U.S. Rep. Paul Ryan’s proposals with respect to Medicare and Social Security fall short. His proposal to keep traditional Medicare for people age 55 or older while providing insurance premiums credits of an average of $11,000 per year for persons under age 55 protects the most important voting block. But it fails from a fairness perspective.
After originally proposing — apparently in an attempt to compensate for Medicare losses — that people under age 55 be allowed to allocate up to one-third of Social Security contributions to private accounts (actuarially unsound, given anticipated cash deficits), Ryan now punts on Social Security.
Once you start a “pay-go” entitlement program such a Medicare that benefits the elderly, the first generation of beneficiaries ordinarily receives a windfall because it receives benefits that it did not fund for the previous generation.
In this regard, with the exception of the wealthy (whose tax burden has gradually decreased substantially since 1980 in inflation-adjusted terms), the overall federal tax burden for individuals has changed little in inflation-adjusted terms since the mid-1950s.
Once a pay-go system that benefits the elderly has been in place for many years, assuming demographic trends remain constant and benefit costs stay relatively in-line with inflation, the results basically are fair. People pay into the system while working and receive payments from the system in old age.
But if either the demographic trend changes or benefit costs are not in-line with inflation, then the results are inequitable (unless the demographic trend works in the opposite direction of the inflation factor and the two essentially cancel themselves out).
Both factors work against young Americans. Furthermore, without a make-up elsewhere, you cannot shut off or substantially eliminate such a system without creating a tremendous inequity for younger persons.
Historically, the elderly have been a relatively small percentage of the U.S. population, and there have been more than enough working people to fund their retirement.
But this trend has shifted dramatically. Despite tremendous immigration, the baby boom generation has basically only reproduced itself, and there will be relatively fewer workers to support this generation in its old age.
Practically, health insurers desire to maximize premiums and minimize benefit payments. Granting stipends to purchase health insurance for seniors, as Ryan proposes, is not the best alternative.
What does this mean with respect to Ryan’s Medicare proposal? Assuming the $11,000 per year stipend provides fewer benefits than Medicare does today (which it should), the young people who will need to fund Medicare benefits for the 55 and over crowd are getting doubly penalized relative to the baby boom generation. They’ll pay more but receive less than their predecessors. Simply put, Ryan’s proposal is unfair.
What would be fair and economically practical for Medicare is a gradual conversion to a system that provides that everyone must sacrifice some to correct our nation’s financial problems. Coupling such a system with elimination of subsidies in the private sector for health coverage that does not necessitate substantial individual responsibility would reap benefits to Medicare and Medicaid, since government discounts are based on market rates.
For example, Medicare Part A’s (hospital) deductible ($1,132 in 2011) could be replaced with 20 percent co-insurance payable by the beneficiary. Part B’s (doctors and tests) premiums and low co-pays could be replaced with no premiums or co-pays and 50 percent co-insurance. Part C, relating to HMOs, could be eliminated. With the exception of catastrophic coverage, Part D (relating to prescription drugs) could be repealed coupled with group discounts for seniors such as those provided to the U.S. Department of Veterans Affairs (and those provided to many foreign governments).
While flawed, Ryan’s plan is a positive in that it actually proposes something to deal with the enormous entitlement problems.
Allen Buckley is an Atlanta attorney/CPA and two-time Libertarian candidate for U.S. Senate.
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