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Washington Post Op-Ed – December 29, 2011

By Bryan R. Lawrence

Releasing information on the Friday before a big holiday is a time-tested way to bury bad news. So

when the Government Accountability Office’s fiscal 2011 financial statements for the federalgovernment were released on the Friday before Christmas, it made sense to read them closely. 1

Since 1997, the United States has been a rare example of a government willing to publish financial

statements using accrual accounting, which counts the cost of promises made as well as cash paid out.2

And the GAO’s professionalism has won it a reputation for impartiality and effectiveness.

That professionalism is evident in GAO’s analysis of the net present value of the Social Security and

Medicare promises Washington has made to Americans. “Net present value” means the total that

would have to be put aside today to pay the costs of these programs in the future. The government

puts these costs in the appendices, rather than in headlines. But the costs are real.

The cost of the promises grew by $2.9 trillion during 2011, from $30.9 trillion to $33.8 trillion.3 To put

that in context, consider that the total value of companies traded on U.S. stock markets is $13.1 trillion,

based on the Wilshire 5000 index, and the value of the equity in U.S. taxpayers’ homes, according to

Freddie Mac, is $6.2 trillion.4 Said another way, there is not enough wealth in America to meet these

promises.

If the government followed corporate accounting rules, that $2.9 trillion increase would be added to the

$1.3 trillion cash deficit that has been widely reported. And a $4.2 trillion deficit is something that

Americans need to know about.

The Treasury acknowledges the need to show an accrual-based deficit, but the only retirement accruals

it includes in its “Citizen’s Guide” to the GAO numbers are for promises to direct government employees

and veterans. 5 Promises to the rest of Americans are excluded, even though they are multiples larger

than the $10.2 trillion of government debt held by the public.6

The latest GAO numbers are particularly interesting because of a change in accounting standards that

requires the government to explain why the cost grew by $2.9 trillion. Fully $1.5 trillion of that reflects

the aging of all 312 million Americans by one year.7 In the 2001 GAO report, the cost of promises was

$17 trillion.8 The growth in the cost from $17 trillion to $33.8 trillion averages about $1.7 trillion per

year. The GAO doesn’t specify numbers for the other nine years, but one suspects that aging has driven

most of the growth in the cost of the promises.

The cost would have been a lot worse but for two assumptions that the GAO found questionable.

First, Medicare’s cost projections assume legally required decreases in reimbursement rates to doctors

that Congress has ignored for years – the so-called doc-fix. For these projections to be realized,

Congress would have to abide by its own cost controls, and allow an immediate 27 percent cut to

doctors’ rates, which is very unlikely.9



Second, the Medicare projections assume that the 2010 Affordable Care Act (ACA) will reduce health

care cost growth by 1.1% per year, despite doubts voiced by GAO and a panel appointed by the

Medicare board of trustees.10

The panel and the GAO recommended inclusion of an alternate scenario in the year-end figures, in

which the doc-fix continues, and the ACA cost reductions do not materialize. The result is a $12.4 trillion

increase in the cost of the promises, to more than $46 trillion.11

Given Congress’s history with the doc-fix, and the general paralysis in Washington, it’s hard to argue with the GAO’s lack of confidence in

Congress’s ability to honor its own cost controls.

If the government were a company, its huge and growing off-balance-sheet liabilities would set off

alarm bells. But investor confidence has not been lost – Treasurys can still be sold at very attractive

yields.

Confidence has been shaken, though, among the American people. Congress’s approval ratings are at

record lows.12 Anger is flaring across the political spectrum, and reflects a deep-seated suspicion that

something has broken in our country.

In such an environment, is it right to release critical financial information the Friday before Christmas? Is

it acceptable that politicians are not required to describe the cost of the promises they have made?

In 1990, the government required that companies begin to account for the net present value of

retirement promises, not just current-year cash flows. General Motors began complying in 1992; and it

recorded a $33.1 billion (pretax) charge to reflect the value of its promises up to that point, which led to

what was then the largest loss in US corporate history.13 Seventeen years later, the “free-until-

accounted-for” promises were a major factor in GM’s bankruptcy.

The United States is stronger than General Motors. And the good news is that small changes in health-

care cost trends have a large impact on the government’s long-term promises. Our system is fixable.

But our politics are toxic, and each side is dug into an ideological trench. In such an environment, why

should information be buried in an appendix?

Americans deserve better. One way for Washington to start earning back our trust is by giving us all the

information, even if it is unpleasant.

Bryan R. Lawrence is founder of Oakcliff Capital, a New York-based investment partnership.



1Prior GAO financial statements can be found at http://www.gao.gov/financial.html. Their publication dates are as

follows:

Fiscal 1997 3/31/98

Fiscal 1998 3/31/99

Fiscal 1999 3/28/00

Fiscal 2000 3/30/01

Fiscal 2001 3/29/02

Fiscal 2002 3/31/03

Fiscal 2003 2/20/04

Fiscal 2004 12/14/04

Fiscal 2005 12/14/05

Fiscal 2006 12/15/06

Fiscal 2007 12/17/07

Fiscal 2008 12/15/08

Fiscal 2009 2/26/10

Fiscal 2010 12/21/10Fiscal 2011 12/23/11

2 This Time is Different, by Carmen Reinhart and Kenneth Rogoff, August 2011 edition, page xxviii. Quote

summarizing their research on financial disclosure by more than 100 governments – “Historical data on

domestically issued government debt is remarkably difficult to obtain for most countries, which have often been

little more transparent than modern-day banks with their off-balance sheet transactions and other accounting

shenanigans.”

3 http://www.gao.gov/financial/fy2011/11frusg.pdf , page 49. Note that the $33.8 trillion does not include

Medicaid. Medicaid’s lack of dedicated revenues and a trust fund required to generate 75 year projections means

that GAO does not have projections to value. An estimate of the cost of Medicaid promises ($35.3 trillion as of

fiscal 2010) is on page ix of Mary Meeker’s USA Inc. study, available at

http://s3.amazonaws.com/kpcbweb/files/USA_Inc.pdf , and co-signed by George Shultz, Paul Volcker, Michael

Bloomberg, Richard Ravitch, and John Doerr.

4US stock market value based on Wilshire 5000 Total Market index as of 12/28/11 (ticker W5000 on Bloomberg).

Real estate value taken from Freddie Mac presentation - http://www.freddiemac.com/investors/pdffiles/investor-

presentation.pdf , page 18.

5Treasury’s accrual accounting, including retirement benefits for government employees and veterans, but not for

other Americans, is on Table 1 on page vi of http://www.gao.gov/financial/fy2011/11frusg.pdf.

6Publicly held debt is in Chart 5 on page vii of http://www.gao.gov/financial/fy2011/11frusg.pdf.

7 http://www.gao.gov/financial/fy2011/11frusg.pdf , page 49, and discussion on pages 140-145.

8 http://www.gao.gov/special.pubs/01frusg.pdf , page 58.

9

http://www.washingtonpost.com/national/health-science/medicare-doc-fix-debate-in-congress-less-predictable-this-year/2011/12/23/gIQATqdvDP_story.html.

10 http://www.gao.gov/financial/fy2011/11frusg.pdf , pages 132-133.

11 http://www.gao.gov/financial/fy2011/11frusg.pdf , page 134.

12 http://www.gallup.com/poll/151628/congress-ends-2011-record-low-approval.aspx.

13General Motors 1993 annual report. $33.1 billion charge is before tax. After-tax was $20.9 billion. Also,

http://articles.latimes.com/1993-02-12/business/fi-1334_1_future-retiree-health-benefits on largest ever by US

company.



Washington Post Op-Ed – March 2, 2012


Accounting standards may seem like a sleep-inducing subject to many people. But when retirement

promises are improperly accounted for, companies and governments can go bankrupt, and hard-

working Americans who have relied on the promises can suffer.

General Motors made its first retirement promises to its workers in 1950.1 Under the accounting rules

at the time, GM did not have to recognize the current cost of these future promises, as they were

considered immaterial to the company's operations.

Forty-two years later, Americans' longer life spans and increasingly expensive health care had

dramatically increased the cost. The Financial Accounting Standards Board, a private organization given

responsibility by the U.S. government for setting private-sector accounting rules, decided that corporate

retirement promises had become material, and it required GM and other companies to begin

recognizing their current cost.

The $33 billion charge GM recorded in 1992 was equal to 29 percent of the company's revenues - well

above the 5 percent threshold that accountants commonly use to gauge whether a liability is material.2

Seventeen years later, these retirement promises were a major factor in GM filing for bankruptcy.

Given this history, consider the Treasury Department's decision to not accrue for Social Security and

Medicare promises. The current cost of these programs is calculated each year by the Government

Accountability Office, and described in great detail in appendices.

3

But Treasury's "Citizen's Guide" tothe GAO financials does not accrue for Social Security or Medicare promises, even though it does accrue

for the cost of retirement promises to federal employees and veterans.4

This decision is embraced by virtually every one of our elected leaders, and accepted by virtually all of

our journalists. The $1.3 trillion budget deficit that is widely discussed would be $4.2 trillion if the

change in the current cost of Social Security and Medicare promises during fiscal 2011 were included.5

Why is this cost excluded?

It is not because the promises are immaterial. Remember that 5 percent threshold? The current costs of

Social Security and Medicare total $33.8 trillion, which is more than 1,400 percent of the federalgovernment's 2011 revenues.6

Instead, the legal reason for this exclusion is that the government follows "obligation-based" accounting

standards, which require the recognition of future promises not when they become material but only

when they are legally binding.7



Since the U.S. government made its first retirement promises in 1935, it has seen the economics of

Social Security and Medicare impacted by the same demographic and cost trends experienced by the

private sector. But because the government can rescind its Social Security and Medicare promises, it

does not have to recognize their current costs, even though they are clearly material to its financial

condition.

They are also material to the financial expectations of tens of millions of Americans. The typical U.S.

household has been promised retirement payments totaling $1.2 million, more than 1,200 percent of its

median net worth of $96,000.8

Is it acceptable that our leaders are able to promise trillions of dollars to the voters but do not have to

recognize the cost because their promises can be rescinded?

If the accounting rules for the private sector changed when corporate retirement promises approached

a third of annual revenues, why haven't those for the government changed when its retirement

promises have grown to 14 times its annual revenues?

Americans know that something is wrong, and they know that hard choices about promises and taxes

need to be made. They deserve a clear accounting and an honest discussion of how to fix the system.


1 http://www.uaw.org/page/uaw-history. 1945-1959, The Home Front, page 4.

2General Motors 1993 annual report. GM’s 1992 revenues were $113.3 billion, and the pretax charge was $33.1

billion. A discussion of materiality is at http://en.wikipedia.org/wiki/Materiality_(auditing). A good summary:

“Information is material if its omission or misstatement could influence the economic decision of users taken on

the basis of the financial statements.”

3 http://www.gao.gov/financial/fy2011/11frusg.pdf , page 130.

4Treasury’s accrual accounting, including retirement benefits for government employees and veterans, but not for

other Americans, is on Table 1 on page vi of http://www.gao.gov/financial/fy2011/11frusg.pdf.

5 http://www.gao.gov/financial/fy2011/11frusg.pdf , page 49. The net present value of Social Security and

Medicare increased during fiscal 2011 from $30.9 to $33.8 trillion. This $2.9 trillion increase in the accrual would

be added to the $1.3 trillion cash deficit if the government followed corporate accounting rules.

6 http://www.gao.gov/financial/fy2011/11guide.pdf , page iv for revenues of $2.4 trillion, and page xv for netpresent value of $33.8 trillion.

7 http://www.gao.gov/new.items/d08206.pdf , page 7.

8 http://www.federalreserve.gov/pubs/feds/2011/201117/201117pap.pdf , page 7 for median household net

worth in 2009 of $96,000, which is the most recent data available. http://www.census.gov/prod/2009pubs/p20-

561.pdf , page 1 for average household size in 2007 of 2.6 people. Average Social Security benefit per retiree of

$1,177 per month is at http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/13/~/average-monthly-social-

security-benefit-for-a-retired-worker, and average Medicare spending per beneficiary of $11,762 per year is at



https://www.cms.gov/ReportsTrustFunds/downloads/tr2011.pdf , page 9. Life expectancy for Social Security

retirees aged 65 is 17.2 years for men and 19.9 years for women, as seen at

http://www.ssa.gov/oact/STATS/table4c6.html. If you assume average life expectancy at retirement of 18 years,

and combined annual Social Security and Medicare spending of $25,886, the average American can expect

$466,000 of benefits during retirement, and the average household of 2.6 people can expect $1.2 million.



Washington Post Op-Ed – May 31, 2012


Medicare may be the most sacred government program in the United States — even 76 percent of tea-party supporters oppose cuts to it, a McClatchy-Marist poll found in November. 1 Given its central role

in our fiscal challenges, it makes sense to examine why this program is so popular.

There are two key factors.

First, retired Americans receive high-quality care but have virtually no idea what their Medicare benefits

cost. The George W. Bush administration required Medicare to begin providing such information, but it

is presented in a way that makes it hard to understand and is read only by people who request it. (The

Medicare Web site even cautions that the “files are large so printing them is not recommended.”) 2

While not every retiree takes the time to study the cost, almost all rely on the benefits.

Second, every working American has Medicare taxes deducted from each paycheck and has been told

that the money is paid into a trust fund for his or her future benefits. It’s not surprising that Americans

feel proprietary about Medicare — they believe that they have spent their working lives paying for their

future benefits.

But those Medicare taxes, and interest on the program’s small trust fund, cover just 38 percent of the

annual cost of the program’s benefits. Premiums paid by beneficiaries cover an additional 12 percent,

but fully half of the program’s $549 billion cost last year was funded by federal income taxes on working

Americans. 3 Put another way, Medicare is a transfer of wealth from younger to older Americans.

As long as the baby boomers were working and paying taxes, their large numbers made this transfer to

their parents and grandparents affordable. But the boomers began to retire last year. 4 In its 2011

annual report on the nation’s financial position — compiled in conjunction with the Office of

Management and Budget — the U.S. Treasury described the federal government’s finances as

unsustainable. Treasury Secretary Timothy Geithner, in testimony to Congress this year, cited the

ballooning cost of the transfer inherent in Medicare as a key driver. 5 The net present value of the transfer — the amount that would have to be set aside today to fund

Medicare’s future intergenerational promises — has grown to at least $25 trillion, as calculated by theGovernment Accountability Office. 6 This number is buried in footnotes of the annual Treasury-OMB

report and is so large (almost twice the $14 trillion value of all public U.S. companies) that it defies

comprehension. 7 It’s not surprising that Americans can’t relate the alarming cost of this transfer to

their own lives.

But recent work by the Urban Institute calculates the amount of the transfer to an average retiree. An

American man retiring in 2011 could expect to receive Medicare benefits worth $170,000 (in 2011



dollars). If he had worked from age 22 at the average U.S. wage each year, he would have paid

Medicare taxes (plus interest) worth $60,000 (also in 2011 dollars). So the average male worker retiring

in 2011 will receive benefits worth almost three times what he paid in. And the transfer to that retiree

will be $110,000 from younger Americans, perhaps including his grandchildren.

If that average worker had a wife who didn’t work, she would receive $188,000 worth of benefits,despite having paid nothing in. So the couple’s benefits are six times what was paid in, or a $298,000

transfer from younger generations. 8

A bill introduced in the House last year by Reps. Jim Cooper (D-Tenn.) and Paul Ryan (R-Wis.) would

require the federal government to provide all adult Americans with an annual, personalized calculation

of these numbers. 9 As with the annual letter showing what we have each paid into and can expect to

get out of Social Security (to save postage, these are no longer sent out but are made available online),

this would alert each of us to the amount of benefits we are expecting from younger Americans. 10

Would Americans be as satisfied with Medicare if we were reminded each year about the hundreds of

thousands of dollars that our retirement will cost our grandchildren?

The good news is that this problem is fixable. Other countries spend far less on health care and have

better health outcomes. 11 Reform of our health-care system would dramatically reduce the cost of

future Medicare benefits and reduce the tax burden on future generations. But Americans are angry

with their elected leaders, and they lack the information critical to understanding the need for change. Our toxic politics are not helped by our government’s dubious accounting standards and poor

disclosure. We deserve better information and an honest discussion of our choices.


1See http://maristpoll.marist.edu/wp-

content/misc/usapolls/US111108/Congress_Flat%20Tax_Mill%20Tax/Complete%20November%2018,%202011%2

0USA%20McClatchy-Marist%20Poll%20Release%20and%20Tables.pdf , page 8.

2See https://www.cms.gov/Research-Statistics-Data-and-Systems/Research/HealthCareConInit/Hospital.html.

The information is for a limited set of procedures, and is in the form of highly complex and voluminous

spreadsheets. Information available elsewhere on the website is simpler, but does not provide cost informationfor specific procedures.

3See https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-

Reports/ReportsTrustFunds/downloads//tr2012.pdf , page 10. Payroll taxes for calendar year 2011 were $195.6

billion, interest on Medicare’s $344 billion of assets was $15.2 billion, premiums paid by beneficiaries were $68.5

billion, and total Medicare expenditures were $549.1 billion.



4The first Baby Boomers were born in 1946, and turned 65 in 2011. The number of retired Americans is projected

to increase from 47 million in 2010 to 80 million in 2030. See

http://facts.kff.org/chart.aspx?cb=58&sctn=170&ch=1808.

5For Treasury’s description of its finances as unsustainable, see http://www.gao.gov/financial/fy2011/11frusg.pdf ,

page xii. For Secretary Geithner discussing drivers of the unsustainability in testimony before Congress, seehttp://www.realclearpolitics.com/video/2012/02/16/geithner_to_ryan_on_debt_we_dont_have_a_definitive_sol

ution_to_our_long-term_problem.html.

6See http://www.gao.gov/financial/fy2011/11frusg.pdf , page 134. Medicare’s net present cost is $24.6 trillion,

using Treasury’s baseline case. Using the alternative case recommended by GAO and a committee advising the

Medicare board of trustees, the net present cost would be $37.0 trillion. The base case assumed that the “doc fix”

would not recur, but it was reauthorized in February – see http://www.aarp.org/about-aarp/press-center/info-02-

2012/aarp-applauds-passage-of-medicare-physician-reimbursement-rates.html. Thus, it’s likely that the base case

understates the cost.

7Value of all US publicly traded companies according to the Wilshire 5000 index was $13.9 trillion on May 30,

2012. See http://web.wilshire.com/Indexes/Broad/Wilshire5000/.

8

See http://www.urban.org/UploadedPDF/social-security-medicare-benefits-over-lifetime.pdf , pages 4 and 5. Aworker retiring in 2011 and having worked at the prevailing average wage each year since age 22 would have

saved $60,000 if Medicare’s taxes had been invested in an account earning inflation plus 2%. A man retiring in

2011 would require $170,000 in an account earning inflation plus 2% to pay for his expected Medicare benefits.

For a woman, the account would have to be $188,000 due to longer life expectancy. Note that the Urban

Institute’s study was featured in a New York Times cover story – see

http://www.nytimes.com/2012/02/12/us/even-critics-of-safety-net-increasingly-depend-on-

it.html?pagewanted=all.

9See http://cooper.house.gov/index.php?option=com_content&view=article&id=470&Itemid=73. According to

Jim Cooper, supporters of the bill include:

Democrats Republicans

Cooper Dent

Costa Dold

Himes Emerson

Peterson Kinzinger

Polis Roskam

Quigley Ryan

Schrader Schock

Welch Tiberi

Young, Todd

10In order to save money, the Social Security administration stopped sending annual statements to all Americans

in 2011 in favor of online access. See http://www.ssa.gov/mystatement/ for online access. Note that the onlinestatement provides information on historical Medicare taxes paid by a taxpayer, but not value of benefits to be

received. For Social Security, information on both taxes paid and future benefits is provided.

11See http://www.kaiseredu.org/Issue-Modules/International-Health-Systems/Overview.aspxfor comparison of

cost and outcome of different countries’ healthcare systems.



Washington Post Op-Ed – July 27, 2012


Now that the Supreme Court has found the Affordable Care Act’s mandate constitutional, there is a danger

that we will go back to our old health-care politics – Republicans warning about death panels and socialized

medicine, and Democrats wanting more tax revenue to protect Medicare.

All of that misses the point. Medicare costs per beneficiary grew by 5.5% annually from 2000 to 2011

(excluding the costs of Medicare Part D).1 Over the next 75 years, they are projected to grow at a slower

rate, 4.3% annually, as Congress stops its annual “doc-fix” avoidance of its own legally required reductions

in physician payments and as the ACA’s cost control experiments prove effective.2

But the 2012 Medicare trustees’ report casts doubt on whether that slower rate will happen. Medicare

already pays doctors just 80 percent of private insurance rates. For the doc fix not to be implemented

again next year, payments to physicians would have to be cut by 31%.

3

Many doctors would stop seeingMedicare patients, and that would make another doc fix politically inevitable.

Medicare’s trustees also worry that ACA’s cost controls may not work. “Actual future costs for Medicare

are likely to exceed those shown by the current-law projections in this report, possibly by substantial

amounts,” they concluded.4 To them, that 4.3 percent growth rate looks low.

Why does this matter? In its 2011 financial report for the federal government, the Government

Accountability Office calculates that health-care cost growth that is just 1 percent faster would require that

the Treasury Department set aside, today, an additional $36 trillion to fund future promises (this includes

Medicaid, which is expected to grow at rates similar to Medicare). 5

That’s roughly 240% of our gross domestic product.6 Greece was pushed into crisis with a debt-to-GDP

ratio of 113%.7

These frightening numbers also show the opportunity for positive change. If total US health-care spending

could be reduced over the next 20 years to Swiss levels – based on 2007 data, that would mean going from

15.7% to 10.8% of GDP – annual health-care cost growth over those 20 years would be 2% slower.8 The

GAO did not calculate the impact of slower growth, but simple deduction suggests that tens of trillions of

dollars would be freed up to spend on schools, or roads, or lower taxes.

Put another way, if we spent what the Swiss do on health care, the reduction of 4.9 percent of GDP would

free up more than $700 billion a year to lessen the burden on American households. That would be almost

as large as the entire 2009 American Recovery and Reinvestment Act stimulus, except that it would happen

every year, and it would not increase the nation’s debt load.9

The Swiss system isn’t just cheaper. Swiss health care delivers better outcomes than our own. Infant

mortality is 38% lower, according to World Health Organization data, and the Swiss live four years longer

than Americans.10 Why aren’t our politics about the outrage of higher costs and worse results?



The Wall Street Journal reported this month on the case of a Medicare patient whose end-of-life care cost

taxpayers $2.1 million, while prolonging his agony.11 Doctors were not able to stop providing care, and

Medicare paid for it. Rather than trying to control costs by reducing fees for each service, which Congress

has tried but overridden with its doc-fixes since 1997, we need a mechanism to choose which services to

perform. Every other developed country has such a mechanism – and provides universal health-care at

lower cost.

In Switzerland, insurance companies choose which services to fund. Swiss citizens are required to buy

insurance, and those unable to afford it are subsidized by the government. Insurance companies are

required to provide a basic package, and compete on price to win business.12

In the UK, the National Institute for Health and Clinical Excellence rejects payments if the added “quality-

adjusted life years” cost more than 30,000 pounds ($47,000) per year.13 It’s hard to imagine Americans

allowing an explicit value to be placed on human life, but the UK’s health-care is 46 percent cheaper than

ours, infant mortality is 25 percent lower and its citizens live two years longer.14

In Singapore, citizens are required to save up to 36 percent of their incomes to fund their own retirementand health-care costs – the government makes no promises.15 An 80-year-old man dying of prostate cancer

can spend $20,000 on a hip replacement or leave the money to his children. Singapore’s health-care is 80

percent cheaper than ours, infant mortality is 63 percent lower and its citizens live three years longer.16

We should be having a national conversation about which of these models to adopt. But too many

Americans believe that any cut in Medicare spending is a confiscation of benefits they have paid into a trust

fund. This misconception has created dangerous expectations among voters. There is little room for

substantive debate in our toxic politics, and our elected leaders are hobbled by the consequences of bad

program design (Medicare’s intergenerational funding model, which required a baby boom to be

affordable) and decades of dubious accounting that hides health-care’s cost.

Our leaders need to show some courage and engage us in a fully-informed discussion of our options.

Americans should listen patiently to any leader lecturing them about death panels or the Buffett Rule, and

then ask three simple questions: Why is our care so expensive? Why do we get worse outcomes? And

how do we stop borrowing from our children’s future?


1See http://www.healthreformgps.org/wp-content/uploads/tr2012.pdf , page 223. Note that I am excluding the

inclusion in 2006 of the Part D benefit. Parts A and B cost $5,653 in 2000, and $10,172 in 2011, an annual growth rate

of 5.5%.2

See http://www.healthreformgps.org/wp-content/uploads/tr2012.pdf , page 12 for 4.3% projected growth in cost

per beneficiary, and page 216 for discussion of Sustainable Growth Rate and other projected cost reductions.

3The Sustainable Growth Rate requirement was enacted as part of the Balanced Budget Act of 1997. See

https://www.cms.gov/Medicare/Medicare-Fee-for-Service-

Payment/SustainableGRatesConFact/downloads/sgr2012p.pdf . It has been overridden by Congress every year since

1997. See http://www.healthreformgps.org/wp-content/uploads/tr2012.pdf , page 216 for 30.8% required reduction.

4See http://www.healthreformgps.org/wp-content/uploads/tr2012.pdf , page 218.



5

See http://www.gao.gov/financial/fy2011/11frusg.pdf, page 156. The 1% Average Excess Health Cost Growth Case

has a net present cost of $42.7 trillion, compared to the 0% Average Excess Health Cost Growth Case at $6.4 trillion.

This $36.3 trillion increase includes increased Medicaid expenses, which are assumed to rise at the same rate as

Medicare.

6US GDP was $15.1 trillion in 2011, according to the World Bank, and accessed at

http://data.worldbank.org/country/united-states. $36.3 trillion (see note above) is 240% of $15.1 trillion. You don’twant to ask about the 2% Average Excess Health Cost Growth Case, and it is remarkable that there is no sensitivity

analysis for a negative variance from Treasury’s base case projections (which come from the Medicare trustees).

7The Greek crisis began in early 2010. In 2009, Greece’s debt was €269.3 billion, and its GDP was €237.5 billion,

yielding a debt to GDP ratio of 113% – see http://www.economist.com/node/15908288?story_id=15908288.

8See http://www.who.int/whosis/whostat/EN_WHS10_Full.pdf , page 136. 15.7% falling to 10.8% is a compound

annual decline of 2% over 20 years.

9US health-care spend falling to Swiss levels would mean 15.7% going to 10.8% of GDP, based on 2007 data, or a 4.9%

savings. On 2011 US GDP of $15.1 trillion, that would be savings of $740 billion annually. The ARRA stimulus totaled

$840 billion (revised up from $787 billion) – see http://www.recovery.gov/about/pages/the_act.aspx.

10See http://www.who.int/whosis/whostat/EN_WHS10_Full.pdf . On page 24, there are 5 deaths per 1,000 births by

age 5 in Switzerland, compared to 8 in the US. On page 54, life expectancy at birth in 2008 was 82 in Switzerland and

78 in the US. On page 136, in 2007 Swiss health care spending was 10.8% of GDP, which is 31% lower than the US at

15.7% of GDP.

11See http://online.wsj.com/article/SB10001424052702304441404577483050976766184.html .

12See http://www.kaiseredu.org/Issue-Modules/International-Health-Systems/Switzerland.aspx.

13See http://www.nice.org.uk/niceMedia/pdf/GuidelinesManualChapter8.pdf .

14See http://www.who.int/whosis/whostat/EN_WHS10_Full.pdf . Page 136 shows UK health-care spend / GDP in 2007

of 8.4%, which is 46% less than the US at 15.7%. Page 54 shows that UK life expectancy for both genders overall was

80 in 2008, compared to 78 in the US. Page 24 shows 6 deaths per 1,000 births by age 5 in the UK, compared with 8 in

the US.

15 See http://mycpf.cpf.gov.sg/Employers/Gen-Info/cpf-Contri/ContriRa.htm. For earnings more than S$1,500/month,the compulsory savings rate is 36% for workers up to age 50, 32.5% for 50-55, 23.5% for 55-60, 14.5% for 60-65, and

11.5% for 65+. Earnings less than S$1,500/month face lower compulsory rates – see

http://mycpf.cpf.gov.sg/NR/rdonlyres/BA213496-E895-4469-929C-

3022315A08A9/0/SingaporeCitizen3rdyearSPR_PTENPENSep2012.pdf . But Singapore’s GDP/capita is S$63,050 per

year, or more than S$5,000/month – see http://www.singstat.gov.sg/stats/themes/economy/hist/gdp.html - so the

majority of working Singaporeans are forcibly saving at a 36% rate. Also see http://www.kaiseredu.org/Issue-

Modules/International-Health-Systems/Singapore.aspx for a description of the system.

16See http://www.who.int/whosis/whostat/EN_WHS10_Full.pdf . Page 136 shows Singapore health-care spend / GDP

in 2007 of 3.1%, which is 80% less than the US at 15.7%. Page 54 shows that Singapore life expectancy for both

genders overall was 81 in 2008, compared to 78 in the US. Page 24 shows 3 deaths per 1,000 births by age 5 in

Singapore, compared with 8 in the US



Washington Post Op-Ed – August 17, 2012


Singapore’s paternalistic government is unappealing to many Americans – press restrictions, one-party

rule, harsh penalties for gum-chewing. But Singapore’s retirement system is a model of honesty and

transparency compared with Medicare and Social Security.

In 1984, then-Prime Minister Lee Kuan Yew redesigned his country’s retirement system to, as he later

wrote, “avoid placing the burden of the present generation’s welfare costs onto the next generation.”1

Singapore makes no promises, but instead requires all citizens to save up to 36 percent of their income

for their own retirement and health care.2 The government invests the savings in stocks and bonds; the

money is not used for current expenditures.

The result? Singapore’s people enjoy comfortable retirements. Their health care system delivers better

outcomes while costing 80 percent less than ours, according to 2010 findings from the World Health

Organization, and all is financed without imposing debt on the next generation.3

Singapore evenreported an uptick in medical tourism last year.4

Now, compare Singapore’s system to our own. When Medicare was debated and enacted, Paul

Samuelson was America’s most influential economist. He was an advisor to Presidents Kennedy and

Johnson, author of the nation’s best-selling economics textbook and a soon-to-be Nobel laureate.5 In

1967, Samuelson wrote in Newsweek about the funding mechanism for Medicare and Social Security:

"The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is

given benefit privileges that far exceed anything he has paid in…. Always there are more youths than old

folks in a growing population. More important, with real incomes growing at some 3% per year, the

taxable base on which benefits rest in any period are much greater than the taxes paid historically bythe generation now retired….A growing nation is the greatest Ponzi game ever contrived."6

But the baby boom was ending as Samuelson wrote those words. Births per woman had fallen from 3.7

in 1960 to 2.6 by 1967 and then to 1.8 by 1975.7 By 1990, births were back to 2.0 per woman, but the

demographics of the next century had been determined: The rapidly growing population needed to

make up for insufficient savings by each generation of Americans was no more.8

Anyone could see that this would mean trouble for Medicare and Social Security when the boomers

began to retire. But our leaders chose to protect the programs rather than restructure them, and have

used dubious accounting standards to hide the burden placed on younger Americans.9

China’s leaders made different choices. With a one-child policy, they could not rely on children to pay

for their retirement. Instead, they have designed a system much like Singapore’s: The government

makes few retirement promises, and Chinese citizens save significant portions of their income – the

average household socked away 38% in 2010, Bloomberg Businessweek reported, compared with 3.9%

for U.S. households.10 Much of those savings are invested by China’s state-owned banks into US

Treasury bonds, which our government sells to finance Americans’ retirements.



Of the $11.2 trillion of Treasurys outstanding – this doesn’t count the $4.8 trillion held by our

government, largely in IOUs to itself for Social Security – the Chinese own $1.2 trillion, making them the

largest holder of U.S. Treasurys other than the Federal Reserve.11

This situation is as dangerous as it is ironic. The Treasury’s 2011 annual report shows U.S. debt as a

share of the economy (gross domestic product) rising – to 125 percent of gross domestic product by2042, and 287 percent by 2086 – as retirement promises turn into cash outflows.12 And if Medicare’s

costs per beneficiary grow at historical rates, as the Medicare trustees fear is likely, the US debt-to-GDP

ratio will eventually exceed 500%.13 Recall that Greece was pushed into crisis with a debt-to-GDP ratio

of 113%.14

How long will foreign investors, who own half of outstanding Treasurys, be willing to use their savings to

finance our promises?15 Last December, the head of China’s sovereign wealth fund, which invests $400

billion of his country’s savings, criticized Europe’s welfare system in blunt terms, saying that it induces

“sloth, indolence.”16 What do the Chinese think of our system?

Here in the States, the investment manager firm Pimco, the largest private buyer of Treasurys, said last

month that our retirement promises have “similar characteristics” to Bernie Madoff’s scheme and

predicted a Greek-like crisis if the system is not reformed.17 Meanwhile, the Federal Reserve bought 60

percent of Treasuries issued last year. This rate of purchases cannot continue indefinitely.18

Today’s leaders did not design Medicare and Social Security as an intergenerational transfer, and they

did not choose the government’s misleading accounting standards. But because these bad choices have

not been corrected, many Americans believe that a cut to Medicare or Social Security is a confiscation of

money they paid into a trust fund. This misconception greatly complicates our politics.19

The good news is that Americans know changes are needed. And our health-care system can bereformed to reduce the burden on our children. We need better information to have this critical

national conversation.

Will our leaders give us an honest accounting and discussion of our choices, or will we have to wait for a

debt crisis to force the issue?

The author is founder of Oakcliff Capital, a New York-based investment partnership



Appendix A



1 http://www.amazon.com/Third-World-First-Singapore-1965-

2000/dp/0060197765/ref=sr_1_1?s=books&ie=UTF8&qid=1341717911&sr=1-1, page 97.

2For earnings more than S$1,500/month, the compulsory savings rate is 36% for workers up to age 50, 32.5% for

50-55, 23.5% for 55-60, 14.5% for 60-65, and 11.5% for 65+. See http://mycpf.cpf.gov.sg/Employers/Gen-Info/cpf-

Contri/ContriRa.htm. Earnings less than S$1,500/month face lower compulsory rates – seehttp://mycpf.cpf.gov.sg/NR/rdonlyres/BA213496-E895-4469-929C-

3022315A08A9/0/SingaporeCitizen3rdyearSPR_PTENPENSep2012.pdf . But Singapore’s GDP/capita is S$63,050 per

year, or more than S$5,000/month – see http://www.singstat.gov.sg/stats/themes/economy/hist/gdp.html - so

the majority of working Singaporeans are forcibly saving at a 36% rate. Also see http://www.kaiseredu.org/Issue-

Modules/International-Health-Systems/Singapore.aspx for a description of the system.

3See http://www.who.int/whosis/whostat/EN_WHS10_Full.pdf . Page 136 shows Singapore health care spend /

GDP in 2007 of 3.1%, which is 80% less than the US at 15.7%. Page 54 shows that Singapore life expectancy for

both genders overall was 81 in 2008, compared to 78 in the US. Page 24 shows 3 deaths per 1,000 births by age 5

in Singapore, compared with 8 in the US.

4See http://www.channelnewsasia.com/stories/singaporelocalnews/view/1156836/1/.html.

5

See http://www.nytimes.com/2009/12/14/business/economy/14samuelson.html?pagewanted=all.6

Paul Samuelson, “Social Security,” Newsweek 69, no. 7 (February 12, 1967), page 88. Page scanned from

microfilm at the New York Public Library, and attached as Appendix A.

7 http://data.worldbank.org/country/united-states?display=graph. Data is available back to 1960, and can be

easily accessed at

http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=sp_dyn_tfrt_in&idim=country:USA&dl=e

n&hl=en&q=us+fertility+rate.

8See http://www.calculatedriskblog.com/2009/08/us-population-distribution-by-age-1950.html for an interesting

illustration of US demographics over time.

9 http://www.washingtonpost.com/opinions/the-trillions-the-government-doesnt-account-

for/2012/02/17/gIQABgdZlR_story.html.

10 See http://www.businessweek.com/magazine/content/10_25/b4183010451928.htm.

11See http://www.treasurydirect.gov/NP/BPDLogin?application=np for Treasurys outstanding. See

http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txtfor Chinese holdings of

Treasurys.

12 http://www.gao.gov/financial/fy2011/11frusg.pdf , page xii.

13See http://www.gao.gov/financial/fy2011/11frusg.pdf , page 156. The 1% Average Excess Health Cost Growth

Case has a net present cost of $42.7 trillion, compared to the 0% Average Excess Health Cost Growth Case at $6.4

trillion. This $36.3 trillion increase includes increased Medicaid expenses, which are assumed to rise at the same

rate as Medicare. US GDP was $15.1 trillion in 2011, according to the World Bank, and accessed at

http://data.worldbank.org/country/united-states. $36.3 trillion is 240% of $15.1 trillion. Adding 240% to the

287% projected by Treasury for 2087 debt/GDP is 527% of GDP. Note though that page 156 of http://www.gao.gov/financial/fy2011/11frusg.pdf states that the 2% Average Excess Health Cost Growth Case is

the one that is “near the historical trend.” So using the 1% case understates the cost of growth at the historical

trend.

14The Greek crisis began in early 2010. In 2009, Greece’s debt was €269.3 billion, and its GDP was €237.5 billion,

yielding a debt to GDP ratio of 113% – see http://www.economist.com/node/15908288?story_id=15908288.

15See http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txtfor foreign holdings of

Treasurys.



16 http://www.aljazeera.com/programmes/talktojazeera/2011/11/2011114434664695.html.

17 http://www.pimco.com/EN/Insights/Pages/Whats-In-A-Name.aspx.

18See http://www.federalreserve.gov/releases/z1/current/z1.pdf , page 47. Net Treasurys issued during 2011

were $1,066.8 billion, and purchases by “the monetary authority” (i.e., the Fed itself) were $642 billion, or 60.2%.

1976% of Tea Party supporters oppose cuts to Medicare. See http://maristpoll.marist.edu/wp-

content/misc/usapolls/US111108/Congress_Flat%20Tax_Mill%20Tax/Complete%20November%2018,%202011%2

0USA%20McClatchy-Marist%20Poll%20Release%20and%20Tables.pdf , page 8.



Washington Post Op-Ed – October 19, 2012


Machiavelli famously advised princes to use deception to win power and to get things done. Five centuries

later, a deception used by our leaders to win power is making it harder for them to fix the biggest issue

facing our nation.

If we do not reduce the growth rate of health-care costs, they will consume the federal budget. We risk a

debt crisis rivaling the 2008-09 crash. Changes that other countries have made soberly, achieving lower

costs and better health outcomes, will be imposed upon us by our creditors. Their goal will be the return of

their money, not the quality of Americans’ health care.

This danger is laid out clearly in reports from the Treasury Department and Medicare trustees, calling our

finances "unsustainable."1 President Obama said in 2009 that “the biggest threat to our nation’s balance

sheet is the sky-rocketing cost of health care. It’s not even close.”

2

But many voters don’t understand the need to reduce cost growth. Decades of bad accounting, and of

politicians promising to protect the Medicare and Social Security “trust funds,” have encouraged the

widespread belief that people have spent years paying into a fund for their future benefits.

This election season is no exception. The presidential candidates accuse each other of raiding Medicare –

to the tune of $716 billion over the next ten years - and offer competing plans to keep its trust fund from

going to zero. One example is Bill Clinton’s speech at the Democratic convention, in which he said the

Democrats would keep the trust fund from “going broke” until 2024, as opposed to 2016 under the

Republicans.3

But the government's numbers show that Medicare has a trust fund in name only. Medicare spent $549

billion in 2011, according to the latest report from its trustees, but Medicare had just $325 billion of assets

in December.4 Is it accurate for anyone to describe an account able to cover just seven months of spending

as a "giant trust fund?"5

Worse, only 38 percent of Medicare’s expenses are covered by payroll taxes, down from 62 percent in

1990.6 Beneficiaries’ premiums cover 13 percent, but the Treasury Department is required by law to make

up the difference. The trustees have calculated that paying for the boomers’ retirement without additional

income taxes would require the Treasury to immediately deposit $27 trillion into the Medicare trust fund

and $11 trillion into the Social Security trust fund.7

And because Congress tends to ignore its own cost controls, the Medicare trustees believe that legally

required cuts to physician reimbursement rates will continue to be overridden and that the Affordable Care

Act’s cost controls are unlikely to be effective. “[A]ctual future Medicare expenditures are likely to exceed

the intermediate projections shown in this report, possibly by quite large amounts,” they wrote, and they

give an alternative set of projections.8 According to the Government Accountability Office, this likely cost-

control failure would require that an additional $12 trillion be deposited into Medicare.9



Because we don’t have $50 trillion, the Medicare trustees have calculated the tax increase on working

Americans that we would need immediately and for the next 75 years: 4 percent of gross domestic

product, or almost 6 percent of GDP if the cost controls don’t work.10

But taxes can’t be the whole answer. Federal income taxes paid by all Americans were equal to about 6

percent of GDP in 2009, the latest year for which data are available. So if costs can’t be controlled, federal

income taxes would have to double.11 Or if the top 1% were made to pay for the entire shortfall, their

effective federal tax rate would have to go from 24 percent to more than 80 percent.12

To feed a health-care system that costs more and delivers less than any other developed country, do we

really want to double income taxes on middle-class Americans, or impose confiscatory tax rates on our

highest-earning citizens?

Given the choices we must make, why are we letting the presidential candidates argue about how to keep

that $325 billion “trust fund” from going to zero? It’s as silly as a couple facing a $500,000 problem arguing

about how to keep a minimum balance in their checking account.

I have some sympathy for politicians who are trying to be responsive to their constituents. It is rational for

them to wait for a crisis to do what is unpopular and to place some of the blame on voters unwilling to hear

about hard choices. The illusion fills a need. Who doesn’t want a trust fund, especially in today’s

economy?

But a crisis will bring solutions more painful than change we make ourselves. Our health-care system is

fixable – all other developed countries provide universal health care with better outcomes at significantly

lower costs. All have settled on a way to choose which services to fund. We have not done this work,

because it does not poll as well as talking about phantom trust funds.

A political season filled with innumerate debate is bad enough. A debate that further cements an illusioninto the minds of voters is worse. Whoever wins will have to govern. The campaign we are having will not

make doing so easier.


1For Treasury’s description of its finances as unsustainable, see http://www.gao.gov/financial/fy2011/11frusg.pdf ,

page xii. For Secretary Geithner discussing drivers of the unsustainability in testimony before Congress, see

http://www.realclearpolitics.com/video/2012/02/16/geithner_to_ryan_on_debt_we_dont_have_a_definitive_solution_to_our_long-term_problem.html.

2 http://www.whitehouse.gov/the-press-office/remarks-president-opening-white-house-forum-health-reform.

3 http://www.cnn.com/2012/09/07/politics/pol-fact-check-medicare/index.html.

4 http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-

Reports/ReportsTrustFunds/Downloads/TR2012.pdf , page 10.

5 http://bigstory.ap.org/article/undoing-obama-medicare-cuts-may-backfire-romney.



6See the 2012 Medicare trustees’ report at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-

Trends-and-Reports/ReportsTrustFunds/Downloads/TR2012.pdf , page 210. Medicare’s payroll taxes were 38.1% of

expenditures in 2011, compared to 62.2% in 1990. Premiums paid by beneficiaries were 13.4% of expenditures in

2011, compared to 9.8% in 1990.

7See the 2012 Medicare trustees’ report at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-

Trends-and-Reports/ReportsTrustFunds/Downloads/TR2012.pdf , page 238. The net present values of projected

revenue and cost for Medicare’s HI and SMI trust funds and for Social Security’s OASDI trust fund are $5.6, $21.6 and

$11.4 trillion, respectively. So the amount required for Medicare is $27.2 trillion, and for Social Security is $11.4

trillion. The amount required for both is $38.6 trillion.

8 http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-


9See http://www.gao.gov/financial/fy2011/11frusg.pdf , page 134, for GAO’s calculation of the net present value of

the alternative case provided by the Medicare trustees. GAO calculated the additional cost as $12.4 trillion, using

numbers from the 2011 Medicare trustees’ report. A GAO calculation using numbers from the 2012 Medicare

trustees’ report presumably will be included in the 2012 Treasury annual report, likely to be released in December

2012. The Medicare trustees believe that the alternative case is likely to happen – see

http://www.healthreformgps.org/wp-content/uploads/tr2012.pdf , page 218.10

http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-

Reports/ReportsTrustFunds/Downloads/TR2012.pdf , pages 239-240. The Medicare trustees calculate the net present

value of US GDP over the next 75 years to be $907 trillion. The $38.6 trillion required to be deposited into the

Medicare and Social Security trust funds is 4.3% of $907 trillion. To fund the additional $12.4 trillion cost of

Medicare’s alternative case would be another 1.4% of GDP. So the immediate (and maintained for 75 years) increased

taxes required to fund the shortfalls in Medicare and Social Security would be 4.3% of GDP, and 5.6% in Medicare’s

alternative case of failed cost controls. Note that these figures understate the cost of higher health-care costs, as

Medicaid expenditures are expected to grow at the same rates at Medicare’s. Since Medicaid does not have a trust

fund, we do not have projections for GAO to value. But Treasury’s discussion

(http://www.gao.gov/financial/fy2011/11frusg.pdf , page 156) shows that a 1% increase in health-care costs would

have a net present cost of $36.3 trillion ($42.7 trillion in the 1% Average Excess Health Cost Growth Case less $6.4

trillion in the Base Case). $36.3 trillion is considerably more than the $12.4 trillion cost of the alternative casedeveloped by the Medicare trustees, and the difference is presumably due to increased Medicaid expenses. It’s

therefore likely that a range of 4.3% to 5.6% of GDP is too low as an estimate of the future burden of health-care

costs.

11See http://taxfoundation.org/article/summary-latest-federal-individual-income-tax-data-0#table1for total

individual income taxes paid during 2009 of $866 billion. This was 6.3% of 2009 GDP of $13.86 trillion. US GDP data

comes from the World Bank, and can be easily sourced at

http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_cd&idim=country:USA&dl=en

&hl=en&q=us+gdp.

12See http://taxfoundation.org/article/summary-latest-federal-individual-income-tax-data-0#table1for income taxes

paid by the top 1% of taxpayers by adjusted gross income of $318 billion in 2009, or an effective tax rate of 24%. This

was 2.3% of 2009 GDP of $13.86 trillion. For the top 1% to pay an additional 4.3% of GDP, their effective tax rate

would have to go to 69%, calculated as (6.6% / 2.3%) X 24%. For them to pay an additional 5.6% of GDP, their

effective tax rate would have to go to 82%, calculated as (7.9% / 2.3%) X 24%.



Washington Post Op‐Ed – January 25, 2013


The 2012

annual

report

for

the

federal

government,

released

last

week,

continues

to

use

dubious

accounting standards to avoid putting the cost of retirement promises into the headline deficit of $1.1

trillion.1 But its disclosures have improved somewhat, and the new information should be read closely.

One example is the cost, in today’s dollars, to make Social Security and Medicare solvent for the next 75

years. This grew to $38.6 trillion, an increase of $4.7 trillion over the prior year.2 According to the

report, Americans’ aging drove $1.6 trillion of the increase; the rest mostly reflected poorer‐than‐

expected economic growth.3

The Government Accountability Office noted that that “the economic recovery has been slower than

was assumed” and pointed to a reduction in hours worked by the average American, and an increase in

the number

of

disabled

Americans.4

These

trends

mean

less

revenue

for

Social

Security

and

Medicare

from future payroll taxes, so we need another $3.1 trillion in today’s dollars – or tomorrow’s income

taxes – to pay for the programs.

This is not surprising. Real gross domestic product grew at just 1.6 percent annually from 2001 to 2011,

and the Treasury assumes a future growth rate of 2.1 percent.5 But the average growth rate from 1951

through 2001 was 3.4 percent.6 Every year of slow growth decreases the amount brought in from

payroll taxes. This hits younger Americans twice with a smaller economy, and higher personal income

tax rates to pay for baby‐boomer retirements. It’s like the old Woody Allen joke about the food being

terrible and coming in such small portions.

Absent from our debate about cutting entitlements and raising taxes on the wealthy is the question of

how to raise the economy’s growth rate. Without the 3 percent growth that the U.S. economy has

historically delivered, the promises we have made ourselves will be even more unaffordable. Why

aren’t we focused on boosting growth?

Another example of improved disclosure: The report keeps the “trust fund perspective” accounting

used for years to claim falsely that Social Security and Medicare are solvent, but it adds a “government

perspective” that calculates the shortfall facing the programs and the government as a whole.7 Rather

than talk about phantom trust funds, Treasury says that if taxes rose and/or spending fell by 2.7 percent

of GDP for each of the next 75 years, the government’s public debt would stabilize at the 2012 level of

73 percent

of

GDP.8

This highlights the continuing disagreement between Treasury and some Medicare trustees, who have

again refused to accept Treasury’s assumption that the Affordable Care Act will slow the growth health‐

care costs.9



That 2010 measure is primarily an expansion of insurance coverage, but it includes several pilot

programs designed to reduce costs. President Obama has said that these have to be given time to work,

but Medicare trustees say that they are likely to fail and point to Congress’s continued overrides of its

own cost controls (such as the repeated Medicare “doc‐fix” on payments).10 A recent example is

language slipped at the last minute into the American Taxpayer Relief Act that will delay price restraints

on a pill,

sold

by

the

biotech

company

Amgen,

that

will

cost

Medicare

as

much

as

$500

million.11

Another cause for skepticism is the outcome of Obama’s first pilot program. In 2005, the Rand Corp.

argued that adoption of electronic health records by doctors would improve care and save $81 billion

per year. Obama pushed for the 2009 stimulus legislation to pay doctors to install the systems.12

Doctors and hospitals were paid $25.9 billion, but the systems “seem to be aimed more at increasing

billing by providers than at improving care or saving money,” the New York Times reported this month,

and a new Rand study concluded that the program has failed to reduce costs.13

To reflect doubts about the Affordable Care Act’s pilot programs, the GAO’s year‐end calculations

included cases in which health‐care costs grow 1 and 2 percent faster than Treasury assumes. What is

the impact? The 2.7 percent shortfall becomes 5.6 to 8.7 percent of GDP. And if we delay closing the

gap for another 10 years, it becomes 6.7 to 10.5 percent.14

To put that in context, consider that the recent tax increase on the rich will raise just $60 billion a year,

or 0.4 percent of GDP, and that the total amount of federal personal income taxes since 1945 has varied

between 6 and 10 percent of GDP, despite marginal tax rates ranging from 28 to 94 percent.15

In other words, if the pilot programs fail, personal income taxes on all Americans would have to increase

to unprecedented levels. Taxes that high will crush growth, making health‐care promises even less

affordable.

When a drug company that gives $5 million to elected officials can get a $500 million hand‐out, why

should we have confidence in the Affordable Care Act’s cost‐controls? Our health‐care system is broken

– so why are we expanding, rather than restructuring, it? And why should we raise taxes to pay for it?

Every other developed country delivers universal health care with better results and lower costs. The

U.S. government’s own annual report shows that our finances are unsustainable unless we do the same.

The author is founder of Oakcliff Capital, a New York ‐based investment partnership.

1

See

http://www.gao.gov/assets/660/651357.pdf ,

page

ii for

reported

budget

deficit

of

$1.1

trillion.

2 See http://www.gao.gov/assets/660/651357.pdf , page 20.

3 See http://www.gao.gov/assets/660/651357.pdf , pages 141‐150.

4 See http://www.gao.gov/assets/660/651357.pdf , page 147 for quote about weakness of recent recovery, page

143 for fewer hours worked, and page 144 about more Americans claiming disability status. The report does not

break‐out the impact of these different factors, but the slowdown in the economy is emphasized in multiple

places, and the fewer hours worked and disability status issues are highlighted as changes to the projections going

forward.



5 See http://www.bea.gov/national/xls/gdplev.xls. In 2005 constant dollars, US GDP was $11,337.5 billion in 2001,

and $13,229.1 billion in 2011. That is a compound annual growth rate of 1.6%. Treasury’s projections for real GDP

are shown at http://www.gao.gov/assets/660/651357.pdf , page 137. For the decades 2020 through 2080, the

projected real GDP growth rate averages 2.1%.

6

See

http://www.bea.gov/national/xls/gdplev.xls.

In

2005

constant

dollars,

US

GDP

was

$2,159.3

billion

in

1951,

and $11,337.5 billion in 2011. That is a compound annual growth rate of 3.4%. Note that compound annual

growth rates of US GDP in constant 2005 dollars by decade were as follows:

1951‐61 3.0%

1961‐71 4.3%

1971‐81 3.1%

1981‐91 3.0%

1991‐01 3.5%

2001‐11 1.6%

7 See http://www.gao.gov/assets/660/651357.pdf , pages 169‐172. There is a great picture on page 169, which is

still complicated, but gets at the key point – there are multiple bodies of the government that do transactions with

each other, but they as a whole have a financial relationship with the public as a whole. And Table 5 on page 188

reconciles the “trust fund perspective”, which is institutional and misleading, with the “budget perspective”, which

is economically accurate. Note that this new perspective appears to have been presented for the first time in a

new appendix to the 2012 Medicare trustees report – see page 234 of http://www.cms.gov/Research ‐Statistics‐

Data‐and‐Systems/Statistics‐Trends‐and‐Reports/ReportsTrustFunds/downloads/tr2012.pdf . It’s interesting to

speculate why the Medicare trustees and Treasury are now using this perspective. Accounting for Social Security

and Medicare trust fund surpluses has been dubious since President Johnson’s decision in 1968 to count Social

Security surpluses against Vietnam‐driven general deficits as part of a “unified” budget deficit – see Social

Security’s history at http://www.ssa.gov/history/BudgetTreatment.html. Note that though Social Security was

declared “off ‐budget” again in 1990, the headline budget deficits reported by Treasury have included the trust

fund surpluses since 1968. By counting the current cash surpluses but not the future promised benefits, this

lowered the reported deficit for the government as a whole. In 2010, Social Security payroll tax receipts were less

than benefits paid by $49 billion, and the trustees project annual shortfalls indefinitely as the boomers retire – see

http://www.ssa.gov/history/BudgetTreatment.html. A

cynic

might

say

that

unifying

Social

Security

deficits

with

general deficits no longer flatters the numbers, and thus the usefulness of a “trust fund perspective” is over.

8 See http://www.gao.gov/assets/660/651357.pdf , page 161.

9 See http://www.gao.gov/assets/660/651357.pdf , page 229 for GAO’s refusal to bless Treasury’s assumptions for

Medicare for the fiscal years 2010, 2011 and 2012. See page 179 for discussion of the 2012 Medicare trustees’

report, which warned that “actual future costs for Medicare are likely to exceed those shown by the current‐law

projections.” See page 178 for discussion of ACA’s assumed impact on health‐care cost growth, compared to

historical health‐care cost growth. See page 20 of the 2012 Medicare trustees’ report at

http://www.cms.gov/Research ‐Statistics‐Data‐and‐Systems/Statistics‐Trends‐and‐

Reports/ReportsTrustFunds/downloads/tr2012.pdf for the trustees’ own summary of their concerns – “[A]s a

result of the improbable reductions in physician payments required under the current‐law SGR formula and the

uncertain long‐range adequacy of other payments affected by the statutory productivity adjustments, actual

future Medicare

expenditures

are

likely

to

exceed

the

intermediate

projections

shown

in

this

report,

possibly

by

quite large amounts.”

10 See http://www.cms.gov/Research ‐Statistics‐Data‐and‐Systems/Statistics‐Trends‐and‐

Reports/ReportsTrustFunds/downloads/tr2012.pdf , pages 2‐3 for Medicare trustees’ discussion of doubts about

enforceability of the SGR’s legally required reductions in Medicare payment rates to doctors, and of the 165

provisions in ACA that affect Medicare.

11 See http://www.nytimes.com/2013/01/20/us/medicare ‐pricing‐delay‐is‐political‐win‐for‐amgen‐drug‐

maker.html.



12 See http://money.cnn.com/2009/01/12/technology/stimulus_health_care/ and

http://abcnews.go.com/Health/President44/story?id=6606536.

13 See http://www.hhs.gov/recovery/programs/index.html#Health for ARRA’s spending of $25.9 billion to

incentivize doctors and hospitals to install the systems. See

http://www.nytimes.com/2013/01/11/business/electronic‐records

‐systems

‐have

‐not

‐reduced

‐health

‐costs

‐

report‐says.html for RAND’s assessment of the program’s impact.

14 See http://www.gao.gov/assets/660/651357.pdf , pages 164‐165.

15 See http://www.cnn.com/2013/01/02/politics/fiscal‐cliff/index.html for estimate of $600 billion raised over 10

years by the ATRA. See http://www.taxpolicycenter.org/taxfacts/Content/PDF/hist_receipt_source_GDP.pdf.

From 1945 through 2011, personal income taxes as a percent of GDP have ranged from 5.7% in 1949 to 10.2% in

2000. See

http://taxfoundation.org/sites/taxfoundation.org/files/docs/fed_individual_rate_history_nominal%26adjusted‐

20110909.pdf for a history of personal income tax rates. The highest rate paid by a married couple has ranged

from 28% in 1988‐90 to 91‐94% from 1945‐63 (followed by 70‐77% from 1964‐1981).



Washington Post Op-Ed – June 14, 2013


The 2013 Medicare Trustees Report had some good news. Costs per beneficiary grew just 0.7 percent in

2012, down from a 5.4 percent annual average since 1990.1 This is the third year of slow growth, and if

the trend continues, our national finances will dramatically improve.

But the reasons for the slow growth are uncertain, and the trustees left their projection of annual future

growth in costs per beneficiary unchanged at 4.3 percent.2 And that is the optimistic scenario: For the

fourth straight year, the report included an appendix, prepared by Medicare’s staff, that outlines

alternative projections in which costs grow faster.3

Given the politics of Medicare and its phantom trust fund, it’s not surprising that both projections

assume the same growth in the volume of health care consumed per beneficiary. The difference

depends on the effectiveness of future price reductions that Congress has legislated.

The Medicare staff, backed by some of the program’s trustees, laid out its belief that the price

reductions will not work: The impact on taxpayers would be $10 trillion in today’s dollars or tomorrow’s

income taxes.4 So it makes sense to read the appendix.

The price reductions take two forms. The first is the physician reimbursement cuts required by the

Balanced Budget Act of 1997. These have been overridden by Congress every year since 2003; at this

point, they would require a 25 percent cut to physician fees. The trustees call it a “virtual certainty” that

Congress will continue to override these cuts.5

The second is the Affordable Care Act’s requirement that most other Medicare reimbursement rates bereduced by 1.1 percent annually. Because U.S. productivity growth has averaged 1.1 percent

historically, the legislation assumes that health care providers will achieve future 1.1 percent

productivity growth and that they can be forced to lower their prices by that amount without reducing

the volume or quality of care they provide to seniors.6

But, Medicare’s staff argued, there has been no productivity growth in U.S. health care for decades. The

staff cited a study showing that productivity in ambulatory care, hospitals and nursing homes declined

by 0.7-0.9 percent annually from 1987 through 2006, and there has been zero growth elsewhere. 7

Getting a hip replacement or a routine checkup requires as much labor and capital as it did 30 years ago.

Worse, despite the lower reimbursement prices that Medicare pays for health care compared to private

insurance (detailed in Steven Brill’s excellent reporting), many health-care providers respond by

increasing the volume of care they provide.8 A 2007 analysis by the Congressional Budget Office found

that between 1997 and 2005, Medicare reduced prices paid to doctors by 5 percent but that doctors

increased the volume of care per beneficiary by 39 percent.9



Finally, if the price reductions fail, the Affordable Care Act created an Independent Payment Advisory

Board (IPAB) to decide how to control costs in some unspecified way. The Medicare report says this will

be “challenging,” presumably because Congress has so routinely overridden its own Balanced Budget

Act cost controls.10

Boiled down, at least some of Medicare’s trustees and staff think that the Affordable Care Act assumesfour unlikely things: Health care providers will begin to deliver productivity growth that they have not

achieved for decades; they will give all of the benefit to the government; they will not respond to lower

prices by increasing volumes; and the IPAB will not be overridden by a future Congress.

It’s almost like the queen in “Through The Looking Glass” who could believe six impossible things before

breakfast.

When Medicare staffers asked outside experts, all said that the price reductions would fail to reduce

costs, though at least one expressed optimism that the cuts would force health care providers to

abandon fee-for-service billing and design new ways to bill for and deliver health care.11 The Affordable

Care Act calls for several pilot programs to experiment with alternatives to fee-for-service, including

accountable care organizations and bundled payments. But, the trustees reported, “The ability of new

delivery and payment methods to lower cost growth rates is uncertain at this time, since specific

changes have not yet been designed, tested or evaluated.”12

Those programs may yet work. But bad accounting and decades of politicians promising to protect trust

funds have made discussion of controlling volumes politically difficult, even if the objective is also

higher-quality care.

After the trustees’ report was published, many politicians and journalists celebrated its two-year

extension of Medicare’s trust fund. But that solvency is misleading. The trust fund now has $288 billion – or just 1 percent of the $27.3 trillion cost in today’s dollars or tomorrow’s taxes of Medicare’s

promises, even assuming the price reductions succeed.13

Every other developed country has a health-care system that delivers better care for less cost. All have

tackled the politics of managing volume as well as price. Despite the good news on recent costs,

Medicare’s own report argues that we need to do this work as well.

The author is founder of Oakcliff Capital, a New York-based investment partnership.

1

See Table V.D1 at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/TR2013.pdf , page 213. Medicare Parts A and B had expenditures per

beneficiary of $1,963 and $1,304, respectively, in 1990, and $5,227 and $5,097, respectively, in 2012. Growth from

$3,267 to $10,324 over 22 years is a compounded annual growth rate of 5.4%, excluding Part D, which began in

2006. The growth rate in all of Medicare per beneficiary was 0.7% in 2012, continuing a three year period of

slower growth that began in 2010.

2See Table II.C.1 at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-




3See http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-

Reports/ReportsTrustFunds/Downloads/2013TRAlternativeScenario.pdf .

4See http://www.gao.gov/assets/660/651357.pdf , page 228.




Reports/ReportsTrustFunds/Downloads/2013TRAlternativeScenario.pdf , pp. 3-5.


Reports/ReportsTrustFunds/Downloads/2013TRAlternativeScenario.pdf , page 5.

8For Brill’s reporting on prices in the U.S. health-care system, see

http://www.time.com/time/magazine/article/0,9171,2136864,00.html.

9See http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/81xx/doc8193/06-06-medicarespending.pdf , page

15. Also cited by David Brooks at http://www.nytimes.com/2012/10/09/opinion/brooks-the-policy-verdict-i.html.

Note that the executive summary of the report claims that “behavioral responses of physicians or beneficiaries to

[reductions] in Medicare payment rates account for only 1.4 percentage points of the 39.4 percent increase,” withthe remainder due to “changing treatment modalities and prevalence of diseases.” There is a fair bit of analysis

that tries to isolate these effects in the report, but the data are clear: lower prices were accompanied by much

higher volume, and there is no reason to expect that this will change in the future without changes to delivery and

payment methods.




Reports/ReportsTrustFunds/Downloads/2013TRAlternativeScenario.pdf , page 9. Experts cited include Dr. David

Cutler (professor of Applied Economics at Harvard), Dr. Joseph Newhouse (Professor of Health Policy and

Management at Harvard), Peter Orzag (former CBO and OMB Director), and Timothy Jost (Professor of Law at

Washington and Lee). Peter Orzag writing in the July/August 2011 edition of Foreign Affairs: ““[One] approach is

to simply reduce payments to providers—hospitals, doctors, and pharmaceutical companies. This blunt strategy

can work, often quite well, in the short run. It is inherently limited over the medium and long term, however,

unless accompanied by other measures to reduce the underlying quantity of services provided.”




Reports/ReportsTrustFunds/Downloads/TR2013.pdf , page 10 for trust fund assets at year end 2012 of $287.6

billion, down from $324.9 billion at year end 2011. See page 227 for net present cost of Medicare of $27.3 trillion

at year end 2012 under the base case projections. Under the alternative case, the net present cost of Medicare

would be $10.1 trillion higher. See http://www.gao.gov/assets/660/651357.pdf , page 228.