Philadelphia Reflections

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

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In Conclusion: No Tree Grows to the Sky

In conclusion, let me set boundaries for whatever hopes this book might arouse. In the first place, HSAs are tax-exempt. The hidden significance is the government will tend to oppose expanding its concepts to other purposes, since Treasury will want to retain as much as it can in the taxable category. This tax exemption is limited to health costs, just as Senator Roth's other qualified retirement programs were limited to paying for retirements. That exposes it to accusations of being a tax dodge perhaps, but it's intentionally limited to health and retirement. Moreover, the added "escrow feature" additionally restrains the individual himself from diverting the tax exemption to unintended purposes. So it's constrained, in two directions. I think that's a good thing, keeping too many people from climbing aboard the lifeboat, and sinking it.

Secondly, no amount of tinkering is likely to make HRSAs cover all health and all retirement costs. One or the other perhaps, but not both. The mathematics of health care and its consequence, extended longevity, simply will not stretch that far. By ignoring all the internal steps, forgetting about transition costs and all the rest, total cost is more than total revenue. After applying some strategies, the shortfall has been concentrated into retirement. The conclusion is health costs can be covered, maybe, but retirement costs can't. Adding Social Security, a constrained retirement might be possible, but this is the point where any shortfall was designed to emerge. If your retirement plans revolve around HRSAs, you had better plan to supplement them with other sources. And if you then must plan to mix sources, you are always going to need a common fund, and therefore the individual fund must continue as a place to derive funds for a common purpose and possibly extended tax relief for funds of differing size, rather than a communal paradise. Everybody better keep on planning to work longer, to pinch pennies, and earn some outside income. It isn't going to result in everyone living the life of a character in a Jane Austen novel. That's not to say it's nothing to pay for all of health care and some of retirement. It would actually be a great achievement. But even that only becomes possible if everything works exactly as planned. And if it won't, don't count on paradise, work toward it.

Bill Roth of Delaware and Bill Archer of Texas made HRSA politically possible, and John Bogle of Pennsylvania made it financially conceivable with passive investing. Dale Yamamoto the actuary devised the system for measuring medical costs at different ages, and my son George then established the probable feasibility of a lifetime financing. My family, including Miriam, Margaret, Stuart and Janice, applied the "No prophet in your own valley" approach, and picked every nit. John McClaughry lurked in Vermont, fearful to see how I would make a mess of his one-liners. God bless you, every one.

In closing, let's restate the argument:

1. Where does the extra money come from? From investing rather than borrowing the healthcare money. That doubles the effective result.

2. Where did the seed money come from? Initially, from HSA tax exemption, and reduced healthcare expenses. Subsequently, from reduced investment costs, and the fact that both lifetime health costs and compound interest follow J-shaped curves, allowing unused early deposits to accumulate until needed later in life, accelerating toward the time they are used. In recent years, the public discovery that unused funds turn into an IRA at age 65, has led to extra depositing within legal limits. (I propose the same incentive system for Medicare.)

3. Isn't this too complex for the average person? Not since the introduction of low-cost "passive" investing.

4. Aren't interest rates too low to accomplish much? Yes, so this increases the attractiveness of long-term, low-cost, total market, index-fund investing.

5. Aren't fees too high? Often, they are. Stick to funds with a trillion or more invested, and cost of less than a tenth of a percent.

6. I'm afraid to be a pioneer. You aren't a pioneer. Nearly twenty million people have HSAs already. You need to worry about waiting too long to start, because you are dealing with J-shaped curves. If you never get sick, you can spend the enhanced money on retirement living.

7. Is that all? By no means. If you want to bedazzle yourself, consider using leads and lags on a. First and Last-year of Life re-insurance, and b. Grandchildren Inheritance Transfers. There's also c. the possibility that science will eliminate some Medicare costs, so the money can then be transferred to retirement. I propose an automatic transfer of Medicare surplus to Social Security, as an incentive. These are all new ways to cope with transitions and to enhance investment income by prolonging its investment periods, but they probably require legislative confirmation.

It would appear both healthcare and compound interest follow J-shaped curves of slightly different shapes over time, sufficiently to encourage the idea that a little manipulation could make achievable, passive investment pay for all legitimate healthcare as we now know it. For example, a single fairy-godmother deposit at birth would rather easily cover the costs of first-year and last-year of life insurance, if interest rates return to a normal 6.5%. That could also be accomplished by saving $5-10 dollars per paycheck from Medicare withholding tax from age 25 to 65, provided the savings were continuously invested at 6.5%. Some might argue such estimated investment return is too high, while others might question whether future generations would be sufficiently frugal to continue the process. But most people would say the amounts estimated are small enough to adjust to such questions. Paying for all of retirement costs, however, is another order of magnitude.

Just as a lot of people warm to the idea of giving newborns an equal financial start, there is a lingering hope that at retirement, everyone might enjoy a more-or-less similar life of leisure. However, a little calculation of the two shows it would be far more difficult to achieve in the case of retirement. If we can agree on a hypothetical number, perhaps it would be debatable whether a hypothetical $20,000 a year might satisfy most ideas of an adequate pension, particularly when reminded this would amount to $40,000 a year for a retired couple. But then just look at what it would cost.

To achieve this goal, savings of $250,000 would be required at age 65. And to achieve that, several of our favorite strategies look a little marginal. We could transfer an increased Medicare withholding tax of $150 a month for forty years and invest it at 6.5%, at the conclusion of which we would have about $250,000. But the newspapers seem certain fifty percent of the population aged 50, have no liquid savings at all. Daunting though it may be, those might be accurate figures. They may well be rough estimates, but do not augur well for asking new hires at age 25 to put away $150 a month, and keep doing it for forty years. Nor does the fairy godmother approach sound like an easy approach. If we imagine an inheritance or a federal subsidy, it would require a lump-sum deposit of $3500 per person at birth to achieve an individual goal of $250,000 at age 65. Or a deposit of $18,000 at age 25, coming from similarly undefined sources. We might look for ways to stretch out the investment period, since it would look as though compound interest has a chance of growing faster than the cost of living. If that approach is tapped, it would require a transfer of $700 to a newborn, assuming a 90-year investment time could be manipulated out of thin air. Or $300 for 104 years, the present definition of a perpetuity (one lifetime of 84, plus 21 years). Or $150 for 111 years, hoping life expectancy to increase to 90 years looking one lifespan ahead. The trouble with such projections is not so much the dollar amount, which some would say could be inflated away, but the extended time period. All such extensions exceed the human lifetime, depend on someone-else to keep them up for someone, who has himself been dead for decades. It is possible to predict great advances in medicine, in computers, and in transportation. But I would not be willing to predict such advances in human nature.

So I would urge everyone to be satisfied with these suggestions for healthcare, looking elsewhere for help with luxury retirement.

 

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