yes your

Social Security Medicare is going to be

there for you it's very unlikely that

anything gets it gets cut maybe there's

a slight adjustment to retirement ages

they could adjust the you know

sixty-five to sixty-seven or they could

change early retirement they can fiddle

around at the edges but I would suggest

that they don't even need to simply

because as Ben Bernanke the old FOMC

chair said we have a technology in the

u.s. called a printing press and we can

print newest all new US dollars and what

will happen is the Federal Reserve will

read didn't need to really continue to

increase its holding of you holdings of

US Treasuries just in the summer of last

year they are down to about two trillion

US Treasuries now they're almost double

that they've gone from two TRO

to Fort Riley just let those numbers

sicken it's absolutely unbelievable and

with every new bailout package with

every new fiscal stimulus package when

Congress says we're gonna inject another

when the President or Congress or both

of them working together say they're

gonna inject another trillion dollars

into the US economy this money is not

coming from taxes it's not coming from

anything it's coming from the Federal


who's gonna print more money buy more

Treasuries cash will go to the to the US

Treasury and to Congress and will get

spent so when you hear about when you

hear about fiscal stimulus versus

monetary stimulus they're now basically

the same thing simply because all fiscal

stimulus is monetary stimulus this money

needs to be printed by the Federal

Reserve even if you taxed I think even

if you text every billionaire in the

United States at a hundred percent just

text 100 percent of their income or even

did wealth confiscation taxes some sort

of wealth net worth tax it's not gonna

be enough money the Fed is gonna have to

keep printing probably for the rest of

our lifetimes or until the US currency

is no longer the US the the world

reserve currency hit that subscribe and

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hope you're all doing well and I'll see

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