Ebenezer Scrooge lived a hard life. Abandoned at Christmas at his boarding school, Scrooge learned to live for himself.
This approach to life led to great financial success. But Scrooge was reviled and had no friends. And the future, well, the future was even darker.
We know all of this because one Christmas Eve Scrooge was visited by three specters. One his past, one his present and the last his future.
What scared him the most was his future. So, he asked the ghostly specter, was this future set in stone, or could it be changed?
Our nation’s future seems burdened by the rising costs of entitlements. Social Security, Medicare, and Medicaid will need to be funded by a shrinking base of workers.
So, we ask, is this future set in stone, or can it be changed? There are many policy wonks sounding the alarm on entitlements. There have also been some politicians.
I say “have been,” as in the past tense, because right now those politicians are running from their past words.
In his State of the Union address, President Biden said some Republicans wanted to cut Social Security and Medicare. This was immediately met with a shout of “liar” and various attempts to look shocked and disgusted.
This display suggests that Social Security seems to be the third rail of politics. And yet, with no change, the specters have shown us what the future looks like.
President Biden himself has suggested one change. Wage earners pay 6.2% of their incomes to social security and 1.45% to Medicare. Their employers do the same.
Self-employed people pay 12.4% and 2.9% of their earnings for the same cause. Both types of earners do not need to pay the 6.2% or 12.4% above an earnings limit.
The president has suggested eliminating the earnings limit. He crossed his heart and hoped to die if he raised taxes on those earnings less than $400,000, so this added tax would apply only when earnings exceed $400,000.
This creates a “donut hole.” The tax ends at a certain level of earnings, and then returns at $400,000. “Hole” earnings are exempt.
But this would still be a 6.2% or 12.4% tax increase for high earners. That may be a second third rail.
Others have suggested raising the eligibility age for Medicare, and the “full” retirement age for Social Security. After all, they say, people are living longer.
Turns out that recently, Americans have not been living longer. And the Medicare start age may be increasingly important given challenges to finding affordable health care.
But we must do something! One approach that gets surprisingly little attention outside of think tanks is bending the curve on health care costs.
Politicians like to tell us that the United States has the greatest health care system in the world. The truth is that it does not. Americans get lower quality heath care at higher costs than the rest of the developed world.
Projections of a bankrupt Medicare and Medicaid assume no change in the future growth of costs. Changing this assumption is a potential game changer.
There is something called the rule of 72. By dividing 72 by a growth rate, one can ballpark how long it takes for something to double in value.
If health care cost grows at 8% per year, it doubles in 9 years (72/9). That means quadruple in 18 years and growth to 16 times in 36 years.
At growth of 6% per year it will double in 12 years and grow by 8 times in 36 years. A growth of 4% will double in 18 years and quadruple in 36 years.
So if we project health care entitlement costs out 36 years, the growth in cost can range from four times current costs to 16 times just by changing the annual growth assumption from 4% to 8%.
What can America do to halve the annual increase in health care costs? The ability to answer this question may be the difference between a solvent Medicare and a Scroogian disaster.
The greatest beneficiary of Scrooge’s changed heart was not Scrooge himself, it was Tiny Tim. Perhaps some creative solutions to our future health care costs can save many more.
Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at firstname.lastname@example.org.