Philadelphia Reflections

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REPLICATED COPY of Privatizing Medicare 11/02/16 01:51 am

The problem of privatizing Medicare is not how to find the revenue, the problem is to arrange a seamless transition to a better system. Those are two different questions. Here's the analysis of the first one (Is there enough money to cover a better system?): There just might be.

Changed Circumstances. There have been three important changes since some wag called Medicare the third rail of politics -- just touch it and you're dead. The first change is increased longevity as a direct consequence of better healthcare. Prolonged retirement is expensive, but it prolongs the period of time available for compound interest to work, and the curve starts to bend upward after thirty or forty years. The same nest egg lasts longer at 80 than at 65. Secondly, passive, or index, investing has greatly simplified and made amateur investing safer. And finally the Health Savings Account was invented, often producing savings of 20-30%. It's time to re-examine the assumptions of 1965.

Proposed. To change Old Medicare (the client pays 56,000 in payroll withholding and premiums, but it costs $112,000 per person -- the rest is borrowed, and there is no provision for retirement.) The "New" Medicare pays for itself with the same revenue and no debt. It includes a modest retirement and might provide a generous one, without changing any program elements. It produces a design more reasonably parallel to the biologic facts.

Tools Available for Transition to the New System. 1) Gradual buy-in for latecomers. 2) First and Last Years of Life Re-Insurance. 3) Trust Fund Extension after Death. 4) Delay the Start of Childhood Roll-Over. 5) Flexible Retirement from Healthcare Residuals. 6. Scientific advances.

Available Tools. Change the postal address of the Withholding Tax and the Premiums to the individual's Health Savings Account. The Savings Account makes contributions tax-exempt and earns 7% compound interest on an escrowed sub-account. Therefore, payroll withholding transforms from $28,000 ($700 yearly for forty years, taxable) into $less than $700, aftertax, and produces $138,000. Following that, it transforms $1400 yearly before-tax into less than that after tax, for twenty years, and then pays 7% on the difference. The net effect is to transform $112,000 before-tax plus $112,000 borrowed, into $534,000 after tax at age 84, the present life expectancy. Furthermore, if an after death trust is created to the limit of legal perpetuity, the present expenditure is transformed into $2,066,000, amply providing for all of Medicare plus a generous retirement without borrowing.

For transition purposes, it may be necessary to create a contingency fund, of up to $250 at birth.


Comments made by a group of liberals:

1. You are comparing non-inflated with inflated results.

2. You are comparing people who pay contributions without including people too poor to pay.

3. You express distrust of government agency, without suggesting an improvement.

4. You are misallocating the high-deductible cost to age 25-65 and allocating none of it to Medicare.

Answers: 1. You are right, in a sense. The 3% inflation figure has been applied to revenue, in the sense that the investor merely gets 7% of the 11% income, while there has been a haircut of 4% between stock profits and investor returns. The consequence and cure of this gap are presently uncertain. There exists unexplained attrition of 3% commonly ascribed to inflation, but it is unclear who really absorbs it, probably the finance industry. The reasoning is flawed and should be corrected, but the conclusion is likely correct: a 3% annual revenue should probably be added, but a 3% cost must later be subtracted. A custody cost of acquiring and storing several trillion dollars of index certificates does not justify such charges.

2. No, the figures apply to all Medicare revenue, divided by the number of subscribers. Thus, the results include free riders, equally. Figures limiting the results to full-paying customers would be lower, thus concealing the subsidy.

3. The individual nature of the account means that extravagance by the subscriber only results in later constriction of his benefits, whereas when the depository is the government, extravagance is treated as a common property of the whole nation. No one spends other peoples' money as carefully as he would treat his own.

4. The high-deductible insurance which is a component of Health Savings Accounts is one-year term insurance. Therefore, its costs from age 25-65 are more fairly apportioned to ensuring working people. After age 65 HSAs are presently discontinued, when perhaps it might be fair to assign the Medicare premium costs to HSAs -- if there were any premium costs. As it stands, there is no recovery of costs for accumulating Medicare premium deposits in HSAs. Nor is there a reimbursement method for Trust Fund handling after death, if that option is chosen.

Originally published: Tuesday, November 01, 2016; most-recently modified: Monday, June 03, 2019