Category Archives: Finance

Medicare Manifesto

Most if not all of the current Democratic presidential candidates have voiced support for “Medicare for All” or a similar public health insurance option.  Ten years ago, when the Affordable Care Act was being debated (and I had high-deductible private insurance), I too was on the bandwagon.  My main interests were the elimination of pre-existing conditions as a basis for denying or cancelling coverage and ending the use of medical underwriting to set individual premiums.  I also hoped that decisive steps would be taken to reduce the obscene sums of money charged by hospitals, specialists and drug makers.  A single-payer system a la Medicare was not axiomatic for me, provided the other aims were met.

I was half-pleased when the ACA became law.  As we all know, decisive cost-containment steps were not taken and, consequently, premiums for private health insurance were only affordable with a government subsidy.  Health care costs continued to rise at a rate of over 5% a year.  The Republicans in power were less interested in addressing these issues than urging the system to implode.  I waited it all out for several years, with my grandfathered high-deductible policy in hand, until I was finally old enough to enroll in Medicare.

Medicare is a great deal if you worked and paid Medicare taxes for 10 years.  My monthly premium (for Medicare Advantage with an out-of-pocket maximum) is about half of what I used to pay for my $10,000-deductible policy and probably one-sixth of what I would be paying for a sans-subsidy ACA policy.  Medicare is far more affordable, at least from the standpoint of the insured, than private pre-retirement health insurance.  And Medicare doesn’t care about your age or health status with respect to coverage and premiums.[1]

So why shouldn’t every U.S. citizen enjoy the benefits of Medicare?  That seems to be the mantra of the Democratic candidates, most of whom (exception: Bernie Sanders) sidestep the particulars of how to pay for it.[2]  Which is sort of an important detail.  Since most of the candidates are busy now, raising money and trying not to be old white men, I thought I would step in and shed some light on the math of Medicare in an easily digested way.

The Current Picture

And what could be more digestible than a delicious pie chart?  The chart below captures the essence of where Medicare funds come from and where they go as of 2017:

Let’s take a moment to review the current situation.  In round numbers, the total cost of Medicare in 2017 was $700 billion — $300 billion for hospital care (Part A), another $300 billion for doctors and outpatient care (Part B), and $100 billion for prescription drugs (Part D).  There were 59 million Medicare participants at year-end 2017, so the cost per enrollee was about $993 per month.

But my monthly premium is nowhere near $993 — I pay $189.10 to be exact, which covers just a fraction (the blue slice of the pie) of my expected doctor and pharmacy expenses.[3]  My hospital expenses are funded primarily by payroll taxes on current wage-earners (which I once paid) and by income taxes on Social Security benefits (which I now pay).  The balance of my expenses — 46% of the total — is paid from the general revenue of federal and state governments, with Uncle Sam picking up most of that tab.

In 2017, the U.S. budget deficit was $665 billion.  By my calculations, Medicare’s share of that was $59.8 billion (the deficit cannot be blamed on any one line item).  This means the Feds had to borrow $84 per month to fully cover my medical expenses.

Medicare for More

If we were to expand Medicare coverage, we would have to decide what kind of deal to offer to the newer, younger enrollees, as well as whether to maintain the status quo for existing participants.  Options include:

  • Full Ride — new enrollees pay the same premiums as older participants do
  • Pay-As-You-Go — new enrollees pick up the full cost of insuring their cohort
  • Pay-Plus — Pay-As-You-Go plus eliminate the annual Medicare deficit

Of course, there are many possible variations of the above, but it will be instructive enough to look at these few.

To make the analysis (as well as the politics) simpler, I propose that Medicare coverage be expanded to one age group at a time.  I would start with the 55-64 age cohort, and then a few years later extend it to the 45-54 cohort.  This would give us some experience before taking the much bigger leap of offering Medicare to all citizens.[4]

I use the word offer because younger people should be able to defer enrolling in Medicare until they reach 65 (as the law now provides).  Newly-minted 55-year-olds would be given a six-month window to decide whether to enroll now or wait another ten years.

So, my facts and figures below pertain to Phase I of Medicare for More, where benefits are extended to the 55-64 cohort.[5]  In 2017, 42 million Americans belonged to this group, and their per capita health care spending (not including dental) was roughly 65 percent of what current participants spent.  Merging these cohorts into one (the Full Ride option) would mean $1,030 billion in benefits would be paid out on behalf of 101 million enrollees, a total monthly cost of $848 per enrollee.  If monthly premiums for Parts B and D were to remain at their current level (14% of total program cost), every participant would pay $119 a month, lower than today’s premium.  Hey look, manna from heaven!

However, without an accompanying payroll and/or income tax hike, the general revenue burden would climb from $324 billion to $604 billion a year.  And the amount the Feds would have to borrow to cover Medicare’s share of the deficit would rise from $84 to $121 per enrollee per month.  That’s the math of the Full Ride.

We might instead offer early enrollees a Pay-As-You-Go plan, in which the 55-64 cohort would pay all the Part A, Part B and Part D costs incurred by its age group (an estimated $325 billion in 2017).  Taxes would not rise, deficits would not fall, and premiums for traditional Medicare would remain the same.  However, the average monthly premium for early enrollees would be much higher — $645.  It would only revert to the lower amount when the enrollee reaches 65.

$645 a month sounds like a lot (and it is).  But it is $50 less than the average premium for non-subsidized ACA plans purchased by eHealth shoppers in that age group.  Now, those ACA plans may have offered better coverage, but I’m sure many people would have opted for a lower-premium Medicare plan.  So Pay-As-You-Go is not an unreasonable option.

What if the politics of the situation demand a fix to original Medicare as well?  This brings us to the Pay-Plus option, where the early enrollees pay-as-you-go and all enrollees pay a $49 premium surcharge to offset Medicare-related deficit spending.  With this surcharge, most 65-plus participants would pay $184 per month (a 36% increase) and 55-64 enrollees would pay $694, erasing any advantage of Medicare for More over ACA.  So the Pay-Plus option would have limited appeal to new enrollees — and current participants would howl at the premium hike.  Unless, that is, some rich people helped pay for it.

Because That’s Where the Money Is

One progressive cause that is gaining traction is reducing U.S. wealth inequality.  In 2017, 40% of the nation’s wealth was owned by the top one-percent, and the figure keeps rising.  Elizabeth Warren is among those who suggest an annual tax on idle wealth.  I’m not much in favor of that, as it would likely lead the rich to hide their wealth using complex financial instruments and/or move it offshore.

But there are other ways to reach into their silk-lined pockets.  One, which I wrote about over seven years ago (Making Wall Street Pay), involves increasing the SEC fee on stock and bond transactions.  The actual dollar volume of U.S. stock trading is hard to pin down (NYSE considers it proprietary information) but my best estimate is that the value of NYSE and NASDAQ trades is $500 billion a day.  Levying a fee of 1/100th of one percent on the dollar value of U.S. stock transactions would generate about $12.6 billion per year.  Most of this cost would be borne by hedge funds and heavy traders.

Many companies used the windfall from the Trump corporate tax cut to buy back shares of their own stock instead of building their businesses or paying workers more.  Over the past decade, the dollar value of big-company stock buybacks has averaged $450 billion a year.  We could raise $4.5 billion for Medicare with a 1% federal sales tax on stock repurchases. What to name it?  The One-Percenters Tax, naturally.

While we are at it, let’s restore some sanity to the corporate income tax.  In 2018, the U.S. collected only $205 billion in corporate income tax, down from an average of $307 billion a year over the previous five years.  A 10% corporate tax surcharge would bring in another $20.5 billion — and perhaps quell some of their enthusiasm for stock buybacks.

Yet another source of big money is Big Pharma.  In 2017, drug makers spent $6.1 billion on consumer advertising and reaped $453 billion in sales.  You don’t need to ask your doctor whether their profit margins were healthy, because they are — from 15 to 45%.  A non-deductible, 100% sales tax on television/radio/social-media ad sales for prescription drugs would net at least $3 billion — and even more if drug makers don’t cut their ad budgets.

One last idea for funding Medicare for More is a reasonable and broadly-based estate tax.  Under current law, the only portion of an estate subject to tax is the amount in excess of $11.4 million, so fewer than 2,000 estates a year pay any tax.  Today, a $15 million estate would pay 40% of $3.6 million = $1.44 million, for an effective tax rate of only 9.6%. 

A fairer estate tax would be based not on total value but unrealized (hence untaxed) gains and untaxed IRA balances, and would apply to all estates valued $3.75 million or more.[6]  According to the Center on Budget and Policy Priorities, “Unrealized capital gains account for a significant proportion of the assets held by large estates — ranging from 32 percent for estates worth $5-10 million to as much as about 55 percent for estates worth more than $100 million.”  The tax would also apply to dynasty trusts and other stratagems used by rich people to pass along their wealth tax-free.  (Check out the link — I find it disgusting.)

Today’s estate tax nets about $15 billion a year.  I estimate that my version would raise at least $23 billion without closing loopholes and probably $10 billion more if it does.

All told, my proposals would haul away about $59 billion a year from the golden vaults of the wealthy and hand it over to Medicare — who in turn would complete the ironical circle by giving it back to hospitals, doctors, device makers and drug companies, on your behalf.  Meanwhile, that $59 billion would pay off Medicare’s share of the federal deficit, and so that pesky $49 premium surcharge in the Pay-Plus Plan would vanish!

So the next time someone says to you, “Surely our nation can’t afford Medicare for More!” you will have an answer: “Yes we can.”  (Then you can add, “And don’t call me Shirley.”)  Feel free to send this article to your congressperson and favorite presidential candidates, so that they will have an answer too.

Now it would be even better if Congress found the backbone to take on Big Pharma and groups like AMA, AHA and Americans for Prosperity (the anti-Medicaid lobby funded by the Koch Brothers) and took action to significantly cut health care costs.  But this, I fear, will take more than one election cycle — and one obscure blog post — to accomplish.

_______________________

[1] Medicare does care somewhat about how much money you make: about 6% of enrollees pay an income-based premium surcharge, according to the Kaiser Family Foundation.

[2] According to feelthebern.org, Sanders would impose a healthcare income tax (whatever that means), an employer payroll tax, a surcharge on high-income individuals and a tax on securities transactions.

[3] My Part B premium is only $135.50 but I elected to pay extra for a lower drug deductible and copays this year.

[4] Sen. Sherrod Brown of Ohio is among those who oppose Medicare for All but support offering it to those 55-64.

[5] Before I delve into the numbers, allow me to say that I see no problem with Blue Cross/Blue Shield and other private insurers participating in Medicare as they do today, via Advantage and Supplement Plans, as long as the public option (i.e., regular Medicare) remains available in its current form.

[6] The $3.75 million threshold would mean 27% of the largest estates would be subject to tax.  I would allow the value of the deceased’s principal residence to be excluded from the estate tax calculations.  Unless that residence happens to be a tower in Midtown Manhattan.

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The Trend, Again

I have written two posts about long-term trends in the U.S. stock market, as represented by the S&P 500 price index.  My first post, The Trend, showed how the index swings above and below its long-term trend but eventually returns to the trendline.  My second post, The Trend Revisited, introduced the sidebar widget I created for the blog which compares the current index to the value predicted by The Trend.

My third post on this subject tries to address a point that always bothered me: why offer information about stock market trends (or any topic for that matter) unless it allows one to act on it?  I hope the following analysis makes a contribution toward that end.

My goal is to show whether the amount that the current price is above-or-bel0w-trend says something useful about the return one may expect over the next twelve months and the chance that this return is positive.  This is the type of information one might act on.

To get started, I downloaded a list of the monthly closing prices of the S&P 500 index from January 1950 to November 2017.  Next, I calculated the amount that each price was above or below the trend and used that to sort the prices into buckets: 50% to 30% below trend, 30% to 10% below trend, 10% below to 10% above, and so on.  Finally, for each of the month-end prices, I wrote down how much the price had increased (or decreased) twelve months later.

I present this data in the chart below.  Each horizontal bar represents the one-year return for a specific month in the timeframe, using blue bars for positive returns and red bars for negative returns.  For example, the lowest red bar at bottom right represents the change (-28.8%) in the S&P 500 index from September 30, 2000 (when the monthly closing price was 99.4% above trend) to September, 30, 2001.

You will notice a weak (but noisy) correlation between the amount that the current price is above or below trend and the one-year-later price change.  Roughly speaking, the expected one-year-later return decreases by 1% for every 7.25% that the current price is above trend.

Because there were relatively few data points in the uppermost trend buckets, I combined the four highest buckets for this analysis.  Here are the results of interest, in tabular form:

Above/Below Trend Range n Average One-Year Return (%) Std Dev One-Year Return (%) Chance of Positive Return
-50% to -30% 106 15.0 15.0 84%
-30% to -10% 164 13.8 14.1 84%
-10% to +10% 227  7.9 14.8 70%
+10% to +30% 167  7.5 16.1 68%
+30% and up 139  1.0 15.2 53%

First take note of the one-year returns.  The average one-year-later return is pretty decent, as long as the current price is less than 30% above trend.  If the current price is more than 30% above trend, one’s expected one-year return is close to zero.

But also take note of the standard deviation (uncertainty) of the one-year-later returns.  The uncertainty in the return, in every trend range, is about 15 percent.  This means that, about two-thirds of the time, the actual return will be somewhere from 15 percent less to 15 percent more than the average return.  This is a large uncertainty for a one-year return: 15 percent represents about two years’ worth of typical returns.

This brings me to the last column, Chance of Positive Return.*  As these figures show, one has an 84% chance of making money a year later if the current price is 10% or more below the trend.  This offers the best opportunity.  If the current price is 10% below to 30% above the trend, one still has a 68% chance of making money a year later.  But if the current price is 30% or more above trend, the chance of coming out ahead one year later is only 50-50.

[This sentence exists for the sole purpose of allowing your mind to absorb these figures.]

As I said earlier, information is useless if one cannot take action by knowing it.  The action one might take based on the amount the S&P 500 index is above (or below) trend would be to sell (or buy) stocks.  Based on this analysis, I suggest that one consider selling stocks if the current price is 30% greater than that predicted by the trend, because one’s chance of coming out ahead a year later is no better than 50-50.

In all other cases, I would suggest holding onto your investments if you can weather the possibility of a negative return.  (If you cannot weather that possibility, you should not be investing in the stock market or mutual funds in the first place.)

One last item.  You may ask, why did I focus on one-year returns as opposed to some other time period, such as six months or three years?  It is because once-a-year is about the right frequency for most people to review their savings and investments and make adjustments.  The Trend is only one factor (and a minor one at that) to take into account when reviewing your investments.  As the table suggests, The Trend is mostly useful for detecting bubbles and avoiding their collapse.

Today, as I publish this article, the S&P 500 index is about 10% above trend.  My analysis suggests this is nothing to get excited about.  There is a roughly two-thirds chance that the price one year from now will be somewhere between 7.8% lower and 23.2% higher, with an expected increase of about 7.7% and a 69% chance of making money.

Here is hoping that you will now find The Trend useful, at last.

________________

* To estimate the chance that the one-year return would be positive (for a given range), I first found the mean and the standard deviation of the return data for that range.  Then, using the assumption that the one-year return data would be normally distributed, I calculated the Z-score for the zero-return point and then the fraction of the normal distribution that falls above this Z-score.  That fraction of the distribution represents the chance that the one-year return is positive.

 

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Social Insecurity

Should one plan for what one hopes for or plan for what one fears?

I have reached retirement age.  This is my year to mull over the “right” time (if there is one) to sign up for the Social Security benefits I accrued (and paid for with my taxes, if I may remind Mr. Trump and Mr. Ryan) during my working lifetime.

If I were destined to enjoy a shorter-than-average lifespan or a debilitating old age, then it would make sense to start my Social Security payback right now, while I have the capacity to enjoy the income.  On the other hand, if it were my destiny to live to a ripe age without much health drama, then delaying the payback of my Social Security benefits would make my later years and old-age care more secure.

So, should I take the money now or later?  You will find plenty of advice on this topic from self-described financial experts on the internet, but here is my take.

I glance out my living room window, at 6:02 pm on an early fall evening, and I see a vista of pale blues and peach clouds and it is amazing.  I just want to keep looking.  I hope to look out there, at these colors, from this room, with my spouse, for a long time.

This is the message our skies send me:  I am lucky that I have a choice to make.  In the game of life, I already won the toss.  I am fortunate that I can even think about deferring my payback to the second half of my life rather than electing to receive.  Mine is one of those first-world decisions that is about optimization, not survival.  I am not dealing with social insecurity — for that, I thank my lucky stars in those peach-and-blue skies.

In the grand scheme, my now-or-later choice matters only at the margins of probability.  Many people have much larger stakes in this decision and I am unqualified to advise them. To serve their needs, I would like to see financial professionals stop chasing after me and instead offer Social Security advice to soon-to-be retirees for free, no strings attached, no names taken, no promotional lunches or dinners involved.  Why should those who are most in need of financial guidance be the least likely to be offered it?

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