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Friday, September 27, 2013

A $1000/month pension equals $200,000 in savings CORRECTED

On the road today, but my wife referred me to this article by Lynn Parramore* (originally published here) on how the 401(k) "revolution" was a big bust for the middle class, something I have also written about. I just wanted to add one quick point to her discussion.

Parramore references the common recommendation that you have at least $1 million in savings to retire. This is usually related to the "rule" that you can take 4% of your savings per year and not exhaust it. That would give you $40,000 per year in income. However, with low interest rates and flat stock market performance (the S&P 500 just topped its 2000 peak this spring), even 4% may be too high as you run a greater risk of outliving your savings.

The flip side of that rule, which I haven't seen mentioned anywhere else, is that a $1000 per month pension equals at least $300,000 in savings, as $300,000 times 4% is $12,000 per year. If 4% is too high, then its value is even greater. If you can only take 3% of your savings per year safely, it would be equal to $400,000 in savings, for example. about $200,000 in savings, as it wold take about that amount to buy a $1,000 per month annuity (see Lyle's comment below).

This shows how important it is to protect pensions where they do exist, primarily at the state and local government level. They are being chipped away at varying rates, mainly but not exclusively in red states. Oregon, for example, looks set to cut state pensions in a special legislative session via reductions in cost of living adjustments similar to the idea of using a less generous inflation measure for Social Security to provide backdoor cuts.

It should be obvious that this is even more true for Social Security, since everyone is eventually eligible for benefits. That is why I have argued that expanding Social Security is the best solution to the coming middle class retirement crisis.

* Disclosure: Lynn Parramore is the editor at AlterNet who commissioned my article there on state and local government subsidies to business.

Cross-posted at Angry Bear.

Monday, September 23, 2013

Nauseating Health Care Idiocy from Forbes

A non-blogging friend points me to this new article at Forbes by Chris Conover purporting to show that the "typical family of 4" will see its health care spending rise by $7450. He quotes the Center for Medicare and Medicaid Services (CMS), saying "in its first ten years, Obamacare will boost health spending by 'roughly $621 billion' [that's the CMS quote]  above the amounts Americans would have spent without this misguided law." How stupid is this? Let us count the ways.

First of all, this is not $7450 per year, but over the entire 10-year (or more likely 9-year; he usually refers to 2014-22) period. So he's hyping shock value that isn't there. As he explains, he divides the $621 billion by total population over the period to give a per capita cost, which he then multiplies by 4 to get the cost to his "typical family of 4." So what we're actually looking at, before we start tearing up his calculation, is ($7450/9)/4 = $207 per capita higher spending per year on average. Recall that in 2011 the United States spent $8174.90 per person on health care (see link on how to navigate to the ultimate source for this data,

Second, Conover doesn't understand present value. He writes, "Of course, all these figures are in nominal dollars. In terms of today’s purchasing power, this annual amount will rise steadily." Of course, it is just the opposite. A dollar in 2022 is worth less than a dollar today. In 2013 dollars, the amount is less than $207 per person per year (how much less depends on what you consider an appropriate discount rate). How does an editor not catch this? I have a screen shot to memorialize the error after it eventually gets fixed.

Third, Think Progress's Igor Volsky is completely right when he quotes Paul van der Water of the Center on Budget and Policy Priorities that none of this will apply to the "typical American family" because that family gets its insurance at work. More money will obviously be spent over time, but it won't be spent at the center of the health insurance distribution, if you want to look at it that way. But Conover can't see this point. Instead, he points the finger at President Obama for promising that the ACA would reduce premiums for the typical family by $2500 per year. Not only do two wrongs not make a right, but...

Point four is that what he says is impossible just isn't: "It’s simply not possible for national health spending to rise by $621 billion and for the “typical” family to expect a $2500 (per year!!!!) premium reduction." I don't know if it will happen, but it certainly isn't impossible. Conover is overlooking the fact that the increase in health spending is being funded in ways that don't come out of individual health care spending. High-income taxpayers ($200,000 single, $250,000 filing jointly) are paying 0.9% points more in Medicare tax and an extra 3.8% on investment income. According to Robert Pear of the New York Times, "The new taxes on wages and investment income are expected to raise $318 billion over 10 years, or about half of all the new revenue collected under the health care law." The medical device tax will raise $29 billion over 10 years, over $100 billion will come from insurance companies, $34 billion from drug companies, and $150 billion from the "Cadillac" tax, according to the Obama administration. (We can debate the wisdom of this tax, but it doesn't fall on the "typical" family.) We're already at $631 billion over 10 years. If we increased these taxes more, yes, we could use the money to fund premium reductions, most plausibly by increasing the income levels eligible for subsidies.

Then, there's the little matter of the newly insured. By 2022, according to the CMS report Conover cites, 30 million more people will have insurance than would be the case without Obamacare. While many of those people will be receiving subsidies, a lot of them will be paying something for their insurance, adding even further to the sources of income that don't come out of what the "typical family" will pay.

Finally, the new 30 million people will be covered very efficiently. $621 billion divided by 9 years is $69 billion per year, divided by 30 million people is $2300 per person per year. While that figure is too low because we won't be insuring all 30 million immediately, remember that 2011 U.S. health spending per capita was $8174.90. Any way you look at it, the newly insured will be costing far less per person than those currently in the insurance system.

There you have it. Forbes' most-read story of the day (with over 26,000 Facebook shares and 3400 tweets as I write this) is simply false. Between all the new taxes and the premiums from the newly insured, you can cover the total increase in health care spending. The typical, already insured family isn't going to see increases due to the rise in overall health care spending. You add 30 million new insured at a far lower cost than what we currently spend per person. And the editors didn't catch a blatant error on present value.

Cross-posted at Angry Bear.