GECON200 Honors-Position Paper 2

The final three chapters of David Wessel’s “Red Ink: Inside the High Stakes Politics of the Federal Budget” examines the source of government revenue, as well as how it is spent. Furthermore, Wessel addresses a few possible plans that could help avert a potential long-run disaster, while directed towards a balanced or sustainable budget in the next 10-20 years. The big ticket items addressed by Wessel include Medicaid/Medicare, Social Security, and defense spending. In this position paper, I would like you to make the link between the discussion of health care and retirement spending and revenue in the last three chapters with Americans who do not currently directly benefit from these programs.

Health care spending now accounts for approximately 25% of the federal budget, and it is expected that this share will increase with the aging of the baby boomer generation. Not only will there be more retirees due to demographic changes, but health care costs have been on the rise in recent years as well. Proposals by Congressman Paul Ryan exist which aim to reverse the trend of rising government spending on health care. The ambitious plan by Congressman Paul Ryan proposes to replace Medicare with a voucher program and escalate means testing, repeal the Affordable Care Act, and turn Medicaid into a block grant program run strictly by states. While it stands little chance of becoming law as it is written, these proposed changes still only address government spending on health care, and not overall spending.

Wessel lays out part of the problem with health care spending for retirees, in showing that Medicare spent around $9 billion on just hip/knee/shoulder replacements in 2009 alone. Retirees receiving these procedures pay little of the cost beyond their monthly premiums. The opaqueness of health care pricing has become an increasingly difficult problem in recent years. A 2012 Angie’s List article details some of the opaqueness of pricing health care. A subsequent Time magazine article by Stephen Brill provided extensive detail on many of the issues determining how much a person is paying for health care.

So, even if health care costs for the government can be contained, no current proposal exists which would offer more transparency to health care pricing. With reduced government spending on health care, if health care prices continue to rise as they have an increasing portion of health care costs for retirees will be shifted to consumers.

Social Security is a very expensive program, but it exists because retirees had little or no savings when the program was implemented. “[N]early half of retirement age Americans sixty-five or older would be below the poverty line if not for Social Security, and a quarter of the elderly get 90 percent of their income from the program (Wessel loc. 857).” Believe it or not, retirement is a relatively new phenomenon in human history, beginning in the last 100 years or so. As recent as 100 years ago it made little sense to actually plan for your own retirement since you would probably work until you died, or would live with your family once you could no longer work. This means saving for retirement is not ‘engrained’ in our DNA. People have a surprisingly difficult time saving for their retirement as noted by economists Shlomo Benartzi and Richard Thaler. Even with schemes like contribution ‘matching’ by employers, few employees actually take the opportunity to get essentially free money. New schemes have been proposed by behavioral economists, with the goal of increasing retirement savings, however these schemes are often easily undone by deliberate decision making. Social Security will likely need further reforms in a few years, but there is not an impending crisis in the system. In a few years though, this will be a hot topic in election season.

Questions you might consider (you can also write about a topic of your own choosing)

  • What can we do about health care pricing? There is not a great deal of pricing clarity in these markets, for either privately insured or government covered individuals. Even proposals to control government costs don’t do much to slow cost growth for anyone. Is there any evidence that costs can be contained in the U.S. under current or proposed policy? If they cannot be contained, what can we do to make health care more affordable?
  • Discuss some economic reasons to provide health care at the federal or state level for the poor or elderly. Why can’t most senior citizens purchase health insurance on their own? Aside from affordability, why can’t many individuals purchase health insurance on their own if they are poor? Supposing you cannot afford health insurance, can you quantify the economic problems these individuals might face?
  • If Paul Ryan’s voucher system is put in place, what are some estimates of costs for future retirees under the plan? Would wealthy individuals expect to pay more under this plan? Or are they promised the same benefits everyone is promised today? What happens if costs cannot be contained? The government may be off the hook, but will the elderly and poor be expected to pay more? Is that acceptable? How does the Affordable Care Act (a.k.a. “Obamacare”) change that?
  • What proposals currently exist to get individuals to begin saving for their own retirement. Many students believe that Social Security won’t be there for them when they retire. However, these same students rarely have any plan of saving on their own for retirement or future health care costs. How much should you save for your future retirement if you want to maintain your ordinary lifestyle in your old age? Discuss some plans on how to increase savings by young individuals. How might this be affected by future proposed changes in the retirement system in the U.S.?
  • Consider plans to privatize Social Security. Do these plans promise to reduce the deficit in future years? Or are they simply a boon to the investment industry. Critics have claimed that the financial crisis would have been all the worse if general retirement savings were at stake. Are these critics right? Or would privatizing Social Security help younger workers plan for their retirement?

(Note, the “loc.” references are Kindle location references and not page numbers.)

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