A little more information on why our main Federal budget issue will be Medicare, primarily, and Social Security in the coming decades. You gotta see these numbers, especially if you are under 25 years of age!!

A little more information on why our main Federal budget issue will be Medicare, primarily, and Social Security in the coming decades.

Here are the projected changes in US population from 2015 to 2030, just 17 years from now. (ATTENTION STUDENTS: this is right in the round house punch of your careers!!). 

Age 18 to 64
    Year 2015---199,150,000
    Year 2030---205,349,000

An increase in this age group of 6,199,000 or a 3.1% increase.

Age 65 and older
   Year 2015---47,695,000
   Year 2030---72,774,000

An increase in this age group of 25,070,000 or a 52.5% increase

In 2015 there will be 4.1 people between the age of 18 to 64 for every 1 over the age of 65.

In 2030 there will be 2.8 people between the age of 18 to 64 for every 1 over the age of 65.

That is a 31.7% DECREASE.

Data from US Census: Table 2. Projections of the Population by Selected Age Groups and Sex for the United States: 2015 to 2060

My short, in simple terms, take on why Medicare will continue to cost more and be a bigger part of the Federal budget for many years to come.

My short, in simple terms, take on why Medicare will continue to cost more and be a bigger part of the Federal budget for many years to come.

Let's use a very simplistic example to illustrate.

Assume there are 100 retired people receiving $100 per year in Medicare benefits.  The total cost for Medicare is $10,000 for year 1.

Assume in Year 2 we add 10% more retirees.  Now we have 110 retirees receiving $100 (assume no increases in prices) in Medicare benefits.  The total cost for Medicare is $11,000 in Year 2. 

Assume in Year 3 we add 10% more retirees BUT we cut the amount we spend on Medicare payments by 5% (arbitrary number I choose). Now we have 121 retiress receiving $95 in Medicare benefits. The total cost for Medicare is $11,495.

We cut payments ("saved" money!), but the overall cost of the program increased.

While we may be able to slow the "per person" payments (cost) for Medicare, the overall cost of Medicare is going to INCREASE because of the sheer number of recipients moving into eligibility for the program.  We may be able slow the growth in cost ("bend the cost curve") relative to projections, but we will not be able to make it less expensive overall. 

That is the reality.  That is the budget challenge, it seems to me. 

Ezra Kline (Washington Post) has a post on this topic (where I got the idea) and has this paragraph that highlights the issue for me:

"...There’s a reason that policymakers prefer to talk about health-care costs than old people. If the problem is just rising costs, then perhaps there’s some cost control “silver buller” — maybe premium support, or paying for quality rather than service — that will cut costs without hurting anyone. But if the problem is more people, then the answer, really, is higher taxes, lower benefits, more debt or some combination of the three..." (emphasis/underline mine)

More evidence that the Federal Budget is about Health Care spending and not much else.

How times have changed regarding the Federal Budget.  In 1960, 50% of the Federal budget was allocated to National Defense. In the 2010 budget it accounted for 19%. 

Like squeezing a balloon, virtually all of the difference has been a movement from Defense to Federal spending on Health Care programs. 

Source: Color coded pie charts copied from AEI but from a study by the Philadelphia Federal Reserve

To put this in perspective I will adjust for inflation and put 1960 spending in terms of what that means in today's dollars.  I think that will be helpful in understanding the scope of issue

Defense spending in 1960 dollars was $53 Billion dollars (source HERE). Adjusting for inflation, that would be equivalent to $390 billion in today's dollars. Actual Defense spending in 2010 was $872 Billion---a 2.25 fold increase OVER inflation.

Health care spending in 1960 was $1.5 Billion dollars (source HERE). Adjusting for inflation, that would be equivalent to $11 Billion in today's dollars. Actual Federal spending on health care in 2010 was $846 Billion----a 77 fold increase OVER inflation. YIKES!! But hold on...

 Caveat:  The Federal program Medicare did not kick in until 1965-66 time period so spending in 1960 on health care might be considered low.  Let's use 1970 for Federal health care spending and use that as the base.

Health care spending in 1970 was $12.1 Billion dollars. Adjusting for inflation, that would be equivalent to $68 billion today. Given health care spending in 2010 was $846 billion that would be a 12.5 fold increase over inflation.

Defense spending in 1970 was $95 billion. In today's dollars that is equivalent to $534 billion, Given actual Defense spending in 2010 was $872 billion, that is a 1.6 fold increase over inflation.

To be more accurate and relevant, the economist who wrote this report probably should have used a post-Medicare implementation time period to use as a base.  Given the realities of the Baby Boom generation, that would have been more helpful.

Yesterday I showed you how someone with an income of $45,000 can pay NO Federal income tax (47%-er) . Today I use the same household and show you how they are a major tax PAYER. These things are never as easy as they appear...

Yesterday I wrote a blog entry on how a person or household with an income of $45,000 can end up paying no Federal Income tax on that income and can actually be a net recipient of tax dollars (.  See that HERE.

Today, I want to show that this same household DOES pay federal taxes, but not necessarily the Income Tax. The taxes they cannot escape paying are Payroll Taxes,---Social Security and Medicare taxes. These taxes are dedicated to paying benefits for retirees and other eligible recipients.

The Social Security tax is 6.2% of income and it is applied to income earned up to $110,100.  Any income OVER this amount is NOT subject to the Social Security tax.  So the MAXIMUM that can deducted from someones paycheck is $6,826.20 ($110,100 X 6.2%).  For our sample household, they would pay $2,790 ($45,000 X 6.2%) in Social Security taxes.

The Medicare tax is 1.45% of income and it has NO INCOME LIMIT! As with tax policy, it depends of the what the definition of "income" is. Capital gains and dividends are excluded from the Medicare tax (Social Security tax too), which are generally the province of "the wealthy".  So, our household pays $652.50 ($45,000 X 1.45%) in Medicare taxes.

Remember, these are MANDATORY TAXES. 

The total payroll taxes paid by our sample household is ($6,826.20 + $652.50) $7,478.70.

Federal Income taxes AND payroll taxes both go to the same place---the Federal Governments General Budget--the Big Pot o' Money that is spent on all things federally budgeted for. Social Security and Medicare taxes make a stop through their respective Trust Funds, but only for accounting purposes.

If we add this amount to the "negative" income tax  of  $637(refunded) mentioned at the top, then our sample household effectively has a tax rate of 15.2% ($7,478.70 minus $637.00  then divided by $45,000 X 100).

In this light, our household is certainly not a "47%-er" and net recipient/taker of tax dollars, but percent-wise, they are a major contributor. 

These federal taxes are not the only federal taxes paid by our household. There is the Federal gas tax, other excise taxes levied on a variety of goods we consume, and tariffs on imported goods. These other taxes are more difficult to see, but they should be considered in the over all discussion of tax policy, in my opinion.

See here how easy it is too have a pretty good paying job (teacher?) and be a member of the "47%" at the same time. Nice graphic and my explanation of why it is so...

It is rather easy, actually, given the aggregated tax policies enacted over time.

There are some basic deductions  that you are allowed to subtract from your total income. These deductions effectively reduce the amount of income that is actually subject to the income tax.  Deductions reduce your income subject to tax dollar for dollar.

Also...

There are some basic tax credits that you are allowed to subtract from your total tax bill.  Tax credits reduce your taxes owed dollar for dollar.  Notice the difference between a deduction and a tax credit.  This is important when discussing tax policy.

Both of these are dependent on whether you qualify for them. Some everybody is entitled to and some you get only if you meet certain criteria.

Deductions and tax credits are enacted to further some social, economic, or political goal. Individually,  they are supposed to serve as an incentive to bring about a desired outcome that benefits society.  Collectively, they could serve that purpose OR collectively create problems and/or inefficiencies. 

The following graphic illustrates how a person (or household in this case--a family of 4) earning $45,000 per year in income can owe no Federal Income Tax on that income by using the available income deductions and tax credits.

Source: The Economix

 This assumes the families total income from all sources (wages, interest earned on savings accounts, and "other") is $45,000.

This couples filing status is "Married, filing jointly" (I  assume) and includes both of their incomes combined OR it could be just one of them is the sole income earner.  It does not matter.

Right off the top, they are entitled to take a deduction of $11,900 for just being married. I will keep it at that and do another posting on how your tax bill will be affected by other potential filing statuses.  This deduction ("subsidy") serves to help reduce taxable income in an effort to help defray the cost of running a household with the goal of keeping families together and encourageing couples to stay married. That is/was the intent of the tax policy.

Next, the taxpayer can deduct from taxable income, $3,800 for each person in the household who is legally dependent on the taxpayer. Generally this means children, but it could be a parent, grandparent, or other dependent. You also INCLUDE yourself AND your spouse in the calculation.  This equals ($3,800 X 4)  $15,200.  See how you and your spouse were "double counted" in the calculation, first for being married then as a member of the household.  Assuming no other deductions you are allowed to take, the your income that is ACTUALLY subject to taxation is now ($45,000 - $11,900 - 15,200) $17,900.  This amount is called your "Taxable Income".  It is derived after taking all of your legally available income deductions.

The Federal Income tax owed on $17,900 is $1,813.  If we stopped right there this is how much the taxpayer would write a check to the IRS for ASSUMING they did NOT have any "Federal Withholding" from their paychecks throughout the year.  We will assume that for this exercise, but is likely they would have had some withheld.  Any withholding would off-set the amount of tax owed, either partially or totally.

This  taxpayer now finds they are entitled to a Child Tax Credit of $2,000 ($1,000 for each child). Taxpayers with an adjusted gross incomes of $110,000 or less are eligible for this credit, so this is not necessarily a "gift" to lower income people, however it benefits them a great deal.  Remember, tax credits reduce your taxes owed dollar for dollar.

Now, we subtract that $2,000 from our taxes owed of $1,813 and we now owe -$187.00 in taxes. Sweet!!  The Child Tax Credit is considered a "refundable tax credit" which means if the credit results in a negative number, the taxpayer owes $0.00 in taxes but they are entitled to the $187.00 too!

We are not done with our tax credits yet.  The next one is called the  "EITC", which stands for Earned Income Tax Credit.  This credit is targeted towards low income people--single, married, with or without children.  It is considered a significant anti-poverty policy and enjoys significant bi-partisan support in Congress and the Presidency.  The EITC is WAY TOO COMPLICATED to explain in a few sentences. Wikipedia has a pretty good summary of it here.

This family qualifies for this tax credit too, to the tune of $450.  Because this credit is 'refundable" as well, we subtract it from our tax bill, which currently is a negative $187.00.  So if you add this credit to the the total, this family will receive a tax REFUND check of $637.000. 

This family effectively pays no federal income tax on their $45,000 AND they get an extra $637 to consume or save.

This is certainly a form of income re-distribution BUT as I mentioned earlier, both of these tax credits in particular enjoy bi-partisan support, historically. 

So, now you know how someone earning $45,000 per year can have no tax liability and receive a refund check as well. 

This is a working person (could be a teacher with THAT salary) who would be considered a member of the 47%.  Working and has a good job,  but the net recipient of tax dollars.

Hope this helps with your understanding of the issue.

In this post I explain in 7 easy steps the "Obamacare" side of how those $700 Billion in Medicare savings are attained. No old person dies, I promise (OR do they??).

This is a complicated issue and I have tried to boil it down to its bare bones so you can have some idea of what the debate over the dueling proposals for Medicare are.

First I will explain what the Affordable Care Act  ("Obama-Care") plan does for/to Medicare and then after studying up a little more on the Romney/Ryan plans I will try to break them down too.

I am just presenting the facts as I know them and I know there are a jillion interpretations and opinions.  KINDLY let me know where I am going wrong on the BASIC facts.  Don't stray too far into the weeds and argue the minutiae, please.

1.  Medicare is a Federal entitlement program that pays for the healthcare of its recipients---old people.  It is (mostly) financed by a 1.45% payroll tax on your earned income.

2.  Because of changing demographics, the US has and is about to get a whole heaping new batch of old people in the coming decades.

3.  Spending on these folks is expected to grow at a somewhat predictable and projectable (my made up word) amount for the next decade or two.  Lets call that amount "X".  Most people consider this amount unsustainable relative to the amount of money brought in through the above mentioned payroll tax.

4.  The Affordable Care Act ("Obamacare) has a provision for controlling that projected cost ("X") to the tune of approx $700 Billion dollars (the figure cited in the media at the moment). In other words over the next 10 years the ACTUAL amount spent relative to the projected amount  ("X") will be $700 Billion LESS--A "savings" of $700 Billion.  Got that?

5. How does this $700 B in savings from "X" occur? This is important, pay attention:  Reducing the amount paid/reimbursed to individual doctors and hospitals for the care they provide patients is the biggest part of the "savings". In other words, if a doctor was getting, say $100 to treat a patient today, under the new law that would be, say, $75.  I DO NOT KNOW the percentage change, BUT I have seen somewhere in the neighborhood of an average of  27% reduction in payments to doctors, so don't hold me to that number, please.  The rest comes from reducing payments to insurers.  This serves as an incentive for insurers to crack down on waste, fraud, abuse, over payments, etc---get  paid less, have to watch out for every dollar.  If you remember, insurance companies supported this because in return they would potentially get lots of new customers paying premiums as a result of the "Individual Mandate". 

6.  KEY POINT.  NO defined benefit to the "Olds" has been decreased by the ACA accounting. Please repeat that.  It is important to understanding this side of the argument.

7.  The ACA proposes to use that $700B in savings to (1) enhance benefits to Medicare recipients and (2) finance a large portion of the many provisions for expanded healthcare in the ACA.

Clear as mud??

I think Point 5 is the MOST important one to understand and the one I don't hear/see talked about much in the media---in regards to the ACA and Medicare.

Point 5 leads to a discussion as to whether it affects Point 6.  ACA says no.  I believe the Ryan plan says yes---I will try to explain that one next.

Some say the savings in Step 7 are an illusion.  Don' ask me---I dunno...

Let me know if this is helpful.  I tried to make it as easy to digest as possible.  :)

Thanks.

Entitlement Spending and Public Investment in 3 easy graphs. Hey, this is not a flashy subject but none more important...

The following sets of graphs illustrate the "Emperor has no clothes" in terms of the Federal Budget. Everyone knows the problem but no one does much about it.
Mandatory, or non-discretionary, Federal spending is concentrated in 3 major areas--Social Security, Medicare and Medicaid (and its subprograms). As illustrated in the first graph, these programs over time have steadily consumed a larger part of the Federal budget---approx. 47%!

Other parts of the budget consist of non-mandatory, or discretionary, spending.  Within this category you have "Investment Spending" by the Federal government. The following is a definition of Federal Investment from HERE:

"Federal investment is the portion of Federal spending intended to yield long-term benefits for the economy and the country. It promotes improved efficiency within Federal agencies, as well as growth in the national economy by increasing the overall stock of capital. Investment spending can take the form of direct Federal spending or of grants to State and local governments. It can be designated for physical capital, which creates a tangible asset that yields a stream of services over a period of years. It also can be for research and development, education, or training, all of which are intangible but still increase income in the future or provide other long-term benefits."

The graph below shows the decline over time of Federal Investment as a percentage of the Federal budget.  The implication is that there is significantly less funding for public works projects that confer benefits on everyone that the private market does not supply.

The last graph puts these two areas of the Federal budget together.  Budget dollars are not unlimited.  Over time, mandatory transfer payments to senior citizens and the poor have significantly surpassed non-mandatory public expenditures/investment in infrastructure. 

The Federal government does not do much of anything anymore in terms of physical public goods. They pretty much just write checks.  Think about that.

How do we address this issue? I dunno, I am just a high school economics teacher.  You will have to ask the Emperor and the Court Jesters we call the Executive and Legislative branches.

Nice population pyramid charts to remind us of the ticking fiscal timebomb awaiting the next generation. THIS is what the OWC's SHOULD be protesting...Go South protesters-- towards Capitol Hill...

Click on the video below to see the age-demographic change occurring in the US.  This is ground zero for a potential busted national budget in the coming decades.  Notice the shape of the pyramid in 1981, specifically the proportion of young working age adults to the retired population (65 and older).  It is a distinct triangle with a wide base and narrow top.  There are far more younger workers paying social security taxes and medicare taxes relative to the recipients, 65 and older.  This is ok---this entitlement program is solvent.

 As the decades pass, notice how the pyramid shape becomes more like a pear.  This is not so good.  The proportion of workers to retirees becomes more equal.  However, what does not become more equal is the tax revenue-to-tax expenditure ratio--expenditures will drastically increase relative to the tax revenues (at current payroll tax rates).  Retirees are living longer, there are more of them and their health care needs (read that "costs") will only increase. This is not ok---this will make these two retiree entitlement programs INSOLVENT, unless serious reform takes place--now.  Well, now is almost too late. Should have been done 15-20 years ago.

 Each of the graphs are below as well (Source for the Graphs HERE)

This cannot be emphasized enough---New charts showing the weight of Entitlement programs have on the Federal Budget..

Two helpful charts that show the rise of direct public transfer payments over time. The first shows, in percentage terms, cash transfers to individuals last year.  The two biggies, Social Security and Medicare, consume 76% of those payments. The rest are crumbs comparably. The second chart shows the rise of payments to individuals relative to defense spending and interest paid on national debt. The scarry part of this graph is it is projected that paying interest on the debt will surpass spending on Defense.  Yikes!! HT: Carpe Diem

Why has the number of MD's produced by the nations medical schools been flat for 20 years?

Why has the number of Medical Doctors produced each year by the nations medical schools been relatively flat for 30(!) or so years?  This question is raised by Professor Mark Perry at Carpe Diem.

From USA TODAY: ""The marketplace doesn't determine how many doctors the nation has, as it does for engineers, pilots and other professions. The number of doctors is a political decision, heavily influenced by doctors themselves.  Congress controls the supply of physicians by how much federal funding it provides for medical residencies — the graduate training required of all doctors.
The United States stopped opening medical schools in the 1980s because of the predicted surplus of doctors. The Association of American Medical Colleges dropped this long-standing view in 2002 with the statement: "It now appears that those predictions may be in error." Last month, it recommended increasing the number of U.S. medical students by 15%. ""

He who controls the supply can dictate the price (Isn't this what the oil cartel OPEC does with oil prices?). What organization is a generous supporter of Federal elected officials and has one of the most powerful lobbying groups in the US?  The American Medical Association (AMA)...The Central Planners at the AMA who have input into the opening of new medical schools failed to predict the market need for Doctors...hmmm...I suppose only the AMA can perform surgery on an invisible hand and declare the patient healed.

My wish for the New Year....YES, it is related to economics...Don't judge me...

Food for thought as we pass into the New Year...

""On Jan. 1, 2011, the oldest Baby Boomers will turn 65. Every day for the next 19 years, about 10,000 more will cross that threshold. By 2030, when all Baby Boomers will have turned 65, fully 18% of the nation's population will be at least that age, according to Pew Research Center population projections. Today, just 13% of Americans are ages 65 and older.""Pew Research Center

New Year, same problem with long-run Social Security and Medicare sustainability...Is THIS the year these programs will be addressed with the seriousness they merit? That is my wish for the New Year---or to lose 25 pounds, whichever comes first.  They both face insurmoutable odds... :)

Who is more selfish---Senior Citizens who won't take reduced benefits to help young people financially, or young people who won't pay more taxes to help old people financially? Good luck with that question...

My students over the last few years have heard something very similar in my lectures, but I have always prefaced it by suggesting this is not something you can say out loud (outside of an academic setting) because these two programs (Social Security and Medicare) are so sacred and personal.  Up to this point, politically, they are off-limits to any significant change.  However, they are the "elephants in the room" that are moving from the recliner to the couch and will soon need a sectional sofa to fit its ever expanding self... 

WSJ: Notable and Quotable-
Robert Samualson

""There has been much brave talk recently, from Republicans and Democrats alike, about reducing budget deficits and controlling government spending. The trouble is that hardly anyone admits that accomplishing these goals must include making significant cuts in Social Security and Medicare benefits for baby boomers. . . .Doing so, it's argued, would be "unfair" to people who had planned retirements based on existing programs. Well, yes, it would be unfair. . . But not making cuts would also be unfair to younger generations and the nation's future. . . . The old deserve dignity, but the young deserve hope. The passive acceptance of the status quo is the path of least resistance—and a formula for national decline.""

What do you think of the following two premises and questions? Are there any alternatives? If so, Washington needs to hear them.... :)

(1) Ask any grand-parent if they would do anything for their grand-children they would say yes...Then why can't we cut Social Security and Medicare benefits to that group of people?

(2)  Ask any Grand-child if they would do anything for their grand-parents they would say yes...Then why can't we raise the Social Security and Medicare taxes on that group of  people.