Thursday, September 17, 2009

You Get What You Pay For...

...is an adage I've always liked. Generally speaking, it is used in a negative sense; those who are cheap shouldn't complain about the quality of what they receive. However, the opposite is also true. If you spend the money you should get every penny's worth.

I thought of this when I read this comment about the recent 9/12 protests over at The Glittering Eye:

I saw an awful lot of retired people in pix of that protest.

You know what I didn’t see? People carrying signs calling for cuts in Social Security or Medicare or VA benefits or government pensions.

Dave’s right: they got theirs, and they got theirs by raiding their children’s piggy bank, and now they want to strut and posture as upright, hard-working taxpayers when in point of fact they are the bulk of the problem.

When I see old people carrying signs that say “Means-test Medicare” or “Means-test Social Security” I’ll start believing it’s something other than rent-seeking, race-panic and generational resentment.

I have to say, I see this comment as complete and utter bullshit.

Social Security and Medicare are not entitlements, they are social insurance programs. You buy them. Get that. YOU BUY THEM. WITH MONEY. EVERY FREAKING PAYCHECK. Now, these insurance programs only come due once you reach a certain age (or encounter circumstance - like a disability - which can also trigger the benefits), but you know that going in.

At least that is how these programs were sold to the American people. Of course the government, who runs these programs, couldn't keep their hands off the money. They spent it on whatever general purpose they wanted and promised to make up the difference for those drawing benefits from new payments coming in from younger workers.

This was, obviously, a stupid idea if you ever found yourself in a situation where you were top heavy with retirees. But that would never happen, right?

Oops.

Now, people like this commentator are turning to the people who have spent their entire working lives paying for these benefits (and who cannot be blamed for the fact the government decided to spend that money on other things) and calling them the equivalent of leeches.

Nice.

5 comments:

Anonymous said...

Well... Actually I think that he has a point. Don't get me wrong: Obviously, the remarks about race panic and generational resentment are complete and utter bullshit as you say. Nevertheless, he has something of a point with respect to the rent-seeking aspect, even though he probably doesn't understand it himself.

The fact is that regardless of how Social Security and Medicare were sold to the public, they are in fact Ponzi schemes. By this I mean that the money that people paid into these programs was never invested on the behalf of the payers by the government. This was done by design. The money paid by the young is directly transferred to the old. Regardless of what people may think, they don't have a right to the benefits that are paid out of these programs, and any future Congress can simply vote not to honor their "obligation" to the payers. Property rights don't attach to these streams of benefits, because there is no property at stake. In short, payments into Social Security and Medicare are tax payments, pure and simple. They do not buy the purchaser anything of value.

This is why Bush's idea for establishing private accounts for Social Security was a good idea: It would give people who pay into these programs an actual claim on property. Something similar could be done for Medicare by creating a health care savings account that people could draw down in their old age as their health deteriates.

Without realizing it, the original commentator put his finger on what is truly perverse about these programs in how they promote dependence on the government, and how reform will be a virtual political impossibility. Current beneficiaries of these programs would naturally expect to get some return on their payments into it, even though they don't have a right to the benefits. And of course, current (or imminent) beneficiaries will oppose efforts to reforms that might jeopardize their stream payments from these programs.

Medicare is the 800-pound gorilla in the room that nobody wants to talk about in the health care debate, because it is clearly largely responsible for the rate of inflation of medical care costs. I think that Republicans are playing with fire by using Medicare as a cudgel in their opposition of Obamacare, because Medicare does have to be reformed and benefits will have to be cut to get control of the massive entitlement problem that faces the country.

The Iconic Midwesterner said...

I appreciate your comments, though I do have some quibbles. For example, making Medicare a notion of property has limited value, as its very clearly set up as an insurace program. Someone could live to be 90 and be in such good health that they never receive back what they paid into it for 40 years. (Although, I admit, the fact Medicare payments were never kept in trust does make it more akin to a Ponzi scheme.)

Social Security, on the other hand, has the reverse problem. Its true it does have a property aspect to it that MEdicare hasn't. But, on the other hand, Social Security money was kept in trust, at least originally. Now the "trust" exists only in the imagination of some government accountants. Plus, you have to love the fact that the government, as we have set up the system now, is required to "repay" many back into the trust which was "invested" but the trust is NEVER required to pay money to the citizens who paid into the system in the first place.

Anonymous said...

I'm fairly certain that what I think should happen with health care and Medicare never will happen, but I'll lay it out for the sake of argument. I would like to see people pay out of pocket for the vast majority of their health care needs, and purchase insurance to cover catastrophic health issues. (Obviously, people have differing preferences for risk, so they could buy policies that covered more types of less-than-catastrophic issues. However, this increased level of coverage would be reflected in higher premiums, which seems fair enough to me.)

Paying out of pocket for health care would get us away from the inordinate waste of money on administrative costs in processing fairly prosaic claims. For example, why do we need health insurance pay for yearly checkups? Are they not fairly predictable? What exactly is the element of uncertainty with respect to a routine checkup that necessitates the involvement of an "insurance" company? Furthermore, paying out of pocket for health care would compel people to consider how much they value the services that they are purchasing. In our current employer-based insurance system, people are far too removed from the transaction for the price mechanism to do its magic, unnecessarily introducing all manner of moral hazard into fairly routine transactions. Having people confront prices directly will compel them to ask a very question, "How much," instead of inquiring whether the procedure is covered under their insurance as they do now. Under these circumstances, I'm quite certain that health care costs would fall, just as prices for our other high tech consumption items decline over time.

By having compulsory health savings accounts to prepare for the infirmities of old age, people would have a nest egg that they could use when their health starts to fail them. These funds would allow them to purchase some insurance to cover catastrophic illnesses, because they would have disposable funds to enable them to purchase a private insurance policies with very high deductibles. Let's face it: Old people are a bad health insurance risk. However, this risk is greatly mitigated if an old person is sitting on a nest egg of a couple hundred thousand dollars that explicitly earmarked for health care needs. In this way, an uninsurable person with pre-existing conditions suddenly becomes a much better risk if the insurance company doesn't have to start paying until a very large deductible threshold is met. In fact, under these circumstances, the insurance company might not have to pay out for many of their customers...

Of course, a government program could be set up to assist and to provide care for the poor and indigent, but at that point, the burden of the provision of health care services for such a small proportion of the population would be a fairly trivial matter, and much more manageable than our current entitlement burden.

WRT Social Security, I believe that you are mistaken about the money being kept in trust originally. It was always a pay-as-you-go program in which payments into the system by the young were immediately paid out to the old. Obviously, the big winners under Social Security was the very first generation of beneficiaries back in 1935, with each successive generation getting progressively smaller returns on their payments into the system as expectancy increased and population growth decreased. However, I'm not sure what was done with the residual revenues collected in excess of benefits paid. I suspect that they were placed in "trust". Nevertheless, the SS trust was always a fiction: One part of the government owed money to the other part (and controlled the mint!). With the SSA accumulating US treasury bills, the US Treasury was accumulating liabilities that had to be paid by either raising taxes or firing up the printing press. As I noted earlier, SS is a Ponzi scheme. If you or I tried to pull a stunt like this, they would throw in prison in a second!

Anonymous said...

I apologize for my rotten typing! In reading my post, I just noticed that I dropped a several words that I meant to include.

I'm fairly certain that what I think should happen with health care and Medicare never will happen, but I'll lay it out for the sake of argument. I would like to see people pay out of pocket for the vast majority of their health care needs, and purchase insurance to cover catastrophic health issues. (Obviously, people have differing preferences for risk, so they could buy policies that covered more types of less-than-catastrophic issues. However, this increased level of coverage would be reflected in higher premiums, which seems fair enough to me.)

Paying out of pocket for health care would get us away from the inordinate waste of money on administrative costs in processing fairly prosaic claims. For example, why do we need health insurance pay for yearly checkups? Are they not fairly predictable? What exactly is the element of uncertainty with respect to a routine checkup that necessitates the involvement of an "insurance" company? Using insurance companies to finance fairly routine purchases introduces midlemen that needlessly increase costs. Furthermore, paying out of pocket for health care would compel people to consider how much they value the services that they are purchasing. In our current employer-based insurance system, people are far too removed from the transaction for the price mechanism to do its magic, unnecessarily introducing all manner of moral hazard into fairly routine transactions. Having people confront prices directly will compel them to ask a very basic question, "How much," instead of inquiring whether the procedure is covered under their insurance, as they do now.
By having compulsory health savings accounts to prepare for the infirmities of old age, people would have a nest egg that they could use when their health starts to fail them. These funds would allow them to purchase some insurance to cover catastrophic illnesses, because they would have disposable funds to enable them to purchase a private insurance policies with very high deductibles. Let's face it: Old people are a bad health insurance risk. However, this risk is greatly mitigated if an old person is sitting on a nest egg of a couple hundred thousand dollars that explicitly earmarked for health care needs. In this way, an uninsurable person with pre-existing conditions suddenly becomes a much better risk if the insurance company doesn't have to start paying until a very large deductible threshold is met. In fact, under these circumstances, the insurance company might not have to pay out for many of their customers. This would make underwriting policies for old folks much more feasible.
In addition, a government program could be set up to assist and to provide care for the poor and indigent, but at that point, the burden of the provision of health care services for such a small proportion of the population would be a fairly trivial matter, and much more manageable than our current entitlement burden.

WRT Social Security, I believe that you are mistaken about the money being kept in trust originally. It was always a pay-as-you-go program in which payments into the system by the young were immediately paid out to the old. Obviously, the big winners under Social Security was the very first generation of beneficiaries back in 1935, who never had to pay into the program, and with each successive generation getting progressively smaller returns on their payments into the system as life expectancy increased and population growth decreased. However, I'm not sure what was done with the residual revenues collected in excess of benefits paid. I suspect that they were placed in "trust". Nevertheless, the SS trust was always a fiction: One part of the government owed money to the other part (and controlled the mint!). With the SSA accumulating US treasury bills, the US Treasury was accumulating liabilities that had to be paid by either raising taxes or firing up the printing press.

The Iconic Midwesterner said...

I hate the fact one cannot edit these comments as well. One fo these days blogger is gonna upgrade...I hope.

I guess I stated my point incorrectly. Until the 1960's when you first had large numbers of workers retiring who had been part of SS for a long time, you had folks only drawing partial benefits. Only at that point did SS become a hand-to-mouth enterprise.

I dont even want to think of what happens if all the trust money (limited to special treasury bonds) if the dollar ever goes ass over tea kettle.