February 24, 2011

Health Care, Social Security, Medicare and Medicaid All Need Reform

America’s Social Safety Net Has Some Holes And They Are Getting Bigger By The Decade
By Melvin J. Howard

Central to understanding the dilemma we now find ourselves in is understanding what it means for the government to write an IOU to itself. But first I want to take all matter of politics out of this whole situation. It is time for people to start facing some serious facts no matter what political stripe. As I discussed in an early post, a US government IOU is the lowest risk asset, but the government being able to come good on this obligation ultimately depends on its ability to collect taxes in the future to pay-off all these IOUs. In reality what really happens with Social Security funding is that the current base of taxpayers always fund the benefits for the current set of retirees. Social Security and Medicare are funded on a "pay-as-you-go" basis. This means that the obligations to be met this year will be funded by revenues collected this same year - there is no pre-funding of benefits, and there cannot be, as we have just argued. When it comes to being the Government, there is nothing safer to invest in than itself, and this is equivalent to depending on future tax revenues to meet all future expenses, which means you fund everything on a pay-as-you-go basis. That is, taxes collected from current workers always pay for the benefits of current retirees.

In reality the Trust Funds provide a mechanism whereby future general income tax revenues of the government can be legally transferred to meet social security obligations in excess of Social Security taxes if and when needed. It is a legal mechanism to facilitate possible future flow of funds and nothing more.

But there is no guarantee on benefits and the law of the land of the day always sets current benefits. But now we get to the problem of the liability being with the government - that is, of course, that the government sets the law of the land! And so the government can change the laws that specify benefits if it so decides. Since the Lock Box (or Trust Funds), are stuffed full of government promises to itself, it becomes a little more than a legal technically that doesn't get at the real issues of funding Social Security and Medicare, it should not be the focal point of discussion. However, unfortunately that’s how some of the leaders in Treasury and Capital Hill are framing the discussion around the Trust Funds.

The real problem that worries the government, and it's not the funding shortfalls in the coming 2030s, 40s, 50s, 60s or 70s! What really worries the government is that within the next few years Social Security and Medicare Costs will start competing for funds that would otherwise be spent by the government on other things (like, military or other things), rather than supplying extra funds to these things (as they have since the Reagan Era). The real issue of Social Security and Medicare funding dilemma is this. How do you fund the medical and retirement costs of an aging society and still keep being the Great Super Power as we are?

As noted, in a pay-as-you-go system the current base of workers fund the retirees and the sick. Translated into real goods and services this means that the current base of workers produce all the good and services, not only for themselves, but also for an increasing proportion of non-producers.

The demographic trends driving an increasing ratio of non-workers needing support to supporting workers are:
* Medical advances that mean people live longer, are retired longer and have higher medical expenses,
* Lower fertility rates keeping down the supply of new workers, and
* Impending retirement of the large baby boomers generation.

In the coming years, more and more of society's resources will be going towards supporting retirees and increasing medical expenses for society as a whole (both workers and non-workers as we've already discussed). This will be true whether benefits are funded in the public sector or the private sector, or both. Thus, Private Savings accounts and privatizing Social Security cannot solve the problem and discussion of these as a solution should also not be allowed to distract debate from the real issues. In fact, putting current contributions into private accounts will make the current funding situation worse, because these funds are now used to pay for current retirees and not "saving" for future retirees.

This increasing demand on society's resources creates great pressure on funds that might otherwise go towards the empire building of the United States in addition to the maintenance of (military and infrastructure), and will likely lead to much slower economic growth. This is perhaps the real dilemma that’s keeping the Governors of States and their Federal counter parts up at night.

Since many necessary maintenance and building expenditures originate in the public sector there is a very real danger that a good chunk of the publicly funded safety net could be cut in the coming decades as we are witnessing now. The reason we now have protests in Wisconsin and now in Ohio should have been expected. Economic risks are thus passed back to those who can least afford them. There is a very real concern that increasing total medical and pension costs will lead to an even worse situation of services provided on an ability-to-pay, rather than a needs basis.

While it is true that both labor force productivity gains and further government borrowing from outside the government could serve to meet some of these increasing obligations, it is not clear that these could be sufficient to solve the problem and both can come with nasty side effects. The point to be made here is that people need to be aware of what the real trade-offs are and that public discussion should be about the real issues and not about the Lock Box (or Trust Fund for the future).

Furthermore, an even more dire situation awaits us than the Social Security dilemma. It is the increasing share of national expenditure devoted to healthcare, as I alluded to earlier. This effects all of Medicare funding, Medicaid funding, private medical funding and the ability of society to come up with a solution to the uninsured problem in the midst of exploding health costs everywhere else.

Add to that the riskiest of national output, or GDP itself, with more and more of it being conceptual and abstract services and thus able to disappear from the economy like poof just like the Lehman Brothers disintegration. I caution about the risks of the components of GDP becoming increasing "conceptual" i.e. we don’t make anything anymore. And the final caution to everybody is this if people are content with the projected increase in healthcare and retirement to eat into the building and maintenance expenses of America then of course the United States of America itself is at risk.

And when America is at risk, so is the whole economic and financial system through which these benefits are paid anyway. So there are no easy answers but not answering them is not an option. Meaning that if don’t fix this problem there will be nothing to debate!