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

Prologue and Epilogue 06/20/16 09:27 pm

This is the second of several volumes on rearranging all the pieces of lifetime healthcare financing. Without adding any substantial money, it begins to appear an entire lifetime of healthcare, plus the extended longevity/retirement it provides, might be paid for with rearrangements of what we already spend. Notice what has been added: "plus the extended longevity/retirement it provides". Since retirement and Medicare coverage begin at the same time, and by some calculations average retirement is five times as expensive as Medicare, that's a lot of reduction of healthcare costs in order to fund retirement benefits out of a constrained funding source. So what's missing is a time limit. Medicare funding would increase quite a lot in fifty years, so fifty years from now the math might come out right. The hard part is to find a bearable transition during the fifty years, because you can't spend the same money twice. The public might well prefer no plan at all, if the alternative is to wait half a century to get what even seems a good plan on paper.

Moreover, two key steps are not exactly ready for incorporation into an extended scheme. The working years of life, from age 25 to 65, are covered by disputed and undisputed portions of the Affordable Care Act, pending lawsuits before the federal courts, and the political positions of the two political parties about how they should be modified or repealed. We must first debate the most realistic outcome for the ACA, and see if this or any other plan could coordinate with it.

The second gap is the same as the first, on a different level. We learned from the 1965 Medicare launch that much of the healthcare load was merely a catch-up of a backlog, far exceeding the cost of forgiving its revenue obligation. People like my own mother never contributed any revenue, but received benefits for forty subsequent years. If we repeat this blunder, our problems will multiply from it.

But don't get desperate. That does not exhaust the toolbox of leftover revenue sources for paying for retirement. After we learn what the public wants to do in the next few years, there are still many untapped financing sources, some of them only explainable later. For example: (1.-2.) We have not identified a retirement direction for the remaining three quarters of the Medicare withholding tax, nor any of the Medicare premiums. (3.) As mentioned, working-age persons make inadequate contribution toward their own retirement, because we were late in recognizing that improved healthcare resulted in longer retirements. (4.) The last-years-of-life rearrangement would pay for half of Medicare's twenty years with four years contribution at the present rate (That's half the cost in return for 20% of the revenue). (5.) Considerable reduction of premiums for employer-based health insurance can be anticipated from transferring obstetrical costs to the baby, removing childhood health costs from the employed parents. (6.) Reduced Medicare deficits, now financed by bond sales to foreigners, should ease the government cost of healthcare. (7.) Even though group health insurance is heavily subsidized by employer tax deductions, the system is not entirely free, and employers should benefit. (8.) If savings of this sort are aggregated and saved at compound interest, one expects substantial contributions to retirement income. (9.) A rather small transfer of the foregoing savings to the contingency fund should appreciably ease the competition for investment income between the public and its financial intermediaries. There can be guarded optimism, therefore, that the discord and unexpected reversals of any such elaborate scheme, can eventually be overcome.

At this stage in the book, these left-over revenue sources may not mean much to the reader. But they are repeated at the end of the book, to be taken up as actual revenue sources after the public has a chance to digest what the book has suggested, and the politics of the twenty-first century have defined what is left to do.

The main new funding sources discussed in this book are:

1. Putting an end to pay-as-you go and collecting compound interest on unspent revenue.

2. Utilizing the Health and Retirement Savings Account to invest a lifetime of savings in the total equity market through index funds.

3. Re-arranging the financing of lifetime health care to optimize the first two mechanisms. In particular, recognizing compound interest rises faster at its far end. The J-shaped curve of Medicare financing already suits this need perfectly. The financing of childcare is the reverse, an L-shaped curve, however. It forces contortions on the system to pay for it.

In summary, our problem somewhat resembles a bank in a crisis. We hold long-term assets, making healthcare seem easy. But a shortage of ready cash makes insolvency seem inevitable. Many banks have collapsed in that dilemma, unable to work out a credible plan, find a patient backer, or the steadiness to stay a stormy course. Healthcare financing must be balanced more carefully, to avoid a similar fate.

 

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