Philadelphia Reflections

Borrowing Your Own Money

The accumulation of earned income within a Health Savings Account is pretty nearly a straight-line accumulation according to the principles of compound interest. It reaches the estimated lifetime medical costs of the owner at the time of his death. The withdrawals from the account pay for medical care, and therefore the two curves end at the same point, but by different routes. Medical care expenses rise much faster toward the end of life so that in general revenue grows faster than health expenses -- a favorable relationship. It seems likely the average medical cost and the average savings to pay for it will differ according to distinctions in their underlying theories, and it is a certainty that any particular individual will see wide patches of difference along the way. The biggest problem is to find a way to use the patches of surplus to pay for the patches of a deficit. There seem to be three ways to do it:

1. Over-invest. The effort up to this point has been to find the lowest contribution possible, so poorer people could afford to buy the insurance. However, over-investment leads to more compound interest and is actually much cheaper in the long run. Besides affordability, the only obstacle to over-depositing is the limit imposed by the law, which is $3300 per year. Everyone is encouraged to do so since a safe, tax-exempt return of about 10% is more than is usually available. The maximum anyone could contribute from 26-65 is $326,700 with annual increases planned. Because of the $3300 yearly limit, however, extreme investment returns are not possible. At $3300 yearly, the compound interest at 10% would double the principle in ten years but it would require perfect health to accumulate $66,000 that way. Keep in mind that money in the account may only be spent on health care of an approved sort, and when heavy medical expenses start to appear, longevity is likely to be appreciably shortened. Present rules prevent further payments to an HSA after beginning Medicare coverage so it would be prudent to be fully funded before that time, but getting greedy would probably mean much is wasted.

2. Persuade Medicare to deposit advance payments (payroll deductions and Medicare premiums) into the Account rather than lose their compounded investment income in the meat-grinder of the pay-as-you-go. There is a transition issue, but otherwise, this item alone would pay for half of Medicare, and its investment income would further add to it.

3. Borrow from yourself. Although payments from the Account are normally made with a bank debit card, and all banks lend money, the administrative costs of many calculations of relatively small amounts could be considerable. It seems much more attractive to seek ways to do the predictable borrowing and repayments by age cohorts in bulk, as a sort of wholesale product. If for just an example, the age group from four to twelve has so little medical expense that the Accounts are always in surplus, it might be borrowed at five percent interest and re-deposited in the cohort from age forty-five to sixty-five which we imagine being constantly in deficit. The outcome would be that the surplus was earning fifteen percent, and the deficit only earning five percent. External borrowing from the banks' own funds, would probably require a shift in the underlying securities in the fund, from equities to fixed income, during the period of the loan. With this sort of safety measure, interest rates for external borrowing might prove to be attractive enough to make short-term loans available from the banks which held the debit card. The distinction here might be made along the lines of structural deficits inherent in the age groups, and transient deficits caused by payments for illnesses. The latter might be riskier, but more short-term. Some sort of pooling might be more useful for re-insurance of outliers, or catastrophe insurance.

But it would be wise to avoid borrowing, except as a final extremity. Naturally, it is better to borrow than to accept destitution while six-figure sums sit idle in your Account, but the experience with 401(k) is cautionary. Around the bar in investment circles, it is easy to hear careless comments that 401(k) is a failure, because borrowing to buy fancy cars or expensive vacations is altogether too common, and the fees charged by investment advisors are regularly so high that attractive investments turn into losers or at best break even. Charges of $200 per trade are quoted when several trillion-dollar firms charge less than $10. Advisory fees are set at 1% or more of assets managed when major firms -- with equal or superior investment results -- charge seven-hundredths of a percent.

Charges of this sort are justified in speculations on drilling oil, or computer start-ups, or foreign dabbling. Perhaps the zero-sum game of fixed-income trading justifies such fees from professional gamblers. In other words, advisors are needed for investments you shouldn't even consider. Trust fund babies, or bewildered old folks holding hands, don't need investment advisors, they need to grasp a few simple facts. The vast majority of profits in the stock market are made in 10% of the days it is open. Don't time the markets, buy and hold, waiting for that 10%. Don't be a stock picker; stock pickers always seem to buy high and sell low. Buy an index fund with thousands of stocks represented, don't pay more than a tenth of a percent. Just forget you have it, except once a year to see how it compares with others. Don't believe what you are told about fees; they are mostly hidden. If your results don't compare well with market performance, just re-read the last paragraph. Borrowing? All that will do is magnify your gains or losses, so be sure what you are doing is superior before you borrow. I'm willing to bet it isn't superior.

Originally published: Tuesday, April 01, 2014; most-recently modified: Wednesday, May 15, 2019