Washington Post columnist Gruberizes Medicare argument

Washington Post columnist Gruberizes Medicare argument

Medicare: A good investment? / Picture: Images of Money, used under Flickr Creative Commons license
Medicare: A good investment? / Picture: Images of Money, used under Flickr Creative Commons license

WASHINGTON, February 28, 2015 — According to the Washington Post’s Catherine Rampell, everyone gets a handout from the government to pay for health care once they reach 65 years old and are forced to apply for Medicare. Her February 26 column is a clear example of gruberization.

That term is associated with MIT economist Jonathan Gruber, an academic whose studies seem to produce results determined before the study is actually conducted. He apparently chooses his data to get him the conclusions that he wants.

This approach is usually behind studies performed by very learned economists, including Nobel Prize winners, who conclude that raising the minimum wage will not destroy jobs, but rather may lead to a net increase in jobs. This conclusion is analogous to someone who says he is strong enough to lift himself off the ground.

These minimum wage studies select data from periods when wage rates and employment were increasing because of demand-driven market forces; thus government mandated increases in the minimum wage had minimal effect on the market. Had these studies been unbiased and selected more representative time periods, they would have reached the conclusion that is consistent with the fundamental Law of Demand: When prices (wages) rise, the quantity demanded (number of jobs) falls.

Before Rampell did any analysis, it appears she had already concluded that every American gets a “handout” from the government when they receive the Medicare benefit.  A less biased conclusion would take into account basic principles of finance.

The current Medicare tax rate is 2.9 percent of earned income. Rampell notes that a single male who earns an average wage will pay about $70,000 in total, or about $1,600 per year in Medicare taxes and will receive, on average, $197,000 in benefits. She concludes that each American receives $127,000 handout from the government. Why is this faulty, gruberized logic?

Suppose instead of paying the $1,600 in Medicare taxes, that single male put the $1,600 into a stock market account each year. On average from 1929 to 2012, the stock market returned almost 12 percent annually. So how much would an individual have in the account if he started saving $1,600 per year from the age 22 until 65? He would have more than $1.7 million.

If the individual were risk adverse and put the $1,600 into corporate bonds which had an average return of 6.6 percent, he would have about $350,000. In either case, he would have much more than the $197,000 he is likely to receive in Medicare benefits. He is not getting a handout from the government, but rather he is more than covering his Medicare expenses and paying for someone else’s, too. Logic tells us that if every American were receiving $120,000 more in benefits than they paid in, the system could not possibly be solvent.

A similar argument can be made about Social Security. With a tax rate of 12.4 percent of wages, a single male will pay, on average, about $6,800 per year in SS taxes. If he put this money into the stock market for the 43 years of working, at 65 he would have $6.7 million. If he invested in the bond market, he would have $1.5 million.

If he retires at 65 and lives to be 85 he would be paid about $600,000 in SS benefits.  This is the reason why President Bush suggested privatizing the Social Security system in 2004. This proposal would have been a choice for new workers to partially offset the crushing burden they will carry because of the $18 trillion and growing public debt, as well as making them less dependent on grossly underfunded social programs. Bush’s idea was soundly rejected.

Academic researchers are supposed to be unbiased when they conduct studies so that their conclusions are valid and reliable. Unless writing an opinion piece, journalists are supposed to be unbiased when reporting events, and even within opinion pieces they are supposed to base conclusions on facts rather than choose their facts to fit their conclusions. Just because Jon Gruber did it, doesn’t mean gruberization is acceptable.

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