By Carl Benefield
Could reverse mortgages be used as a tool to combat our nations increasing national debt? John Mitchell, CPA and founder of Reverse Mortgage USA, made some very interesting points in an article of “The Reverse Review.” I want to share the points expressed in the article and allow you to come to your own conclusion.
The U.S. has reached a financial tipping point and that was evident in the most recent partisan conflicts in Congress, which led to Standard & Poor’s downgrading our national credit status from AAA to AA+. However, the real evidence lies in that our formal debt exceeds its annual output of goods and services (GDP). The annual cost of interest on this debt, which is approximately 4%, is likely to be greater than the annual growth of the economy. OMD Director, Jack Lew, speculates that the economy will only grow 2 ½% to 3% in the second half of the year. Since the nation’s debt ceiling was just increased, our formal debt now stands at $14.6 trillion and our gross domestic product for 2011 is estimated at $14.7 trillion––almost the same. So you can see that the country is at a tipping point where the U.S. economy isn’t growing at a rate close to the interest rate on the national debt.
Deficit reduction and fiscal responsibility will be two hot topics leading up to the 2012 elections. One thing is for sure, our nation has to make some tough decisions and look for ways to cut back and ways to generate more income. All areas of the budget will be on the table for cutbacks. Medicaid is one area that could generate some savings.
In the U.S., the three major entitlement programs (Social Security, Medicare and Medicaid) account for approximately 58% of the annual budget. Medicaid currently covers 53 million people at an annual cost of $373.9 billion, with the states being responsible for about half of it. Starting in 2014, the Obama Care rules will add about 20 million people to Medicaid all at one time, according to Medicaid’s chief actuary, Richard Foster.
The eligibility rules for Medicaid are very loose and that is where the fundamental problem lies. Today, there is a thriving industry within the legal community that helps people shift their assets so they can qualify for Medicaid and have their long-term care paid by the government rather than themselves. It is for this reason that Medicaid has evolved from its intended purpose of being the provider of quality long-term care for the genuinely needy into the role it actually plays today: protecting people’s inheritances.
The most glaring problem in the Medicaid eligibility rules is that Medicaid allows a person to exclude their personal residence, regardless of value, from the means test to determine if he or she qualifies for Medicaid. The effect of this is that there is no incentive for people to take responsibility for paying for their own long-term care with their biggest asset: their home.
If the home exemption rule for Medicaid eligibility is removed, reverse mortgages could be a tool used to help cover some of the future costs of long-term care. The increased usage of reverse mortgages for long-term care would certainly reduce the drain on Medicaid. In John Mitchell’s article, he estimates an annual savings between $3.3 billion and $5 billion annually.
The U.S. has a $14 trillion annual economy and a $14 trillion national debt and that does not include $70 trillion plus unfunded liability from Social Security, Medicare and Medicaid. There is an available solution that will save between $3.3 billion and $5 billion annually in Medicaid expenses; the solution is reverse mortgages. If people are incentivized and encouraged to take out a reverse mortgage to pay for their future medical needs, fewer people will go on Medicaid and be a burden on the U.S. government and its taxpayers. This is just one suggestion of many needed to help rein in spending and get our economy back on track.
For more information about reverse mortgages, visit the Federal Trade Commission website at https://www.consumer.ftc.gov/articles/0192-reverse-mortgages