Why Medicare For All Is Logically Affordable

With the 2020 presidential election campaign just getting off the ground, health care is shaping up to be a foundational issue, as it should be. Health care in the the United States is expensive and complex. Per person spending in the U.S. is higher than other similarly wealthy countries. It’s actually twice the average spending of Europe and Japan.

Democratic candidates are unanimous in their support for reform. Nine candidates have come out in favor of Medicare For All, an aspirational statement with multiple meanings, or some form of universal health care. Another three have come out in support of an expansion of Medicare or Medicaid.

Critics first reaction to the idea, even though a concrete plan has yet to be proposed, is that it is unaffordable. But there is no logic behind this conclusion.

According to the Centers for Medicare and Medicaid, health care spending was $10,739 per person in the U.S. in 2017. Some of this was paid by insurance companies through employer sponsored or individual health care plans, some was paid for by Medicare and Medicaid, some was paid out of pocket by the patients, and some was paid by health care providers when patients were unable to pay their bills.

While the cost of health care is projected to continue to rise, the fact of the matter is someone will pay it. Single payer solutions to paying for health care, which is what Medicare is, don’t, by themselves, change the cost of health care.

As a thought experiment assume every dime of health care spending were paid for by the government through an increase in corporate and individual taxes. You must then assume the other ways you pay for health care would go away and compensate for the higher taxes. The cost of health care will still average $10,739 per person.

The average annual premium for employer sponsored insurance for single coverage was $6,896, and it was $19,616 for family coverage according to the 2018 Kaiser Family Foundation Health Benefits Survey. Average premiums for plans under the Affordable Care Act in 2018 were $5,280 for single coverage and $14,016 for family coverage. These expenses would go away if the government paid for health care.

Out of pocket costs paid by patients continue to rise and provider networks are getting more and more narrow. This makes patients responsible for more of the cost of their health care and subject to financially devastating bills. If the government paid for all health care you must presume that your own costs will go away, offsetting the increase in your taxes. Other expenses, like those paid by insurance companies and those paid by health care providers would all go away.

A single payer system does not mean that the government will be in charge of your health care. They aren’t now with Medicare enrollees. Why would they be under Medicare For All? It also does not necessarily mean that all insurance companies will close. There are European countries that utilize insurance providers under a single payer system.

However, health care could benefit from some government regulation. Pricing is far from transparent, and even if it were, it’s not like you’re going to call around if your baby’s fever spikes to 104, or your husband is having a heart attack. And the cost of some life sustaining medications is becoming unaffordable even if you have insurance. It is the pricing side of the equation that makes health care so expensive. Not who pays for it.

Similar to health care, we depend on our electricity to work at an affordable price. Utility prices are regulated by municipal boards. It might be worthwhile to consider a similar arrangement for health care.

So no. Medicare For All is not unaffordable. We are already paying for healthcare in one way or another. In exchange for higher taxes, companies, health care providers and individuals would pay less for health care. The overall cost of health care won’t necessarily change with the implementation of a single payer system, though with some creative thought, we might be able to get that under control as well.

Photo by Tbel Abuseridze on Unsplash

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Who Robbed Social Security?

The Social Security Trust Funds are estimated to be depleted by 2034. Were they robbed? I’ve heard a variety of versions of this story. Essentially many believe the Trust Funds were diverted/robbed to pay for other government programs leaving future retirees high and dry.

The fact is the Social Security Trust Funds have received every dollar they were entitled to receive under the laws that govern the program, and no money from the Funds was ever used for anything but the payment of benefits. So why will they run out of money in just seventeen years?

Over the decades since Social Security was created, we, the American people fought tooth and nail against tax increases that would have kept the Trust Funds afloat and were happy to see benefits extended beyond those in the original design. As a result Social Security has been severely underfunded. If anyone robbed Social Security it was us.

The two funds, the Social Security Disability Income Fund and the Social Security Old Age and Survivor Insurance Fund together help support 60 million people; 43 million retired people and their dependents, 6 million survivors of deceased people and 11 million disabled people.

In 2023 when the Disability Income Fund is depleted, the tax revenue supporting the program will only be able to pay 89 percent of the benefits, and in 2035 when the Old Age and Survivor Insurance Fund is depleted, the tax revenue will only support 77 percent of projected benefits. Most analysts implicitly assume the Old Age and Survivor Trust will be tapped to fund disability payments, bringing the projected life of the two together to 2034, 100 years after Social Security’s conception.

When Franklin D. Roosevelt first considered creating a social insurance program in 1934, he envisioned a self supporting system, similar to an insurance contract, where contributions for a worker would be collected over his or her lifetime and invested. The contributions and investment interest combined would provide the funding to pay out the worker’s benefit at the end of their work life.

Of course this wasn’t possible in the early years of the program, because it would be decades before a worker would have contributed enough for a fully funded benefit. Therefore the early payments had to be funded from the contributions of those still working.

The new law included a schedule of tax increases to be implemented over time to make the program self-funding. Without the tax increases, the system was projected to require government subsidization by 1980.

When Social Security was implemented the benefit payments were cheap relative to the tax revenues that were being collected.  In 1940, there were more than 159 workers for every beneficiary. As a result, congress didn’t see any harm in pushing the tax increases back as well as expanding the program.

By 1955, we were down to nine workers for every beneficiary, and the ratio of workers to beneficiaries steadily declined from there. Sure enough, just as predicted, the system was in dire straights by 1977.

After two rounds of tax increases and increases in the full retirement age in the 1980s, congress secured some breathing room. But with the baby boomers retiring in droves and after a decade of low interest rates, that breathing room turned out to be shorter than anticipated.

In order to solve the problem, an immediate tax increase of 2.6 percent or an immediate reduction in benefits for all current and future beneficiaries of 16 percent (or some combination of the two) is necessary. Yet fixing Social Security is blatantly off the current administration’s agenda.

Social Security is once again in dire need of a fix, and few who are still working have confidence that the program will be there for them. Yet we continue to demand that our politicians avoid tax increases and changes in benefits for the worse. As the time when we have no choice but to severely curtail benefits draws nearer, keep in mind that we are only getting what we asked of our politicians. The only thieves in the Social Security heist are us.

Image courtesy of kittijaroon at FreeDigitalPhotos.net

Dismantling Obamacare: A Self Inflicted Wound

With Republicans winning control of the White House, the House of Representatives and the Senate you can nearly hear chomping at the bit to dismantle the Affordable Care Act, a.k.a. Obamacare. Objections to the law have been loud and unending since it was passed in 2009. Congress has voted to repeal the law in its entirety six times and voted to defund or delay parts of the law 54 times since then. Only 40 percent of Americans approve of the law and about 50 percent disapprove. Yet anecdotally speaking, few people I have spoken to understand how it works, and too many blame it for problems it did not cause. Before there is too much enthusiasm for repealing or mortally dismembering the law it is worthwhile to consider what we would be giving up.

The ACA has allowed 20 million people to get health insurance coverage according to the Department of Health and Human Services. This includes people who previously could not get coverage due to preexisting conditions and young people who can now be covered under their parent’s work related group healthcare plans. It requires that all healthcare plans, including work related plans, cover wellness exams fully among other minimum coverage requirements. The law also mandates maximum out of pocket costs and eliminates coverage limits.

This last piece of the ACA is likely the source of dissatisfaction among those covered by an individual policy purchased through the healthcare exchanges who are not happy with the law (less than a quarter of those buying insurance through the exchanges). In 2014, minimum coverage requirements went into affect causing insurance companies to drop some policies. These were generally cheap policies with coverage limits that could leave the insured holding the bag on costs related to serious illnesses like cancer. Those who owned these policies had to select a new plan, and their premiums increased substantially.

What is misunderstood about this feature is the benefits the coverage requirements provide. Individuals purchasing insurance can count on a reasonable level of coverage regardless of the plan that they buy. The ACA compliant plans have maximum out of pocket expenses that, while high ($7,150 for individuals and $14,300 for families), make sure that people with serious conditions have a limit to what they will have to pay. People can focus on premiums, deductibles and whether their doctor is in the coverage network when buying healthcare insurance. For plans with coverage above the bottom tier, doctors visits and prescriptions are mostly covered within the deductible. Three quarters or more of those buying individual healthcare coverage through the exchanges rate their coverage as excellent or good.

Another complaint about the law is that it is driving up healthcare costs as well as insurance deductibles even in work related group insurance plans. Insurance premiums have a long history of rising every year. Since the ACA was enacted, increases in insurance premiums have actually slowed on average. That is not to say the healthcare law is responsible for lower premium inflation, but it is certainly not responsible for higher premiums. Rising deductibles in work related plans are corporate reactions to rising premiums. Companies can buy high deductible plans more cheaply than the traditional plans, so they are narrowing their offerings to these lower cost options.

The ACA requires that everyone have health insurance either through work, through a state sponsored healthcare program, such as Medicaid, privately or through the healthcare exchanges. Those who don’t get health insurance are charged a fine. Critics consider this feature of the law to be unconstitutional. In their view, no one should be required to buy something they don’t want.

There are two purposes behind this requirement, though only one of them is widely discussed. The requirement allows insurance companies to have a better mix of risks. Those who are healthy and use their insurance less help subsidize the costs of providing coverage to those who are not healthy and use their insurance more. When said this way, it is easy to understand why the healthy would not appreciate their role in the system.

The second, less talked about reason is if you don’t have coverage and need health care, someone else has to pick up the bill. The cost of uncompensated care for uninsured individuals in 2013 was over $84 billion, or on average $900 per person. Many states require motorcycle riders to wear a helmet. The reason behind this is the high cost of caring for those with injuries that could be prevented by a helmet. It would seem reasonable to require those who are subject to injuries and serious illnesses, i.e., all of us, to have a minimal level of health insurance so healthcare providers don’t have to pay for our misfortune.

Still, even though the healthcare law requires you to have insurance many choose to pay the fine instead. For those who don’t qualify for tax credits because their income is too high, the fine is cheaper than most healthcare plans. These people are putting their financial security on the line. They face serious financial hardship if they are involved in a car accident or are diagnosed with a serious illness.

The number of people who buy healthcare insurance through the exchanges without help from the government is a minority. About 85 percent do receive some level of subsidy in the form of tax credits and reduced out of pocket costs. The average subsidy is $291 per month which is a sizeable portion of the average monthly premium per person of $386 in 2016. Without the subsidies, many more would not be able to afford coverage.

If you think health insurance is expensive now, wait until you see what some of the proposed changes in the healthcare law do to premiums. The most often cited proposals include eliminating the individual mandate, the requirement that everyone buy health insurance, and reducing the subsidies available currently on the healthcare exchanges. The first proposal would increase insurance company risks as more of those who are healthy drop out of the marketplace. That will drive insurers to either raise premiums or leave the market altogether. Reduced subsidies means that fewer people will be eligible for tax credits raising their cost of insurance.

No good can come of dismantling the healthcare law. Yes, there are some things that would make it better, but the currently proposed changes would make it worse. A better use of time and energy would be to focus on reducing the cost of healthcare. Americans pay more than twice as much as other developed countries with worse outcomes. The ACA has helped millions of Americans get access to healthcare and, for most, at affordable prices. Undoing the law amounts to cutting off our noses to spite our face, with no health insurance to cover the cost of treating this self inflicted wound.

Image courtesy of zirconicusso at FreeDigitalPhotos.net

Corporate Tax Rate Needs to Go Down

I have always voted as a democrat. I consider myself a left leaning moderate, but the political party quiz put together by Pew Research has me as a very liberal democrat. Take the quiz, and see where you wind up. One of the reasons I appear to be so left wing is that all of the questions reflect social values which seem to be the focus of the current Presidential race. There are no questions regarding tax policy, the public debt or other important financial issues. It is in these areas where I disagree with the democratic party.

Recently, in an Op-Ed piece in the New York Times, Elizabeth Warren made the case for increasing corporate taxes as a percent of total tax revenue. This was in response to the European Union’s finding that Ireland’s tax deal with Apple was illegal. This is a rare bit of commentary when solutions to our financial problems are really not being debated. For example there is little on the table that would lower the corporate tax rate, and that is what is needed. If we want to create and keep more jobs here at home, we need to avoid creating incentives for companies to grow their businesses overseas. Our current corporate tax policy is pushing all businesses, who can, to prefer to grow elsewhere.

According to the Tax Foundation, a leading independent tax policy research organization, the United States has the third highest general marginal corporate tax rate of anyone in the world. Anyone. At 39 percent (including average state taxes), our tax rate is lower only than Chad’s and the United Arab Emirates. We have the highest tax rate among the countries of the Organization for Economic Cooperation and Development (OECD) and our rate is 16 percent higher than the world wide average of 22.9%. In a world where workers and services can be provided globally from just about anywhere, what rational business leader could justify not sheltering what profits she could in a lower tax country, especially when it could be pretty much any other country? The following chart compares our tax rate with that of the OECD.


Source: OECD Tax Database

Warren’s Op-Ed pines for the 1950’s when corporate taxes were a third of government revenue. In the fifties, our corporate marginal tax rate was 52 percent. We were just coming off of World War II, and global trade had not yet recovered. The corporate tax rate of other countries was similar to our own. Even if locating a business in another country were feasible at the time, it wasn’t compelling given that there was no tax advantage. Things are very different today. Particularly for technology and finance companies, it is easy to locate businesses in other countries, and the tax advantage of doing so is huge.

Bloomberg News estimates that US companies are holding $2.1 trillion overseas. The top seven companies would owe $90 billion in US Taxes if that cash were repatriated. That would be a big boost to tax revenues. Would you think companies would be more likely to bring that money home if we increased corporate tax rates or if we lowered them? If we were to lower our corporate taxes to the OECD average of 25 percent, and these seven companies brought their profits home, the tax revenue would still be $58 billion. Which is better, $58 billion or nothing?

There has been little talk of dealing with our budgetary issues in the current political campaign. Among other concerns, we’re going to need to dedicate effort to reforming our tax code in a way that encourages businesses to stay here in the US, and that doesn’t include higher corporate tax rates.

We live in a global economy, and as long as our corporate tax rates are higher than competing countries, we are going to find it difficult to get US companies to invest here at home. Of course we do not want to engage in a race to the bottom for tax rates, and that means engaging with other countries to coordinate corporate tax policy where possible. That is a tall order in a world where few are even discussing the problem.

Image courtesy of cooldesign at FreeDigitalPhotos.net

Where Do All The Taxes Go?

Have you ever found yourself at the end of the month with more bills than paycheck? Many Americans are in this situation. In fact, all Americans are in this situation if we take collective responsibility for how our government spends our tax dollars. In this election cycle the candidates are handing out plenty of goodies. The republicans are going to rebuild the military, while the democrats are going to increase spending on social programs. All of the candidates’ plans, except John Kasich’s, would increase government spending according to a study by the Committee for a Responsible Federal Budget. There has been a lot less talk about balancing the budget this cycle, and that is probably because there is little room to increase spending without raising taxes. That seems impossible these days.

From the White House 2016 Budget Proposal

Almost 70 percent of our federal spending goes to mandatory programs and interest on the national debt. Mandatory programs predominantly include Social Security, Medicare and Medicaid. Having nearly 70 percent of spending committed to things that can’t be changed is like having the cost of your housing and the interest on your credit card debt take up 70 percent of your income. If that were you’re budget you would feel pretty pinched. The kind of pinched where you have to choose between groceries and utilities. So it’s no wonder that we run an annual budget deficit. We spend 18 percent more than we make in tax revenues.

Overtime, as more and more people leave the workforce and enter retirement, those mandatory spending items will grow, like the Blob, eating everything in its path. The mandatory programs have a dedicated tax revenue source, but the tax revenues are now less than the costs of the programs.Ten years from now that portion of the budget dedicated to funding them will grow to nearly 80 percent. Our deficit will have increased by a third. In the process something will have to give. Spending on those non mandatory items like defending our country and maintaining our roads will grow by a scant 16 percent over the next ten years, while the mandatory portion will nearly double. The primary purpose of our tax dollars will be to support our aging population.

It is not only the federal budget that is weighed down by pension payments. Several states are in dire straights due to their pension obligations. Illinois, Kentucky, Pennsylvania and New Jersey are just a few. Detroit filed for bankruptcy when it couldn’t meet its pension obligations and debt payments. The growth in the near retired or retired population makes traditional pension systems unsustainable, and it is why most corporate pensions have been frozen or eliminated.

We simply can’t afford to do all of the things that we want to as a nation. Whether we’re social liberals and want to see more help for the poor or we’re conservatives who want to lower taxes and strengthen the military, there just isn’t any room under our current outlook for revenue.

What can be done? Well if it were you or me, I’d say we needed to move to a cheaper neighborhood to reduce our housing costs, but that isn’t an option for the country. There are some changes to social security and medicare that would reduce the pace of growth of the programs, but taking those very far probably won’t go down well. Many talk about reducing government waste, and I’m sure there is some of that, but how much could it be? Every large organization has waste. These are human endeavors, and we don’t always get things right. If we plan to realign our budget solely on the expense side, we’d need to seriously restructure. Maybe we’d lop off Florida (no offense to Floridians intended).

The fact is, we simply need more income. You or I could try to get a better paying job, but the government will have to raise taxes.The most likely place where we will see higher taxes will be those related to the mandatory programs. The Social Security Administration projects that by 2034 the required payroll tax rate to maintain the current benefit levels for Social Security will be 17 percent if no changes are made. Proposals for reforming the system include increasing taxes on high income workers and reducing the growth rate of benefits. But those changes would need to take effect soon to avoid more dramatic changes.

Better funding for the mandatory programs will certainly help, but there are many other programs that most would agree could use more funding or investment. Where will we get the money? Better economic growth would certainly help. Better growth produces more tax revenues. Unfortunately, with more of the population growing older, our demographics are working against robust growth.

Before we jump on any politician’s band wagon for spending increases or tax cuts, we need to understand where most of the money is going. Most of our budget goes to support our elderly and poor, and we certainly wouldn’t want to stop doing that. If we want to do anything else, we’ll have to be willing to pay for it, and that means paying higher taxes.

 Image courtesy of David Castillo Dominici at FreeDigitalPhotos.net

Fed’s Rate Increases May be Few and Far Between

Yesterday the U.S. Federal Reserve raised interest rates for the first time since 2006. There has been much hand wringing in the financial markets in anticipation of the event, but what does it mean for the Fed to raise rates?

The rate that has been changed is the Federal Funds Rate, which is the rate banks pay to borrow money from other Federal Reserve member banks overnight in order to manage the amount of money (reserves) they hold at the Federal Reserve. Each institution has a required reserve level, and if their reserves rise above the required level, they can lend the excess to another institution whose reserves may have fallen below the required level. When the Fed Funds rate is low, banks may be more willing to make loans, which increases their required reserves, because the cost of borrowing their reserves is low. As the rate increases, banks may make fewer loans, and this can put a damper on economic activity.

This rate increase will likely have little impact on the economy, given its size (only 0.25%), but there could be additional rate increases over the next year or more. Janet Yellen, the Federal Reserve chairman, stated “the underlying health of the U.S. economy seems to be quite sound,” at a press conference. The Fed is interested in bringing interest rates to a more normal level both to ensure that economic activity doesn’t overheat and to provide more wiggle room to adjust rates if the economy weakens in the future.

There are forces at work that could limit the level to which the Federal Reserve will increase rates. While unemployment has declined to only 5%, underemployment (people who would prefer to work more hours) remains persistently high at 9.6% of the labor force, excluding the unemployed. Inflation has also been a tough nut to crack. We baby boomers grew up afraid of the return of the double digit inflation that plagued the country in the early 80’s, but now we are in a new era. Inflation has remained uncomfortably low since the recession ended in 2009. A healthy pace of inflation acts as grease for the economic wheels. Just as an ungreased wheel may turn more slowly, low inflation can lead to lower economic growth. Wage growth and spending may stagnate, and debt repayment is more costly without inflation to eat away at the value of the debt.

Masaaki Shirakawa, a former Bank of Japan (equivalent to the Federal Reserve) governor diagnosed the cause of the chronic deflationary, low growth economy in Japan as being a shrinking labor force and declining labor force productivity. Japan’s median age is over 46 and 39% of the population is over the age of 55. His theory is that interest rate changes, and other central bank activity, are less effective in boosting economic activity than they were in the past due to the downward pressure of an aging demographic. Older people simply buy fewer things. Shirakawa also warned that the U.S. and Europe were destined for a similar fate.

He may be right. We have seen that the Federal Reserve’s actions to boost the economy have had less impact than the Fed itself predicted. While not as old as the Japanese population, our population is getting older. The median age in the U.S. is 37 and 25% of the population is over the age of 55. With baby boomer retirements increasing, the labor force participation rate (the percent of the population that is actively working or seeking work) has dropped to less than 63%. Labor force participation peaked at 67% in the late ’90s, and leveled off at 66% through 2007. But since the recession, it has been on a steady decline, with the improving economy doing little to entice people back into the labor market. In addition to declining participation rates, labor force productivity has been anemic. Productivity growth (measured by output per hour of labor) has languished at less than 1% for four years running.

Due to our own demographic pressures, we are unlikely to see a substantial increase in economic growth which would relieve the underemployment issue and stoke inflation. As a result the Federal Reserve will see little need to substantially increase interest rates going forward. Rate increases in Europe were quickly reversed after having an adverse impact on the European recovery from the recession. The median Fed Funds rate over the last 25 years has been about 3.0%. We probably won’t be seeing those rates any time soon.


We Should be Welcoming Immigrants with Open Arms

In the recent Republican debate, the candidates spent quite a bit of time talking about illegal immigration. There was a great deal of support for a wall and increased unmanned and manned patrols. As we know, Donald Trump favors deporting all illegal immigrants in the country today, though he hasn’t mentioned how he’ll accomplish that feat. I have a number of friends who are legal immigrants, and given how hard they had to work to become citizens, I certainly can’t condone illegal immigration. However, we make it very difficult to immigrate to the U.S., and we would be better off with more immigrants. Europe and Japan would be as well.

The reason we would be better off with more immigration is that we are getting old. The median age of the U.S. population is almost 37, the European Union population, over 42 and the Japanese population, over 46. The percent of the population over the age of 55 in the US is nearly 26%, in the European Union, nearly 35% and in Japan, 39%. In Demographic Changes, Financial Markets and the Economy, a paper written in 2012 by Robert D. Arnott and Denis B. Chaves, using 60 years of data from 200 countries, the researchers found a strong link between the age of a population and economic growth. The larger the percentage of the population that is over the age of 55, the lower is the average economic growth rate of the population, all other things being equal.

There are logical reasons for this. Older people consume fewer goods and services. As we age, we’re less likely to buy a new home and furnish it. We’re more likely to downsize. We buy fewer cars, clothes, and vacations and spend more on health care. Younger people and families do buy houses, furniture, cars, clothes and vacations. In fact, Arnott and Chaves found that the best propensity for economic growth for a population occurs as the percentage of the population between the ages of 20 and 45 increases. In the U.S., Europe and Japan, about one third of the population is between the ages of 20 and 45.

One of the reasons the US population is younger than Europe’s or Japan’s is immigration. Without it, we would be aging nearly as fast. More than half of foreign born citizens in the U.S. are between the ages of 18 and 44, while only about one third of the native born population is between these ages.

Only 140,000 of the 900,000 immigrants to the U.S. are granted permanent residency each year, and the process is long and tortured. Without a family sponsor, an immigrant must have an employer sponsor. For an employer to hire a foreign born worker permanently, they must get a labor certificate indicating there are no available U.S. Citizens for the position. This can take two or more years. It can take another four to fifteen years and thousands of dollars for the worker to get permanent residency, and residency is still a long way from citizenship. In the mean time, these people have no security. They cannot change jobs, and if they lose their position or are laid off, they face being returned to their native country, with all they have invested in the process lost. Frankly, its no wonder that so many people attempt to stay in the U.S. illegally.

We should be welcoming immigrants with open arms, and not for moral reasons. From a purely selfish standpoint, immigration is good for the economy. These young families buy things, contribute to our productivity and, best of all, pay taxes, including social security taxes. Instead of spending our time and money on keeping people out, we should be looking for ways to make immigration easier and more economical.

Population data from the U.S. Census Bureau, Eurostat and The Statistics Bureau of Japan

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