Entirely forseeable costs and how to pay is the real debate…not the rhetoric

by coberly

Robert Samuelson has written an article so nasty and dishonest that decent people might wish to avert their eyes. But the 288 comments on his website suggest that enough people believe him that it’s worth trying to explain what’s wrong with his thinking.

Here is an example of it: ” One of our long-running political stories is the economic assault on the young by the old. We have become a society that invests in its past and disfavors the future. This makes no sense for the nation, but as politics, it makes complete sense. The elderly and near elderly are better organized, focus obsessively on their government benefits, and seem deserving. Grandmas and Grandpas command sympathy.

“Everyone knows that the resulting “entitlements” dominate government spending and squeeze education, research, defense and almost everything else. In fiscal 2008 — the last “normal” year before the economic crisis — Social Security, Medicare and Medicaid (programs wholly or primarily dedicated to the elderly) totaled $1.3 trillion, 43 percent of federal spending and more than twice military spending. Because workers, not retirees, are the primary taxpayers, this spending involves huge transfers to the old.”

“Everyone knows.” You see, the fact that “the elderly” paid their payroll tax (when they were “the young”) imposes no obligation on “us” to see that they get what they paid for.

But the fundamental fallacy here is that apparently none of “the young” will ever become “the old.” So instead of thinking of Social Security and Medicare as money they pay in advance, while they have it, for services they will need in the future, when they won’t, it is politically important to get them to think of it as “the economic assault on the young by the old.”

In order to do this Samuelson has to represent “entitlements” as “43 percent of federal spending.” This is not true. Social Security and Medicare have their own funding, and have nothing to do with “federal spending”. They are just the people paying for their own needs using the government to handle the details. This is no more “government spending” than it is “bank spending” when the bank takes in your deposit and later gives it back to you. Most people would be glad to learn that they will pay more for rent and groceries and health care when they get old than they pay for their share of “defense.” But Samuelson’s friends don’t like that. Where’s the profit in keeping old people alive? With their own money.

Even in the private insurance market, Samuelson entirely fails to understand this basic idea. We buy insurance, paying for it today, so that if some expense arises at a future time, there will be money to pay for it. But in Samuelson’s world, that transaction can only be understood on a month to month basis:

Samuelson says, “All insurance aims to protect against risk — but within groups facing similar risks. Put differently, most insurance is risk-adjusted. Auto insurance premiums vary by age; younger drivers pay higher rates because they have more accidents. Homeowners’ policies for similar houses cost more in high-crime areas. This is not “discrimination”; it’s a reflection of risk and cost differences. Insurers that ignored these differences would soon vanish, because they’d suffer heavy losses and lose customers.”

What Samuelson, and his admirers, cannot understand, is that if you “expect” heavy expenses in the future, it makes no sense to wait until that future to start paying a premium appropriate to the risk of that month. You simply can’t afford it. It makes more sense to prorate the expected expenses of a lifetime over an entire working lifetime. Your “expected costs” when you are young might be less than 20 dollars a month, while your expected costs when you are old might be 1000 dollars a month.

Only to someone with the brain of a Samuelson would it make sense to pay 20 a month when you are young and working, and pay 1000 a month when you are old and not working. Since the young person knows he will get old, and will have much higher “expected” costs, he can prepay those expected costs at an affordable 200 dollars a month. This way that 200 a month adds up over 40 years to about a hundred thousand dollars, enough to pay your expected costs when you are old and out of work, without having to find a 1000 dollars every month.

Of course it is difficult for a private insurance company to run this way. Even the government has to understand what it is doing as “pay as you go,” in which the premiums collected today (from the young) go to pay today’s medical bills (mostly of the old). As long as this pay as you go is understood and continues from generation to generation, the problem of paying for the higher expected costs in old age, coupled with lower expected earning, is solved.

But Samuelson and his ilk don’t want you to understand this..

Worse, it sometimes seems that the non partisan experts advising the President and the Congress don’t understand it. Even the “good guys” always frame the debate in terms of “fairness” to old people, whatever that means. The proper debate is “how do we most rationally pay for the entirely foreseeable high costs of our own medical care when we get old.”
by coberly