Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Introduction: Surviving Health Costs to Retire: Health (and Retirement) Savings Accounts
New topic 2016-03-08 22:42:53 description

Building a Little Safety Into the Program

In the usual funding and billing operation, the main concern is finding enough money to pay the balances. In this circular system, however, if a balance keeps going around and around for generations, it will eventually reach infinity. Anticipating this loophole, with the absolute certainty that someone will try to take advantage of it somehow, the laws of perpetuity provide that inheritances may only last a single lifetime, plus 21 years. The main concern, however, is to be sure there is enough money without pooling.

In this case, what individuals have available are sixty years duration(age 25-85), or 85 years if we start the clock at birth (0-85), and maybe 90 years if longevity inches up during the 90 years of a coming lifetime. Using the 7% in 10 years doubling rule, that's 9 doublings. Compounded quarterly, these age durations create a multiplier of the $400 we plan to donate, of 64x, 256x, and 512x, leading to contingency funds at death of $25,000, $102,000, or $205,000, respectively. Those are multipliers which surprise most people. Keeping the compound interest within present Medicare ranges just isn't enough, but $145,000 might scrape by, and $206,000 is quite comfortable for the purpose. The specified goal is to bequeath, donate or tax $18,000 to the designated grandchild, and $100,000 to Medicare as a last-year-of-life reinsurance transfer, all of which grew out of the original $400.

We compound 7% as an example because it's easy to double every ten years in your head, but 7% relates well to a century of large-cap common stock returns at 11% (re Ibbotson), less 3% inflation, less 1% more for overhead. And it correlates well with the mode for the last 50 years of the S&P, which comes to 6.6% (see my son George's calculations in the special index.) That's in the ballpark of what we seem to need. And remember, by doing this, the heaviest and most permanent expense of life (terminal care and death) has been transferred away from lifetime cost burdens, into Medicare. (Birth costs are not saving; they are merely transferred from the mother's account to the child's). For reasons we won't go into, reducing the volatility of buy-and-hold investments might lower their transaction cost somewhat.

Obviously, someone must be designated to watch this drama unfold, with latitude to make small mid-course corrections re-aiming it toward its goal. Eventually, Congress must reserve to itself the right to change the ground rules if serious miscalculations begin to appear. It may begin to fall short, which results in raising the initial donations. Or someone may figure out a way to game the system by overfunding it, turning it into a perpetual money machine.

For that rather vague goal, I advise adjusting the choke point at age 25. That's when childhood subsidy runs out and the adult funding for death begins; in a sense, it's the beginning of financial life. It fits the existing laws about perpetuity. Every dollar you change it, up or down, can have a leverage of roughly $300 at the time of the subscriber's death. Of course, there's such a thing as outright fraud, where you ultimately have to send someone to jail rather than allow him to topple the financial system.

Essentially what you would have done, is identify a safety buffer for first and last year of life insurance, with an approximate risk cost ($400), toward which we work as scientific advances slowly modify the rest. Any other surpluses go into the retirement fund for seniors, as healthcare surpluses appear. How long it will take to come into equilibrium is uncertain, but at least it's a plan. Leftovers from the first year of life gift from grandparent to grandchild will appear at birth, but shift over to the grandchild's own account at age 25. After that, he's on his own.

Originally published: Tuesday, April 12, 2016; most-recently modified: Wednesday, May 15, 2019