Charles Skelley: Adam Smith’s economics shows how to cure both the US Social security and healthcare problems

Life expectancy for US citizens at the age of 60 years has increased by 3 years since 1983, the last time Social Security was reformed. Therefore it is logical to study the effects of delaying the start of Social Security benefits by 3 years. A three-year delay could move the SS program closer to the degree of solvency it had when the Greenspan commission reform was activated in 1983. The following life expectancy table suggests that a 3 year delay probably would average about 17% decrease in lifetime benefits for future SS retirees.

My Presidential program advocates sharing the burden of Social Security reform among all US generations. So I expect a 1.5 year delay for starting to collect Social security benefits is fair IF SIMULTANEOUSLY all current retirees have their SS benefits reduced by a total of 9%, in three increments of 3% per year.

But a careful inspection of the life expectancy table, when viewed from the perspective of Adam Smith’s economics, also shows where another serious problem has occurred in the way the US has conducted its healthcare programs.

quote from: http://www.infoplease.com/ipa/A0005140.html

AVERAGE YEARS OF LIFE REMAINING FOR US CITIZENS Age

Calendar Period 0 10 20 30 40 50 60 70 80

1979-1981 70.8 62.0 52.4 43.3 34.0 25.3 17.6 11.4 6.8

2004 75.7 66.3 56.7 47.3 38.0 29.1 20.9 13.7 8.1 increase 6.9% 6.9% 8.2% 9.2% 12% 15% 19% 20% 19%

endquote

Adam Smith’s classic economics book, Wealth of Nations, proposed that a society should be analyzed in two categories — Productive people and Unproductive people. The societies which are prosperous, and generally good, will try to help their Productive people. But the societies which are collapsing, and generally bad, will be placing too much emphasis on their Unproductive people.

Data in the above Life Expectancy table can easily be analyzed through the prescriptions of Smithian economics.

For the period since the 1983 Greenspan Social Security reform, the US has increased the life expectancy of its Productive workers (ages 20 to 40 years) by 10%; but for the Unproductive workers (ages 60-80) life expectancy has increase by 20%.

According to Smithian economics, the US healthcare scenario during 1983 to 2007 would be graded as bad, precisely because it OVER-emphasized Unproductive people and UNDER-emphasized Productive people. A similar diagnosis can also be made from inspecting the following graph of the money which is being spent on people in various age groups.

Estimated Per Capita Health Expenditures, by Age and Sex, 1995

Line chart showing Estimated Per Capita Health Expenditures, by Age and Sex, 1995. Health expenditures begin between $2,000 and $4,000 and drop sharply until the aged 5 through 9 years category. At that point, the trend stays generally even until the late forties. Then the trend shows a general increase in expenditures from a little over $4,000 at aged 50 through 54 years to over $14,000 at over 80 years for both sexes.

Source: From Baby Boom to Elder Boom: Providing Health Care for an Aging Population. Copyright 1996, Watson Wyatt Worldwide.

In the above graph, there appears to be a “knee” in the costs curve at the age where Medicare takes effect, around age 60. If the curves for both men’s and women’s healthcare cost from age 5 to 50 is extrapolated into the retirement years, it would propose spending about half as much at age 80 as the US is currently spending on 80 year old people. According to Smithian economics, this would be graded as bad. And here again the reasoning is that the US healthcare system is UNDER-emphasizing its Productive people, and OVER-emphasizing its Unproductive people.

The two analytical approaches which were used above are independent of each other. But Smithian economics draws similar conclusions, both on the costs side and on the results side, about US healthcare.

Smithian economics has shown that the US Medicare budget should be cut in half, over a gradual period. And half of the healthcare savings should be applied to cost-effective free medical attention for Productive people in their prime years, ages 20-50.

This Smithian analysis comes close to the magnitude of the healthcare reform in my Presidential program. I am asking Congress to cut the overall cost of US healthcare in the US to 11% of GNP, from its current 16% of GNP.

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