More on the fiscal outlook
My recent post on the government’s fiscal outlook generated several thoughtful comments.
Two readers mentioned Paul Krugman’s op-ed on Social Security in The New York Times. It is true, as Krugman points out, that Social Security is only a modest part of the fiscal problem. Using statistics from the Congressional Budget Office (CBO), federal spending on health programs and Social Security is expected to grow from 10% of GDP to 16% over the next quarter century. About 1% of that growth is due to Social Security, according to CBO; the other 5% is due to health programs.
The Social Security increase is a pure “aging” effect—it’s from having relatively more retired boomers and relatively fewer workers paying Social Security taxes. One advantage of reforming Social Security is that, after decades of study, we have a clear idea of what can be done to bring the program itself into balance. In fact, there is a simple cartoon book on the reform options where you can sketch out your own plan.
Most of our fiscal imbalance arises from health care costs. Those cost increases are occurring as a result of two intertwined trends. The first, as with Social Security, is the aging boomer effect: Older people spend more on health care than do younger people, and with the baby boom we’ll have more older people collecting benefits.
The second is that health care costs across the population, for the retired and the nonretired, continue to grow faster than the economy itself. So we have “excess” growth in health costs in programs targeting the aged (Medicare, the part of Medicaid paying for nursing home care) and those targeting children and the working population (the other part of Medicaid for the poor, the Children’s Health Insurance Program, and the new insurance exchanges).
The problem is that cutting health expenses is a much more daunting task than reforming Social Security. There are no simple books laying out the options. A number of areas have been fingered as the cause, including the rapid growth of expensive technology, regional differences in treatment patterns, and medical costs at the end of life. I am no expert on the issue and so will leave that question to health policy wonks.
But it’s simple math. We have growing costs due to the pure demographic effect—having more retired Americans relative to the working population collecting benefits. We have growing costs from a system-wide increase in health costs affecting all Americans. And unless something is done to tame both trends, the red ink will continue to flow.
Note: Links mentioned in this blog post will open new browser windows. Except where noted, Vanguard accepts no responsibility for content on third-party websites.
So what exactly are you saying? That we have a difficult problem (or two difficult problems)? Well, everybody already knows about them for a long time.
From an investors viewpoint it is futile to speculate and bemoan the woulda, coulda, oughtas of the healthcare/budget/deficit dilemma, akin to the Pathetic Fallacy in philosophy. What investors need from this portion of the financial community are high-probability options for making money, from the problems themselves as necessary.
I never blog here but I am disappointed in this post. You are willing to leave your health care options to policy wonks. Good for you just don’t include me. The only policy I know is the Government isn’t going to decide when my life isn’t worth saving.
The health care industry is a disaster. Doctors used to be their own bosses and were able to compensate themselves accordingly. Now they are reduced to being employees almost at the bottom of the hierarchy as health care is now controlled by Medicare and even more so by enormous insurance companies. The insurance companies and their executives now take the lion’s share of profits out of the system much to the chagrin and detriment of the doctors and their patients alike.
Thank you for the attempt at education. The Krugman piece and the Cartoon presentation were excellent. The comments I have read so far amount to opinions on what has been called “Obamacare” presuming, I suppose, that Social Security will surely be “fixed”. One thing I don’t hear mentioned very often is the fact that so many more lifesaving options are now available in health care (and none of them seem inexpensive). One thing I think should be obvious to us is that we all can’t try absolutely everything – and more so – to prolong life at taxpayer expense during the last year of life (which seems to be what is happening now).
Healthcare is indeed a 900 lb gorilla. We have a daughter living in Norway, a social democratic country with socialized medicine. In some ways it is better than in the US and in some ways it is worse, particularly in specialized medical healthcare and procedures. However, healthcare there is very expensive like it is here. Norway taxes the devil out of everything to pay for their “free” healthcare for citizens. There is no free lunch.
The big question here is what are individual Americans to do to prepare for the upcoming fiscal train wreck. Saving more is definitely an option provided you will be able to maintain the purchasing power of those savings given the possibilities of high inflation, confiscatory taxes on investment income and outright asset taxes on savings in retirement plans etc. If we have a hyperinflation chances are a lot of wealth that was stored in supposedly safe assets will turn out to be a mirage.
Given the realities of our politics can one predict a set of political / economic outcomes and plan accordingly? Suppose we become like Argentina – where can we safely store accumulated savings under those conditions? I don’t trust our economic policy makers – I don’t even trust the US electorate not to adopt economic policies that would hurt savers.
Nearly my whole experience with health care has been with with the military, wherein the practice of medicine is much different. In civilian life, if you have some ailment you WILL see the doctor. In the military you will be treated based on the seriousness of the ailment, maybe by a hospitalcorpsman, maybe by a nurse, maybe by a physician’s assistant, maybe by a nurse practitioner. The military is not governed by state laws, the purpose of which is to maintain the doctor monopoly on health care. So I have been shot and cut on and stitched up and treated and medicated and taped up—all by high school graduates. The lesson to me has been that the vast majority of ailments are perfectly perfectly treatable by the independent-duty hospitalcorpsman who sees sick people hour in and hour out year after year, and who has books and the internet at his/her right hand.