The Important Twin Safety Nets

It’s pretty much a given that people do not save or cannot save for a secure retirement these days.  The cost of every day items has been going up more than wages.  The returns on safe investments are rock bottom.  Health insurance costs have been rocketing.  That is why social security and medicare are still the most important investment that we make in planning for our old age.  They shouldn’t be the only thing we rely on, but they have been the safest pillar.  The stock market has been volatile, risky, and not as lucrative as it was 20 or 30 years ago.  Home values have plummeted.  Medicines are unbelievably expensive as are tests and hospital stays.  The only security most people really have in their old age are these twin safety nets for old age.  Recently, the wealthiest demographic has been the elderly.  Prior to the New Deal, it was the most poverty ridden.  Unfortunately, the most poverty ridden title now goes to young children.

Bruce Bartlett, an economist that used to adviser Ronald Reagan, has a fairly good article up in the NYT that provides some fodder for discussion.  Bartlett has not thrown his economics degrees to the wind for political expediency like many Republicans.  Recently, the Republicans have been doing everything they can to make the country and the Twin Safety nets appear “bankrupt”.  This is chilling on two accounts.  First, they’ve been primarily responsible for the recent structures of medicare, social security, and the high level of government spending.  It’s interesting to see them try to blame this on others.  Dubya morphed medicare last.  Ronald Reagan “reformed’ social security.  Both of these guys ran up expenditures on the military like crazy.  Dubya and the Republicans have passed excessive, unproductive and draining tax cuts.  Bartlett straightens up some of this disinformation basically by introducing shock therapy.

The trust fund for Social Security and Medicare are something most people don’t understand.  Government accounting is unlike any other type of accounting.  They can’t amortize or depreciate or otherwise defer capital expenditures.  They also don’t market assets to market.  When they buy a Space Shuttle, it gets paid for the year it is bought.  The land they own is on the books for whenever value it had when it was put on there. They also have the power to tax and print money.  No business or household does any of this.  Also, the trust fund for Social Security and benefits for medicare aren’t exactly like what a business does or a household does either.

Benefits are not paid out of a trust fund filled with income-producing assets, like a private pension fund; benefits are paid out of tax revenues. The trust funds are merely accounting devices best thought of as budget authority. As the trust funds draw down their assets, general revenues — that is, tax revenues besides the payroll taxes earmarked for these programs — are injected into the trust funds to redeem bonds that had previously been placed there during years when revenue from the payroll tax exceeded costs.

Although there is often speculation that Social Security and Medicare benefits would have to be slashed to the level of payroll tax revenue on the day the trust funds are empty, this is simply nonsense. It would take Congress a matter of hours to change the law to allow explicit general revenue financing for these programs.

There is never going to be a day when Social Security checks are cut across the board because the Social Security trust fund became exhausted.

That’s a pretty succinct explanation of things.  Scaring old people and folks like me that have small time lines to re-plan their retirement is just plan immoral.  There are plenty of ways to change things including raising the ceiling on wages exempt from Social Security.  Most of these never get discussed, however.  They’d rather scare us with disinformation.  Just raising the joint contribution would solve problems too.  The deal is that the Republicans don’t want to fund anything.  They didn’t even adequately fund the last two wars.

Medicare’s problems are much more complex–as Bartlett explains–because there are now three programs with various providers, funding, and issues.  The only shared problem is that health care costs are high and keep going higher.  This is where there are a lot of problems.

First is Part B, which pays for doctors’ visits and is financed partly by premiums paid by beneficiaries and partly by general revenues. It has no trust fund. Originally, premiums paid 50 percent of Part B’s costs, but now that is down to just 25 percent. The long term general revenue contribution to Medicare Part B is estimated at $22.4 trillion or 1.5 percent of G.D.P. in perpetuity. (Table III.C15.)

Finally, there is Medicare Part D, which George W. Bush and Congressional Republicans rammed into law in 2003. Even though Medicare’s finances were rapidly deteriorating, they provided no additional funding for Part D beyond trivial premiums paid by beneficiaries. The unfunded cost of this program is estimated at $16.1 trillion, or 1.1 percent of G.D.P. in perpetuity. (Table III.C23.)

Thus we see that Social Security and Medicare are underfunded relative to promised benefits by $56.4 trillion or 3.8 percent of G.D.P. per year forever. To put these programs on a sound footing, federal income taxes would have to rise from 6.2 percent of G.D.P. to 10 percent, an increase of 61 percent.

In other words, whatever amount you paid on your federal income tax return this year would need to be 61 percent more, now and forever, to pay all the Social Security and Medicare benefits that have been promised over and above the payroll tax.

You can see that the current system isn’t sustainable in its current format which is something we all should agree on and then move forward from there.  While the fixes to Social Security can be relatively minor, the problems with the health sector in this country go way beyond the Medicare and Medicaid problem.  We’ve had a third party payer system that relies on the beneficence of employers.  It has added incredible complexity and unnecessary costs to the entire system.  The Medicare problem cannot be solved out of this context.

As Bartlett points out, most of the ‘cost’ control via Medicare is going to come via a 1997 “sustainable growth law”. This is likely to cause many health providers to opt out of caring for Medicare patients.  Most are limiting their rolls right now.   This enactment of this law was recently postponed.

This is known as the “sustainable growth rate” (S.G.R.) and involves implementation of a law enacted in 1997, but repeatedly postponed by Republican and Democratic Congresses. It would require a 29.4 percent cut in fees for doctors who treat Medicare patients on Jan. 1, 2012.

The Medicare actuaries just don’t believe this provision will be allowed to take place because they think Congress will punt the ball once again. Therefore the official estimates of Medicare’s fiscal position are much too optimistic.

None of this was solved by Healthcare Reform. Nothing we’ve done to date has actually contained the overall costs of drugs or health care provision.  Nothing has really been done to simplify the third party payer system we have now.  Bartlett’s op-ed is really more of the statement of the problem than any suggestion of a solution.  However, it’s useful to think about how much the U.S. pays for medical care compared to every one else in the developed world.   So far, we’ve had two completely incongruous approaches suggested by Democrats and Republicans.  There is no patching together some make-it-work critter with this current Krewe of Pols.

President Obama is seeking to use the negotiating and regulatory power of government, while Rep Ryan wants to abandon any pretense that government can control costs and cede responsibility to individuals and private industry.

It would appear no consensus position is possible from such radically opposing views. Ryan’s plan squarely puts the risk back on the elderly.  It’s essentially a voucher system that wouldn’t keep up with the rising costs of health care.  It doesn’t address pre-existing conditions, it leaves seniors to the scruples of the insurance industry and the offerings they wish to make, and it does absolutely nothing to address the ever escalating costs of health care provision.  We’ve spent some time on this plan so I won’t outline it much more here.  Here’s what the President has offered up.

As a start, last week the President appeared to call for the Feds to negotiate drug prices with big pharma; strengthen, greatly increase the power, and enlarge the role of the Independent Payment Advisory Board; and speed up adoption of new models to deliver care.

Notably, the President’s IPAB would make significant cuts whenever Medicare spending rose more than the increase in gross domestic product plus one percent. And, if Congress failed to act to control costs, the Secretary of HHS could act independently to initiate changes in Medicare. Finally, the IPAB could sequester Medicare funds if neither Congress or the Secretary acted.

The question is can the federal government effectively cap spend and control costs this way? The IPAP has a central role in this mission.  It is an idea still subjected to “death” panel charges as well as rationing.  The strange thing is that all Ryan’s proposal does is gives people the inability to both find and afford health care.  So, which is worse?  Possibly being shut off from a service or never being able to access it to begin with? Politico says the IPAP job will be a thankless one while Ezra Klein believes it will be deadlocked by political rhetoric.  IPAP is central to the Obama health cost control mission.  Here’s Politico’s explanation:

The board is a crucial part of the cost containment strategies in the health care law. It’s supposed to come up with ways to bring down Medicare spending, and they take effect automatically unless Congress comes up with a different way to save the same amount of money.

But it also has lots of restrictions on what it can and can’t do. It can’t touch hospitals or hospices until 2020, and it can’t cut Medicare benefits, raise premiums or taxes, or change the eligibility rules. There’s also a line in the law that specifically says it can’t “ration health care” — and the board’s opponents are likely to hold members to that, in the broadest possible ways.

So whoever sits on the board will have great power, in theory, but also lots of constraints. With 15 members on the board, any one member, other than the chairman, isn’t likely to have a lot of influence.

And any nominee who has ever uttered anything controversial is sure to hear about it in the confirmation process — just as the famous “ration with our eyes open” quote pretty much destroyed Don Berwick’s chances for Senate confirmation as administrator of CMS.

The Senate authors of the health care law intended IPAB to be modeled on the Medicare Payment Advisory Commission, which suggests payment rates to Congress and is well-stocked with prominent health industry officials and researchers. But the MedPAC members are allowed to keep their day jobs — and they don’t have to find spending cuts that providers, and the public, are bound to hate.

Right now, we clearly don’t have a competitive market for health insurance. The Ryan plan thinks you can introduce this into the market by letting senior citizens with vouchers loose.  The administration has tried to offer up minor government plans as a way to provide an average cost benchmark in this concentrated and inefficient market.  I don’t think that either of these plans will work to will because health insurance is by nature a parasitic industry.  As long as some one is standing in between you and your provider, there will be unnecessary costs and more demand than services available.  The bottom line is going to come down to who do you trust?  Do you like the safety in numbers or would you rather be the lone ranger out fending for yourself?  I don’t see Republicans and Democrats agreeing on that answer for some time.

So, what about the Twin Safety Net programs for the elderly?  Will we see another kick the can down the road approach that both Dubya and Reagan took or will we continue to debate this until it gets more out of hand?  My bet says they argue until it basically blows up.