Philadelphia Reflections

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

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Start Younger, Save Longer, and Do It Yourself: Health Savings (and Retirement) Accounts
New topic 2016-06-22 19:26:36 description

Younger is Longer, and Longer is Bigger

A central feature of compound interest is the quirk that the longer you invest, the higher the interest rate becomes. That's not going to change, no matter who votes against it. What did change, after thousands of years of staying the same, was longevity. The Biblical guess for potential longevity was three score and ten, but most people died in their twenties and thirties, far from the theoretical longevity of the human condition. By the year 1900, actual longevity was 47 years, and three-score and ten still seemed about right. But today longevity at birth is thought to be around 82, and what with heart transplants and all, it may level off at 90 in a few decades. The Sunday supplements are already speculating the average person may someday reach the age of 110, or more.

It's probable that civilization developed a number of conventions to adjust to shorter longevity, based on the notion that if things don't change for a century, we can make do with short-term expedients for national currencies, life insurance, mortgages and similar long-term arrangements. Stories are told of Bismarck, or was it Franklin Roosevelt, who based retirement schemes on the assumption most people would be dead at the age of 65 or 67, so there would be plenty of money to pay their pensions. But insurance companies gradually learned how to get rich on premiums based on old assumptions, but pay-outs based on a longer reality. Other long-term financiers played the same game, and governments switched from a gold standard to inflation-targeting. A fixed amount of gold drives prices steadily downward in an expanding economy; a floating currency gradually floats prices upward, but creates innumerable adjustment headaches. With periodic crashes, we manage. The present book proposes we use the quirk of rising interest rates in compound interest as a way to cope with unstable currencies, but it's only an expedient, and it may not last forever.

At the moment, it looks as though longevity will level off at around age 90, but that projects a progressively longer retirement vacation to pay for. For the time being, we appear to be leveling off at equal thirds, childhood and education until 30, earning from 30 to 60, and retiring from 60 to 90. That's pushing things a bit; no one can be sure a third of the population can, or will, support the other two thirds. It's particularly dubious when you consider about 30 million people in America will always have some degree of dependence. That's roughly seven million incarcerated in jail, eight million handicapped, and 11 million illegal immigrants. Going to work at age 25 and retiring at age 75 would provide much safer numbers, particularly if 5% of the population is normally between jobs in a mobile society, and we propose to spend 18% of national income (GDP) on healthcare for the rest. Americans like to grumble a lot, but compare how much better off we are, than the other four fifths of the world, living on something approaching a dollar a day. We like to think it is possible to get rich without making anyone else poor, but the rest of the world has been taught to make money by taking it from someone else.

So, without further illustration, Americans should adjust themselves to a century of working longer and harder, perhaps age 25 to 75, recognizing the rest of the world will out-vote us if they can, and trusting in our own resources whenever there is a choice. That's the reality underlying a preference for individual savings accounts, it really isn't safe to trust the currency forever because even our leadership occasionally disappoints us for whatever motive. And it's the reality of extending the working years, even if income falls, because the longer you are self-supporting, the shorter the time you must depend on others. And there's one other simple peasant teaching: start saving as young as you can, on the day of your birth if your family is organized that way. It was pretty useless when people lived to be 40, because compound interest scarcely had time to begin work. But the rule of thumb is that money at 7% interest doubles in ten years. If you live to be 90, that could be nine doublings (2,4,8,16,32,64,128,256,and 512) or five hundred dollars per dollar. Since you only need a trustworthy custodian to do it, it is probably the basic unit of currency, slowly changing over time. But you don't need to take it so literally, understanding the principle is more important.

The rule for health insurance (which is what we are mainly describing)is to organize the insurance to begin saving as young as possible, and to spend the money as late as possible. Health insurance is one big transfer mechanism. You earn money from 30 to 60 and you spend it from 0 to 90, but you spend the greatest amount in the first year of life and the last four years of life. Therefore, it is poor design to assign the cost of childbirth to age 30, it's mostly borrowed money, and it's spent the day you were born. You could argue before a judge the cost is partly the mother's cost, partly the father's, partly the infant's; the judge will probably assign the cost to the person with the deepest pocket. In this particular case, the deepest pocket is probably the grandparent, having six or seven doublings intervene. In fact, in a situation torn with divorce and dissension, the grandparent may be the person -- not only most able, but -- most willing to pay the bill. Skipping the process of inheritance, the donation of the money by grandparent to the baby's individual account eliminates cost and controversy, and potentially reduces the cost by 32 to 64-fold.

Originally published: Wednesday, June 22, 2016; most-recently modified: Thursday, June 06, 2019