The financial planning software we use for building and adjusting models of the future financial outcomes of clients and prospective clients of course includes an adjustment mechanism to project the future impacts of general inflation on a family’s spending habits.
Interestingly, however, the software also includes functions enabling the planner to project different inflation rates for specific types of expenses, namely college education costs and health care. Using this function allows the planner to inflate those parts of the family’s budget faster over time. The reason this function is baked into the software is over the past five decades or so, costs in these expense categories have consistently increased at a pace of about two to three times the general inflation rate.
When we take a step back and think through these two types of planning expenses, one attribute of these specific expenditures is over the same period, let’s say about 50 years, is these are the two areas of household expenses most heavily impacted by federal benefit programs.
In the arena of health care spending, the federal government fully funds Medicare and partially funds Medicaid. There is no doubt, these two programs increase the demand for medical care, and when consumers access medical care, as the delivery of care in a large part becomes disconnected from the financial cost of the care. The result of increased demand, combined with the removal of cost consideration by the consumer, has had a predictable result. The true cost of medical care has risen at a rate of about 6% (source: BLS) since 1965. But here is the real rub, the cost increases tend to be concentrated on the population group that does not qualify for the federal benefits. Or in simple terms, government money runs up the price, but the rest of us bear the cost.
The same phenomenon is observable in college education costs. Through a number of different programs like Pell grants, institutional level support payments such as federal grants and service contracts, as well as subsidized and unsubsidized student loans, the federal government injects massive amounts of money into higher education. Once again, predictably, because higher education supply can’t simply be ramped up overnight, as demand for college has increased the cost of attendance has risen at about three times the rate of general inflation over the past five decades (source: National Center of Education Assistance). Just like with medical expenses, these cost increases tend to impact the percentage of the populace that is less likely to access the federal benefit programs for college costs, or in other words, those who finance higher education through family savings or student loans.
Enter Bernie Sanders. I have strong negative opinions about this politician. Disclosure given. Somehow, however, Senator Sanders has managed to gain material control over the economic agenda of the Democratic Party, and in typical Socialist fashion is leading out of the gate with a goodie bag of supposed giveaways that are baked into the $3.5 trillion budget framework plan currently slithering around Washington, D.C.
Tax and financial planners tend to look at this type of legislation and dissect it primarily from a tax point of view, and certainly the serious tax components of this proposal need to be understood. But when I look at the buffet of new program giveaways, I actually think back to the inflation rate functions of our financial planning software, and I see writing on the wall.
Through a number of expansive new programs in the proposed budget framework, the federal government would inject federal money into daycare services, community college and dental care. Just like federal benefits in health care and higher education, while I haven’t seen the full proposal on these items, I would guess these new benefit programs would involve either a needs test (income based) or an age test (Medicare), targeting the new program benefits into specific subsets of the population.
Using simple supply and demand logic, I shudder when thinking about the cost increases for American families who don’t qualify for federal benefits will experience. Try as it might, no government can re-write the laws of economics. When demand outstrips supply, prices go up. As this legislation becomes more of a focus over the next few months, it’ll be important to attempt to discern in advance, the myriad of unintended consequences its passage would likely set in motion.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
