By Jack Cumming

In senior living, inflation is a huge threat. Many seniors living in communities have relatively fixed incomes. Even though Social Security is indexed, the COLA increase only comes in January, and inflation, as it occurs, waits for no one.

Providers get hit by inflation long before they can adjust rates to compensate. That’s true also for workers who experience rising prices before their wages rise. Providers get a double whammy: rising prices and workers leaving for pay. Federal Reserve policy is committed to inflation.

Anticipate Inflation

Many not-for-profit communities operate with little margin, so an unanticipated inflationary hit can be devastating. Moreover, in an inflationary economy, it’s crucial to keep resident rates rising ahead of expenses.

It’s tempting to want to wait to see if the inflationary trend recedes or levels out. Those rising costs, though, flood in before you can raise those rates, and then concern for residents can inhibit raising rates as much as the data indicate.

Ignoring these simple cautions to keep fees ahead of rising costs can lead to the collapse and failure of many businesses, especially given the weak balance sheets of many in the not-for-profit senior living sector. Insurance companies that take on similar risks to those of entrance-fee CCRCs must meet minimum risk-based capital requirements. CCRCs are typically net worth thin.

Economic Uncertainty

These considerations are particularly important in today’s uncertain economic climate. Conservative economists now warn that the belief in the solidity of the dollar could collapse under the sheer weight of the mounting national debt and the interest rate premium that lenders may demand to finance it. [Reference]

To understand this requires a side excursion into the nature of money or currency. We accept dollars in exchange for something of intrinsic value because we believe in the value consistency of the dollar. If we were to slide toward hyperinflation and/or depression, that presumption could disappear quickly. This leads conservative economists to counsel bringing our national fiscal spending more in line with government revenues.

Modern Monetary Theory

The alternative is to continue as we have been, with government spending exceeding revenues, without even taking account of long-term liabilities implicit in social insurance programs. This more liberal school of economists appeals to what is called “Modern Monetary Theory (MMT).”

“MMT argues that a government with full monetary sovereignty — meaning it issues its own currency, does not peg it to another currency or commodity, and does not borrow in foreign currency — faces no hard financial limits on its spending.” [Source and this]. The idea appears to be that a government can create money as it spends, allowing it to always meet its financial obligations.

Executive Responsibility

At this point, anyone with responsibility for enterprise soundness has to make a judgment. Politicians wanting to please the electorate will prefer MMT over fiscal prudence. Thus, there is a likely scenario that increases in the money supply will trigger inflation. It may even verge on hyperinflation. That is something that CEOs, CFOs, and their boards have to consider.

What backs up our money today? Answer: not much. Our money works because we believe that it works. It’s like a corporate share that is worth what buyers and sellers agree it’s worth. With money, the measure of worth is what payers and sellers agree is a fair price. Perhaps it’s always been that way. Even gold is only worth what buyers and sellers agree on.

The Looming Threat

Obviously, either inflation or a deep recession would be devastating for senior housing operators. Yet, given the daily news of radical governmental economic actions, it seems likely that we may soon have one or the other, or both, simultaneously, as happened during the stagflation of the 1970s.

This article is a call for the industry to take seriously the looming economic uncertainty and to take steps now, quickly, to minimize the risks to senior living enterprises from such a possibility.