Philadelphia Reflections

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

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Pearls on a String:Further Extending Health (and Retirement) Savings Accounts
Pearls on a String: Further Extending Health (and Retirement) Savings Accounts. HSAs are the string. Retirement saving, Privatizing Medicare, and Shifting Childhood Costs-- are the Pearls. Other Pearls to follow.

Dubious Wisdom: Adding Incentives to Health Savings Accounts on Behalf of Other Linked Accounts

Government programs tend to have a "one size fits all" quality, growing in part from the Constitutional requirement for equal justice under the law. Most of them make no mention of what to do with left-over funds, usually implying they return excesses to the pool for recycling. Supposedly that reduces the cost for everyone else. Sometimes, of course, it raises employee salaries, buys battleships, or is otherwise spent for things we didn't specify. A much better default rule would be to return unspecified excesses to the original contributor, as an incentive to keep his spending lean and mean. But that's someone else's Crusade; we just urge it to be examined each time the matter arises.

Cookie-cutter similarity is exaggerated by the way legislation is created. Each Congressman represents nearly a million constituents, far too many to be running for re-election every two years with scant time left to legislate. The laws are consequently too general, are revisited too infrequently, and leave too much to the Judicial branch and the administrative agencies to settle. Congress increasingly resembles a Board of Directors, rather than the source of legislation, ultimately lacking the power to control the President by picking him. For this reason, we hear the British parliamentary system praised, since the Prime Minister is chosen by the ruling party. My own feeling is Congressmen are not able to devote enough time to the job of legislating mainly because they spend so much time in the telephone call center, soliciting election funds within the hearing of their leadership. The deluge of business is ultimately the balance point of leverage in the system. Let's examine some issues which are not urgent, but eventually must be settled by these harried law-makers.

We have stumbled onto the clear linkage between paying for healthcare, and subsequently being forced to pay for the resulting extended retirement, which is an unexpected but inevitable consequence of improving health care. Although the cost of healthcare has been a national concern, extended longevity proves to be potentially even more expensive, expressed as a lump sum at age 65. That's because a completed retirement fund becomes a constantly shrinking asset once you retire, whereas Medicare is only spent when you get sick. Furthermore, retirement will soon last a third of a lifetime (or more), so it is awkward to suggest a defined price for it. Everyone, even someone who is quite rich, is afraid to spend retirement funds for fear of running out of money during a particularly expensive terminal episode, like some of the cancer treatments now making an appearance. Homogeneous nations like the Scandinavians seem willing to carry equal retirement to a national level, for approximately the same reason socialism is more popular there. A homogeneous people are more willing to trust each other to "re-insure" the whole population in unpredictable circumstances. But our society seems headed in the opposite direction of diversity. These are not parallel goals.

Socialism is mainly unpopular in America if carried beyond issues of mere subsistence, because of its tendency to reduce work incentives. So it's a circular argument usually growing out of famines and genocides. For example, raising the retirement age might ease financial strains, but instead many people just want to quit work at age fifty, while others see no reason to retire at all. Unfortunately, workaholics resent the suggestion their extra income should support others who prefer to quit work. The difficulty is magnified by first supporting thirty million people who are plainly unable to work, plus at least an equal number who hate the kind of work they do. The outcome is a diverse nation seemingly resistant to government protections which guarantee more than bare survival, in constant contention with a subpopulation which yearns for education during the first third of their lives, and another subpopulation which yearns for expensive leisure during the last third of their lives.

If that's a fair analysis, there will always be divergence in luxury for retirements, and therefore a constant propaganda war between fairness to the poor and fairness to their more visibly successful competitors. The term "Social Darwinism" captures that flavor. At least for a long time to come, the amount available for individual pensions at retirement age will be a scorecard for a successful life. Both public boasting and envious criticism should therefore be discouraged, but the lifelong incentive to be frugal cannot be ignored. If we can manage this paradox, the incentive can be used as a silent reminder that what you frittered away as a youth, might have been used to improve your retirement. At the very least, the public might be reminded government debt lowers long-term interest rates, intentionally lowered in order to stimulate short-term growth of the economy. But to paraphrase John Keynes, "In the long run, we are all retired." Eventually, we must all live on what we saved, and debts we agreed to must be repaid. What we now seem to have, are incentives to retire early, and incentives for the government to inflate away the cost by suppressing interest rates.

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One logical place to begin, is to pay a bounty into an HRSA for subnormal spending during the previous year {bottom quote}

Therefore, if unifying the finances of medical care and retirement at any age, is an incentive to be medically frugal, why not unify the incentives for all things medical? Otherwise, the landmark moment becomes the termination of your present means of support, the termination of your present mortgage, or graduation from your present school. There is general agreement, medical costs have risen so fast because there is nothing else to spend earmarked medical money on, except frivolous medical care. As we said earlier in the book, there is reason to suppose the success of Health Savings Accounts lies in the powerful incentive provided by retirement needs, offered as a use for left-overs from healthcare. The roll-over of an HSA into an IRA provides an alternative, and the tax deduction for health of an HSA provides a preferred, but not mandatory, outlet.

If, one by one, other funding sources for healthcare flow into an HSA, healthcare at all ages is provided with a unified incentive to be frugal. Health insurance of one form or another may resist the HSA alternative, but if we are correct, the market will force it. Because medical care seems destined to concentrate among elderly people, it seems urgent to provide this incentive to Medicare first. Of all places, Medicare is the least desirable place to be employing deficit financing, pay-as-you-go financing, or other mechanisms to make it appear to be less expensive than it is. Medicare is where serious expensive disease concentrates, and that trend continues. Because of stretched finances, one logical place to begin, is to pay a bounty into an HSA for subnormal spending during the previous year. The compound-interest beauty of this approach is: the younger you do it, the more it will help; and so that idea might be built into it,too.

Flexibility is also an incentive for almost any program. We have mentioned several ways to enhance Medicare's revenue and there seems no reason to limit the choices. The transition from Medicare as we know it is likely to be a long one, and family circumstances may change several times during the phase-in. If the individual could contribute to the contingency fund, or to the Last Year of Life fund, make choices for increased benefits for late retirement --and flexibility for anything else anyone can suggest, the bookkeeping may become more complicated, but the attractiveness of Medicare improves.

Attention might be paid to the individual's ability to apportion the distribution of his nest-egg at the time of retirement, until the time later on when he writes his last will and testament. There will be an irresistible tendency to overestimate personal retirement needs, in order to avoid exhausting them too soon, and that should be relied upon. On the other hand, these requirements are often abruptly changed by illness, or death of a spouse. There might be several contingency funds, with different rules for invading them. These warnings are issued in full realization most people cannot see so far ahead, and most people will be a long way from achieving their own goals.

With such general ruminations in mind, it seems inadvisable to limit choices without good cause, or provide for handling exceptional cases with some sort of required approval. Doing otherwise might lead to forcing some people to reject a job opportunity, or else to buy insurance they do not need. Or to encourage inflation to minimize the unfairness to a surviving spouse, to force reduction of his/her lifestyle. For the first few decades at least, constraining the choices at certain critical points should operate on a sort of common-law or Court of Equity process. As the issues gradually surface, they are slowly resolved. The country grows increasingly restless about the intervention of administrative agencies without adequate oversight by the court system, at the same time it distrusts the courts. The problem is not so much incompetent courts, as the design of a system dumping decisions on them which might better be made by the individuals. Once more, the problem of too little congressional time surfaces. At present, the tendency to flexibility is to reduce it, and most of the public prefers otherwise.

Marriage Laws. Broken marriages, whether broken by death or design, are too common to justify immobilizing their future direction. A lawyer dominated legislature must recognize the danger of too much power in the hands of the trial bar when dealing with life-long savings of either party to a divorce, or both, or prior expenditures of the couple for health purposes. Or unanticipated contingencies which occur after the separation of a couple. It will be a long time before we have settled what is best to do about serial marriages of homosexuals, or marriages of intersex couples, or no marriages at all. The courts dealing with lifetime health and retirement funds should at least have a defined outlet for the special insights their role provides, because the country will need to hear those insights.

Special Treatment of the Handicapped. Not only do handicapped people of all varieties have increased healthcare expenses, they have special laws dealing with their problems. These may conflict with what is generally best to do about lifetime health and retirement funds. It is unwise to freeze the rules before the exceptions become evident. Retirement is now commonly thirty years long; relationships can change. Freed of obligations to minor children, they may even change more rapidly.

Expatriate Citizens and Conflicts Between States. It is comparatively common for citizens who were foreign-born, to retire to the nation of their birth because it is cheaper to live there. They become subject to devaluations of the foreign currency, and prey to agents who purport to help them, just as residents of different state jurisdictions become subject to conflicting mandates. If the host country abuses them, they present a problem for the State Department.

The list of potential conflicts with flexibility is very long, and these are only examples of it. The basic point is that a mechanism should be created to deal with long term exceptions to laws which envisioned a much shorter horizon and many fewer linkages.


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