PART 2, DISCUSSION, p6 (fb-35.html)

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[O] Some Solutions (107)

[O1] A Review Of The Situation (108)

In section non94, "What About Privatizing, Or Investing Some SS Revenues In The Stock and Bond Markets?", the "low return" myth of Social Security was discussed. (It's true, but SS is not an investment program, it's a pay-as-you-go program!). Following that was a discussion of privatization, particularly of the very heavy transition costs of changing SS from a pay-as-you-go program to an investment program.

Section non88 explained that generations who worked primarily before 1980 paid much lower rates than those working primarily since 1980. (1980 is just an arbitrary date for discussion purposes, as payroll taxes have been rising at a fairly steady rate ever since the programs began -- see section non70 for the full details).

Also, the SS system has been funded entirely on a pay - as - you - go basis, with current payroll taxes being spent on two things: {1} benefits for the current elderly generation and disabled people, and {2} on current general federal programs. None has been saved for anyone's future. There is nothing in the trust funds except Special Issue Treasury obligations that represent government promises to pay benefits to the elderly in the future. This is further explained in section non88.

So, to put it bluntly, all SS taxes that people paid in the past went to taking care of their elders, and on current federal programs and/or lower income taxes. Nothing was saved for the future.

From the standpoint of fairness, it doesn't seem like the current elderly (nor the boomers) are entitled to big payouts at the expense of generations in the future. Remembering too that Generations X and Y will, per the Trustees' Intermediate forecasts, be shouldering double today's tax burden in order to pay for the boomers' retirement. That sure isn't fair. (Though perhaps real pay will increase in the future enough so that even after paying much heftier tax rates, real after-tax pay will also increase. Then it won't seem so unfair).  

[O2] Use the Surpluses to Eliminate the Publicly-Held Debt (109)

I think that we should dedicate most of the surpluses to reducing the national debt. If the multi-trillion dollar budget surpluses projected over the next 15 years start to turn out to be less than expected, then some benefit cuts to the most affluent beneficiaries is also a reasonable measure to take.  

[O3] Then Invest Any Surpluses in Private Sector, and State and Local Securities (110)

After the publicly - held debt is eliminated, and if there are still surpluses, then we should try to save those in some way. Simply spending the surpluses and putting Special Issue Treasury obligations into the SSTF -- as we have been doing -- is not a form of savings.

One way to accumulate real savings in the trust funds is to invest in the private sector economy (stocks and bonds), just as local, state, and federal employee pension plans do now.  

[O3.A] Government Pension Programs Already Invest In The Private Sector Without Allegations Of Political Interference (111)

I am aware of the arguments about the dangers of the government investing in the private sector. Here is what Social Security Commissioner Ken Apfel has to say about Clinton's January 1999 proposal to invest $536 Billion (or about 12% of the projected 15 - year $4.5 Trillion unified budget surplus) in the private sector:

[Begin Apfel quotes: ] ... Under the proposal, total investment in the private sector would account, on average, for around 4 percent or less of the U.S. stock market over the next 30 to 40 years. This, by the way, is about the size of Fidelity's share of the stock market today. State and local pension funds now represent more than twice as much -- about 10 percent -- of total stock market investments. If State and local pensions had not, years ago, gone in the direction of a diversified portfolio, then States and localities would have had to increase taxes or curtail pensions significantly. State and local government pension plans now hold roughly 60 percent of their total investment portfolios in the private sector.

We must provide safeguards to avoid politicizing the investment process. Under the President's proposal, the Administration and Congress together would craft a plan that ensures independent management without political interference. I believe that this can be done, and that the Federal Reserve Board and the Federal Retirement Thrift Investment Board could serve as models. The Federal Reserve Board makes extremely important and sensitive economic decisions and no one doubts its independence. The Federal Retirement Thrift Investment Board oversees the investment of billions of dollars in the private sector and there has been no allegation of political interference in those investment decisions. [end Apfel quotes]

[O3.B] Other Risks (112)

Investing in the private sector may be risky. But it is a lot better than the government spending the money and then writing IOUs to itself, as it has been doing with the SS surpluses. And if the economy tanks such that there is a severe crash of both the bond and the stock markets, is everyone so sure that the government is going to be able to raise enough taxes or sell enough bonds to make good on trillion - dollars - a - year promises to the elderly? The federal government has made good on its obligations during many depressions and recessions in the past. But in the past, its obligations never included promises of such magnitudes as now.  

[O4] Diversification - Some In Private Sector, Some in State and Local Government Bonds (113)

Diversification is one of the cardinal rules of investing. It seems to me that it might be fool-hardy to invest all of our retirement savings in the private sector. Likewise, it might be fool-hardy to invest all of our retirement savings in government bonds, even a diversified collection of state and local bonds, and then rely entirely on these governments (actually their taxpayers) for retirement security. A more diversified strategy is to have some of our retirement savings invested in the private sector, and some invested in state and local governments. (Admittedly, deciding which state and local government bonds to invest in certainly raises concerns about independence and politics, even more-so than deciding which private-sector stocks and bonds to buy).  

[O5] Transition Slowly Towards A Fully Prefunded Program (114)

As for suggestions to go to an entirely pre-funded investment plan, I don't think that we need to go quite that far, at least not in a short time frame. It is a reasonable goal to undertake over the course of the next generation or two. On the other hand, the current system will be running deficits after 2013. So something must be done. Beginning a partial prefunded program now will (probably) somewhat lighten the burden of the future heavily-burdened Generation X and Y taxpayers.

In any case, recognize that transitioning to a pre-funded retirement system will cost a considerable amount in extra taxes or other fiscal sacrifices during the transition period.

For more detailed solutions and some alternative solutions, the Concord Coalition Social Security primer volume 1 and volume 2 have a lot of discussion on proposed solutions on a "pro - and - con" basis.

[P] Medicare, Medicaid, Healthcare (115)

Most of the solutions above for dealing with the Social Security problem are also applicable to dealing with the Medicare and overall senior health-care funding problem. Namely, first pay down the national debt in the next ten or fifteen years. After that, use any budgetary surpluses to build up real savings in the trust funds by investing in private sector stocks and bonds and state and local government bonds. These measures will leave us much better prepared to finance the boomer retirements without requiring large tax increases on the then - current working generations.

In this paper, I've focused on Social Security (SS). In contrast, I have covered Medicare and senior health topics only sporadically in bits and pieces all over the place. I've hardly said anything about Medicaid.

I've focused on SS because it is larger than Medicare, and it is easier to describe. (As you'll see shortly, Medicare consists of two parts. Part A is very similar to SS in that it is financed by payroll taxes and involves a trust fund that pretends to be a reservoir of savings. In contrast, Part B -- financed by premiums and general tax revenues -- is not at all like SS). Also, there is much less uncertainty in the future costs of Social Security than of Medicare. (Both programs share uncertainties in demographics (life expectancy, fertility rate, immigration, growth of labor force, ratio of workers per beneficiary) and general economics (productivity growth, inflation and interest rates, real GDP growth, and real wages growth). But Medicare also depends on health care costs, which long have been increasing far faster than inflation, thanks to a number of factors including rapidly improving medical technology.

Medicare consists of two programs -- Medicare Part A and Medicare Part B.  

[P1] Medicare Part A (HI - Hospital Insurance) (116)

HI covers inpatient hospital stays.

HI is financed by payroll taxes.

There is an HI trust fund similar to the social security trust funds. If HI payroll taxes exceed HI expenditures, than this surplus revenue is loaned to the Treasury general fund. In return, the HI is credited with Special Issue Treasury obligations (SIT obligations). When HI payroll taxes are not enough to cover HI expenditures (as is currently the case), then the program is running a deficit. SIT obligations are redeemed (meaning money is obtained from the general taxpayer) in order to cover the deficit.

[P2] Medicare Part B (SMI - Supplementary Medical Insurance) (117)

SMI covers physicians' and outpatient hospital insurance.

It currently has about 37 million people enrolled ( 1999 ).

SMI also has a trust fund, but unlike the Social Security and HI trust funds, it does not pretend to be a reservoir of savings for future beneficiaries. Rather, it is a short - term buffer meant to be able to have sufficient funds during the current year to meet expenses.

SMI (unlike Social Security and HI) is not financed by payroll taxes. Rather, SMI costs are paid approximately 75% out of general tax revenues and 25% by monthly Medicare premiums.

[P3] Medicaid (118)

Medicaid provides medical coverage for the poor -- both young and elderly. For the elderly poor, Medicaid's biggest expenditure is for nursing home costs. (Medicare covers most medical costs for the elderly, but does not cover nursing home costs).  

[P4] SS, SSI, Medicare, and Medicaid Costs From 1998 to 2009 (119)

The below table, extracted from section non145, shows the size of these programs, in billions of dollars, from 1998 to 2009. (Remember that their costs are expected to rise steeply after 2010, when the first baby boomers begin to reach age 65).
==========================================================

Table T119.1
Medicaid, SSI, Social Security, and Medicare Expenditures
In 1998 and Projected For Years 1999 through 2009
 
                                  Actual
Fiscal Year                       1998    1999    2004    2009

Medicaid                           101     108     160     245
Supplemental_Security_Income (SSI)  27      28      37      48
                                 -----   -----   -----   -----
_____Subtotal_Medicaid_&_SSI       128     136     197     293


Social_Security                    376     387     487     631
Medicare                           211     220     304     444
                                 -----   -----   -----   -----
_____Subtotal_SS_&_MC              587     607     791   1,075

__Grand Total                      715     743     988   1,368

Table T119.2
Medicare Part A and B Benefit Payments (does not include admin 
expenses)

                                  Actual
Fiscal Year                       1998    1999    2004    2009

Medicare Part A (HI)               136     141     169
Medicare Part B (SMI)               75      82     126          
                                 -----   -----   -----   -----
____Medicare Total                 211     223     295

Source: The March 1999 Hospitals Insurance Trustees Report (HI.pdf) 
and the March 1999 Supplemental Medical Insurance Trustees Report (SMI.pdf) 
HI.pdf Table II.D1 p. 32 {39}.  
SMI.pdf Table II.D1 p. 28 {35}

[P5] For More On Medicare, Medicaid, and Senior Health Care (120)

{1} The Combined Cost of Social Security and Medicare (Summary) at non29. It looks like the combined cost of Social Security and Medicare, as a percentage of payroll, will nearly double between now and 2040.

{2} OASDI + HI + SMI to nearly double at non69. Between 1999 and 2040, the combined cost of Social Security (OASDI) and Medicare (HI+SMI) is expected to increase from 15.85% of payroll to 29.34% of payroll. And to continue to increase after 2040.

{3} History: Payroll tax rate has gone way up, so has maximum salary taxed at non70. This documents the increase in Social Security and Medicare payroll tax rates from the beginning of these respective programs to the present. Also, the increase in the Social Security maximum wage taxed. (The Medicare maximum wage taxed was removed in 1993 -- now the Medicare tax rate applies to all earned income, no matter how high).

{4} Robert Bixby Feb-25-1999 Testimony About Budget "Surpluses" and Entitlement Spending at non137. Included is his quote, "...age-related federal entitlement programs such as Social Security, Medicare, Medicaid, and government pensions for both civilian and military employees. At a combined $800 billion this year, these programs account for 44 percent of all federal spending." Also, "Social Security's unfunded obligation is pegged at $9 trillion. For Medicare and other federal entitlements the amount is approximately $8 trillion."

{5} Mandatory Spending And What Mandatory Means at non145. This section shows Medicaid, SSI, Social Security, and Medicare expenditures in billions of dollars. (See also Table T119.1 above).

{6} SS + Medicare + Federal Pensions at non151

{7} The "The Rapidly Growing 'Old Old' Population" at non251

{8} "Accounting Changes, Questionable Accounting Procedures" at non201. One such example for Medicare: Shifting Home Health Care Costs From Part A (HI) to Part B (SMI): This one is an example of another way we'll manage to make the trust fund obligations last longer. ALSO, as general information from the March 1999 SMI Trustees' Report:, Medicare Part B, in calendar year 1998 was financed 73% from general revenues, 24% from premiums, and 3% from interest and miscellaneous.

{9} "It is Politically Impossible to Cut Benefits" at non202. The HI program maximum wage ceiling was partially eliminated in 1991, and totally eliminated in 1993.

{10} "The SS Trustees Have Been Consistently Overly - Pessimistic In The Past?" at non172. In the last two years, the projected HI insolvency date has been extended from 2001 to 2008 to 2015.