Morning Fog

Rising Food Costs

Note: The following item is also posted on The Tin Lizard.

I had a surprise today, reviewing what we spent in various categories of ordinary household expenses last year.  The last time we conducted the same review was on expenses for 2005.

Shocker!  Our ordinary food costs, excluding meals out, and excluding wine/beer, were about fifty percent - 50% - higher in 2011 than in 2005.  This increase occurred even though, as we age, we tend to eat less (smaller portions and fewer big meals),  consistently shop price, and seldom buy anything that isn't "on sale."  One might be tempted to think there was a miscalculation somewhere, but I really doubted that; we have very good, thorough data for this in our financial software.

So, looking a bit farther, I ended up at the FAO website (via the intermediary of "ThinkProgress.org").  The FAO publishes a monthly index of world food prices.  It's worth a look.  It confirms not just that prices have gone up, but actually by far more than just 50%; comparing the average index number for 2005 (117) to that for 2011 (about 225) in fact, the FAO index suggests that costs have gone up by over 100%.   I guess we can congratulate ourselves on keeping costs down as much as we have! 

Food costs have increased more than any other category that we consider.  A related category for dining out shows an uncannily similar increase - about 50% - even though we consciously go out less often than we used to.  And while the media love to stir us up with almost daily reports that the cost of gasoline is up another penny or two, it's interesting to note that we paid only about 26% more for gas in 2011 than we did in 2005, for the same amount of driving.  These data suggest we ought to be paying more attention to those occasional reports about food increases, and less to those almost daily ones about gasoline. 

Still, as retirees, we have felt the effects of these rising food costs in the form of feeling frequently pinched, without consciously discerning to what to attribute it.  Other expenses has risen too, and far more quickly than our retirement income (even though the latter is somewhat buffered by cost-of-living increases). 

This insidious cost creep affects everyone, but it's particularly serious for seniors, and more so for seniors at marginal income levels.  It has some clear implications for the future of social security and current talk about altering its cost-of-living calculations downward.

Historectomy

There is a huge contingent of malevolent forces at work in the land, bent on persuading us that black is white, and that known historical events never occurred.  One such event, for example, is the entire eight years of George "Dumbya" Bush's Presidency, which according to certain elements, never actually happened.   They seem so entirely convinced of it that we who retain normal memory function must suppose they're either suffering amnesia or have had history surgically removed from their brains. 

How else can we explain the constant drumbeat of articles and opinions from business interests and their representatives in Congress, to the effect that Obama is responsible for the current economic stagnation; that measures that were successful in the past in reviving economies are now "job-killing" wastes of time; or that the real path forward is to double down on the laissez-faire approach that led us directly into the slump we're now in?  (Oh, about that last point, I forgot - of course that eight years of free rein for business never actually happened...)

In a world where the only solution conservatives can offer is of the "same-song, second-verse" variety, while hoping that nobody will recognize the tune, it's instructive and useful for us to hear from Senator Christopher Dodd, in the Washington Post, regarding "Five Myths About Dodd-Frank."  Dodd co-sponsored the subject legislation, more formally known as the "Wall Street Reform and Consumer Protection Act of 2010," which sought to end some of the worst and most irresponsible practices of self-enriching financial wizards.  

As he correctly points out, critics who are now attempting to roll back that legislation are "launching false attacks" against it.  He is too polite by far in allowing that the critics might be just "misguided" rather than "intentionally misleading," but most readers will know which motivation is the real one.   I'll leave you to read the article, but would just emphasize Dodds's opening comment under the first "myth" he deals with:

Critics who charge that the law is aggravating the recession have forgotten where our economic woes came from in the first place.

Well said!  When a Senator defends legislation he authored and sponsored, we can expect there may be a grain or two of exaggeration in the details.  But at least Dodd hasn't totally forgotten his recent history.

 

   

The Military Entitlement

I've argued for some time that if we are to put our national budget on a diet, and cut costs enough to restore both a degree of fiscal responsibility AND a degree of flexibility in government spending, we can't continue to be straitjacketed by the huge percentage of our outlays now being taken up by "entitlements." 

Lately politicians have rather cautiously approached this taboo subject too, but they tend to focus on "fixing" social security and medicare through a combination of cost cuts and premium increases, while ignoring the 800-pound sacred cow on the books -- military spending.  That, to me, seems unreasonable.  We must include military spending in our search for cuts.

Naturally there are those who don't see it that way, including most members of the military services.  Their views are, I think, fairly well represented by retired Col. Andrew Bacevich's thoughtful piece, "Don't Rewrite the Rules..." this weekend.  But I think Bacevich leaves out a couple of pertinent points, and unrealistically inflates others.

He argues that reduced retirement benefits could put an end to the all-volunteer army.  Personally, I would welcome a return to conscription, but our politicians have found it easier to fight long wars of choice if the fighting is being handled by guys and gals who volunteered for it.   So if we can't get the draft back, let's look closely at this premise. 

It's true that as we switched to a volunteer force after Vietnam, benefits and active duty salaries were enhanced considerably as an incentive to volunteer.  However, the retirement system for the military is pretty much the same now as it was forty years ago, so it can't be seen as an incentive built for volunteers.  If we're honest with ourselves, most of us who are now in, or have served in, the military will concede that when you're 18, or 20, or 22 and thinking of a military career, you don't look 30 years ahead and consider the retirement benefits in any studied way.  

I think this is true in any career, it's just human nature.  You're considering starting salary, benefits like health care maybe, but definitely not the retirement system.  I know I didn't.   And to be frank, it would worry me to think that many of our professional military people were worried about their retirement plan at that age.  If they are, maybe they'd be better off as CPAs or insurance salesmen.  Finally, this whole argument ignores a key fact of our age:  The pattern of careers has changed; a "typical" working life will be divided into a half-dozen or more stints with different employers, possibly doing very different work.  No one nowadays expects to be with the same employer his entire working life.

In fact to me, it's because we have a professional, all-volunteer force that we can and should look at the costs of their overall compensation.  When we had a bunch of draftees, we could get all dewy-eyed thinking of the poor bums who served while their buddies stayed home, built careers, and stole their girlfriends; and we built a compensation package for the relatively small corps of "lifers" accordingly.  We haven't got out of that habit yet, but that citizen soldier no longer exists.  We should look at a professional force with a much clearer eye.  When we do, we'll see that his/her dependence on a pension is no more dire than seniors' dependence on social security or medicare.  (Perhaps it's even less as the military pensioner begins younger.) 

We'll also see that unlike social security recipients and medicare beneficiaries, military members pay nothing - not a cent - out of pocket for their retirement plan.  (They pay social security taxes, and receive social security benefits in addition to their military pension.)  How could we possibly consider it fair that we stand to be increasing premiums for medicare, requiring higher or longer pay-ins for social security, but don't ask our military members to contribute something toward a pension most other people would consider very generous?  What it really boils down to is whether we want to create a privileged military class; I posit that we don't - no more than we have already.

All that said, I also believe, as Bacevich does, that the military life makes more demands than most civilian occupations, and that there should be a defined benefit retirement system that covers them.  Ideas now being proposed, about jettisoning the current system in favor of a 401(k) plan, are just as misguided as the suggestion that we do away with social security and put private savings accounts in their place.  These "solutions" benefit only banks, investment advisors, and other financial institutions, to the detriment of retirees.  Keep the pension, but certainly - for new recruits - institute a reasonable payment to come from the beneficiary.  

Paying For Federal Pensions

This graphic appeared in Sunday's Washington Post, though it was prepared by the "National Institute on Retirement Security."  The basic purpose of the chart, and of the article it accompanied, is that employee contributions for federal pensions are considerably less than for defined benefit plans in state/local government or in the private sector.  That is a valid point, though it needs a couple of caveats:

• I think the federal government deserves credit for being ahead of the curve, back in 1980, when it redefined its 100%-traditional pension system into a mixed package of social security, defined benefit, and market-driven 401(k) plans.
• It's futile to compare federal, state/local, and private pension plans on the macro level, as the chart tries to do.  How can we make comparisons, for example, when we don't have any information about the benefit received in return for the input?   How can one federal plan be compared to 1700 state/local plans, or ten times that many private ones, each with its own different benefit structure?  Impossible.

That said, if everybody is going to be tightening their belts by paying a larger share of their defined pensions, I’m sure federal employees will be asked to – and should – pay more also. 

But that brings us to something not even whispered in this chart, or the article:  military pensions, which aren't referenced at all here.  As Morning Fog has argued before, budget cutting is fine IF we don't fence off entire sections of it from any cuts at all.  We can't exempt Medicare, Social Security, or even the U.S. armed forces, from sensible and prudent reductions.  Remember the famous robber Willie Sutton, who was asked why he robbed banks and answered, "Because that's where the money is?"   So, why should we consider cost savings in all entitlement categories?  Same reason.  (Thanks for that wisdom, Willie).

Military personnel pay into social security.  That’s all.  Their defined benefit pensions, which can kick in as early as age 50, are more generous than their civilian counterparts', and cost them nothing at all.  Two pensions for the price of one, plus  - again unlike their civilian counterparts - they are permitted to take federal employment after they retire without any penalty against their social security or pension benefits.   All the Willie Suttons in Congress appear to be overlooking this particular bank.  So for military government employees, the belt-tightening expected will be an increase of $60 per year in the premiums they pay for health care, while for civilian government employees, it will be an additional 5.2% of their salary.  What's wrong with this picture?

Now, I'm not just a civilian lamenting that it's only my ox getting gored.  I've served in the military, including combat zones; my father was an Army lifer; and I spent years in a government pay/retirement system much like the "old" one described in the chart.  So I believe I see all sides of this issue.   And what I see is that we redefined our military after Vietnam, but not our way of looking at it.   

Our current view of military pay and allowances still harks back to a bygone era, when we all shared the potential burden of military service equally (more or less) through conscription.  We who served and risked our lives were the same as everyone else, except that we served and they didn’t.  The generous benefits were designed to compensate for that difference. 

Today’s military is different – all professional, they are government workers who wear uniforms.  Are you thinking about their risking their lives?  They do, but in modern war, not so much more than our police, whose benefits are far less.  The young recruit who joined up right out of high school who got killed last week in Afghanistan?  That is tragic and sad (especially when the life was lost because of politicians playing war as a game) but those unfortunate KIAs won't be collecting a pension, so this isn't about them. Certainly pay and benefits should be commensurate to attract the people we need in the armed forces, but it is neither just nor affordable to continue to subsidize them as if they were hapless GI Joes, or not to expect them to contribute something to a very generous retirement package.  

 

Military Compensation, Civilian Compensation

Since I last wrote here, the House has approved a modest increase in the premiums that certain retired military personnel will pay for their health care plan.  Now the Senate must deal with the same issue.  As I said earlier, the small increase seems more than justified (perhaps even a little too small) given that there has been no increase in 16 years. What isn't so reasonable is the concept military retiree organizations are pushing, and which the House appears to have accepted:  limiting the amount of future increases to the general inflation rate, rather than to the actual cost of the benefits provided.  

The Senate should kill that provision; it mortgages the future and limits our flexibility.  The only logical and fair way to engineer an enduring method of handling future premium increases is on the basis of cost.  Otherwise, the growing gap between premiums paid in by retirees, and the costs of benefits received, will contribute in perpetuity to our budget deficits.  This is the dilemma of all our entitlement programs in microcosm.

The topic of paying for health insurance, of course, is immense, and all the issues involved won't be resolved in this space.  But on this small part of the puzzle, I'd propose that we avoid future problems by defining the premium as a fixed percentage of costs.  It would take a bit of study to figure what that percentage would be.  It might be the percentage these retirees would be paying once the current increase becomes effective (we're not told here what that is).

Such a system would provide a mechanism that would track better with trends and wouldn't need to be re-jiggered every year.  On the other hand, it would also provide a means of regularizing gradual increases in premiums, without having to wait sixteen years for the next tiny increase.  In addition, a cost factor might provide some small incentive for individuals to consider pricing and need in their health care decisions.  It could even permit premiums to decrease in future, if we can succeed in getting a handle on skyrocketing health care costs.  

There was a time when we collectively might have thought that we could define a premium to be paid that would remain fairly constant over many years.   With the sorts of cost increases we're seeing recently, that clearly is no longer the case.   That presumably is why the cost of Medicare for civilians has risen about 22% in just the past two years.  Tricare is the military equivalent of Medicare.  The implications are evident.    

Costs Of Health Care

I think James Surowiecki pretty well sums up the dilemma of U.S. health care costs in his column "Bitter Pills" in this week's (May 2) New Yorker.  I recommend you read the whole article, but the nub of it is this:

"We’re unhappy about the rising cost of health care, but we’re also unhappy about what we would have to do to curb it. The ideal system, for most voters, would guarantee all seniors reasonable health care, stop the debt from getting out of control, and keep paying health-care providers as before. The problem is that you can only do two of those things at once. The debate between Ryan and Obama is a debate over which of the three we’re willing to give up."

To look at it another way:  there is perhaps no perfect system. 

My personal views and situation reflect some of the same paradoxes Surowiecki points out.   I believe that Medicare is a good and necessary program, and that some form of universal coverage needs to be extended to the general population, not just old folks.  Yet I also think Medicare needs "fixing." Its costs suck up too much of our national budget, even while I recognize that health care providers are probably underpaid in market terms (and that needs fixing too).   Extending insurance to everyone will add to the costs, so another problem looms as well. 

To a large degree, it's a problem of our own making.  We've allowed ourselves to be duped by politicians who have told us that we can have services without taxes.  It's unclear to any rational person what sort of alchemy makes that possible; certainly attempts to put the theory into practice (e.g. as George W. Bush did) have come a cropper.  So a good part of our problem can be dealt with by simply changing our tax policy. 

"Tax the rich" is a good way to start, given the increasing inequality of income distribution in the U.S.; and systemic changes in the way medical care is delivered will also help, but I also consider that we're all going to have to pay more to get the health care we want.  We can pay more to the government through taxes, or we can pay it to profit-motivated insurance companies and care providers.  Take your choice.  My preference is the former - both systems can produce waste, but in the government model, waste (in the form of denial of care or needlessly burgeoning costs aimed at bolstering profits) is not incentivized.  

Nevertheless (back to those paradoxes), though I'm willing to cough up more in a system I consider equitable, there is, nolens volens, a limit to how far I can go.  It happens that I became eligible for, and signed up for, Medicare Part B in January 2010.  At that time I was told that my monthly rate would be $110.50.  In December 2009, it would have been $96.40; in January this year, my rate increased to $115.40 per month.   I don't know what causes these rate jumps (it appears to have to do with the fact that I am ineligible to  collect social security!  Go figure.)  What I do know is that in 14 months (December 2009 to January 2011), my monthly premium for Medicare B shot up nearly 21%.   As a retiree, even a cost-of-living-adjusted one, my income is relatively static; it can't withstand continued increases of this magnitude for very long.  However committed I am in principle to paying a reasonable rate, I could easily be priced out of Medicare in a few years, even as my need for the insurance increases with my age. 

Everybody's got his own story.   It's difficult, if not impossible, to take all the permutations into account.  Yet from my perspective, no solution will be equitable if it can't cushion those like me, and more important, those far less well off than I, from 21% annual increases.  The path to reform isn't easy but it begins with putting both cost-cutting and revenue-raising on the table. 

Food Prices Up

Yesterday, I read an interesting report about the future of food prices.  Because of weird weather, increasing costs of transportation and processing, and other factors, predictions are that food prices are very likely to continue to increase for the foreseeable future. 

The article focuses on concerns about feeding the world's burgeoning population (according to last month's feature story in National Geographic Magazine, we'll be reaching 7 billion soon), and on the fact that production and demand are currently in a very delicate global balance that could be upset by unexpected crop failures (floods, freezes, or even civil unrest).

Closer to home, it seems to me seniors will be most heavily affected by increases.  Food is something that older folks can't really put off buying, yet in many cases their income is fixed, static, and -- as the increase in food prices that we've already experienced suggests -- also steadily decreasing in buying power. 

I've been retired for ten, going on eleven years now and have seen the the cost of heating the house double in just three years (2000-2003); my monthly water/sewer bill likewise; local taxes have also nearly doubled in the same period; and food prices are up (though I don't know by how much) and going higher.  Such increases are tolerable, if unwelcome, for me, at least so far; but I wonder about those who are making do on less, or who have been retired much longer than I have.

The fact is that the real universe today's retiree lives in is diametrically different from the model universe on which most pension plans, including social security, are based.   In the old model, prices of utilities and food were low, slow to change, and (except for food) largely regulated.  For decades, we were told that food constituted a lower part of the average U.S. family budget (as I recall, about 22%) than in any other country.  Social Security and many other defined benefit plans, as well as the cost of living adjustments for which some plans provide, were all constructed on the assumptions of this older model.

The grand incongruity is that the shifting ground of cost expectations for basic commodities and goods comes at a juncture when we are also under pressure to cut government spending and get our deficit under control. 

To me, there is absolutely no question that for the country's economic health, the costs of entitlements -- social security, Medicare, and (not to be forgotten) military expenditures -- must be reduced or paid for in different ways.  As we're doing that, it will be essential, albeit difficult, to consider carefully the countertrend (rising prices and decreasing buying power) that will affect seniors. 

Inflation - Should We Encourage It?

I'm generally a fan of James Surowiecki, who writes the financial column at The New Yorker.  He explores interesting economic phenomena, generally gets it right, and is able to present often murky economic concepts in a cogent and understandable way.

In one recent column, he defended - in fact, lauded - inflation as a beneficial economic phenomenon.  Quoting a 1996 study of attitudes toward inflation, he notes that most people think inflation lowers their standard of living and makes them poorer.   Surowiecki argues that this is misguided.  Inflation, he says, benefits most and does little harm to anyone.  But I would have to disagree with this characterization.

The columnist concedes that the exception is people on fixed incomes or living on their savings, who are indeed damaged by inflation.  Then he writes them off as (apparently) not worth further consideration.  Yet it's common knowledge that the percentage of oldsters in our population continues to grow; the fixed-income crowd is large now, and getting larger every year.

There's a second category of people who are also damaged by inflation:  People on defined-benefit retirement programs.  It's odd that Surowiecki would leave out this group, because I recall reading in his column, perhaps about two years ago, of this very phenomenon.   As inflation proceeds, salaries and prices edge upward together in general.  But those who depend on some form of inflation adjustment (this is usually based on the government's cost of living index) such as anyone on social security or most government and military pension plans, will experience gradual but significant loss of real buying power over time. 

Surowiecki himself explained it better than I can, but the problem relates mainly to timing.  In a year when prices and salaries increase by 5%, the cost of living is not measured until the end of the year; by the time it's reflected in retirement income, costs have continue to rise still more.  Frequently, the actual measured rate of inflation is also reduced for political reasons, so that the 5% increase is "compensated" by (maybe) 3.5 % or less. 

These differences sound small, but they can add up surprisingly quickly.  I can recall my father's surprise to find that my starting salary as an army lieutenant in 1970 was more than his had been ten years earlier as a full colonel with 30 years' service.   His pension, of course, was based on some percentage (probably about 70% - fairly generous, right?)of that salary, with cost of living increases.  But it wasn't a question of having just slightly less buying power than I did; it was less by roughly half, after only 10 years. 

In short, far more people are affected negatively by inflation than Surowiecki admits; and unlike the rest of the population, those people have no way to maintain buying power.  No wonder then, that most of us fear inflation.  We can accept that it's inevitable, over the long term; but we shouldn't be consciously working toward it.    

Health Care - An Appointment With Innovation

There are varying opinions floating around regarding Obama's recess appointment of Donald Berwick to head the Centers for Medicare and Medicaid Services (CMS).  Given what I said just yesterday about the positive role of experimentation and innovation in health care choices, I can wholeheartedly agree with David Ignatius, who points out that need, and realistically assesses the foolish partisan bickering that anti-reform political forces would have unleashed if Obama had gone through the more normal "advise and consent" process. 

Ruth Marcus, by contrast, is far too unrealistic in assessing the willingness of the GOP ("Geezers Obstructing Progress") to play politics with the national interest.  If we accept the argument that the President ought to have been prepared to fight the good fight if he wanted to nominate a person of Berwick's incendiary (to opponents) policy views, then surely we must concede Obama made the right decision with the recess appointment by avoiding the equally incendiary (to opponents) policy views of senior Republican Congressmen. 

Marcus admits that the real purpose of recess appointments has long since been lost amidst the smoke and fire of political battles, which indeed it has.  This originally well-intended procedure for enabling government to keep functioning has unfortunately gone the way of the Supreme Court nomination process.  Both have become overly politicized.  But that being the case, politicians across the spectrum will continue to employ them as political tools (clubs?) when they can. 

In Health Care, A Thousand Flowers?

There was interesting health care news yesterday in USA Today: an item by Julie Appleby of Kaiser Health News, providing some examples of new arrangements aimed at encouraging nationwide "shopping" for low-cost, high-quality health care.

As the article describes it, some employers are now seeking out facilities with good quality records and notably low costs on specific procedures, and encourage their insured employees who need those procedures to travel to those facilities for their surgery, with costs of travel picked up by the employer.

Whether or not this might work for everyone, or regardless of whether some may think it doesn't provide the best care, what's interesting about it is that employers, insurers, patients, and others involved in health care seem increasingly inclined to search for innovative ways of reducing costs while maintaining quality, and of making people more responsible for choice in their health care.

Ultimately, I think that's a good trend.  And it's a trend that has been catalyzed, or greatly accelerated, by the health care legislation earlier this year, a fact that is, and probably will remain, unappreciated by many.