8. Encouraging Savings for Postretirement Medical Expenses

Problem: Because federal health care programs for the elderly operate on a pay-as-you-go basis, and because federal tax law encourages employer-provided postretirement health insurance to operate on the same basis, there is very little saving – public or private – to prefund health care expenses that are virtually certain to occur during people's retirement years.

Solution: Individuals and their employers should be given tax incentives to make deposits to Medical IRA accounts designed to supplement and eventually replace coverage under Medicare.

Discussion: One of the most frightening social problems we will face as we move into the next century is the problem of paying retirement pensions and medical expenses for the elderly. Since both Social Security and Medicare are pay-as-you-go programs in which there is no current saving to meet future obligations, tomorrow's obligations will have to be met mainly by taxes oil tomorrow's workers. The bill will be high. According to reasonable projections: [30]

  • By the year 2000, total health care expenses for the elderly will equal 14.3 percent of workers' payroll, and health care plus Social Security will equal 21 percent.

  • By the year 2050, total health care spending for the elderly will equal 46 percent of payroll, and health care plus Social Security will equal 69.2 percent.

Currently the elderly pay about one-third of their own health care expenses. If we can continue that practice, the future burden for workers will be lower, but still quite high: [31]

  • If the elderly continue to pay one-third of their health care costs, the combined burden of elderly health care and Social Security will be 17.7 percent of payroll by the year 2000.

  • That burden will reach 54.5 percent of payroll by the year 2050.

In the year 2050, retirees on the average will be older than they are today, however, and as retirees age they tend to have fewer assets and less income from assets. Thus, in the future it will be increasingly difficult for the elderly to pay one-third of their health care costs. Clearly the need is to create a system in which the elderly can pay much more than one-third – relieving future workers of an almost impossible burden. But in order for that to happen, there must be increased saving by today's workers to meet postretirement medical needs.

Although the federal government subsidizes spending on current medical needs to the tune of $45.8 billion, individuals have no opportunity to engage in tax-subsidized savings for postretirement medical needs. [32] Corporations are also greatly constrained in their ability to set aside funds today for the postretirement health care expenses of their employees. As a result, the federal government is encouraging employers to adopt the same pay-as-you-go approach that characterizes Medicare and other government health care programs for the elderly. Although one-third of all employees work for companies that provide postretirement health care benefits, currently:

  • Unfunded liabilities for postretirement health care for U.S. employers are as high as $2 trillion. [33]

  • If' Fortune 500 companies were required to account for postretirement health cart benefits the way they now account for pensions, their annual net income would he reduced by 30 to 60 percent. [34]

To address this problem, individuals and employers must be encouraged to save and invest today for future health care expenses. One method is through deposits to Medisave accounts which willgrow tax free and provide funds for medical expenses (including nursing home care and long-term care insurance) not now covered by Medicare. More is needed, however.

Individuals and their employers should be given additional tax incentives to save today for postretirement health care needs. In addition, individuals and their employers should be given tax incentives to contribute to Medical IRA (MIRA) accounts. Funds deposited to MIRAs would substitute for future claims against Medicare. [35] 8y making annual contributions over time, people would rely more on private savings to support their postretirement medical needs, and less on Medicare. Eventually, we would move to a postretirement health care system in which each generation pays its own way and in which postretirement health care dollars become the private property of the elderly, out of reach of politicians and special interest bureaucracies. [36]

Creating tax incentives for deposits to MIRA accounts would, of course, reduce federal revenue and increase the federal deficit. However, the evidence shows that each dollar contributed to ordinary IRA accounts is mainly a dollar of new savings. If the same were true of contributions to MIRA accounts, then for every dollar of lost federal revenue there would be more than a dollar of new savings. This means that new savings will be more than enough to finance any increase in the federal deficit.