March 13, 2008

Democrats Reject "Slashing" Medicare Down to a Scant 5% Increase

Hatched by Dafydd

Here's a fun party game: Google the following phrase: budget 2009 slash

I got 135,000 hits... how about you?

Now, there are some false hits there -- "Lawmakers vote to slash Florida budget," for example. But if you just keep clicking Next, you'll see page after page of links with titles like "Bush Budget Slashes Women's Health Funding | Reproductive Health" and "Bush's 2009 Budget Calls For Slashing Public TV Funding"... but especially ones like "Bush budget would slash Medicaid, Medicare budgets."

If they don't say "slashes," nearly all these pieces generally include some equivalent; here's a typical example, from the Associated Press today, that talks about "huge cuts" rather than "slashes":

A Republican alternative that largely mirrored a plan by McCain to permanently extend Bush's tax cuts and eliminate the alternative minimum tax was expected to fail badly, with party moderates distancing themselves from the GOP plan's huge cuts in popular programs like Medicare, housing, community development, and the Medicaid health care program for the poor and disabled. Such cuts were needed to make room for big tax cuts and still project a balanced budget.

So why the obsession with how President Bush's budget or John McCain's budget "slashes" (or inflicts "huge cuts" -- get a bandage, ow!) in "popular programs like" [fill in a series of "entitlement" programs that Americans now rely upon, after decades of "liberal fascism" under both Democratic and Republican administrations]? Why is any cut -- rather, any reduction in the rate of increase -- denounced as draconian, ruinous, and thuggish? Read on to find out...

Pay no attention to that budgetary black hole behind the curtain!

Quite simply, the inflammatory rhetoric is designed to take our minds off of the real story:

  • Democrats fully intend to vastly raise taxes -- by stealth. Allowing the Bush tax cuts to expire at the end of 2010 will jack up income taxes by $683 billion over five years, or $137 billion per year. Yet even so, Democrats propose even more spending increases than the tax increases, so the deficit will explode as well, probably triggering a real, live recession (and lowering tax receipts even further).
  • Democrats have no intention whatsoever of doing anything to restrain the growth of putative "entitlement" programs -- Medicare, Medicaid, and Social Security. They will allow the programs to rise at more than double the inflation rate until the cows come home to roost.
  • Therefore, in fewer years than most folks realize, either Congress must enact tax increases on the level of trillions of dollars... or else the "entitlement" programs will grow to the point where they literally gobble up the entire rest of the budget. All revenues will go for entitlements, leaving nothing left over for anything else -- no more national defense, education, NASA, scientific research, or any other discretionary spending.

The Bush budget (unveiled last month) will at least "slash" the Medicare growth rate from 7.2% per year to 5% -- which is still more than inflation: Inflation has averaged 2.69% per year during Bush's presidency, but will probably rise to around 3.5% this year. This "huge cut" -- which still leaves the programs advancing more than retreating, even in constant dollars -- would trim about $10 trillion, about a third, off the unfunded liability of the program, currently estimated at $34 trillion.

But that still leaves the unfunded liabilities of Social Security, Medicaid, and other "entitlement" programs. Estimates vary, but a figure I've often seen is that all of them add up to about $75 trillion dollars... a staggering amount that equals the entire gross domestic product of the United States for 5.7 years. In budgetary terms, it represents the entire annual federal budget for a quarter century.

Unfunded liability stems from the fact that the cost of the programs rises so much faster than the inflation rate; this will only get worse as baby boomers begin to retire in mass numbers in 2011, just three years from now, and as retirees live longer and collect benefits for many more years.

John McCain has not yet proposed a serious solution to the problem, but there are quite a few very good ideas out there. I expect he will make entitlement reform the centerpiece of the domestic part of his campaign... because he has no choice. The retirement time-bomb is ticking, ticking, ticking; and neither Barack Obama nor Hillary Clinton has made -- or will make -- any serious proposal.

Social Security

There are two serious problems; eventually, Congress must fix both in order to make the program sustainable into the future:

  • The return on investment (ROI) for an individual's payroll-tax contribution to Social Security varies due to a number of factors, including lifespan, how much he contributed while working, when he retired, and so forth. But the Heritage Foundation calculates that the ROI for a person born in 2006 is no more than 1%... and it can even be negative, meaning you literally pay more than you ever receive. (This is especially true for men, who tend to have shorter life expectecies than women.)

    In other words, the Social Security Trust Fund is a terrible, miserable investment. Your retirement money would do better in virtually any private investment imaginable.

    The ROI may go up if lifespan increases significantly, as I expect it will; but that means the cost of the program will again become unsustainable, since it does not generate any wealth, as a real investment would, thus cannot pay for itself over the long run.

  • Even the pittance we earn on our "investment" (not much better than stuffing the money into a mattress) has been systematically raided by past Congresses, Democratic and Republican, to finance current expenses.

    There is no trust fund. There is no "lockbox." There is no money; there is only a wad of hand-scribbled IOUs.

    Social Security is a pay-as-you-go program. We paid as we went... but we also spent that money on a vast array of other "popular programs" besides Social Security, and it's all gone. C'est la vie.

Both problems can be solved by a single change... but it's going to hurt. Social Security must be fully privatized. Not the namby-pamby partial privatization proposed by President Bush (and shot down in a green-eyeshade second by the Republican Congress), but the whole kit and kaboodle. We do it like this:

Each payroll taxpayer gets an individual Social Security Retirement Account; the SSRA can be maintained by any brokerage firm, which sets up any number of SEC-approved investment funds... divided into three tiers of investment: 1 - Safe, 2 - Moderately Aggressive, and 3 - Aggressive.

All Social-Security "contributions" by a taxpayer are poured into his own personal SSRA. The taxpayer picks the tiers and the funds to invest in; when he retires, that's his own money -- to spend, to reinvest, or to pass along to his children.

And there you have it:

  • The ROI is the same as for a 401K, so the SSRAs will be self-sustaining;
  • And since they're in the name of the taxpayer, the government cannot raid them.

That's about the only way to permanently solve the problem -- as numerous countries have already discovered, including Argentina, Australia, El Salvadore, Great Britain, Hong Kong, Hungary, Mexico, Peru, Poland, Sweden, and many others.

The feds will have to skim off the top to partially subsidize the program for those folks who, for whatever reason, have SSRAs deemed too small to live... and also to pay the transition cost of all the past contributions by taxpayers into the current system, spread over some period of time to avoid bankrupting the country. Alas, the transition costs will be very, very high; payroll taxes will have to rise, though hopefully not damagingly so.

Such a fix would be market-positive, since it would increase America's "net worth." It's like paying to put a new roof on your house: The money you pay now will increase the value of the house for later resale by more than you put into it.

Will John McCain have the guts to propose it? I hope so; but I know for a fact that neither Hillary nor Obama will.


Medicare is basically health insurance for senior citizens of any income level. Medicaid is a group of needs-based state-run (under federal guidelines) medical welfare programs for the poor, which is currently gnawing away at state economies, gobbling up 20% to 30% of state budgets.

With these entitlement programs, the real problem is the rising cost of health care itself. But the cost is being driven to a large extent by factors external to medical care:

  • Medical malpractice lawsuits, which force doctors and hospitals to practice "defensive medicine," ordering unnecessary tests for the purpose of covering themselves in the event of a lawsuit.
  • The vile practice in other countries (especially Canada) of legally requiring prescription drugs to be sold to their citizens below manufacturer's cost... forcing Big Drug to jack up the price here to avoid going out of business.

    (Were we to follow suit -- an idea that McCain has flirted with in the past, alas -- we would likely lose many pharmaceutical manufacturers... and all the lifesaving and life-enhancing drugs they would have produced.)

  • Increasing lifespan: Just as with Social Security, when people live longer -- as they have been, due to medical advances, the decreased rate of smoking, and so forth -- the government must pay more money per person. Thus, if the taxes paid by future recipients don't rise as fast as the increased payments due to living longer, any system will eventually become insolvent.

The solution has several components. First, we need major tort reform, especially in the area of medical malpractice. The reforms must include loser pays; barring "expert witnesses" hired by the plaintiffs' attorneys (let them come from a pool hired by the court, with no financial incentive to lie); and ending the practice of expanding liability further and further outward until one finally reaches a parent company with enough money to satisfy the trial lawyer's greed.

Second, patients are just going to have to be responsible for more of their own medical costs; this will force them to budget their medical dollars more wisely. A very, very good first step is to introduce medical savings accounts (MSAs) into the Medicare system in a big way, particularly for affluent seniors. Getting fiscal responsibility into Medicaid is harder, because it is by definition a program for the poor; but we should put some thought into it.

Third, rather than pay doctors and hospitals directly, perhaps Medicare and Medicaid should pay the patient -- then let him pay the bills. If doctors charge more than the government pays, they will have to get the rest from the patient himself.

This gives patients a huge incentive to shop around and think twice about going to the doctor for minor problems; and it likewise gives doctors a huge incentive to reduce costs by bringing the free market into the equation. At the moment, they simply get paid according to a government "schedule"... which encourages medical professionals to spend money on lobbyists to increase the scheduled payment rates, rather than on finding ways to contain their own costs and remain competitive, as every other business must do.

Fiscal responsibility

If Republicans want to regain control of Congress someday -- and if John McCain wants to get elected president -- then both must offer bold, permanent solutions to the entitlement crisis. There is no more time for tepid "can-kicking."

Even if the Democrats shoot down the GOP proposals, that will give us a vital and future-oriented issue to run on, buttressing our claim to be the party of great new ideas. And this issue will be one that clearly differentiates between the European-style socialism of the Left and the American tradition of personal responsibility on the Right.

Let's hope that if the GOP can ride this issue back into power (this election or the next), that this time, the reality of Republican governance will actually live up to the stirring rhetoric of personal responsibility.

Hatched by Dafydd on this day, March 13, 2008, at the time of 8:14 PM

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The following hissed in response by: hunter

If - and apparently this is a big 'if' we can get the public square to acknowledge that increases are not cuts, we can win not only more elections, we can save this country.
If not, we are doomed.

The above hissed in response by: hunter [TypeKey Profile Page] at March 14, 2008 7:55 AM

The following hissed in response by: Geoman

Very good, but add:

1) Index existing social security benefits to inflation rather than wages.

2)Drop benefits for wealthy seniors. Remove wages contribution cap. I'm against this - but it would be a sop to the liberals.

3) Offer a plan to "opt-out" of social security -one time lump payouts from social security. Make them half (or less) of what the expected payout of benefits would be if they stayed in the system.

For example, on retirement, social security might calculate the total benefits I was likely to receive as $150,000 over the remainder of my lifetime. I could opt out and receive $50,000 into an annuity now.

Imagine the benefits:

1) No more government control of your life.
2) A promised, one time pay-out.
3) Something valuable to leave the grandkids.

I think you might rapidly reduce the pool of those promised benefits, and therefore your overall long-term liability.

3) Set up annuities for all workers just entering the system.

I think with a little creativity you could painlessly transition over to a new annuity based system of retirement.

The above hissed in response by: Geoman [TypeKey Profile Page] at March 14, 2008 10:30 AM

The following hissed in response by: cdquarles


Back in the days before HIPAA, et al, doctors filed paper Medicare claims for their patients as a courtesy and the patients were expected to pay up front. Since the forms were confusing to patients, heck, even to the doctors; patients gladly took advantage of this service, for which the doctors directly received the payments where the patients were so inclined to allow.

Needless so say, there were real and imagined abuses. Sometimes the patients would ask (demand?) the doctor extend credit until the Medicare check arrived (which sometimes it never did because the claim wasn't filed properly or timely). Sometimes the patients committed fraud. Sometimes the doctors committed fraud. Sometimes both did.

Given the gross underestimate of the costs (which given the lack of provision for inflation were not that far off in 1965 dollar terms), it was only a matter of time before the Henry Waxmans of the world changed the rules throughout Medicare and Medicaid's history.

The current mess is the expected consequence of HIPAA and its criminalization of billing mistakes as fraud as well as its requirements for doctors to do the filing electronically (for which payment within 14 to 30 days is nearly certain) so that data mining can go on for, um, political purposes. One of the new definition of fraud is that aggressive collection attempts must be made for co-pays, deductibles, and balances due up to the MAAC(Maximum Allowed Actual Charge) where the doctors do not accept assignment.

The current system is one where the supplier, be he a doctor, hospital, ambulance service, nurse practitioner, pharmacist, rehab facility, nursing home, home health agency, etc is always at risk for prosecution. If the DEA doesn't get you, the trial lawyers or HCFA will.

Free the doctors! Free the patients! US out of Medical Care NOW!!!! ;) A full and immediate privatization is the only way to go.

The above hissed in response by: cdquarles [TypeKey Profile Page] at March 16, 2008 8:15 PM

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