We will continue to update this article whenever significant developments warrant it. It may mean that this article will become very lengthy, but we feel it is important that all the developments be written about in one place, so that you may be better able to understand the complexity of the issue. Of course you can always say lets abandon the Balanced Budget Act of 1997 and go back to our old ways. So what if we go into deficit spending. That way everybody can have whatever moneys they need, because the expenditure is necessary and for a very good cause. We will present the facts; you make your own decisions.

At the end of this article we discuss the fact that the CBO is now projecting a non-Social Security budget surplus. Congress is due to adjourn on August 6 and so far no budget for fiscal year 2000 has been passed. The original Republican plan called for an allocation of $270 billion for the military and $268 billion for all other spending. This is the amount that remains unallocated of the $1.75 trillion budget after payment for mandatory programs and spending. The Defense Department was to receive $19 billion more than it did for the fiscal year 1999, while domestic spending was to be cut $26 billion from the amount it received in the fiscal year 1999.

According to John Feeherty, a senior aide for Speaker J. Dennis Hastert, " we're going to trim off some of the allocations for Defense, Treasury, the legislative branch, and feed some of that back". The exact details of the changes proposed have not been released, but we will advise you of it as soon as it is released.

On January 25th, 1999 the U.S. Supreme Court, in a 5-4 vote, ruled that the Census Bureau could not use statistical sampling to determine the population counts for purposes of allocating seats in the House of Representatives among the states. This ruling is now coming back to further demonstrate the difficulty in maintaining a balanced budget. On Tuesday, June 1,1999 Jacob J. Lew, Director of the Office Management and Budget wrote to the Congressional leaders of the House and Senate appropriations committees to advise them that an additional $1.72 billion would be needed to conduct the year 2000 census. Incidentally, this would bring the cost of the year 2000 census to $6.99 billion up from the $2.6 billion spent on the 1990 census.

The increased estimate is 60% more than the administration had budgeted for the task. The Senate Appropriation Committee has allocated $32.2 billion in budget authority for the bill that includes the census, which is already $300 million less than appropriated for the current year. The House Appropriations Committee has allocated $30.5 billion, so it is already at a lower figure than is the Senate.

If the $1.72 billion is allocated we then have to contend with the Balanced Budget Act of 1997 because we then will need $1.72 billion taken from somewhere else to offset this increase. Where will this offset come from?

If you had a 13% mortgage and could refinance it for 6% wouldn't you want to refinance it at the lower rate? This strangely as it may sound shows you how complex the issue is, in connection with preserving the Social Security surplus for the Social Security system. An article written by David Wessel in the Wall Street Journal edition of June1, 1999 entitled " Treasury Edges Toward Bond Buybacks" delves into this issue.

In one of the latter paragraphs of this article we pointed out the fact that the Government has reduced sharply the amount of bonds, bills and notes that they have issued, since our debt has been reduced substantially by our surplus. In the last quarter alone the amount of debt held has been reduced by $116 billion. With the lower amount of borrowing, and therefore the lower the supply available, interest rates had fallen until very recently. Since March 1997 the amount of marketable government securities in private hands has fallen by $300 billion.

Now the U.S. Government has a great deal of high interest bonds outstanding, which were issued in the days of higher interest rates of the 1970s, 1980s and early 1990s. These bonds are non-callable meaning that you can not be forced to surrender these bonds before maturity. There is a procedure called a reverse auction that may be invoked to induce the bondholders to voluntarily surrender their bonds. It is called a reverse auction because the government would be buying the bonds from the holders instead of the normal auction procedure wherein the government issues the bonds. In order to induce the bondholders to surrender their bonds the government would have to offer the holders some inducement to accomplish this. This is called offering a premium to induce the surrender. Federal auditors would classify this premium as an extra interest expense immediately and thus the size of the surplus would be reduced by this amount. This procedure would involve billions of dollars to have a meaningful impact and yet that would mean that less of a surplus would be available to be used to balance the budget. No offset would be required in this situation unlike some of the required offsets under the Balanced Budget Act of 1997. Future predictions of surpluses would be increased because of the interest savings.

The Treasury will put the issue before the White House National Economic Council before issuing any of the required regulations in connection with this matter. Again we take no sides in this issue, but feel that bringing this matter to your attention will further help you at arriving at your own decision.

We continue to add paragraphs to this article because of the newsworthiness of the evolving issues that are becoming more and more complicated. Because of the divergent issues involved herein, we may face another governmental shut down because of these budgetary complications. Emergency and/or temporary spending bills may be needed once again to keep the government running.

The House of Representatives recessed on Thursday, May 28, 1999 without passing the $288.8 billion defense authorization bill. The night before the Senate had passed its version of the bill by a huge 92-3 majority. Some Republicans want to add $8.3 billion to President Clinton's defense request, but others are opposed to it. Complicating matters is the fact that the House bill, as drafted by the House Armed Service Committee, would bar use of the money for the war. It would require President Clinton to come back to Congress for additional funding approval for actions in connection with the war after September 30th. Speaker Dennis Hastert tried to have this restriction eliminated from the bill but conservative Republicans opposed to the war blocked his efforts. You must also remember that under the Balanced Budget Act of 1997 if spending is increased in one area, compensating cuts must be made in other areas. If you add to defense spending you may be negatively impacting the solvency of Social Security by utilizing some of its surplus as the offset.

With each passing day it is becoming more and more obvious that the budgetary conflict between Security and Social Security is widening instead of narrowing. On May 26th, 1999 the U.S.Senate, by a vote of 60-40, rejected the Administrations request to close down more military bases. Secretary of Defense William S. Cohen and the Pentagon estimated that $2-3 billion could be saved through base closings with no appreciable impact on our military preparedness. The General Accounting Office had agreed with this estimate. Sen. John McCain (Rep.-Ariz.), Sen. Charles S. Robb (Dem.-Va.) and Sen. Carl Levin (Dem.-Mich.) had introduced the base closing legislation. With the spending caps in place from the 1997 Balanced Budget Act it is beginning to look like we may have a budgetary impasse once again. The shortfall is almost $30 billion and Social Security and Medicare look like the cash cow that will be used to make up the deficit under the caps.

As the budgetary process continues to evolve we are now seeing another promise that was made by many of our Congress people fall by the wayside. In the latter part of this article we articulate how the promise to not touch Social Security and Medicare funds, while at the same time preserving and enhancing the solvency of these systems, is being broken. It now looks like the promise of no new taxes will also be broken. Instead of calling it a "tax" they are calling it a "fee".

To make up for the increases in military spending the Senate Appropriations Committee is calling for spending for the Federal Aviation Administration operations to be limited to $5.75 billion, or almost $300 million less than requested under the president's budget request. To make up about $200 million of the loss the FAA would be permitted to impose new fees on air carriers to pay for the agency's costs in operating the air-traffic-control system for trans-oceanic flights. Guess who in turn will pay for these new "fees"?

In addition the Army Corps of Engineers construction spending would be cut by over $300 million from current levels. This will result in some serious cutbacks to several water projects out West. Over $90 million would be cut from projects to protect the ecosystem in Florida, California and the Pacific Northwest.

In the Energy Department funding, about $600 million more will be allocated to the military portion, while taking away that same amount from the non-military portion thereof.

"Weapons Makers Seek Rise in Pentagon Spending " is the title of an interesting article in the N.Y.Times issue of Wednesday, May 19, 1999 written by Leslie Wayne. The main reason we began this site was our " hope that as a result of reading these articles you will be able to make a more informed decision about the problems associated with the elderly". We are not attempting herein to affect your beliefs about the current war going on in Yugoslavia, nor how we should deal with the tyrant President Slobodan Milosevic. The horrible genocide taking place there is certainly being fully covered by your local and national media. The purpose of this article however is to explain the ramifications that increased spending for defense and security will have on the Social Security System. Once you understand the ramifications, it is up to you to make your own decisions on this matter.

The Balanced Budget Act of 1997 mandates that there can be no increased spending in the budget without having a balancing cut therein, so that the budget must remain in balance. It was just a few years ago that the U.S. Government was operating at an almost $300 billion deficit. The U.S. Government is by far and away the largest borrower in the credit market. As the largest borrower the government was creating the most demand. As we got into deeper and deeper debt the lenders would ask for higher and higher interest rates to be paid to compensate them for our weakening credit status. If you lent money to someone deeply in debt you either require more security or a higher interest rate. It had reached the point wherein for each dollar the government raised in revenue, almost 30 cents had to be paid to cover the interest service being paid on the debt. Thus only 70 cents was left for operating the government.

There are two basic reasons why interest rates have been dropping over the last few years. The combination of low inflation and less borrowing by the U.S. Government are the driving forces behind this lower interest rate environment. Although the Federal Reserve Board has just indicated a bias towards higher interest rates we must wait to see how this will play out for itself. Ask the average stock market investor how he has enjoyed this low interest rate environment and he will surely smile.

We will now come back to the core of our problem caused by the potential conflict that arises from increasing spending for the military and helping insure the solvency of the Social Security System. Military spending has decreased by about 70% since the late 1980s. Many people have felt that the combination of base closings and cutbacks to the military have weakened the military power of the United States much more than was necessary. Thus the Administration of President Clinton requested $112 billion in additional military spending over the next 5 years. Weapons procurement would be increased from $44 billion in 1998 to $53 billion in 2000 and $60 billion in the year 2001. Now mind you, these proposals were announced even before the war in Kosovo and Yugoslavia. Much of the armaments that have been used will have to be replaced. New generations of weapons and planes are more expensive than ever. As of the latest figures about 240,000 barrels of jet fuel and oil products are being consumed daily by the war effort. Incidentally this is one of the reason why we have seen an increase in the cost of gasoline. Cutbacks in production by producing nations are the other cause for the increase in price. Congress is presently working on a $14.7 billion emergency spending bill, part of which is to cover the cost of the Yugoslavian campaign. This matter is covered in our article The Accurate Numbers as To Social Security and Medicare Solvency. In updating this article it is now expected that the CBO will show a non-Social Security surplus of about $20 billion for 2000, which is expected to grow to a surplus of $100 billion by the year 2005. According to strict private practice accounting this money should not be used in arriving at a budget surplus The healthier economy of the last 2 years alone has resulted in the increased estimates for the solvency of Social Security from the year 2029 to the year 2034. The estimate for Medicare has been increased from the year 2001 to the year 2015. Now let us suppose that interest rates rise because of additional borrowing done to pay for the increased military spending. This of course assumes that Congress finds a loophole to get around the Balanced Budget Act of 1997. Will that not mean that the economy will weaken, and that the actuaries will than have to shorten the solvency estimates for Medicare and Social Security? Then of course there is the other possibility of borrowing from the Social Security Trust Fund. Another possibility would be to cut back on Social Security and Medicare spending and use the additional money for military spending.

We are not even attempting to answer this very difficult question in this article. It is our hope however that in reading this article you can make a more informed decision on this matter.

FOR AN INFORMATIVE AND PERSONAL ARTICLE ON PRACTICAL SUGGESTIONS WHEN SELECTING A NURSING HOME SEE OUR ARTICLE "How to Select a Nursing Home"

By Allan Rubin
Updated August 4, 1999
http://www.therubins.com

To e-mail: RehabStrat@aol.com or rubin@brainlink.com

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