Tuesday, January 06, 2009

Trends for 2009: Discussion Begins on Means Testing and Rationing of Entitlements

As the impossibility of funding Baby Boomers' pensions and Medicare becomes ever more evident, a tentative, terrified-of-alienating-voters discussion begins on the most obvious ways to limit unaffordable entitlements: means testing Social Security and rationing Medicare/Medicaid.

Reader Maggie R. took me to task yesterday for being long on anti-Boomer diatribe and short on solutions. I would have to agree with her critique, so today's entry is on potential solutions. Maggie wrote:

"I read with interest your essay this morning on Trends for 2009 Generational Optimism. But I was sorry to read that what began as an essay about the millennial generation degenerate into a diatribe against the "boomer" generation.
To implore a whole generation to fall on their swords is really cavalier, to put it mildly. I would ask you to imagine a generation of elderly people without incomes or health care, many of them without family to live with. I wonder if this millennial generation would be able to tolerate a society full of indigent old people?

Rather than come up with some catchy phrase like "fall on their swords" why not use your considerable intellect to propose some pragmatic steps that individuals and society can take to ameliorate the coming situation?"

Well said, Maggie, thank you. Maggie then offered solutions which many well-informed observers view as inevitable: means testing, rationing and a national healthcare plan of some sort.

"I agree with you that Social Security and Medicare are unsustainable as is and need policy changes that will recreate them as entitlements for the poor. And universal health insurance may allow us to do that. . If SS is means tested, there will be no need for anyone to "fall on their swords." The financial impossibility of SS is due to its being owed to everyone, even those who could live quite easily without it. The upper and upper middle class will need to give up their SS benefits and new tax laws will likely accomplish that. But they won't like it having paid into the system all her life.The economy will need to become quite dire for people to swallow this necessity.
Medicare is another issue. There is no question that health care provision will have to "rationed" for everyone. In fact, those of us who have managed to purchase individual health insurance with high deductibles already ration our care. I have a $2700 deductible and you can be sure that I do not go to the doctor for minor issues. "

It was not my intention to sound cavalier, so let me re-phrase my intent in saying Baby Boomers will have to "fall on their swords." What I meant was this: politically and culturally, we are in the deathgrip of an entitlement mindset in which the vast majority of the populace is focused on "what I was promised," "what I deserve," "what I paid into," etc. etc. etc. and not at all on what the nation can actually afford and what sacrifices might have to be made to restore fiscal prudence (and survivability).

That transformation from entitlement to sacrifice is "falling on your swords." That change will have to occur within millions of Boomers, and then as a result of that inner understanding, in the body politic of the nation.

I would say we're not even close to that transformation. But discussions--tentative, fearful, murmured, whispered--of limiting unaffordable entitlements are beginning, and will become ever more common as the U.S. economy continues its downward spiral.

Astute reader Jason submitted a link to this upcoming book The Narcissism Epidemic: Living in the Age of Entitlement with this comment: "Not out yet, but you have to love that title." Agreed, and thank you, Jason, for bringing this to our attention.

Maggie R. also observed that the Boomer generation is not solely responsible for the present financial meltdown and culture of entitlement:

"I, too, have been frustrated by the short sightedness of my generation in regard to economic issues, but I believe that much of the blame can be laid at the feet of our whole culture that prefers to pay millions to football players and 30K/year to teachers. This is merely an example (I'm not an embittered teacher). These skewed values cannot be blamed on the boomer generation; they were inherited. One could blame the WWII generation for raising its children with these values. It's true that one doesn't need to accept such values. But the numbers of people with an independent mindset are few in a culture permeated by mass media culture. One would have to fault the human species for that.

I'd also like to point out that our generation protested Vietnam, supported civil rights for African Americans, and promoted equal rights for women. There is much to admire, although I feel pessimistic that these achievements will be lauded by younger generations when they are faced with looming poverty as a result of an economic firestorm."

While I would agree no one generation bears sole responsibility, it is the Boomers who are about to retire and thus it is they who must step up to the plate and make the fiscal sacrifices necessary for the survival of the nation. The generation who got drafted to fight World War II didn't get a choice about what sort of sacrifices they would be called upon to make, and it can be said that those Boomers who got drafted (or volunteered) to fight the Vietnam War have already made enough sacrifices.

Fair enough, so let's place Veterans' entitlements at the head of the "entitlements triage" line. Medical care provided by the Veterans Administration is actually very cost-effective compared to the bloated, 50%-is-waste Medicare program, so that can be left more or less as-is.

As for retirement benefits, maybe some prioritization is in order: those who served in combat and those who served active duty for more than 20 years are at the head of the line, followed by everyone else. Do Veterans' widows receiving the benefits of their spouses "deserve" that entitlement if they have adequate income from other sources? Since my Mom fits in that category, it would be easy for me to say "yes," but I think the coming triage really requires us to get back to basics: the Vets get the benefits they earned with their service and when they pass away the benefits do, too.

It would be nice if we could pay every entitlement forever, but reality is about to impose limits on how much the nation can borrow to pay entitlement benefits to 75+ million people.

Is "means testing" fair? I would say: absolutely. Look, if someone is collecting a $4,000/month pension from a government/private retirement pension, then would sacrificing their $1,000/month Social Security put them on the street in a cardboard box? No.

Do they "deserve" Social Security" because "I paid into it"? Well, actually, yes and no. The truth is that virtually all Social Security recipients pull out the actual money they put into the program, and interest earned on those contributions, in a few years. Everything after that is welfare, paid by other taxpayers--i.e. the generational Ponzi scheme.

Most people refuse to accept this incontrovertable fact: after a couple years, every dollar of Social Security you get is flat-out welfare: an unearned benefit paid by someone else.

So far, we've been borrowing money from future generations to pay this welfare to retirees, but our ability to borrow trillions of dollars from foreign exporters is about to be radically restricted (by rising interest rates and the destruction of their surpluses), and as the worker-retiree ratio slips toward 2-to-1 then the generational Ponzi scheme that worked when the ratio was 10-to-1 or even 5-to-1 is about to collapse.

(Bernie Madoff has provided us with an example of how Ponzi schemes eventually collapse, and retirement "entitlements" are the world's biggest Ponzi schemes.)

So let's envision a means-testing triage for Social Security. Let's say we aim for a non-taxable cap of $2,000/month. If a retiree pulls in $1,200/month from whatever sources, then their Social Security benefit above $800/month is taxed. If they receive $2,000/month or more, then their Social Security benefits are taxed at extremely progressive rates--essentially 99% by $3,000/month in all income (even Muni bonds--no loopholes).

It's called triage, folks. Why should people drawing $8,000/month in other government pensions receive Social Security? What number is "too much"? Well, once you finally admit the nation is effectively bankrupt, then you set that number pretty low because that's all the actual money we'll have to spend anyway.

Once you agree to live within the nation's means, i.e. what's collected in cash via taxes, then all sorts of entitlements melt away--there's simply no money for them.

As for Medicare care being rationed: while I understand that's one way to go, I'm not sure that's the fairest or most practical way to go. I would start with these limitations:

1. There is no entitlement or right to care: all Medicare/Medicaid benefits are privileges, not rights, which have to be adjusted to the fiscal realities of the nation's income and expenses.

2. Those who can afford private care/private insurance which duplicates Medicare are excluded via means testing. Transferring your wealth to your offspring a year before you retire won't cut it: all wealth transferred within the past 20 years is counted. (see item 1. There are no "rights" except what's in the Bill of Rights. Medical care is not in the Bill of Rights.)

3. Every doctor's visit under Medicare regardless of the patient's income costs a $50 co-pay. This will create a market for $20 visits at the Wal-Mart walk-in clinic, and the government won't get billed $700 for a $20 visit.

4. What gets covered by Medicare is severely restricted. The triage is based on age and the cost of the procedure. The amount to be paid by each procedure is based on airfare to New Delhi, Shanghai, or Bangkok, Singapore, etc. plus the cost of the procedure wherever it is the cheapest. (Thus a hip replacement which costs $43,000 in the U.S. would be reimbursed at the rate of $5,000. See Doing the numbers on medical tourism (S.F. Chronicle, 1/4/09)

The net result of this would be clinics popping up in Mexico with First-World trained staff providing the care at those prices at a profit. No, you won't be able to sue; you'll have to do the research on the clinics and doctors there, and take your chances. Or you can save up cash or buy your own insurance to pay the $43,000 here in the U.S.

It's peculiar that we don't have a "right" to drive or a "right" to auto insurance; if you get three DUIs and wreck your car, your "right" to the privilege of driving and auto insurance are revoked or severely restricted. The lesson here: if the "right" to medical care is likewise revoked, then maybe people will start taking responsibility for their health. It certainly works in other areas of life like driving.

Before you start writing me, please keep in mind the context: a bankrupt nation requires fiscal triage such that its expenses are aligned with its income. Now if you want to leave all the entitlement structures as is, then you have to raise the funds to pay for them via taxes. Go ahead and nail the corporations for $1 trillion a year (and see how many still generate a net income to tax), and raise income taxes to 65%--yes, 65%. That's what Danish and Swedish citizens pay, and they don't even have the world's mightiest and most expensive military to support--so maybe we better nudge that up to 75% for the U.S. tax rate.

If you think I'm joking, do the math on raising $66 trillion (or maybe it's $90 trillion, we're only guessing at how much Medicare will actually cost) via taxes. Right now the U.S. government collects about $2.5 trillion in taxes per year and borrows a $1 trillion more to squander/spend, mostly from non-U.S. exporting nations like Saudi Arabia, Japan and China--yes, the very nations which are also entering recession and seeing their trading surpluses vanish.

It would be nice if the coming triage were easy, and if it could be managed with a few minor nips and tucks. But that is fantasy. The reality is: we either trim spending by $60 trillion over the next 20 years or we raise taxes by $60 trillion to pay for the entitlements we "deserve." Or we cut $30 trillion and raise $30 trillion in taxes. One way or the other, the sacrifices will have to be made.

I personally think our nation's cost structure has become bloated to an insane degree and the first step is to "get back to basics" and cut costs rather than try to raise $60 trillion in new taxes. This isn't just philospohical; I just don't think raising $60 trillion in new taxes is practical, as the imploding economy won't support it. But that's a discussion for another day.

Here are some other thought-provoking reader comments on the subject:

Noah C.

I was born in 1980 so I'm one of the people you're talking about. It is accurate to say my generation is full of optimism.
In Ohio where we are supposed to be a lost people. Everyone I know that graduated from college last December wants to work for the government, my friend wants to be a school teacher, one woman I know wants to work for intelligence, and another wants to work helping criminals reenter society.

I went to New York City, one woman with her psychology degree is helping the mentally retarded, another I met was going to school to become a lawyer to help with border issues.

My one friend with a masters is working for the state library in New Mexico organizing their archives.

My dream is to graduate next December and join Americorps.

The strangest is that we party hard. We get drunk a lot and have promiscuous sex. We are not in terms of past generations the most moral people when it comes to what we do after work.

But most of the people I know personally have the dream of working for the government trying to make America a better place.

Barely anyone I know wants to work in the private sector anymore.

The private sector doesn't provide the money, benefits, or enriches our emotional lives like it does working for people.

Concerning ideology: We aren't ideological. We are very pragmatic like you said. We were raised in a very factual world, we consider facts, take them, and seek a solution. We were raised by schools and television more than our parents, and schools and television don't have political affiliations. But they do have facts and problem solving.

We are a generation that has no real love for a political party and wants to work for the government, I think this will have strange consequences no one will be able to predict. I'm very excited to see it and will participate in it as much as I can.

My father and mother were born in 1946, they went to work and came home. My mother took pain killers all day. My father drank at least twice a week, smoked weed, and watched a shitload of television.

Saint Augustine said you can define a nation by what they love: My parents and their baby boomer friends loved air-conditioning, indoor heating, indoor plumbing, cement driveways, basketball hoops in the driveway, sports, well maintained highways. All of them loved their unions and were proud to members of it.

Besides that I couldn't see anything else they loved. They loved the conviences of modern living and want them to be there forever. All of them grew up hearing stories from their grandparents about being cold in the winter and having to farm for food. Hell, my dad got to listen to old Sicilians talk about what it is what like to live there, which what a stone shack and a small field to farm. My mother grew up on a dirt road they used to put oil on in the summer. She would talk about her grandfather coming in the house smelling like cow manure from farming all day. But there was no running water, so he could only shower once a week. I think baby boomers had an idea that was life different before world war 2, and didn't want to go back to that state.

Clinton and Bush are about not going back to that way of life before World War 2. They were presidents of Maintenance not of Change.

Also I think maybe the thing abour generation was that in the late sixties when the civil rights movements were successful, it set america on such a course, that america really couldn't move again until blacks and women were really equal. And I think now, we are seeing that a large level of equality has been accomplished. and since that course has been accomplished, we can take a new direction with the new stage set even further. but we needed that equality to move further, so it was like your generation's job to make that happen, to make that equality happen and I think you did that.

Dave E.

I am quite optimistic about the future, and I'm a baby boomer.
The things I'm optimistic about are a retreat from materialism and consumption, toward community, sharing, and a renewed civility. In addition, I'm hopeful that we may once again work in harmony with nature and willingly protect the environment as much as we would our own personal health, as if they are distinct.

The only reason not to be optimistic, and this is a real concern, is that the existing power structure may destroy the planet in a futile effort to preserve the existing hierarchy, from which it derives so much benefit. This is a far graver concern to me than even peak oil. After all, humans existed just fine before the advent of oil, which was a mere 150 years ago. We can do so again. Of course, I recognize that the human population that exists today cannot be sustained without oil, but I'm hopeful that the population can diminish gracefully and through attrition, if people are given a chance to work things out for themselves. Again, the biggest threat to the human population comes from the existing power structure.

Pat M.

The poll indicates optimism about the future and willingness to embrace change. Is this naïve or realistic? When the Ipods and Blackberrys cease to work and travel is restricted and food costs escalate to absurd levels, what will be their reaction then? In my observation few of the younger generation have ever got their hands dirty to earn a living, what dirt they have gotten on themselves is mostly from extreme sports, and their feeling of entitlement equals or surpasses the baby boomers.

While I agree with the assessment of the mess the boomers have made, I notice that the poll did not address whatever extreme measures that must be embraced to correct the mistakes and greed that these younger people will have to address. After all, we are in an extreme situation and it is going to take some extreme measures to right this sinking ship we are on. I wonder at what howling will be manifested by the young’ns when a large amount of what they take for granted isn’t there anymore and their attention must turn to grubbing in the dirt to grow food.

It sure appears to me that this optimism expressed in the polls only has validity if we assume that a radical change in life style is not necessary for just pure survival. It also assumes that working within the system also has validity. Being a doomer, neither of these assumptions appear viable to me. But what the heck, I’m 68 and what do I know?

Thank you, readers, for your thoughtful comments.


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