1. I assumed that the average lifetime of a Medicare beneficiary was 12 more years. This is from the CDC data base. Actually it is 18 years if one reaches 65. I was told the added 6 years was a flaw and indeed it is an error in fact.
2. However, here it gets complicated, there were many Medicare contributors who paid into the system but who died before getting benefits. Should we recognize those contributions? The answer is yes, it is like an insurance plan. But they never benefit. Yet the money must be recognized. So even tough the duration is longer the total imputable contributions are greater.
3. Does the added 6 years make a difference. Again it depends. We discounted future payments by some cost of capital. But they must also be inflated by medical costs inflation. Here it gets sticky. If say the discount factor is 5% from year 13 thru year 18, then this neglected period is an additional 20% to the total NPV at 65. Following me folks? Now if at 65 we had obtained $140,000 and now we have $168,000 but we contributed $174,000 then we still hold water. But wait... If medical care inflation exceed the return on invested capital, then it explodes! However .... one could invest in a portfolio of health care companies and hedge the bet ...
4. My analysis was different from the one critiqued since they assumed a single income family who made $45,000 by age 65 which is just above poverty. My argument was that one should still look at the average not the lowest. Still feel that is correct. Yet the real method should be to consider a real distribution of incomes and weight them. Also one must add in the contributions of those who did not survive to 65 but who contributed. This is somewhat difficult as are all allocation algorithms. This is why I used the average lifetime and not the average lifetime given one had reached 65. This was a plug for the lost revenue from those who did not survive.
5. Then there is the issue of race and sex. Blacks have lower survival and women live longer than men. I did not look into this detail. For example white women have been paid less then men but live longer and benefit more. So ... I really cannot comment but it is a fact ... that is why it is insurance.
So bottom line, was 12 years wrong, yes in a specific manner, no in a general sense. Was the conclusion in error; yes in an exact science manner given the way the problem may have been defined but no when one considers the orders of magnitude of difference when including the data.
However, the main time bomb in all of this is the issue of the inflation in health care. If that exceeds economic growth the system is doomed. Yet that assumes the past is prologue to the future and unchangeable. If we look at the changes in health care we can see clear signs that it is possible to reduce costs thru genetic approaches. However. the costs of life style diseases such as type 2 diabetes, most often driven by obesity, will soon smother the system. That is the challenge, it is a challenge of the present, and has yet to be voiced except by the current President's spouse who went bravely to the front. Should we tell people what to eat, yes if we are forced to collectively pay for the consequences, no if they agree never to charge us for their costs. It is just a matter of dollars and sense!
I have updated the analysis for 18 year lifetime post 65 and attach it below.
As expected it is really not that different. Let me explain:
1. I assumed a typical lower middle class worker with a reasonable job. Starting work in 1970 1ith $16,000 pa but never really going anywhere so I gave him a 6% pa raise. Remember that is thru Carters 18% inflation period.
2. I assumed 3% Medicare tax as was the law.
3. I assumed the payment was invested at 6% during this period. Not too bad.
4. I assumed that the person retires at 65 and lives 18 years. Simple but still skews the real actuarial result. So they live to 83.
5. Assume inflation and Medical care costs rise. I have parameterized the data accordingly.
6. Then I plotted at age 65 the difference between the NPV of Medicare Benefits and Medicare Contributions. The net is the "excess Medicare benefit". Worst case it is $100,000 only if health costs exceed inflation by a factor of 2! Not the several hundreds of thousands that others complain about making no assumptions about such costs.
My argument stands. The Brooks et al argument assumes a two family household where the age 65 income is near poverty. I assume lower middle class individual. Can we adjust this across all of the society, yes, just lots of work but I believe the conclusion will not change much.
Now I have also parameterized this versus starting salary to give an idea as to the benefit.
Note that for the very poor, starting at $4,000 pa in 1970 and receiving marginal raises and with medical inflation 7% in excess of core inflation we can generate an individual benefit of almost $160,000! That is possible but it is for an extreme segment of the population not on average!
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