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August 2, 2013

And Forgive Us Our Debts, Part 2

Summary:

This is part 2 of a 2-part series on the national debt and social insurance (including health care financing). The series was first written twenty years ago, but its principles are still valid today.

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Dear Jackson:

In my last letter, I wrote of the economic child abuse your generation has suffered at the hands of your elders. I said that the country you will inherit is in actuarial ruins from damage by “termites,” which is my term for politicians who buy votes by mortgaging your future. Yes, I painted a dark picture for you who will eventually pay more than a quarter of your lifetime earnings to retire the $25 trillion real national debt that you inherited, in addition to the toll the government will extract to finance its current operations. I then proceeded to revisit the assumptions underlying my projections — and lo and behold, found them to be too rosy!

I’ve now had two months to ponder those projections in my first letter and have found that I omitted much that describes this precarious future of yours. I spoke of government, where so much of the termite damage occurs, but what of the productive sector itself? Only now are future retiree health care benefits recognized as a matter for actuarial concern — the previously unrecognized costs may well add up to a major fraction of a trillion dollars. General Motors recently announced an $11 billion shortage in its pension fund — is that the exception, or the rule? Fiscal irresponsibility may be the hallmark of our government, but public servants certainly don’t have a monopoly on that dubious commodity.

Even good news can have a leaden lining when it comes to actuarial projections. For example, consider lovastatin, the cholesterol-lowering drug that has been available, for several dollars per day, for the past few years. Statistically speaking, that drug alone will keep me and many others like me alive to consume a couple more years of retirement benefits. Given universal access to such drugs — and what else is fair? — you will have millions of years of additional retirement benefits to add to Exhibits A and B. (One perverse advantage of government’s increased involvement in health care practices will surely be that the pace of medical advances, such as lovastatin, will slow considerably.) So, your life may be long, but it won’t be easy.

Exhibit A
The Real National Debt
Public Debt Component $ Trillions
Social Insurance Programs
  • Medical insurance
8
  • Hospital insurance
4
  • Old age, survivors, disability
1
Total 13
Acknowledged Government Debt
  • Federal
3
  • State and local
1
Total 4
Other Government Debt
  • Off-book programs
3
  • 1990s increment
5
Total 8
The Real National Debt in 1990 25
Exhibit B
The Average American’s Share
Your Financial Plan Amount
Your Share of the Public Debt
  • Total public debt
$25,000,000,000,000
  • U.S. population
250,000,000
  • Your pro-rata share
$100,000
Your Annual Budget
  • Government debt payment
$6,000
  • Federal Tax
5,000
  • State and local taxes
3,000
  • Social insurance contributions
2,000
  • Poverty-level necessities
7,000
  • Discretionary spending and saving
2,000

I do foresee nothing less than the collapse of the country due to runaway greed, and lust for power, in the guise of compassion. Is there no hope? There may be, if restoration begins promptly. One good sign is that government is showing signs of realizing the scope of the problem, and of recognizing that health care costs play a major role. Unfortunately, there’s no evidence that the government recognizes that the infectious agent that has stricken our health care financing system is government itself. Worse, this misdiagnosis may prove fatal, for the proposed therapy is a shot in the arm of snake oil mixed with more of the bacteria that caused the disease in the first place. The media have pointed with alarm to the increasing proportion of the gross national product that goes to pay health care costs. Seldom do they point out that this is due in part to factors such as the aging of the population and increasing levels of demand for the most sophisticated forms of medicine. Never do they point out that it is due in larger part to costs associated with government involvement with the system, such as compliance with regulations and the removal of buying power from actual consumers to government and employers. Hope may be found in the oxymoronic concept of “managed competition,” but only if the emphasis is on the noun rather than the adjective. Restoring the dual role of consumer and buyer of medical services to the individual, with or without employer and government subsidies, has the potential to slash the Exhibit A real debt by trillions of dollars.

There may also be reason for hope in the assumed economic turnaround in the new millennium that (I hope, for your sake) may be dramatic and even breathtaking. But rather than belabor the actuarial mess we’re in, let’s move on to practicalities. To do so, we should ask Lenin’s question, “What is to be done?” and then look to the future to construct the shape of your life.

Well, 20 years have passed, Jackson, and you are now a man. I’m still writing this in the twentieth century, but joining you this way in the twenty-first is a familiar exercise for someone who has worked so long as an actuary. Imagining you and your physical environment is clearly another matter, for so much will have happened since this letter was composed, and so much (as I write this) is yet uncertain.

My deepest wish is that the glimmer of hope for restoration that I saw has brightened into a sunny day, and that your problems are merely those that are normal for any young man. My expectation is otherwise, so I now set about trying to describe your environment, and, if I’m right, suggesting some ways for you to deal with your difficulties.

You live near the Pacific Ocean, north of Mexico, in what used to be called California. The United States and most of its institutions are still limping along, though there is increasing talk of its disintegration, thereby following the path led by the USSR, Canada, and California. You live with your parents, but most of your friends live in boardinghouses, both because their parents can no longer afford to house them and because intergenerational hostilities have now reached the personal level. One reason for the hostility is that the now-older generation wishes to postpone retirement, in order to make ends meet, while your generation wants them to retire early, since so few jobs are available in the declining economy. You have a job lined up, thanks to the self-education your parents encouraged and to your own motivation for a degree of independence. Your job provides average compensation, most of which goes toward payroll taxes, with the balance about evenly divided between benefits provided by your employer and net take-home pay. Another bit of luck: You’re able to keep your ancient car running by bartering yard work for a mechanic’s services. If you should need health care, however, the situation is somewhat grim. While black market doctor services and drugs are available (more or less), hospital services are very difficult to find except for life-threatening conditions, or unless you have a friend in government.

Your life is difficult, but you’re young and health, and there is some reason for hope. The adverse economic and social trends of the twentieth century, and particularly of the Gray ’90s, may be ending, especially with the recent trend away from federal government power, and the corresponding disclosure of termites and their removal of office. But the national economy and society, like supertankers, can’t be turned on a dime (a coin from the old currency), so economic recovery and social comity remain elusive. Your todays are not all unhappy by any means, but you do envy yesterday, and fear tomorrow.

If my gloomy picture has come true, or is coming true, by the time you are grown, you may be giving thought to finding freedom and opportunity in another country. I hope you’ve been studying a few foreign languages in anticipation of this, along with a heavy dose of math and finance. There is probably some belated demand for actuarial services (probably by another name if the actuarial profession has withered away), so such studies might provide a stable meal ticket.

Should you decide to stay in the United States, however, I recommend as a career the now-disgraced profession of politician. Barring anarchy, the work of government must still be done, and the climate may be right for you and other decent citizens to restore the profession, along with the country’s well-being. You will need a new political party, of course, as the old ones are now held in utter disrepute.

The economic platform of such a party might be based on the goal of shifting the maximum amount of money that the economy can sustain, from the rich to the poor. (This is rather like baking a large pie and spilling as little as possible in serving it.) A great deal of actuarial and political work will be needed during your working lifetime to forge a new structure — so similar to the one it replaces, yet so unlike it in important ways.

A plank in your party platform might include that ancient concept, the negative income tax. During your childhood, everyone, by the use of this simple device, could have moved above the poverty level with money to spare, especially if it had been combined with the elimination of all other government transfer programs. That it was never used or considered seriously was due to the delicious spillage, going far beyond mere crumbs, and to the votes that were bought with those pieces of pie.

But that’s not what destroyed our country, for the public can see, however dimly, what’s going on before its eyes. What people can’t see if the destruction of their future and the damage behind the walls. So keep your platform and planks, and the structures you build with them, free of termites. Maybe in that way, my grandson, you’ll be able to salvage the future that was so damaged when it was given to you, and to forgive your elders for their passed-along debts that are now making your adult life so difficult.

And now to return to the present … I must admit I was taken aback recently to see you and a group of other children happy and smiling, seemingly oblivious to the problems ahead of you. And it occurred to me that maybe you (and your peers) know something that I and other grown-ups tend to forget: that mankind has always struggled against adversity, that America thrives when challenged, that you have the strength to overcome all obstacles. But then another truth dawned on me: You kids are happy and smiling because you trust us. Well, don’t.

Love, Grandpa

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