If the fate of Social Security were a children's fairy tale, it would be called
And it's going to get worse.
Based on figures in a recently published brief, the director of the Center for Retirement Research at Boston College indicates that a worker who is 30 today can expect premiums, deductibles and co-pays for parts B and D of Medicare to absorb about 50 percent of his or her initial Social Security benefit. A baby born this year can expect the same costs to absorb nearly 70 percent of future Social Security benefits.
Since Social Security benefits will have to be cut 25 percent by 2041 unless taxes are increased, today's newborns are facing a future in which the cost of health care will have gobbled up the entire Social Security program.
So, in the future, retirees will have plenty of health care. Their only worry will be the trivial, mundane stuff — like buying food.
Professor Munnell isn't alone in her concern. But in the 30 years I've followed her research, I can tell you she's not an extremist or an alarmist. Like most economists and policy wonks, she is simply well aware that Medicare, not Social Security, is the elephant in the room. Indeed, the unfunded liabilities of Medicare are six to seven times the unfunded liabilities of Social Security. One new part of Medicare alone, the prescription drug plan signed into law in 2003, has unfunded liabilities nearly twice as large as the unfunded liabilities of the entire Social Security retirement program.
Talk about bitter pills.
These realities should be telling our politicians to start working on a complete reset for health care. Instead, candidates for both parties talk about major changes but only rearrange deck chairs on the rapidly sinking USS Medicare.
It's time to think different.
One idea can be found in a new book from MIT Press, "The Healthcare Fix: Universal Healthcare for All Americans." Just released, it's a painless 86 pages. Better still, the basic elements of the plan fit on a single page (page 74). The book's author, Boston University economist Laurence J. Kotlikoff, proposes to abolish Medicare and Medicaid and to enroll all Americans in the "Medical Security System."
Yes, you've seen his name in this column before. Often. Professor Kotlikoff and I wrote "The Coming Generational Storm" together and, more recently, completed "Spend 'Til the End," a book on financial planning that will be published next June by Simon & Shuster. In fact, the kernel of the Medical Security System was published in "Storm."
The basic idea has also been proposed by others. It starts from a simple reality: Today, health care is constantly "gamed" by participants. Rather than benefit from the mass sharing of medical risk, insurers try to slice out mini populations that have less medical risk. They spend fortunes on marketing to do it. To eliminate that, professor Kotlikoff proposes a major change.
Vouchers.
Every American would receive an annual voucher to buy a basic health insurance policy. We would all be experience-rated. The value of the voucher we received would be related to our health rating. Those in poor health would receive vouchers that were worth more money than those in good health. As a consequence, private insurance companies would have no incentive to game their participant populations in search of lower risks.
The insurance companies (or HMOs) would be allowed to offer participants rebates in exchange for accepting co-payments and deductibles. They might also offer incentives for full participation in wellness plans.
Everyone would be insured because everyone would have a voucher. Since we already pay for vast amounts of medical care that isn't covered by insurance, the voucher option would create a vast reordering of health-care finance — but the money would be there to pay the bills.
And how would future medical costs be controlled?
Simple. The annual increase in the value of the vouchers would be limited to the rate of growth of per capita income.
A radical idea? You bet. But we're facing a country-killer-size problem.
(Questions about personal finance and investments may be sent by e-mail to scott@scottburns.com or by fax to 505-424-0938. Check the Web site: www.scottburns.com. Questions of general interest will be answered in future columns.)
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