October 18, 2012

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

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 on 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.” President Obama said in 2009 that “the biggest threat to our nation’s balance sheet is the skyrocketing cost of health care. It’s not even close.”

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 10 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.

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 billionin assets in December. Is it accurate for anyone to describe an account able to cover just seven months of spending as a “giant trust fund”?

Worse, only 38 percent of Medicare’s expenses are covered by payroll taxes, down from 62 percent in 1990. 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.

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. According to the Government Accountability Office, this likely cost-control failure would require that an additional $12 trillion be deposited into Medicare.

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.

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. Or, if the top 1 percent were made to pay the entire shortfall, their effective federal tax rate would have to go from 24 percent to more than 80 percent.

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 illusion into voters’ minds is worse. Whoever wins will have to govern. The campaign we are having will not make doing so easier.