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.

Medicare Including Retirement, Pearl # 2

Invest the Withholding Tax and Pre-pay Medicare? Borrowing to pay for Medicare, except temporarily, has very little to be said for it. On the other hand, the choice between pre-paying for it and paying at the time of service, is a closer argument. Pre-payment can sometimes be arranged to reduce the price out of recognition of the interest foregone, but usually the seller gets the better of such a deal. In this section, we propose to arrange the payment stream to give the buyer the interest, but Medicare finances are so strained, it doesn't make a heavy impact. About a quarter of Medicare cost is paid from premiums from current beneficiaries. If that were collected in advance over a period of forty years like the payroll deduction, the combined interest payments would considerably reduce the eventual total cost. Unfortunately, young people are now so suspicious the money will be diverted to other purposes, it is a political question whether they would permit the withholding to be increased in amount. Furthermore, the other half of Medicare is essentially borrowed, so interest payments each way would about cancel each other without affecting the principle cost.

They would, however, probably be sufficient to keep the debt from continuing to rise at 7% a year, and that's a major advance. The withholding tax and the Medicare premiums would remain the same, the benefits would be unchanged. So what's in it for the average voter? Most accountants would say it was still a desirable change toward a more stable system, but many politicians would say it runs a risk without any political benefit at the next election. Everybody is correct; it isn't enough but it is something. It solves a definable portion of the problem, of bringing future deficit increases to a stand-still. Things are so bad I'm afraid that's all you can buy for $3.5 billion a year. We must find some way to supplement it, but it's a start. We have five other suggestions:

Devise Some Way to Escrow Long-term Funding. New revenue ordinarily arrives as cash, and is invested in short-term loans until it is decided what to do with it. With thirty-day loans, or even overnight loans, you just have to wait a little, in order to restore cash status. But money market funds show us what can potentially happen. If customers get into a sudden panic, they want their money back immediately. If it's already invested in thirty-year mortgages, the money market fund may go bankrupt unless someone "bails them out". Which is to say, loans them more money to supply some cash -- even though they have ample funds frozen in long term investments. The creditors have their own creditors to consider. If no one will help out, the creditors may shut them down and you get the beginning of a liquidity crash.

Because of this remote but very real possibility, the longer the loan, the higher its interest rate, because the liquidity risk gets extended. That's bad if you are a borrower, but pleasant if you are a lender. Therefore, if the Medicare wage-tax receipts flowed into a frozen single-purpose investment account, creditors would be more assured money would be unrequested before the stated time, and its rate of return could rise with this new attractiveness. Just how much extra income would be provided is a little uncertain, because very few loans are currently for longer than thirty years. However, about forty-five years are potentially available between age 21 and 65, and educated guesses could be made. A one-or-two percent rise in income might change many calculations, not just this one alone.

Find Ways to Extend the Years at Compound Interest. Since retirement is conventional at age 65, a fund for retirement will immediately start to dwindle until the date of death. But many people continue to work, or have other retirement funding sources. If they do not need the surplus immediately, they should be permitted to leave it in the escrow fund, to prolong its term. This could be either fixed-term extensions or demand deposits, at the election of the depositor, and its election would make these funds preferable to retain, compared with Social Security, for example.

The open-endedness of retirement is always going to be a problem. If we speak in averages, they suggest half of the population will be dead, mid-way to the average. Any unexpended surplus after their deaths will be a source of contention, and there will be a struggle for it between heirs and longer-term survivors. If the compounding of unused income could continue longer, for even five years after death, the extra revenue would be considerable.

Continue to Earn Interest after the Death of the Depositor, as in a Trust Fund Long ago, a perpetuity was defined as one lifetime, plus 21 years. Adding another two decades would add two more doublings, and still not run afoul of inheritance traditions. In effect, it would increase the multiplier from 512 to one -- to 2048 to one, increasing the number of newborns who could afford $100, considerably, by making it only $25.

Because of the de minimus initial deposits, it would be a small matter to devote a small portion of the deposit to a backward-funding for childbirth costs. My Libertarian friends would be shocked to hear the proposal, but this small diversion would settle a myriad of cases before the Matrimonial courts about paternity, divorce, single parenthood and even same-sex marriage. Indeed, the financial incentive might be so great it would affect behavior, and need to be debated on that level separately.

But all of the foregoing is small-time, based on the mistaken notion the system is basically sound. Let's look, without pretense, for seriously larger amounts of money:

Contingency Fund. Any projection a century in advance risks making gross mistakes in its planning. No matter how confident the predicting party may seem, it is only prudent to have a contingency fund, when the multiplier of compound interest is so great. For example, most people can expect to be of Medicare age when they die, but not everyone will do so. But mostly a contingency will need to cover the considerable risk of simple miscalculation, without creating a temptation to divert it. The size of the contribution is scarcely a handicap. That is, a contingency fund of $2000 can be envisioned from the gift of $1 to a newborn. Since you know with absolute certainty that every newborn will die some day, a contingency fund of a million dollars per person is possible with a grant of $500 to everyone born in poverty, so long as:

you don't spend any of it for 111 years, providing you can get an average 7% return, and providing the government doesn't devise other uses for your money in the meantime.

Incidentally, increasing public resistance to inflation is one of the hidden virtues of this proposal. Most people would laugh at such a long-term projection. For a single individual, yes, for an extended family, not so much. The trick is to get started with small amounts, which don't attract much attention until they demonstrate some power.

Instead of fanciful extrapolations, it is possible to say almost every working person could summon up $200 per child, and the government could summon up $200 for those who can't. This is what is needed to provide supplements which would accomplish reasonable goals for lifetime healthcare, plus a somewhat more modest description of a comfortable retirement supplement to Social Security. And for those who are unable to support themselves for handicap reasons, the government might summon up the cost for indigents. In the long run, that would be a bargain investment. Since every child has two parents, it leaves a 100% cushion for under-estimates when we extend this idea to children. The problem is not arithmetic, it is public acceptance of the whole idea of individual long-term contingency funds, plus a way to store such a fund for centuries at a time, protecting it from pilfering by its custodians.

First and Last Years of Life Re-Insurance By far the best proposal for refinancing Medicare, however, is to anticipate the way science is going to re-design costs. In the long, long, run, there will be very little medical cost left, except the first and last years of life. We have no idea how long it will take, but that's the direction it is going.

So, phase in a re-structuring of funding for both children and elderly first, and then add in the rest of a lifespan, step by step. The rest of the lifespan will eventually shrink as a cost center, while the beginning and end would not. Be sure to do all this in such a way that maximizes investment income at compound interest. This might be a project under construction for decades, but its first step would be to begin funding for the Last Four Years of Life, which happens to be an early step in the proposal for refinancing Medicare. Since the reader may be unprepared for the topic, it is considered in a free-standing way, in the next section.


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