The New Republican Plan to Save Medicare - Part One, Defining the Benefit

The great enemy of the truth is very often not the lie, deliberate, contrived and dishonest, but the myth, persistent, persuasive and unrealistic.

John F. Kennedy

I always found it ironic that when I was interviewing for a job, one of the first things discussed was retirement. When I was looking for radiology jobs, private retirement plans were transitioning to defined contribution plans from defined benefit plans. Understanding the evolution of private pension plans is a useful exercise for grasping the motivation behind representative Paul Ryan's new budget proposals, and are vital for understanding the daunting problems confronting Medicare, Obamacare, and healthcare in America.

A defined contribution plan is much like your 401k. You put in money every year, invest it, and take out whatever is there when you retire. Of course, the problem is that if you invest poorly, you have less than you might have hoped, and you can never be certain of how long your money will last. In contrast, a defined benefit plan guaranteed you a certain amount of money per year after a certain age, no matter what. Although money would be put aside from your salary every year, if the pension plan did not have enough money to pay you when you retired, new employees would be required to make up the difference, by contributing more from their paychecks, usually without limits.

Private plans and individuals realized many years ago that defined benefits plans were unfair to future employees. If the accountant's investment assumptions didn't work out, or retirees lived a long time, new employees would be required to contribute large amounts to retirees. Furthermore, present employees would be reliant on the success and goodwill of future employees to ensure their own retirement. Additionally, companies and partnerships were not able to anticipate what their future expenses would be. These defined benefits plans, and their undefined risks became major impediments to corporate health, and to hiring new people. Such programs have been almost completely eliminated among Radiology groups, and in most corporations with a choice in the matter.

More importantly, if the accountants or executives were dishonest, these defined benefit plans could be manipulated and result in major abuses. Unreasonable growth assumptions could be utilized to justify lowering present contributions to the retirement plan. The extra money could then be used for salaries and bonuses, placing the burden for the fraud on future employees. Pressure to pad the bottom line, and satisfy union demands, makes the incentive to cheat on these assumptions enormous. Eventually the piper must be paid, and the expense of funding these pension plans can make companies uncompetitive, leading to their failure. There are many examples of such malfeasance, the auto, airline, and steel industries in America have been destroyed, in large part, by such abuse of defined benefit pension plans.

Government programs, including medicare, social security, Obamacare, and other pension plans are far far worse. Not only are the assumptions underlying the plans blatant lies, the benefits themselves are "undefined", with no attempt to cap outlays being made.

Paul Ryan is making a brave, if doomed, first attempt to address these issues, more to come.

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