Sunday, April 3, 2011

A Curious Statistic

Reading through the latest policy analysis from the Cato Institute (Bankrupt: Entitlements and the Federal Budget by Michael Tanner), I was struck by the following statistic: the wealth of all millionaires (defined in the report at people earning $1 million or more per year) is approximately a year of U.S. GDP.

The total obligations of the U.S. government, including off-balance sheet liabilities of Medicare and Social Security are around 9 times GDP. To put this in further perspective, the federal government's revenues, as a percentage of GDP, have averaged 17.7% since 1950. From 2000 to 2010, the average was 17.2%. (Data source) If all our tax revenues were set aside to pay for these liabilities, it would take 50 years to do so (assuming the luxury of not needing to spend for defense, transportation, NIH, and other programs). Of course, since we already overspend tax revenues today, it's not as if we can set aside an amount each year for Medicare and Social Security right now.

But maybe we need to tax the rich? Class warfare and all that jazz, right? Well, remember the above. Confiscating the entire wealth of the wealthiest people in the US will reduce those liabilities only by 11%. (It would also be blatantly immoral, arbitrary, anti-property rights, and ruinous in regard to any incentive to work hard or innovate to create a high demand product consumers want and become wealthy as a result.) And I highly doubt most people who are not rich want to pay higher taxes. I certainly don't. So at least be a bit skeptical the next time the popular topic of class warfare comes up as a budgetary solution.

While I certainly am not an expert in regard to how to solve the problem (the above policy analysis has good ideas though), it seems obvious to me that one way of not solving the problem is higher taxes. Consequently, spending and obligations need to go down (much of those liabilities are future obligations, so cutting the promised benefits would cut the off balance sheet liabilities of Medicare).

Ultimately, I wonder if Medicare and Social Security are even morally sound. I dislike it that 12+% or so of my pre-tax payroll each year goes to pay for retirement and medical care for people who never saved enough money for healthcare and living because of government promises (moral hazard). And by paying that tax, that creates the expectation that I've paid into the system and hence should get something out of it. But unlike traditional insurance, where your premiums from that year go into a pool that will pay for you should an event occur, or annuities where your money goes into a pool that will pay you out when the annuity event occurs, Medicare and Social Security takes the money I pay today and immediately pays it out to cover the costs of current beneficiaries. (Isn't that a Ponzi scheme? I guess the government is allowed to run Ponzi schemes, but no one else is.) So by the time I'm eligible, none of the money I paid in is there - I'm depending on people younger than me to pay for this program. More likely, I'm depending on my fiscal prudence because I doubt Medicare and Social Security will survive as it is today by the time I am eligible. And that makes me just a bit furious at the inequity of the situation.

In regard to Medicare, instead of my taxes going to the government, maybe I would be better off with a private insurance company setting up an elderly healthcare insurance policy or annuity where you can pay into it from whenever you choose, and what you get out is based on when you subscribed to the policy and the amount of premiums you paid. Ditto Social Security taxes either going into a private account that I can invest, even if restricted to index funds unless you pass an exam showing that you're an investment expert and hence can be given full control; or Social Security taxes going into a private annuity. I think it would get rid of the moral hazard of people not saving enough because they're depending on government promises. And I think it would reduce demand pressures on healthcare spending too, because instead of the elderly using other people's money for their medical bills and hence not worrying too much about silly things like "How much is this going to cost?", it'll be their money from their policy and they'll have more incentive to minimize costs (i.e. more preventative measures). Finally, because the private healthcare and retirement solutions would be dependent on the premiums I've paid in and the investments I've made, it would be a much more equitable and hence morally fair solution than our current government scheme (and I use scheme in all its negative connotations).

Oh, and those who don't pay into a private healthcare policy account like that or a special retirement account? Well, they can reap the lack of benefits that they sowed. Irresponsibility should have consequences. That it does not because of the current entitlement scheme is an example of moral hazard, one that ought to be remedied. Maybe not in as radical way as I'd like, but it needs to be. Otherwise, my generation is going to be stuck paying for the budgetary sins of our grandfathers and fathers.

Note: Consider listening to this podcast from the Cato Institute, where I got some of the above statistics. When I have the time, I'll likely read the policy paper they put out on the subject. If you happen to know of any contrary views, please forward them to me, as I believe one should always understand the opposition's viewpoint to see if they have any valid points or if they're just rent-seekers determined to preserve the status quo.

Further Note: Reference #122 in the analysis points to a study of Switzerland's healthcare system where individuals can purchase a long term contract while young that extends into their elderly years. Apparently this system works quite well, probably in large part because the individual gets it and it is tied to the individual no matter where he or she is employed, unlike the U.S. where if we want to enjoy the tax benefit of healthcare we get it through the employer and lose it when leaving that employer. At some point, after the insanity of tax time is over, maybe I'll get a chance to read it.

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