Philadelphia Reflections

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

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REPLICATED COPY of Privatizing Medicare 11/17/16 04:12 am

Since Medicare finance isn't much affected by the Affordable Care Act, there's a temptation to forget it. But its deficits and poor design are at the heart of the Medicare problem.

Changed Circumstances. There have been three main 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. Someone should have seen this coming, but apparently, no one spoke up. Although prolonged retirement is expensive, notice how it also prolongs the period of time available for compound interest to work, and so the income curve starts to bend upward after thirty or forty years, regardless of the economy. The nest egg lasts considerably longer at 80 than at 65, because compounding makes a nest egg bigger.

Secondly, passive, or index, investing has greatly simplified and made amateur investing safer. Finally, the Health Savings Account was stumbled upon, often producing savings of 20-30%. It's time to re-examine the assumptions of 1965, in those three lights.

Proposed. In Old Medicare, the beneficiary pays $56,000 per lifetime in payroll withholding tax and premiums, but it costs $112,000 per person -- the remaining $50,000 or so per person is borrowed, so there is no provision for retirement. Viewed in that light, Medicare is broke. The "New" Medicare pays for all of present medical care, plus some added retirement cost, with the same revenue, no government debt, no rationing or change of service. That is, it should do so if no one tinkers with the basic framework. It does this without changing any program elements; this is a financial change, not a medical one. It really does let you keep your own doctor, and doesn't tell him how to treat you, or if you should be treated. It produces a financial design more reasonably parallel to biology's facts of life.

Tools Available for Transition to the New System, But Presently Unused. 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. All of these will require later explanation.

Needed Tools. Change the postal address of Medicare's Withholding Tax and Premiums so the money ends up intact in the individual's Health Savings Account. Depositing in an HSA makes contributions tax-exempt and earns compound interest (we hope, at 7%) on an escrowed sub-account. At least, escrowed in such a way that it cannot be diverted from Medicare use. Therefore, payroll-withholding transforms from $28,000 ($700 yearly for forty years, taxable) into health care worth on average 18% more than that, because it's aftertax, and grows to $138,000 at age 65 (Try that out on your Internet compound interest calculator). Starting at age 65, it transforms $1400 yearly Medicare premiums, again aftertax, into 18% more than that after tax, for twenty more years, and then pays tax-exempt interest. The net effect of augmented income tax augmentation, compounded, is to transform $56,000 aftertax plus $112,000 borrowed by the government, into $534,000 before tax at age 84, the present life expectancy. That doesn't sound like good arithmetic, but If you don't believe it is possible, try it on any one of the Internet's free compound interest calculators. (Furthermore, if an after death trust is created to the limit of legal perpetuity -- one lifetime plus 21 years --, the present expenditure is transformed into $2,066,000, amply providing for all of Medicare plus a generous retirement without government borrowing.) You won't be surprised to find that others think that is more than you will need.

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

Originally published: Wednesday, November 16, 2016; most-recently modified: Monday, June 03, 2019