Financial Math

Yellow_field flowers_2012-09-03

2013-01-04 – There was a time when Republicans were thought of as sober and frugal decision makers. I was never a Republican but, as a Democrat, I always thought it was good having sober and frugal decision makers to force some reality into the national discussion.

This state of affairs is no longer. Democrats are now imploring the nation to do the math. And . . . yes, the Dems seem to have a better grasp of math than the GOP, but I’d say the Democratic grasp itself is a bit shaky.

Take Social Security.

The Republicans are totally wrong when they say that Social Security is on the brink of collapse. The challenge in Social Security is twofold.

First is the retirement of my generation, the baby boomers. That has started. We are a big generation. Social Security is expected to remain strong for roughly the first 15 or 20 years . . . Then what?

Then Social Security will be forced to cut back benefits by about 25 percent until the boomers die off. Then everything will be hunky dory again. Only about 20 years until the system recovers.

I’m not sure why the Dems think that I will be happy to have my benefits cut so drastically and to have the cut happen when I’m in my mid 80s. It’s nice that the system will recover. But as an 80-something geezer, I may never recover.

The other mathematical fact that the Dems don’t want to acknowledge is the consequence of people living longer.

The huge population bulge, known as the baby boom, wouldn’t be so much of a problem for Social Security if we all died in our 60s, which was the norm when the Social Security system was set up. But current statistic give us hope of living into our 80s and 90s. That’s 20 more years of benefits!

There’s really only two ways to make the math work out after such a drastic demographic change: either reduce benefits, or increase the Social Security tax.

Reforms done under Ronald Reagan (when Republicans still understood math) did both of these things. The payroll tax was increased significantly at that time. And benefits were reduced by slightly delaying the age when you can collect your full benefit. It was originally 65. It is now 66. In a few years, it is scheduled to increase to 67.

The proposals to fix Social Security today, would have to use the same tools: either increase the tax or raise the retirement age slightly. The problem is actually not as severe as it was in the 1980s, so the changes required would be relatively minimal and could be very gradual.

Does anyone want to do that?

Of course not. No matter how slight or gradual, these changes violate some cherished principle.

Apparently, keeping Social Security forever solvent (which could be accomplished) is no one’s cherished principle—no politician, that is.

The only real objection I have heard, by the way, to raising the retirement age is that people in some occupations (generally low-paid, and usually physically demanding) really need to retire at 65 and they tend to have lower life expectancies anyway, so they ought to be able to get their full retirement benefit at the younger age.

Here’s my solution to that: let people in those occupations have an option to pay a slight bit more to buy down their retirement age. The amount would be quite small, but would add up over many years to enable the early retirement benefit. It’s not ideal. Maybe someone has a better idea. But I don’t see people even looking for ideas like this to make the whole thing work.

Because they don’t do the math.

Or they have some other agenda.

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3 responses to “Financial Math

  1. Nice! Here’s hoping we get your views on the math of Medicare, as well. That is one sticky wicket.

  2. Steve– Some day I’ll write more on that. But briefly, and oddly, of my two preferred plans, one is far left and the other is to the right of Obamacare (which I consider a center-right plan).

    My preferred plan would be to have a nationalized (or federalized) system in which the doctors and hospitals were governmental altogether. It’s not going to happen.

    In the absence of a true national (or state) health system, then we have to look at the risks we’re trying to protect against with what is now a health INSURANCE program, not a health program. If you have an insurance program, you have to realize that your are concerned about financial risk, not health risk. Consequently, I would have a system of national catastrophic health insurance atop a layer of private insurance and/or savings and/or (even) self insurance. So the national insurance system would kick in maybe after your medical bills exceed 7.5% of adjusted gross income. (Sound familiar? This is really, in part, the idea behind the medical expense itemized deduction on your tax return. I would just make it a complete reimbursement above the level, not partial).

    With catastrophic risk off the table, normal health insurers are protected and they no longer have a need to exclude pre-existing conditions or deny claims, etc. So it cleans up the regular health insurance.

    In addition to the national catastrophic coverage, I’d throw in coverage for your basic preventative stuff — or require commercial insurance to do that.

    To facilitate the self-insurance part that I mentioned, it could make sense to use HSAs, but not necessary. But you can see how this is a definitely republican plan.

    Liberals would squawk about this plan, but it is because people don’t see that any insurance for non-catastrophic events isnot really insurance but is simply a pre-payment plan. I personally don’t see that pre-payment is some kind of great liberal principle. Protecting sick people from losing their homes is!

    I guess that wasn’t brief, but it sure could go on a lot longer.

  3. Steve– I left out one thing. Not only is protecting people’s home a valid and compelling goal. Of course, access to health care is, too. People who can afford health insurance now not denied access except for catastrophic situations (including preexisting conditions), so the national catastrophic health insurance solves that problem. For those who can’t afford it, I think the expansion of Medicaid in Obamacare is entirely right.

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