The Congressional Budget Office may have done the country a big favour. It put into blunt words what choices we face. In the report dated July 19th CBO had this to say:
I) Raise federal revenues significantly above their average share of GDP;
II) Make considerable changes to the sorts of federal benefits we provide for older Americans;
III) Substantially reduce the role of the rest of the federal government—that is, defence (the largest single piece), Food Stamps, unemployment compensation, other income security programs, veterans’ benefits, federal civilian and military retirement benefits, transportation, health research, education and training, and other programs—in our economy and society.
‘I’ is necessary and it’s going to happen. While this may sound easy it is not. Increased taxes from workers are just a drag on the economy. If there must be new taxes, the money raised has to support more than just the rapidly growing ageing population. The country is in desperate need of new investments (energy, infrastructure, education); it would be a mistake to channel more scarce financial resources to one segment of the population.
‘III” is also going to happen. Cut backs in defence are critical. The other programs in the “rest of the government” will also be part of the mix. But let’s get real about this. The US can’t cut these programs by an amount that would move the needle. Do we really want to eliminate a substantial portion of the defence budget? It’s true that the US can no longer afford its huge bases in Asia and Europe. And we certainly can’t afford to go off to wars that last 10 years. We don’t need a huge standing Army. There can be cuts in the Navy’s carrier fleets. The Air Force doesn’t need new combat fighters. But it would be the dumbest mistake we ever made to degrade the military so they could not react if and when needed.
So that leaves ‘II’. The baby boomers are the real problem. This chart from the CBO says it all:
Note that of the significant components in the budget there is the assumption that they all remain about the same as a percentage of GDP for the next 10 years. The exceptions are Social Security and Medicare. These two programs gobble up a greater and greater share of the pie. It’s simply not possible to change the direction of the deficit in the USA unless spending for the older population is reduced.
There is no plan from any side of the budget debate that is addressing this simple reality. I have a plan. It goes like this:
-Decrease the number of those covered by Medicare by 20% (now and in the future).
-Maintain existing revenues sources for Medicare at their current (and projected future) levels.
-Provide a major economic stimulus to the health care industry.
It is very tempting to say that a means test is the mechanism to achieve these objectives. IMHO it’s necessary that well off seniors have to take a sizable hit. That may sound like an easy solution, but it is not. The tax codes only address income, so there is no effective “means test” measuring system. There would have to be an “asset test”; this is something that does not exist and would be very unpopular. (Note: If one had $10mm in the bank it would be very easy to make $500k a year tax free. This very wealthy person would not be hit with a means test based on income.)
Probably the most significant factor against a means test is that it is confiscation. While the results may be considered fair by a broad segment of the population the fact is that this is stealing. I think the courts would not look favourably toward this type of approach. A means test is a very tough political sell.
So the question are:
How do we steal old rich people’s money?
How do we do it in a way that actually has some fairness (to all) attached to it?
And can we do it in a manner that would also act as a broad economic stimulus?
I think it might be possible to achieve these things. Rather than confiscate rich old people’s money I want to sell that group something they desperately want. I want to sell them what they want at a very high price.
If those rich older folks don’t want to buy what I want to offer them, there will be a price to pay. Those with significant resources will have two choices in my plan. Either they can sign up for what I’m offering or they have to pay a tax on the SS and Medicare benefits they receive.
Here is a brief description of the new health care plan that I would offer to high net worth seniors. I call this the Gold Plan. Assume a 65 year old got this in the mail from Uncle Sam:
Your government is offering you a new health plan called the Gold Plan. Here are the features you will like:
-It will cost you nothing out of pocket to get this insurance.
-It will provide the best possible care with no deductions or co-pays.
-You can go to any Dr. you like, whenever you want.
-Your prescriptions are covered at no cost to you.
-There is no part A,B,C or any of that. No paper work at all. You get a Gold card and everything is covered.
-This is the same level of coverage that a President would get.
-This is lifetime coverage, regardless of health outcome. It will never cost a dime out of pocket to get.
That sounds good doesn’t it?
Medicare has an out of pocket monthly cost of $500 (including supplemental). There are co-pays, tons of forms and deductibles for prescriptions. Not all doctors or treatments are covered. Medicare is not cheap and it does not provide for the best level of care. Therefore if someone 65 got that letter in the mail they would whoop for joy.
What does the new health insurance actually cost? 100% of ones monthly social security check. Sign that payment away and you have a Gold Plan.
Very quick numbers:
The average cost per Medicare beneficiary is $11,000 per year. (Medicare annual report)
The average SS check for high life time earners is $1,800 per month or $21,600 a year. (A range of monthly SS income from $1,400-2,200+ would be accepted as full payment. This is a progressive feature of the Gold Plan.)
The maths on this looks good from the government’s perspective. A beneficiary would be “paying” $22k per year. That is more than double the average cost of a Medicare beneficiary. A portion (approximately $3,000) would go back to Medicare. The balance of $19,000 a year is available to cover the benefits under the Gold Plan.
This is the “carrot” part of the plan. There has to be a “stick” to get one’s attention. The stick would be a new tax. Those that are high lifetime earners would be subject to a new tax on their SS benefits (a flat tax of about 15%) if they don’t go for the Gold. There would be two doors to choose. Yes, either door is costly. But at least one door has something valuable on the other side.
On the economics: Assuming a 20% participation rate, the Gold Plan initial revenue pool would be ~$190 billion a year and rise with annual COLA + 750,000 new enrollees every year (increasing by $20b or 10% PA). The objective would be for the Gold Plan to breakeven. This is a bailout of Medicare. That would be the “prize”.
This would also be a huge boost to the medical industry. In my example Medicare expenditures would go down by $140 billion (20%) while Gold Plan medical expenditures would rise to ~$200 billion. The net gain of +$50 billion (and growing) would be very supportive of the health care industry. I am not a fan of Big Pharma or Big (private) Hospital, but if you want to create jobs in America, health care is the place to do it. If you think that CAT, CSCO, INTL, GM are going to create the jobs we need, think again. Healthcare is the only growth industry the country has got.
Yes, this is a “backdoor” means test. I’m sorry, but something like a means test has to happen.
Note: If you’ve read me before on this topic you know I am apposed to an economic plan that entails a huge inter generational wealth transfer. Unfortunately, that is the plan we are currently following. My thinking is that we need a different plan. A plan that shifts the burden (substantially) to the generation where the problems reside. The foregoing was my effort to turn the arrow in a different direction.