Month: October 2004

Andrew Samwick, who has written extensively on the issue, lays out some of the mathematics of social security debt at Vox Baby.

At present, the Social Security actuaries project an unfunded obligation of $10.4 trillion in the Old-Age, Survivors, and Disability Insurance (OASDI) program. This number comes directly from the 2004 Trustees Report released in March….Note that this is the unfunded part of the obligations–it is over and above all of the payroll taxes (12.4 percent of taxable payroll) and income taxes on benefits that go to support the program under current law….

Is having so much implicit debt a problem? I think so, and the reason is that, just like explicit debt, we accrue interest on implicit debt….if we have an implicit debt of $10.4 trillion, and the real interest rate is 3 percent, then next year, the implicit debt will grow by 0.03*10.4 trillion = $312 billion, up to $10.7 trillion, if the assumptions underlying the projection stay the same….[B]oth the President and Senator Kerry have repeatedly stated that they will not cut benefits for those at or near retirement age. …This, in turn, means that each year that elapses without reform causes the burden of financing the unfunded obligations to be shifted away from one more birth cohort that crosses the threshold of being “at or near retirement.” The more we wait, the larger the burden on future generations…

If I were running the show, both Social Security and Medicare (which has even larger unfunded obligations) would be reformed so that under current law and reasonable economic and demographic assumptions, they are projected to have zero unfunded obligations. This means changing current law to reduce future benefits, raise future taxes, or both.

See also my earlier post, The US Government is Bankrupt.

At the Imperial Hotel in Delhi the attendant in the men’s room turns on the water for you, puts the soap on your hands, and dries your hands (including the crevices between your fingers) with a towel when you are done, all in the hope of a tip. Another man watches him, presumably to see how well he is doing, or perhaps if two customers were to come along at the same moment.

A gallon-sized jar of whole pickles is something to behold. The jar is the size of a small aquarium. The fat green pickles, floating in swampy juice, look reptilian, their shapes exaggerated by the glass. It weighs 12 pounds, too big to carry with one hand. The gallon jar of pickles is a display of abundance and excess; it is entrancing, and also vaguely unsettling. This is the product that Wal-Mart fell in love with: Vlasic’s gallon jar of pickles.

Your guesses please…

In the latest New Yorker, Malcolm Gladwell has an excellent article on prescription drugs. In a heartless and cruel post earlier this year I wrote:

People talk about the high price of pharmaceuticals as if high prices lasted forever. In fact, within a year of the expiration of a pharmaceutical’s patents, prices will typically fall by more than 50 percent as generic producers enter the market. Patents nominally last for 20 years but the effective patent life is much lower because patents are typically granted years before a product has cleared FDA review. The effective patent life of the average new pharmaceutical in the 1990s averaged just 12 years (see here for some references)….people who are demanding price controls are not simply asking for lower drug prices they are asking for lower prices on the newest drugs. Lower prices for drugs introduced 15 years ago are already here.

Gladwell gives a nice example:

If you are taking Mevacor for your cholesterol, the 20-mg. pill is two-twenty-five in America and less than two dollars if you buy it in Canada. But generic Mevacor (lovastatin) is about a dollar a pill in Canada and as low as sixty-five cents a pill in the United States…so many other drugs are going to go off-patent in the next few years–including the top-selling drug in this country, the anti-cholesterol medication Lipitor–that many Americans who now pay more for their drugs than their counterparts in other Western countries could soon be paying less.

Generics are often good substitutes for brand-name drugs but because neither the patient nor the doctor typically pay the costs we don’t choose the cheaper generics as much as we should (see here for more analysis).

Tyler asked why other institutions don’t arise to substitute for the cost-control of first party payment. Gladwell notes that such institutions are starting to evolve.

Pharmacy Benefit Managers, or P.B.M.s…build incentives into prescription-drug plans to encourage intelligent patient behavior. If someone wants to take a brand-name oral contraceptive and there is a generic equivalent available, for example, a P.B.M. might require her to pay the price difference. In the case of something like heartburn, the P.B.M. might require patients to follow what’s called step therapy–to try the cheaper H2 antagonists first, and only if that fails to move to a proton-pump inhibitor like omeprazole.

A good idea, especially if PBMs focus on pay for choice rather than restricting choice. I also worry that liability problems will plague PBMs just like they have HMOs and don’t forget that the lack of incentive to choose drugs with an eye to cost will get much worse when the new Medicare drug entitlement program kicks in.