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Why Are/Aren't Social Security and Medicare Worthwhile Programs?

Posted: 09/05/2012 9:06 pm

This question originally appeared on Quora.
2012-09-06-imccullough1.jpeg
By Ian McCullough, Consultant for Consumer-Facing Startups, Armchair Policy Wonk, and Quora User Since November 2010

Having social safety nets to deal with both retirement benefits and health care for seniors are worthwhile. In considering the matter, we all have to ask a few deep questions of ourselves:

  • At what point do we begin to care about the welfare of other members of society and at what point do we stop? At what ages? At what income levels? Where does "its their problem" end and "its our problem" begin (and perhaps where does "its their problem" begin again)?
  • Taking that a step further, how do we draw the boundaries of "our society" in a way that we can actually manage to effect positive changes? (With that in mind, is the use of "we' in these first two bullets presumptuous?)
  • What should the American family experience look like? Multi-generational institutions, or launchpads for independent individuals?
  • Do we want and expect rising standards of living for all across our society?

If every person (or every family) in the country had to cover the cost of retirement and senior health care on their own, it would likely quickly choke the economy across the board ... or take us back to the sorts of conditions for seniors we saw in the 1930s that led to the creation of Social Security in the first place. These are issues worth addressing collectively, and although I'd prefer it weren't the case, they seem to be most practically addressed at the Federal level.

As for senior health care: there needs to be strong support here paired with some serious discussion about how we deal with death & dying, since we keep getting better and better about prolonging life. Medicare "as we know it" shifts costs and makes health care across the board more unsustainable. Care for seniors should be rolled into additional steps to make health care in America more affordable.
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I'm going to step back a bit and try to address the "worthwhile" aspect of the question from a broader perspective of both social and economic value. I want to see if I can construct the basic rationale from scratch. Many folks are probably already here on a bunch of these points, but I'd like to talk all of it through just to make sure. I kind of know where I'd like to end up on this ... but don't really know how I'm going to get there as I start this out.

As such, I'm going to have a bit of a dialogue with myself. That way, y'all can follow along and challenge me at the various steps along the way.

What do these programs ultimately aim to do? These are government-run programs that give old people - currently defined by law as age sixty five and over - money to live on with some degree of dignity and affordable (cheap?) access to health care.

What are some of the alternatives to having government-run (at some level) programs like these to do that? What if they didn't exist?
  1. We could expect people to plan ahead and provide for their own retirements and the health care costs associated with advancing age (which almost always rise as most people do what they can to prolong their lives as much as possible).
  2. We could expect adult children to provide for their parents and have families absorb those costs.
  3. We could rely on charitable institutions, foundations, and individuals to provide care for those (seniors/families with seniors) who can't afford it.
  4. Failing any/all of those, we can collectively wash our hands and take the position as a society that if you can't provide for yourself, then we all have to die sometime, right?

Let's pick off that last point (#4) first: does everyone have an inherent right to have their individual lives extended as long as possible and have the rest of society pay for it?

.....!#&^%.

That right there, I think, is the multi-trillion dollar question underpinning the whole discussion.

In trying to address that, I have to ask myself the question: if I lost everything, what would I want for myself? On the Social Security retirement benefits side: I'd prefer not wind up old, homeless, and starving to death because I can't afford food. On the Medicare side: since I have an advance directive in place, I know that ideally what I would want for myself is for medical practitioners to extend my life as much as possible until they came to the conclusion that I was highly unlikely to regain cognitive function. Perpetually comatose and hooked up to machines is not my brand of being alive ... but up until that point, I'd want them to do everything they could. (I'd rather not think about the costs and mechanics when it's my life on the line.)

Flipping the consideration, what would I want for other people? Moreover, what would I personally be willing to do for them?

Well ... uh ... that's different. How well do I know these other people? Are we talking about my mom and dad? Or are we talking about some random guy who lives in Vermont? I mean, before we get into a heady discussion about the value of human life, let's talk through the costs and mechanics, okay?

In doing unto others what I would have done unto me, my position is that we shouldn't support things indefinitely until full clinical death - but we should do everything we can. In doing unto myself as I would do unto others, I have to be honest that the place where I draw the rather abstract "everything we can" line seems to move towards more concrete boundaries the less emotionally invested I am in the person in question. I can respect that people who have never met me would have limits to their willingness to sacrifice for my benefit. So we ought to do something for everyone ... but not everything for everyone.

Fine. That being the case, let's move up that original bullet list to #3. Is there a chance that we can reasonably achieve that "something but not everything for everyone" strictly through charitable means and purely voluntary giving?

I'm a pretty nice guy; I donate to a bunch of different charitable causes each year. Based on my sense of the way things are, I'd be willing to voluntarily chip in a few hundred dollars to cover a general fund for those who need it if Social Security & Medicare didn't exist. It's a bit hard for me to picture since they do indeed exist ... but gut reaction is as good a place to start the conversation as any.

My brain, however, is way out ahead of my gut. I already know that FICA taxes are 7.65% of gross earnings from full-time employees, plus another 7.65% in payroll taxes to the employer for a total of 15.3% of gross earnings for full-time employees. (http://www.ssa.gov...ates.html). 12.4% goes to Social Security Disability and Retirement benefits and 2.9% goes to Medicare Hospital Insurance. According to the census bureau, median household income at the end of 2009 was $49,777 (http://www.census.gov/.../12s0690.pdf). The average American household is contributing and having contributed on their behalf $7615.88 into the system to support Social Security and Medicare. Maximum taxable earnings for FICA in 2012 are $110,100, meaning that top income earners are all contributing and having contributed on their behalf $16,845.30.

My gut's willingness to contribute to this particular issue is an order of magnitude off for average income earners and two orders of magnitude off for everyone who earns over $110K per year. (And that's the contribution side for programs that most everyone agrees currently have unsustainable expense trends.)

Let's now factor in some available statistics on household charitable giving.

According to the IRS, in 2009 37,243,302 households itemized $158,016,526,000 in contribution deductions (both cash and non-cash) for a household mean of $4,240. (See Table 1 at http://www.irs.gov/ta...4,00.html) Since these are mean values, though, large donors seriously skew the number upward. You can check the supporting data yourself. Mean contribution for households earning up to $75K drops to $2,300. Looking at what I believe are median cash-only values, the survey work of Syracuse University professor Arthur C. Brooks in his 2007 book Who Really Cares, the average liberal leaning households gives $1,127 to charity annually and the average conservative leaning household gives $1,600 annually.

(Let's pause for a moment to take that tangent. You can buy the book on Amazon at http://www.amazon.com/Who-Reall...p;keywords=who+really+cares. You can also do what I did and read the summary columns written by George F. Will http://www.realcle...iberal_giv.html and Nicholas Kristof http://www.nytimes.com/...ristof.html?hp. To my fellow left-leaning types, we need to acknowledge that - as a group - the criticism that we can be rather cavalier about spending other people's money does have merit. One can more effectively make the case for collective responsibility on issues of concern when you take active personal responsibility for them too. Back on point now.)

Although there's a potential argument to be made that if the money that was currently directed to FICA taxes were released back to households (and employers currently paying payroll taxes) that charitable giving might rise ... but general consumer spending patterns and history do not support that. Any one individual usually only has a real sense of the scope of their own issues. It's much harder to see the issues across a society, so it's highly unlikely that charitable giving would rise high enough to support the combined social need, and there is no historical evidence to indicate that it would either.

Also, my attention has been called to the work of Remote Area Medical. This is much more focused on our wider health care crisis, but it illuminates the demands that are already placed on charitable efforts:

Now just imagine the number of seniors that would be in that video if there was no program that made health care accessible to seniors, as Medicare currently does.

What about these peoples' families, then? (This moves us up the list to #2.) Why can't they provide care for the parents who gave care to them?
The number of multi-generational households is already increasing in America. (http://www.pewsocialtrends.org/20...ily-household/, http://www.pewsocialtrends.org/201...-with-relatives/, http://assets.aarp.o...sing.pdf) Some of this appears to be seniors moving in with younger generations, but a very notable trend has been adult children who are unable to find employment moving back in with their more economically secure parents. We have, then, aging Baby Boomers who have adult children moving back in with them because they aren't making enough to live independently. That does not bode well for the younger generation's general ability to provide for their parents' retirements in the absence of external support.

For the sake of argument, though, let's assume a multi-generational household with employed adults (in their 30's - 40's) who have a child themselves, and seniors that move in as grandparents.

Let's start with the prospect of eliminating Social Security retirement benefits.

OK. That means that people would be paying less taxes which means more money from wages and salaries in their pockets.

I actually seriously doubt that.

Most people in the United States earn their incomes through "full time employment" and have their taxes withheld from paychecks. The market for salaries and wages is therefore tuned to net pay, not gross pay. That is compounded by the fact that almost all of those people are even blinder to the FICA contribution that their employers pay on their behalf on top of their salaries. Employers are not going to suddenly hand that money over. For the 2011-2012 Payroll Tax holidays (originally passed under http://thomas.l....4853:), it's not as if employers temporarily raised employees' salaries.

I have to pause for a moment of candor and honesty: I want to see the Payroll Tax done away with. It accomplishes nothing anymore, and I'm pretty sure it never actually did except for making unionized workers feel like industrial employers were sharing the tax burden. If someone has a more informed explanation and rationale, please educate me - but these days, it's invisible to the vast majority of taxpayers and further complicates the principal-agent problems that are endemic to withheld taxes. I'd like to see a bill in Congress that immediately gives every W2 employee in the US a 9.032% pay raise, simultaneously shifts the full 15.3% FICA burden to the employee's paycheck, and proportionally shifts down all of the income tax brackets. The intent would be to result in the exact same take home pay for the employee at the time the bill takes effect, but to make all of the taxes related to employment visible. To employers, their cost per employee stays the same ... or actually goes down a bit since you lift the administrative burden of payroll tax processing. To be really honest, I'd ideally like to do away with tax withholding altogether and shift to direct payment of income taxes for everyone - not just those of us who report our income on Tax form 1099. I acknowledge that might create collection and enforcement headaches, but I think those headaches would be worth it. Having been self-employed for three years now, having to take responsibility for my own taxes has completely shifted my perspective on the topic, and given me the interest to write obscenely long answers like this. However, I digress again.

Coming back to my hypothetical multi-generational household, let's even pretend that I got my way and that full FICA taxes are shifted to individuals ... and then the programs go away so that all of the previously withheld taxes now truly are in individual families' pockets.

If the seniors have a decent stream of income from their own savings or investments or a pension, then that can help every member of the family save some money. If they have a paltry stream of income or no income, then they become a net expense to the household finances, and start draining income that would otherwise could go to other spending and drive expanding economic activity. That is money the families could be spending on buying a home instead of renting, taking a vacation - heck, even supporting their local economy by going out to dinner. Those expenditures in turn move through the economy making it incrementally more possible for everyone to do more stuff across the board.

Hold on there, tiger - those living costs don't mysteriously go away because the seniors aren't living with younger generations. In fact, the overall costs if you look across the whole family go up since you have to support multiple homes - but the expenses are spread amongst a broader pool of tax contributions than just the resources of the one family. Explain to me: why I should have to pay for your aging parents' living expenses?

There are two reasons, and if any one part of this extended answer draws scrutiny and criticism, I'm betting this one will be it. (1) This is one of those points where the proverbial rubber meets the road as policy intersects our shared societal values and (2) it's in everyone's economic self-interest.

If we think that everyone in our society should, in aggregate, enjoy rising standards of living - which has been a stated objective for both conservative and liberal economic policies in the U.S. - then we have to account for people who are past their productive working years. Before you suggest that they get a job to contribute to the house, remember that not being able to work as much is the big thing leads people to retire in the first place. Whether the age of sixty five is still the right standard age to mark the end of productive working years is a different question that ultimately falls to the policymakers we elect.

This benefits the wealthy as well, since economies only expand and standards of living only rise when money is moving - not when it is sitting still. "Currency" shares the same root (currere = "to run") as current. Think water or electricity. When cash starts building up only in isolated large ponds and isn't flowing like streams and rivers, it becomes stagnant and it hurts everyone. That's why people storing money under the mattresses is a bad thing. In order to build wealth anywhere, money needs to be moving - be that in the form of investments in companies that allow them to generate revenue, or interest bearing deposits in banks that are used to make loans, or through somebody simply transacting cash for a good or service with another person. Moving money both across generations and across income brackets so that seniors who don't have other resources can spend ultimately builds wealth everywhere.

You may be asking, what about ridiculously rich people who never leave their vast estates? For those who are so phenomenally wealthy that they can't even fathom the idea that they or someone they know could wind up impoverished, there's not a whole lot I can do. Some people also draw the boundaries of what they consider their society very narrowly and couldn't be bothered to even consider the situation of anyone else; to those I ask, if they flat out refuse to consider the rest of us a part of their society in any way shape or form, why would we allowing them to present themselves as part of ours? I have no problem with material comforts, competition, or capitalism - in fact, from my cozy Bay Area suburb, I rather enjoy the benefits! Figuring out the way we all interact with one another and how we allocate resources is a serious topic, but there does come a point where we each have to make a choice: am I in or am I out? The assumption I have to work off of is that everyone is committed to raising living standards across society; although there is major disagreement about issues like wealth inequality, most point to lifting living standards as the stated goal of both liberal and conservative economics.

Can't those multi-generational households just get married younger and have more kids to create more economic contributors for the household?

Oh boy. We'll set aside that accelerating population growth paired with technological increases in productivity would create economic and consequently social challenges of their own. Here we hit on another huge point that lies hidden underneath a lot of our big social discussions in this country: what is the role of families in American life and society?

Although there are many ways to answer this question, I'm going to suggest two:
  • A family is an enduring institution that lasts over time and across generations. The individual family members are all a part of something greater than themselves.
  • Family is a cycle where parents launch their children to independent (although still connected) lives and pursuit of their own individual aims. Those individual aims may include having children of their own and restarting the cycle yet again.

Each family is different; each family needs to answer this question for themselves; each family member needs to answer this question for her/himself. My family experience has been much more the latter than the former, so that is what informs my personal perspective. To the extent that our laws are a reflection of our society, we as Americans generally place a lot of weight on individual freedom and personal liberty. If our society shifts so that economic imperatives begins forcing young people into parenthood, I view that as a huge step back in time and a set-back to our expanding ability for self-determination.

You're really going to talk about how shared society is important in one breath and then in the very next breath praise self-determination?

They're not mutually exclusive; in fact, I hold them as interdependent issues - like yin and yang. If one isn't healthy, than neither is the other. I think that the grand effort is striking the right balance so that both can thrive.

Let's talk more about self-determination and choice then. Choices have consequences, right? Why shouldn't people be expected to plan ahead and provide for their own retirement? (Moving up that first list to item #1)

They should, but...

You're about to say that people can't be trusted to manage their own finances so the government ought to do it for them, aren't you?

Yes ... yes, I am saying that. But only to a limited extent.

Life is full of surprises - some wonderful, some shattering. Family businesses fail due to changing conditions. People lose jobs and can't find work. People get in over their heads with personal debt and go bankrupt. People invest their money with abject and absolutely unquestionable crooks (See Enron, Bernie Madoff) who take off with everything. They use investment managers who are so rife with conflicts of interest that they're openly not looking out for their clients (see Goldman Sachs) or have so much faith in their ability to defy risk that they make staggeringly poor decisions (see Lehman Brothers and - hell - the whole 2008 Financial Crisis) or who are staffed with people that are solely focused and incented on quarterly and annual profits and performance and who won't have to personally answer for the fallout when it comes time for their clients to retire. All it takes is one major medical crisis for an uninsured or underinsured individual (and there are still and will continue to be millions out there despite the ACA) to completely destroy a life's savings.

I have already said - paragraphs and paragraphs ago - that I think "we ought to do something for everyone ... but not everything for everyone." I believe there should be a social safety net, and I believe I explained my rationale for it. Our highly mobile society - where people might live in many states over their lifetime - means that it's impractical to try to address this at the local or state level since so many people are on the move. The safety net has to exist (or at least be mandated) at the Federal level.

Once you set up a safety net, though, some set of people will inevitably wind up having to use it ... and some (hopefully smaller) percentage of people will come to the conclusion that their best option is to just sit in the net. This is the sort of serious challenge where there will never be a 100% solution, but there is no virtue in keeping an imperfect system from supporting people because there are some out there who will exploit it.

Otherwise, we wind up right back where we began: having to ask ourselves if we should just collectively wash our hands and take the position as a society that if you can't provide for yourself, then we all have to die sometime, right?

Speaking of dying, most of what we just went through was focused on Social Security retirement benefits. What about health care? What about Medicare?

We need to be clear about something here: affordable health care for seniors is the challenge - and it's a worthwhile challenge (or else everything I just wrote about retirement benefits become a moot point really quickly). Medicare is the current solution to that particular challenge. The problem with that solution is that it's a serious chunk of the much larger program of health care for everyone, and the current approach is not working in a way comeasurate with the resources that we as a society are willing to put towards the challenge.

Source: Medicare Payment Advisory Commission June 2012 Data Book: http://www.medpac.gov/...ntireReport.pdf

Medicare operates because the government makes it operate. Unlike Social Security retirement benefits, which moves cash resources, Medicare provides reimbursements to service providers - but because of its massive scale, it forces providers to accept reimbursements at significantly below market rate. This means that they have to raise the price on services to everyone else to make up the difference. We also have to account the fact that 39.7% of Americans over sixty years old are obese (as of 2010, reported by the CDC in a January 2012 data sheet: http://www.cdc.gov/...b82.pdf) meaning that this population is subject to more chronic and more expensive-to-treat health conditions ... for services that aren't being priced properly. Further, there's the issue that this program that accounts for 23% of US health services does reimbursements on a fee-for-service basis, which creates incentives for unnecessary services by the doctors who are taking below-rate reimbursements. Medicare payments are also used as the stick to enforce compliance with the Emergency Medical Treatment and Active Labor Act, which requires hospitals to provide care to anyone needing emergency treatment regardless of citizenship, legal status, or ability to pay. That act doesn't provide for any reimbursement on its own, but does withhold both Medicare and Medicaid funds from any hospitals that don't comply with the act.

We must also deal with the fact that in the end, it is true: we all have to die sometime. According to the Dartmouth Atlas of Healthcare
Patients with chronic illness in their last two years of life account for about 32% of total Medicare spending, with much of it going toward physician and hospital fees (Medicare Part A and Part B) associated with repeated hospitalizations.
http://www.dartmouthatlas.org/data/topic/topic.aspx?cat=1

The United States is not even close to done with addressing health care needs for the population, and care for seniors needs to be a part of that conversation, but it has to be a complete conversation, and me to go further into it here will just make this already lengthy answer even longer.

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