Where Credit is Due

Health Care policy has been an interest of mine for many years (wrote a paper in grad school in 1994) and I gravitate towards the stories that draw attention to our health care system. Full disclosure, I wish that the U.S. had a single payer system like virtually every other developed country. When I studied the issue back in grad school, the primary obstacles I saw were the cultural value/myth of individualism and personal responsibility and powerful corporate interests. Not much has changed and if anything, those voices are louder and the influence, stronger. The central purpose of my blog is not to convince anyone about the logic of any particular system, but to raise principle centered issues, concerns and questions.

Having grown up in Colorado, the first governor I remember was Richard Lamm, who served in that office for three terms from 1975 to 1987. I give credit to the governor stimulating an initial interest in health care policy when he suggested in a 1984 speech that terminally ill people had a “duty to die and get out of the way” rather than be kept alive by artificial means. He followed that with “Let our kids, the other society, build a reasonable life.” Not surprisingly, his statement created a lightning rod of controversy. During his terms as Governor of Colorado, he witnessed health care absorbing a larger and larger share of public resources. His statement was about the ethical aspects involved in those choices and drawing attention to how health care spending is relatively unquestioned and “off limits.”  His ideas are expanded in the book “Brave New World of Health Care” and I will borrow generously from concepts presented in the book.

This past year, Time Magazine, devoted a special edition to the runaway costs of our healthcare system with the feature article “Bitter Pill: Why Medical Bills are Killing Us.”  The 23 page expose’ removed the curtain behind the wizards pulling the levers that have created the health care system that is twice as expensive as anything else on the planet. Here is a link the article and related content: http://healthland.time.com/why-medical-bills-are-killing-us/.

In advance, I wanted to credit these thinkers and resources for a lot of what is to follow in this blog.

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Now That We’ve Fixed Social Security – It’s on to Healthcare!

Of course my title is in jest, but what I hope is recognized is that there are plenty of options to make Social Security sustainable for the long term. Among the options, there are things for different vantage points to like. The fact that our elected officials are unable to create a positive outcome shows the dysfunction our political system and the vacuum of leadership that exists.

So we move on to a much more challenging beast, reigning in healthcare costs and the health care industry. Here’s a visual slideshow that the Christian Science Monitor assembled to illustrate the size of the beast.

http://www.csmonitor.com/Photo-Galleries/Infographics/On-eve-of-Obamacare-US-health-care-vs.-socialized-health-care-in-five-countries#759269

Somehow, our health care system has managed to cost roughly twice, per capita, as other OECD countries and be about twice the percentage of GDP. It would be one thing if we could point to better health outcomes and better coverage of the population, but we can’t. The beast is served while we have 48.6 million uninsured and the research is virtually unanimous that the health outcomes in the United States are worse than our peers. Here’s one example that illustrates how the US is last of 16 peer countries in overall mortality rate.

http://sites.nationalacademies.org/DBASSE/CPOP/DBASSE_080393#deaths-from-all-causes

Meanwhile, here’s what we are good at:

  • Creating fantastic medical technologies.  The US is the leader in creating medical technologies that diagnose and treat illnesses. This includes devices and drugs.
  • Generating “profits” for medical corporations. So-called non-profit hospitals are among the most profitable.  In Fortune Magazines ranking of most profitable industries, Pharmaceuticals ranked #3 and Medical Products and Equipment ranked #4.  I shutter to think where the non-profit hospitals would rank if they were included.

It would seem that medical consumers would be outraged. We are overpaying for an industry that is under performing. Ironically, health care providers don’t love the beast either.  They feel like they are serving the industry and not the patient. It would seem that these two taken together would create enough energy to generate meaningful change. Alas, this is one difficult beast to tame…

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We Have Options with Social Security

Been a very busy past few weeks at work, so I haven’t had the time to blog. Bad Blogger! I found a pretty good summary of Social Security reform options on the AARP website. http://www.aarp.org/work/social-security/info-05-2012/perspectives-options-for-reforming-social-security-AARP-ppi-econ-sec.html  The vast majority of options presented would help fill the funding gap discussed in the previous post (a few would increase it). The pro and con commentaries I found to be very predictable and not very nuanced. I am not going to summarize all 12 proposals that were presented (collective sigh of relief). I am going summarize one and provide some general observations.

The biggest observation was that taken together, these proposals would fill the funding gap of Social Security, and then some!  If we were to add the estimate of the gap filling measures together, on the conservative side, they would fill 210% of the gap, the more aggressive proposals would fill 313% of the funding gap. What that says to me is that by doing even a portion of several proposals, we could solve the funding gap of Social Security. Hence my declaration earlier that solving the problem that Social Security presents (funding wise) is much more viable than doing the same for Medicare. Now, lets look at an example that shows how something that would seem simple and doable, gets complicated.

I’m using the example of raising the retirement age. If the retirement age were gradually raised to 68, beginning in 2023, it would fill 18% of the funding gap. If it were gradually raised to 70, beginning in 2023, it would fill 44% of the funding gap. With the increases in life expectancy, this would seem to make sense. Here’s the problem, the wealthier you are, the longer, in general, you can expect to live. Already, the top half of earners born in 1941 will live 6 years longer than the bottom half of earners. Lower wage workers will be more aversely affected because they already have fewer years to collect benefits. If the top-half earners’ years to collect benefits goes from 22 to 20, thats about a 9% reduction. If the bottom half earners’ years to collect benefits goes from 16 to 14 years, that represents a 12.5% benefit reduction.  That’s the opposite of means testing! Speaking of which, a few of the proposals do involve means testing so that wealthy individuals would receive reduced Social Security benefits. Initially, I liked these ideas, especially if wealthy individuals were advocating for them. However, as a blog commenter pointed out, this would fundamentally change the nature of the program.  Although it is true that some pay in more than they will receive and some receive more than they paid in, it is generally a pay in, pay out system. Introducing means testing would create and “Us/Them” “Makers/Takers” dynamic.

So, what’s my idea? I’d go for a combination of raising the cap on the payroll tax to cover 90% of earnings, the way it was intended to do in 1977, I would slightly increase the payroll tax rate, and I would modify the cost of living index to make the benefit increases over time more moderate. That would include one item where the wealthy pay more, one where everybody pays more, and one where everyone sees a small reduction in benefits.

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Social Security Reform – A Primer

As promised, I wanted to share some ideas to reform Social Security and make it more viable. My premise has been that this should be a much more simple task than doing the same for Medicare. It makes sense right? Social Security benefits are paid as income and calculated based upon some formulas (how much you contributed, how long you worked, what age you chose to begin receiving it, and a cost of living adjustment). Medicare benefits, by contrast are based upon unpredictable variables (health care needs for any given individual, services rendered, the costs of those services, increases in costs for the services over time)

My initial exploration into the realm of Social Security reforms resulted in discovering some “good” news, and some bad news. The “good” news is that even though Social Security is currently paying out more than it is collecting, the system isn’t broke. Social Security established a significant surplus as money paid into the Social Security Trust Fund exceeded expenditures for every year from 1984 to 2009 (which was more of a break even year). At that point, the perfect storm hit – the great recession, payroll tax holiday, and increasing numbers of baby-boomers retiring and taking Social Security Benefits. Even with an improving economy and the elimination of the payroll tax holiday, it appears the days of surplus are over due to the demographic bulge of the retiring baby boomers and fewer workers to support them.

The Social Security Trust Fund would appear to be simple from an accounting perspective, and perhaps to an accountant it is, but I’ve also noticed that it is subject to misinformation. Here’s the best source of info that I’ve come across from the Congressional Research Service, which, as the name implies, prepares reports for members and committees of Congress.  http://www.fas.org/sgp/crs/misc/RL33028.pdf

The other sort of good news is that even when the surplus is gone (current estimates are for that to happen in about 2033) Social Security will not be “broke” because there will continue to be workers paying into it. At that point, it is estimated that benefits would be subject to about a 25% across the board cut. Not great, but not exactly the doomsday scenario of there being zero money to pay retirees at that point. 

So, how do we avoid that painful of a benefit reduction? I really will get into this next time, but wanted to contextualize things first.

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Other Voices

Some of the responses I’ve had to the blog have directed me to read related articles and opinion pieces. I wanted to share some of them.  First is a story about billionaire Stanley Druckenmiller who is going around the country talking about how Medicare and Social Security represent a type of Robin Hood in reverse.

http://online.wsj.com/news/articles/SB10001424052702303680404579141790296396688?mod=wsj_valettop_email

One of the points I’ve been making about Medicare spending is its contribution to the exploding deficit. Columnist Eugene Robinson’s opinion is that we should be thinking about job creation and not just deficit reduction. The deficit is expanding, but not at the rate it was when the recession was most felt. He also notes that there has been a significant drop recently in the rate health care expenses have increased.

http://www.washingtonpost.com/opinions/eugene-robinson-our-best-bet-is-to-grow-the-economy-not-cut-it/2013/10/21/2588d872-3a8d-11e3-a94f-b58017bfee6c_story.html

The third article is not directly related to entitlement spending, but was a very interesting read about how accelerated advances in artificial intelligence will impact work, and workers, in the future. Of course the indirect implications are huge if the result is fewer workers/earners/tax payers in the economy.

http://www.motherjones.com/media/2013/05/robots-artificial-intelligence-jobs-automation?page=2

Enjoy!

Posted in entitlements, medicare, health care | 4 Comments

Social Security and Medicare – Similar, but very different

It’s not uncommon for Social Security and Medicare to be lumped together when the topic of entitlements, or programs at risk for sustainability, or things that are exploding our national debt are mentioned. It’s not surprising in that they are both programs designed to provide support and care for our elderly population.

I’ll start with the similarities:

  • They are both entitlement programs. If you meet the eligibility criteria, you get it. In this case it’s an age criteria. For Medicare, it’s age 65. For Social Security, beneficiaries can start receiving financial support beginning at age 62, or they can defer until they are older, like 65, or 67, or 70. Beginning benefits at a later age means receiving a larger monthly amount. The amounts don’t increase after age 70.
  • They are both funded through payroll taxes. If you are employed, your employer pays half and you pay the other half. The total tax rate is 15.3% for wages up to $113,000. 12.4% is Social Security (6.2% per half) and 2.9% for Medicare (1.45% per half) The Social Security tax drops off entirely for wages beyond that. The Medicare tax does not have an income cap, and in fact, the rate increases by .9% for high wage earners (above $200,000 for individuals and $250,000 for couples filing jointly). This tax increase began on January 1, 2013. We’re starting to see the differences now.

The Differences:

  • Let’s stick with the way they are taxed. Social Security is taxed at a higher rate, but only up to a certain point of income. The Social Security tax is “felt” by more people as a significant tax. For high earners, it is only “felt” for the first $113,000. One result from this is that the distribution of the benefits is more equitable. If you recall from my previous post, the average wage earner retiring today paid in about what they get out of Social Security. The lower wage earner gets somewhat more out than they put in and the opposite for the high wage earner. The problems with Social Security are more due to demographics (fewer workers supporting more retirees).
  • Medicare is taxes at a lower rate than Social Security, but without the income cap. The rate difference doesn’t come close to reflecting the differences in benefits received. Social Security is taxed at just over 4 times the rate that Medicare is taxes. However, if we go back to our two income, average wage earning couple, instead of receiving 4 times the Social Security benefits, as compared to Medicare, they will receive about 1.6 times more Social Security than Medicare benefits. Because Medicare does not have an income cap, some of the “slack” is picked up by high wage earners who pay more in than they get out, but the program remains essentially highly under funded and unsustainable.
  • The biggest difference between Social Security and Medicare is how to fix them. Fixing the funding/benefit mechanism for Social Security shouldn’t (I know we’re talking Washington) be that difficult. Fixing Medicare – well, that’s why I started this in the first place.

In my next blog, I’ll share some proposed fixes to Social Security.

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You (probably didn’t) pay for that!!

One of the things I heard a politician say lately about Medicare and it’s recipients is “You Paid for it, you’re entitled to it.”  While the Medicare tax is something all employees and their employees pay during their working lives, the vast majority of medicare recipients get a lot more back than they put it. The Urban Institute has analyzed the benefits realized in comparison to taxes paid for Medicare and Social Security for a variety of income levels and familial situations. For instance, an average earning single man that retired in 2010 is projected to receive $167,000 in Medicare benefits while they would have paid $58,000 in taxes. The taxes paid are actually calculated as if they were invested with a 2% over inflation return. They are getting 3 times the benefit they paid for.  A single woman of average income will receive an estimated $185,000 worth of Medicare benefits (I’m guessing she would receive more because she will live longer).  Lower income retirees receive significantly more than that in comparison to taxes paid and higher income retirees less benefit in comparison to taxes paid.

A retired couple with one average and one above average wage earner that retire in 2010 will still receive more than twice the benefit as compared to taxes paid ($149,000 taxes paid and $351,000 in Medicare benefits). Here’s a link to the study: http://www.urban.org/publications/412281.html

May 2013 poll by the Harvard School of Public Health showed that two-thirds of people believe their lifetime taxes at least cover the cost of all their Medicare benefits.  The reality is quite different. Only high income earners pay as much, and more in taxes than the cost of the benefits they will receive from Medicare. I’ve tried to find that threshold, but haven’t found a source for that yet. I’ll keep looking. 

The Urban Institute study also compares Social Security taxes paid to benefit received. It’s a much more equitable scenario, which is why Social Security (though it has challenges) is a much more sustainable program in comparison to Medicare.

 

For the visually inclined, here is a nice graph from PolitiFactImage

Lots of implications here. We’ll get to that later…

Posted in entitlements, medicare, health care | 5 Comments