Paul Ryan's Plan for a Dismal Future

The House GOP leadership has settled on a list of budget cuts for 2011 to keep their Tea Party allies happy. They are categorized here at the Washington Post. These are the tip of the conservative sword aimed at government and the public. Except for cuts to the State Department, Agriculture subsidies and Homeland Security, the cuts target programs that are of aid to Americans who need aid now probably more than at any time in their lives. To insult the injury, the GOP proposes to increase defense spending while cutting VA funding.

It's a typical conservative approach to budgeting. Cut services to those in need after having passed tax cuts for people who aren't in need. But it's just the tip of the Titanic sinking sized iceberg they aim to put in our path. That iceberg has a name. It's Paul Ryan.

Paul Ryan, the Republican wunderkind fiscal genius and now House Budget Committee Chairman has carte blanche to implement his Roadmap For America in House budget planning. Since it's entirety or parts of it may be coming our way very soon, we'd best understand what it will mean. We'd best understand it before it gets to the President's desk.

Republicans don't normally talk about policy detail, and for good reason. People generally do not like GOP/conservative policies when they actually get to hear them.

Until just days ago, the front page of the Roadmap For America website there was a link to this article labeled "Alarm over U.S. debt creates 'window' for tough choices". You'd think an adult would be lamenting tough choices rather than viewing them as an opportunity.

Opportunity "window" for what though?

Ryan proposes changes in health insurance, Medicare/Medicaid, Social Security and the federal tax code. The changes he proposes are incontrovertibly conservative ideas. Ryan's proposals, one by one:

Health insurance -- Ryan's plan for health care will replace the Affordable Care act of 2010 with a refundable tax credit of $2,300 for a single person and $5700 for a family. The plan will define a federally mandated health insurance policy designed to provide coverage that can be bought for the amount credited/refunded, seemingly a one size fits all solution that seems hard to square with existential facts of cost. In 2009, the average health care policy cost $4,824 for a single person and $13, 375 for a family (USA Today). If you're over 40 you imagine the kind of policy you could get for $2,300/year.

Tax credits are tricky though. First off, the U.S. government already subsidizes the health care of 67% of Americans. Socialism in health care already exists. But that's another discussion.

As it is, employers are subsidized for providing health care plans. Employers get to deduct 100% of their employees health care as overhead. This reduces the tax obligation of employees as well as employers by providing a benefit to employees in lieu of wages that would, ostensibly, be used to buy health insurance. Also, partial premiums paid by employees can be paid with pre-tax dollars, further reducing their taxes. So if an employer pays your health insurance tab, you, as a single person, will save something like $500-$1,500 in federal taxes by having the employer as middle man with your insurer.

Under the Ryan plan, the objective is that you would pay your health insurance individually. The plan is intended to, and argues to, remove employers as the primary source of health insurance. So if you're single, the Ryan $2,300 tax credit plan will not get you equivalent coverage and will cost you an additional $3,000 to $4,000 to maintain it. The family plan will cost you an additional $9,000- $12,000.

So the Ryan plan is grossly insufficient in terms of coverage as put forth in his Roadmap.

Another way to look at it is that a tax credit as a subsidy comes first off the balance of taxes that you owe. Since the taxes that you owe will go up if your employer drops insurance as a benefit, the value of the tax credit is reduced by $500 to $1,500 dollars if, and only if, your employer decides to pass on to you the difference in his outlays caused by withdrawing the health insurance benefit. The best case scenario is that your employer will pay you the cash formerly dedicated to your health care benefit. In which case you'll be in the hole the aforementioned $3,000 to $12,000 depending on your life situation. The worst case scenario is that your employer will just keep the cash and stick you with paying for your health insurance on your own with a little help from Mr. Ryan. In which case you'll pony up the cash for health insurance out of savings, if you have any, and be reimbursed next year. You will then be reimbursed half of what your health plan cost.

The Ryan plan would be of benefit to people who have no employer plan at all, about 20% of Americans. Where Medicaid and Medicare fit into this is even more problematic.

It is a long standing conservative belief that health care costs will come down if individuals make their own purchasing decisions. How eliminating the bargaining power of companies from the health care cost/delivery system will help is a matter of faith. But to conservatives, anything that smacks of collective bargaining by or on behalf of labor is an intrinsic evil.

Tort reform is included in the policy plan, as always with conservatives, it's a central theme. Tillinghast's "Tort Cost" Figures are cited by the right to justify tort reform. Tillinghast's accounting voodoo has been widely debunked as wildly overstating tort costs. The right then uses Tillinghast's faulty numbers to claim that malpractice suits add 10% to health care costs overall when independent calculations show that number to be off by an order of magnitude at least. Tort reform is an affront to American justice and will do nothing to lower health care costs, empirically even, as the states that have adopted tort reform have seen no benefit from doing so whatsoever.

Last and most important, this program is not funded. It is particularly not funded if employers rush to ditch their employee health plans as the program seems designed to foster. Tax revenues might go up by eliminating the employee health care deduction at a significant number of companies. But overall, a recoup of taxes lost to employer and employee tax benefits in the current system can't equal the payout of the refundable tax credit. Tax breaks amount to 30 cents on a dollar at most and tax credits are dollar spent for dollar of revenue. So gained revenue would amount to a best case of $265 billion and the liability for tax credits would amount to a worst case of $600 billion.

Medicaid -- Federal participation in Medicaid will largely be replaced by the Ryan health insurance refundable tax credit above, low income an tax pitfalls and all. As people on Medicaid by definition haven't the income to buy health insurance, a prefund will be required but is not mentioned in Ryan's plan. For persons with substantial medical problems, Medicaid will remain the source of healthcare and will be funded with a bloc grant to States. A bloc grant implies some calculation of the Medicaid needs of a particular state.

Medicare -- First and foremost, Ryan's plan aims to split the public sentiment by assigning a cutoff of age 55, at or above which age changes to Medicare will not apply. This is blatant splitting of the electorate pitting the older against the younger. But what the younger voters might not find obvious in their new and improved Medicare plan is that it states no provision for funding the continued benefits of seniors. Younger people's Medicare payroll tax will not go down, and it may have to be increased to cover shortfalls caused by the revisions.

In place of open ended Medicare, people who are now under 55 will, upon reaching Medicare eligibility age, receive a voucher with which they will be required to buy some health insurance product or presumably not get the voucher. The pilot amount seems to be about $11,000/year, conditioned on buying a new "Medicare" sanctioned plan. What is covered in that plan is not disclosed.

The Centers for Medicare and Medicaid Services estimated Medicare spending on persons over 65 to be $14,000/year per person. It's hard to imagine getting a health insurance policy for $11,000/year that will then cost the insurer $3,000 an year plus administrative overhead.

Speaking of administrative overhead, private insurance overhead and profit consumes a minimum of 15%, now under law, of every insurance dollar. Medicare overhead is 6%. You get more health care for your tax dollar from Medicare than any private insurer can or has as yet provided.

How putting Medicare administration in the hands of private insurers will cut costs is not clear. One has to assume that since people will have about 70% of the health care they would have gotten under the current Medicare system it will then cut total federal expenditures if not costs per case to the public.

Social Security
-- The Ryan plan contains, like with Medicare, a proposal to buy off voters over 55 by promising to continue their Social Security benefits under the current system, and prey on the naivety of the younger voter. The plan for the under 55 will allow people to devote a third of their current payroll Social Security contribution to a private account. Since Social Security pays current benefits out of current receipts, it could nominally leave the benefits of current retirees unfunded by as much as a third.

Further, Ryan's plan assumes that there will be no downside to investing in a private account in a volatile market system. As people found out in 2009, equity markets are not always "up". Future retirees may, and many likely will, find that when they need their retirement funds that they may not be there. Of course the same forces operate on the wages from which Social Security pay as you go system is currently based. If you retire in difficult times, more difficult that even now, Social Security might fail to meet promised benefits. By the nature of investment funds, diversification is limited to the choices of fund managers. Individual equities and even money market funds can go bust and become worthless, dealing a blow to a generation of retirees that can't be made up. Social Security is the most diversified "investment" that it possible to make as it's based on the entire economy and not just a limited menu of securities and strategies.

Much fantasy surrounds the return on investment of Social Security too, which Ryan fails to investigate. The fact is that, with current Social Security, the longer you live the more return you get. A self administered annuity is designed to drain principle down for a fixed interval, say thirty years. Under that design, you might well outlive your funds, unless Ryan's Medicare plan doesn't kill you first.

Here's the math Ryan fails to disclose. If a person making the median wage saved an amount equal to his total yearly Social Security payments, $3,380, after 40 years at 3% interest he would have $260,000 at retirement age. If he then started withdrawing money in equal payments spread over his remaining lifetime, say 30 years, he could withdraw about $1,000 a month the same as his Social Security benefit would be if started at 62. But at the end of that 30 years his savings would reach zero, as annuities do.

Say that you can make more that 3% interest? In terms of historic performance of the DJIA, that's possible. But you have to consider this, stocks advance unevenly. From 1930 to 2010, all the advance in the DJIA happened in two bull markets which together spanned thirty years. For the other fifty years, the DJIA didn't move much or retraced. If history is predictive, you can expect to make nothing for twenty to thirty years, get discouraged and quit contributing and miss the next bull market. That is the nature of private investments. The DJIA hasn't netted a gain for the last ten years in what is arguably been the best financial environment possible for it to do so.

Ryan attempts to assure voters by promising that their privatized contributions will be guaranteed against loss by the government. This from a member of a party that promises never to raise the income taxes that would cover that guarantee. It' an empty promise bordering on fraud.

Now then if a person owns and can bequeath a Social Security account, it is a personal possession. A personal possession can be forfeited for criminal or civil legal cause. Your private account could be wiped out by someone slipping on your sidewalk or in a divorce. Your Social Security can't be wiped out by liability or by economic calamity short of total economic collapse of the U.S.A., an event which would wipe out any private account as well.

Finally, in terms of administration overhead, a privatized retirement plan will have higher overhead than the current Social Security system. A for profit component in the system assures it. Consider whether or not you want to fund Wall Street bonuses with your retirement funds.

Income tax -- Ryan proposes replacing existing tax code with its multi tier progressive rates with two rates of taxation on income and elimination of all itemized deductions in order to simplify the code. Simpler would be better. But the wholesale elimination of deductions like medical expenses and mortgage interest will have a profound affect on people and markets.

Tax code is one of the main tools that the federal government has to encourage or discourage economic activities such as buying a home, R&D or shipping jobs off shore. Economic incentives, applied through the tax code, are the preferred method of controlling commerce in lieu of criminalizing a host of activities or subsidizing others directly. It may be that these tax code based controls backfire or do nothing sometimes, but they have generally been recognized by both political wings as less onerous means of expressing the will of government.

Ryan's standard deduction and exemptions seem generous enough, but in combination with the elimination of itemized deductions and a woefully inadequate health care plan, most middle Americans and the poor will be net losers. This while the upper incomes get the greatest tax break in history, a 25% top bracket.

The Business Consumption Tax will replace the corporate income tax. As corporations pay only about 7% on income now, an 8.5% tax on revenues minus expenses seems a fair tradeoff, when in fact it is a giant tax cut. Businesses that now pay zero taxes because of loopholes will be losers. All business purchases will be expensed and depreciation will no longer be required or allowed. It will lower the accounting burden on business and eliminate thousands of special interest loopholes. It will also remove important leverage that the government has in shaping economic policy and commerce.

The plan will be stillborn of course. Business is much too invested in subverting the tax code to permit passage of a simplification that would end their proud record of never paying any income tax.

Finally, Ryan's tax code revisions rely heavily for justification on the conservative ideology. Lowering taxes on the rich and business is assumed to create economic growth through making capital formation easier. The last thirty years have proven that assumption to be hogwash. Capital that is formed and not employed is of no use to America. There is so much capital available already that it is idle. Most of it simply chases returns in unproductive speculation in stocks (the bubble), housing, commodities (metals, energy and food), currencies and soon in bonds. Instead of more concentrated wealth, the U.S. and the world needs more distributed wealth. Paul, show me a tax plan that will get money out of banks in Switzerland and the Caymans and into the streets of Detroit and New Orleans and then we can talk.

In Summary: Ryan's plan makes token and obviously inadequate provisions to placate the poor and elderly in an effort to disguise the standard conservative agenda of laissez faire health care, the dismantling of Medicare, Medicaid and Social Security, and the neutering of the tax code as a policy instrument while enriching the wealthy of this country even further than anyone has seriously proposed to date.