Tag Archives: financial advisor

Flashing Red Ratio

My Comments: Will stock prices plummet? Maybe…

The Ratio That Predicted The 2001 And 2008 Stock Market Crashes Is Again Flashing Red

by Atle Willems, May 4, 2017

The co-movement of the stock market and the money supply to saving ratio has been obvious especially in recent decades.

But the two have now dislocated with stocks still climbing though the ratio has plummeted.

This should be worrying for stock market investors since stocks crashed following the peaks in the money supply to saving ratio in ’01 and ’08.

Savings are paramount for economic growth. Frequently ignored these days is the principle that an adequate amount of savings also helps promote economic stability. Since money is created as debt under the current monetary system, changes in the money supply relative to saving can therefore serve as an indicator of the degree of economic risk present in an economy.

As is well-known among economists, the economic costs of monetary inflation are wide-ranging and include price inflation and distortions, over-consumption and mal-investments. Combined, these costs lead to lower economic growth and, in some cases, poverty. They also contribute to economic instability.

Enter the money supply to saving ratio (MS/S), a ratio based on an insight F.A. Hayek first offered generations ago and which I outlined some weeks back. In short, the higher the MS/S ratio the potentially greater the economic distortions and the higher the risk of boom and bust cycles. The ratio is therefore closely related to The Austrian Theory of The Business Cycle.

Following a period of expansion, the MS/S ratio must at some stage eventually drop. An inflating money supply will ultimately produce intolerable levels of price inflation. Alternatively, banks will eventually cut back lending as delinquency and default rates increase (which may trigger a banking crisis). The latter has been the biggest problem during the last couple of decades.

As for the denominator in the ratio (saving), people will increase the proportion of income saved when uncertainty increases. This may take place in tandem with, or even be induced by, a declining money supply growth rate. Saving preferences, especially increases, can change substantially quicker and more violently than the money supply.

As economic and stock market corrections are closely related (as both react to changes in the elastic money issued by banks), the chart below reveals how peaks in the MS/S ratio for the U.S. economy were associated with the onsets of the 2000/1 and 2007/8 stock market corrections.

The chart also reveals how stocks turned slightly ahead of the MS/S ratio before the prior two downturns and that peaks in the ratio were associated with stock market losses. The table below depicts the annualized price changes in the Russell 3000 stock market index for four different time periods following the 2001 and 2008 peaks in the MS/S ratio.

For example, the table shows that stocks depreciated 10.9% on an annualized basis over the 6 month period following the Q1 2008 peak in the MS/S ratio and 41.2% during the first 12 months.

But the chart also shows this: stocks and the ratio departed in the second quarter last year with the two heading in opposite directions. Based on the 2001 and 2008 outcomes and the fact that stocks have again appreciated in recent months, these developments could be troubling for stock market long positions going forward.

Though the chart shows an initial decline from peaks actually did mark the end of the 2001 and 2008 upward swings, successfully timing peaks in the ratio must be assumed to be more luck than science.

In general however, the higher the MS/S ratio and the longer it remains elevated, the greater the probability of an economic reaction and hence the greater the chances stocks will perform badly. It could therefore prove to be a wise move to gradually decrease the allocation to stocks proportionally with increases in the ratio. For those more concerned with capital preservation than squeezing out a few more percentage points returns from a fading bull market, it could prove wise to dispose of all stocks once the MS/S ratio has turned downward. For aggressive speculators, this might even prove an opportune time to go short.

Based on the above observations and the theory underpinning the MS/S ratio, it would not be unreasonable to be prepared for further declines in the ratio from the 2016 peak and another financial crisis. As the ratio has already contracted for two consecutive quarters since the record peak in Q2 last year, it also would not be unreasonable to expect stocks to soon plummet once again.

A few more Laws from Murphy

A reminder: Murphy’s Law states that if anything can go wrong, it will.

So here are a few more:

Cohen’s Law: What really matters is the name you succeed in imposing on the facts, not the facts themselves.

Manly’s Maxim: Logic is a systematic method of coming to the wrong conclusion with confidence.

Murphy’s Corollary: Left to themselves, things tend to go from bad to worse.

O’Toole’s Commentary: Murphy was an optimist.

Rudin’s Law: In crises that force people to choose among alternative courses of action, most people will choose the worst one possible.

First Law of Revision: Information necessitating a change of design will be conveyed to the designer after – and only after – the plans are complete. (Often called the ‘Now They Tell Us’ Law)

Witten’s Law: Whenever you cut your fingernails, you will find a need for them an hour later.

Today’s Last Law: Time flies like an arrow, but fruit flies like a banana.

Saving for Retirement

My Comments: It’s a truism in our society that having more money rather than less money is a good thing. And retirement, by definition, is a time in your life when earning money to pay bills and enjoy life is not in the cards.

That being said, if you expect or need to transition to retirement, it would be helpful if you had the necessary financial reserves to make it happen on your terms. Here are 7 things financial advisers wish you knew about saving for retirement.

Holly Johnson, WiseBread April 19, 2017

Wish you had a crystal ball for retirement planning? Most of us do, and for good reason.

Even if you’re sure you’ll have enough money to retire, there are no guarantees until you get there. If your nest egg runs short, it will be far too late for a do-over.

This is where a financial adviser can help. A financial adviser will know if you’re heavy on risk, not diversified enough, failing to maximize tax advantages, or simply not saving enough.

They will also make sure to take into account your lifestyle and preferences to ensure you’re on the right path to your ideal retirement, and not just following a cookie cutter plan that’s not going to be the right fit.

We asked financial advisers for some of the most important ideas they wish their clients understood when it comes to money, retirement, and the future.

1. Social Security will be around in some form
Andrew McFadden, a financial adviser for physicians, says many clients refuse to accept that Social Security will still be around when they retire. This is especially true if they are part of Gen X or Gen Y, he says, since they are decades away from receiving benefits.

However short on funds we may be, the Social Security Administration projects the ability to pay around 75% of current benefits after the fund is depleted in 2034. This is a key detail, notes McFadden, since many people hear Social Security is going bankrupt and refuse to acknowledge any benefits in their own retirement planning.

“It’s not all roses, but that’s still a far cry from those bankruptcy rumors,” says McFadden. “So lower your expectations, but don’t get rid of them altogether.”

2. It’s OK to “live a little” while you save for retirement
Russ Thornton, founder of Wealthcare for Women, says too many future retirees sacrifice living now for their “pie in the sky” dream of retirement. Unfortunately, tomorrow isn’t promised, and many people never get to live out the dreams they plan all along.

“So many people assume they can’t really live until they’re retired and not working full-time,” says Thornton. “Nothing could be further from the truth. Find ways to experience aspects of your dream life now, whether you’re in your 30s, 40s, or 50s.”

With a solid savings and retirement plan, you should be able to do both — save and invest adequately, and try some new experiences that make life adventurous and satisfying now.

“Don’t accept the deferred life plan,” he says. That future you dream about and plan for may never come.

3. The 4% rule isn’t perfect for everybody
Born in the 90s, the 4% rule stated retirees could stretch their funds by withdrawing 4% per year. The catch was, a good portion of those investments had to remain in equities to make this work.

The 4% rule lost traction between 2000 and 2010 when the market closed lower than where it started 10 years before, says Bellevue, WA financial adviser Josh Brein. As many retirement accounts suffered during this time, it was shown that the 4% rule doesn’t always work for everybody.

It doesn’t mean the rule should be thrown out completely though, nor should it still be followed like gospel. In fact, in 2015, two-third of retirees following the 4% rule had double the amount of their starting principal after a 30-year stretch. These retirees could have benefited from taking out more than the limited 4%, which could have meant an extra vacation each year, or another luxury that they were indeed able to afford.

There’s absolutely no denying the importance of making your retirement dollars last. But, after a lifetime of working and saving, you also deserve to enjoy those dollars to their full capability.

Bottom line, take time to re-evaluate your drawdown strategy every few years and make adjustments as necessary. While you don’t want to go broke in retirement — you also don’t want to miss out on all the incredible things this time in your life has to offer.

4. Retirement looks different for everyone
Minnesota financial adviser Jamie Pomeroy says he wishes people would abandon their preconceived notions on what retirement should look like. He blames the financial industry in part for perpetuating the idea that certain retirement planning accounts and products work for everyone. “They don’t,” he says.

“Some enjoy retiring to the beach, some take mini-retirements before reaching a retirement age, some work part-time in retirement, and some just want to spend time with their grandkids,” he says. “The concept of retirement is dynamic, ever-changing, and defined very differently by lots of different people.”

To find the right retirement path and plan for your own life, you should sit down and decide what you really, truly want. Once you know what you want, you can craft a realistic plan to get there.

5. Investment returns aren’t as important as you think
According to North Dakota financial adviser Benjamin Brandt, too many people focus too much energy on their investment returns — mostly because they are an immediate and tangible way to gauge the success or failure of our financial plans.

Investment returns should only be judged in the proper scope of a long-term financial plan, and “over decades,” he says.

In the meantime, our behavior can make a huge impact when it comes to reaching your retirement goals. By spending less and saving more, for example, we can avoid debt and potentially invest more money over the long haul. Those moves can help us retire earlier whether the market performs the way we hope or not.

6. Small changes add up
When it comes to retirement planning, many people feel overwhelmed right away. For example, some people may realize they need $1 million or more to retire and give up before they start.

Financial adviser Jeff Rose of Good Financial Cents says this could change if everyone realized how small changes — and small amounts of savings — add up drastically over time.

“Someone who invests just $200 per month for 30 years and earns 7% would have more than $218,000 in the end,” says Rose. “Now imagine both spouses are saving, or that they boost their investments incrementally over the years.”

As Rose points out, a couple who invests $500 per month combined and earns 7% would have more than $566,000 after 30 years.

Looking for ways to save money and invest more will obviously make this number surge. If you boost your contributions each time you get a raise, for example, you’ll have considerably more for retirement. Remember even the smallest contributions can greatly add up over the years.

7. Don’t forget about long-term care
Joseph Carbone, founder and wealth adviser of Focus Planning Group, says many future retirees are missing one key piece of the puzzle, and that piece could cost them dearly.

“I wish many of my clients understood the biggest hurdle from passing wealth on to their heirs is long-term care costs,” says Carbone. “Whether it is home health care, assisted living, or the dreaded nursing home. It is real and it is scary.”

According to Carbone, most people have no idea how much long-term care costs and fail to plan as a result. “Even though the average stay is only 2.7 years in a nursing home, the total cost for those 2.7 years could be well over $400,000,” he says

To help in this respect, Carbone and his associates suggest working with an attorney who specializes in elder law. With a few smart money moves, families can prepare for the real possibility of using a nursing home at some point.

One more thing advisers wish you knew
While financial advisers don’t know everything, their years of experience make them painfully aware of what lies ahead for those of us who fail to plan. And, if there’s one thing financial planners can agree on, it’s this: The sooner we all start planning, the better off we’ll be.

How Not To Screw Up Your Investments

My Comments:
Basic stuff for some of us; gibberish for others. So if you have difficulty with this, ask your financial advisor for help.

Dana Anspach on April 6, 2017

Smart investors follow an asset allocation plan.

An asset allocation plan tells you how much of your total investments should be in stocks versus bonds and then gets into additional detail, such as how much should be in large company U.S. stocks (or index funds) vs. international vs. small cap.

You maintain investment ratios by rebalancing on a predetermined basis, such as once a year. In a 401(k) plan, rebalancing is often accomplished automatically by checking a box that says something like “rebalance every x months to this allocation.”

In general, while you are saving, rebalancing can be easy. If you should have 10% of your investments in small cap, and you only have 5%, when you fund your IRA, you put it in a small cap fund.

This process gets more complex as you accumulate different types of accounts. You may have a 401(k), an IRA, a Roth IRA, or a 403(b). If a married, your spouse may also have multiple types of accounts. Maybe you also have a deferred comp plan or stock options. Now rebalancing must encompass which types of investments should be in which accounts. While working, as you add money to accounts you can make progress on maintaining the right balance by putting new deposits into the investment type that is most needed.

When you retire, if you have multiple types of accounts, it gets more complex. Should you withdraw from the S&P 500 Index SPX, +0.11% fund in your brokerage account first, or sell a portion of the stable value fund in the 401(k)? Some 401(k) funds won’t allow you to choose which fund to sell. You may have to take withdrawals proportionately from each investment type, which isn’t necessarily a bad thing, but it limits flexibility in how you manage your investments.

If you have enough wealth, rebalancing won’t matter. I have one client who has about $2 million with my firm and manages the bulk of his investments, another $6 million, at Vanguard. I recently asked him how he manages cash flow in retirement. He said when his checking account gets too low he sells something at Vanguard. Pretty easy for him. The amount he is selling is small compared with his portfolio size, so his decision will have an insignificant impact on his portfolio allocation.

Most retirees don’t have $8 million in financial assets. If you are a consistent saver, you may have $500,000 to $1.5 million; if you have a great job or inherited wealth, perhaps a bit more. You have enough to be comfortable, but the decisions on how you withdraw it will have a significant impact on your total wealth and available cash flow in retirement.

There are two primary approaches to rebalancing in the withdrawal phase: systematic withdrawals and time segmentation.

With systematic withdrawals, you withdraw proportionately from each investment type. For example, if you were withdrawing $30,000 from a $500,000 account which was allocated 60% to stocks and 40% to bonds, you would sell $18,000 of your stock holdings and $12,000 of your bond holdings, thus maintaining your 60/40 allocation. Systematic withdrawals are easy to manage if the bulk of your investments are in one account.

If you have multiple account types, systematic withdrawals are more difficult. For tax reasons, it often makes sense to withdraw from one type of account first, and that account may be allocated differently than other accounts. And, if you’re married, your spouse may invest conservatively, while you invest more aggressively, or vice versa. Investing this way may not be optimal, but if you haven’t coordinated your plan as a household, this is often the reality. Multiple accounts with varying tax consequences and an uncoordinated allocation make maintaining an appropriately balanced portfolio while withdrawing more challenging.

With time segmentation, first, you develop a plan that tells you which accounts to withdraw from in which years. Next, you match up the investments in those accounts with the point in time where you plan to take the withdrawals. If you know you are going to withdraw $30,000 a year for the first five years from the IRA, you will have $150,000 of the IRA in safe, stable investments, like CDs or bonds with maturities matched to the year of the withdrawal, or low duration bond funds.

As with all investment strategies, there are pros and cons to any approach. The biggest problem is many people don’t have a plan at all. Having a well-tested retirement income plan brings peace of mind. A plan allows you to relax and enjoy your retirement years. If you are nearing retirement age and don’t have a defined rebalancing strategy in place that shows you when and how you will take money out, it’s time to get one.

Social Security Is Failing Because the Program Is Antiquated

My Comments: This is far and away the most coherent overview I’ve read that addresses the problems faced by Social Security going forward. Now we have to convince the politicians that it’s in everyone’s best interest to take remedial action.

Sean Williams | Apr 8, 2017

The data doesn’t lie: a majority of seniors rely on Social Security to meet their month-to-month expenses come retirement. According to the Social Security Administration (SSA), 61% of retired workers currently receiving benefits counts on those benefits to comprise at least half of their monthly income.

But this vital source of retirement income is also causing retired workers, pre-retirees, and tens of millions of working Americans grief. The latest annual report from the Social Security Board of Trustees estimates that the program will begin paying out more in benefits than it’s receiving each year in revenue by 2020, eventually resulting in the depletion of its more than $2.8 trillion in spare cash by 2034. If this spare cash is completely exhausted, the Trustees have implied that a benefits cut of up to 21% could be needed on an across-the-board basis (i.e., for current and future retirees) in order to sustain payouts through the year 2090. That’s not a comforting outlook for the aforementioned majority of retired workers who count on Social Security each month.

Social Security’s biggest problem is that it’s antiquated

If there’s one thing Social Security isn’t short of, it’s finger-pointing as to why the program is headed down an unsustainable path. Some blame the baby boomer generation for their poor saving habits and early Social Security claims, which are expected to weigh heavily on the worker-to-beneficiary ratio. Others point to lengthening life expectancies, or the political divide in Washington. There’s no shortage of blame to go around.

However, the real blame for Social Security’s seemingly imminent budgetary shortfall can probably be placed on lawmakers who’ve chosen to allow an antiquated program to take care of our nation’s retirees.

Social Security was signed into law more than 81 years ago in Aug. 1935. When the first payment was made in 1940, senior citizens weren’t living anywhere near as long as they are now. Additionally, the costs that comprised a good chunk of today’s expenditures for retired workers (housing and medical care) weren’t outpacing inflation by much, if anything, in the 1940s.

The last significant overhaul to the Social Security program came during the Reagan era with the passage of the Amendment of 1983. These Amendments introduced the taxation of Social Security benefits, and increased the full retirement age (the age at which an individual becomes eligible to receive 100% of their monthly benefit) in the decades to come, to name a few of the changes.

While there have been some changes to the Social Security program since 1983, there’s been no major overhaul to the extent of the 1983 Amendments.

Now, here’s what today’s seniors are left with.

1. The taxation thresholds haven’t been adjusted for inflation in 34 years

The first issue is that the income thresholds that define what portion of Social Security benefits are taxable haven’t been updated in 34 years to account for inflation! When first introduced in 1983, individuals with earned income over $25,000, and joint filers with earned income above $32,000, could have 50% of their Social Security benefits taxed by the federal government. A decade later, the Clinton administration added another tax tier, allowing 85% of Social Security benefits to be taxed if a recipient’s annual income topped $34,000, or $44,000 for joint filers.

In 1983 and 1993, these taxation changes affected around 1-in-10, and nearly 1-in-5 households with seniors. By 2015, according to The Senior Citizens League, 56% of seniors owed at least some tax on their Social Security benefits. Had these thresholds kept pace with inflation, individual tax filers wouldn’t be hit until $57,107 (in 2015 dollars), and couples until $73,097.

2. The full retirement age hasn’t kept pace with life expectancy increases

Another issue with the Social Security Amendments of 1983 is that they phased in a two-year full retirement age increase over what amounted to a four-decade period. Beginning in 2017, the full retirement age will rise by two months per year, ultimately moving from age 66 to age 67 between 2016 and 2022 (the full retirement age of 67 applies to anyone born in 1960 or later). In other words, between 1983 and 2022, the full retirement age will have increased just two years.

However, actual life expectancies since 1983 have risen at a quicker pace. Data shows that the average life expectancy in 1983 was 74.6 years, compared to 78.8 years in 2015 according to the Centers for Disease Control and Prevention, an improvement of 4.2 years in 32 years. A slower-growing full retirement age means retired workers are potentially collecting Social Security for a longer period of time than ever before, which is weighing on the program.

3. More income than ever is escaping Social Security’s payroll tax

It’s probably also fair to say that quite a bit of wealthy Americans’ income is escaping Social Security’s payroll tax. As a refresher, Social Security’s payroll tax, which totals 12.4% and is often split down the middle between you and your employer, covers earned income between $0.01 and $127,200 as of 2017. This means earned income above and beyond $127,200 is free and clear of the payroll tax.

However, a quick look at the SSA’s wage distribution statistics from 2015 shows that 137,545 people earned at least $1 million. These individuals would have paid an aggregate of about $16.3 billion in payroll taxes in 2015 (based on the cap of $118,500 that year). However, these millionaires earned an aggregate of $340.8 billion in income in 2015. That’s over $324 billion dollars that escaped taxation because the maximum taxable earnings cap has been stuck growing at a snail’s pace (it’s tied to the Average Wage Index). And remember, I’m not including earned income between $118,500 and $999,999 in these figures, either. In other words, the program could be bringing in a lot more money for future generations of retirees if the payroll tax cap were adjusted.

4. Social Security’s COLA is inadequately taking into account the high expenditures seniors face

Lastly, the cost-of-living adjustment (COLA) that seniors receive most years (i.e., their inflation-based raise) isn’t coming anywhere close to reflecting the true inflation they’re dealing with when it comes to housing costs and medical care inflation. A quick review of medical care inflation and Social Security’s COLAs over the past 35 years shows that medical care inflation was higher in 33 of 35 years. This makes it practically impossible for seniors to make do with what they’re being paid since more of their income is going to pay for their medical care with each passing year.

Lawmakers are attempting to make a program that was developed in the 1930s and tinkered with heavily in the 1980s work for seniors in 2017 — and it’s clearly not working. Change can only come from Washington, but that’ll only happen once lawmakers realize that a good portion of the program, both from the revenue and benefits sides of the equation, needs to be refreshed for today’s senior citizens.

The Brilliant Incoherence of Trump’s Foreign Policy

My Comments: This may be far too long to read in one sitting. But if, like me, you are willing to absorb some rather heavy reading, you may find yourself somewhat relieved by the message.

Stephen Sestanovich | May 2017

Every 20 years or so—the regularity is a little astonishing—Americans hold a serious debate about their place in the world. What, they ask, is going wrong? And how can it be fixed? The discussion, moreover, almost always starts the same way. Having extricated itself with some success from a costly war, the United States then embraces a scaled-down foreign policy, the better to avoid over commitment. But when unexpected challenges arise, people start asking whether the new, more limited strategy is robust enough. Politicians and policy makers, scholars and experts, journalists and pundits, the public at large, even representatives of other governments (both friendly and less friendly) all take part in the back-and-forth. They want to know whether America, despite its decision to do less, should go back to doing more—and whether it can.

The reasons for doubt are remarkably similar from one period of discussion to the next. Some argue that the U.S. economy is no longer big enough to sustain a global role of the old kind, or that domestic problems should take priority. Others ask whether the public is ready for new exertions. The foreign-policy establishment may seem too divided, and a viable consensus too hard to reestablish. Many insist that big international problems no longer lend themselves to Washington’s solutions, least of all to military ones. American “leadership,” it is said, won’t work so well in our brave new world.

With minor variations, this is the foreign-policy debate that the country conducted in the 1950s, the 1970s, and the 1990s. And it’s the same one that we have been having for the past few years. The rise of the Islamic State, the Syrian civil war, Russian aggression in Ukraine, and China’s muscle-flexing in East Asia jolted the discussion back to life in 2014. Presidential debates in 2015 and 2016 added issues (from Barack Obama’s Iran nuclear deal to his Asian trade pact) and sharpened the controversy.

Those of us in the foreign-policy business are always glad to have our concerns get this kind of prominence. Down the decades, these debates have tended to produce a consensus in favor of renewed American activism. Yet each version unfolds in its own way. The global turmoil of 2016 meant that nobody could be completely sure how this one was going to turn out.

We still don’t know. The advent of Donald Trump—his candidacy, his election, and the start of his presidency—has given our once-every-two-decades conversation extra drama and significance. Some commentators claim that Trump wants to cast aside the entire post–Cold War order. To others, he is repudiating everything that America has tried to achieve since 1945. Still others say he represents a break with all we have stood for since 1776 (or maybe even since 1630, when John Winthrop called the Massachusetts Bay Colony “a city upon a hill”).

That we talk this way is but one measure of the shock Trump’s victory has administered. The new president is raising questions about the foreign policy of the United States—about its external purposes, its internal cohesion, and its chances of success—that may not be fully answered for years. Yet to understand a moment as strange as this, we need to untangle what has happened. In this cycle, America has actually had two rounds of debate about its global role. The first one was driven by the 2016 campaign, and Trump won it. The second round has gone differently. Since taking office, the new president has made one wrong move after another.

Though it’s too soon to say that he has lost this round, he is certainly losing control of it. In each case, we need to understand the dynamics of the discussion better than we do.

Our Distorted Health Care System

My Comments: As a tax paying mortal, I’m not happy with our incredibly expensive system, one with less favorable health outcomes for us than exists in other countries, at far less cost.

Given my background, I have a reasonably good understanding about health insurance and the role it plays in our society. I also have the benefit of five decades with both health care issues and with insurance coverage for myself and my family.

The American health care system is broken. It’s been out of whack for at least 40 years. The ACA (Obamacare) was an attempt to impose a fix, but like 45 says, it’s complicated. Since the ACA is here to stay, as per Paul Ryan, somehow we have to fix it.

As a start, it might help to better understand how we got to where we are. These comments from Myron Magnet below are instructive. Where we go from here is anyone’s guess, but that we must go is an absolute necessity.

Myron Magnet / Mar 28, 2017

A World War II-era mistake distorted the U.S. health insurance system. Reformers tried to fix the problem with patchwork solutions until Obamacare dumped yet another layer of misguided policy onto what was already a mess. Now the tangle is so perplexing that a Republican Congress, under a Republican president, could not even bring a health-insurance reform bill to a vote last week. But legislators will no doubt try to tackle the issue again, and when they do, they should consider erasing the original error instead of merely papering it over.

As World War II raged, competition for scarce labor grew fierce, what with so many able-bodied men in the military. Legislators, worried about possible runaway inflation, imposed wage controls in 1942. In response, employers began enticing workers by offering rich benefits in lieu of increased wages, and, as these benefits were not income, they were exempt from income and payroll taxes, a subsidy to workers and employers alike. Chief among these benefits was health insurance, whose cost was originally modest.

But as the cost of healthcare rose in the 1950s, retirees and the poor found insurance unaffordable, and President Johnson, who never saw a problem he didn’t think big government could solve, injected Medicare and Medicaid into the health-insurance business. Prices continued to rise, in part because of spectacular advances in medicine, such as the development of coronary bypass surgery in the late 1960s. By 1980, corporations found their medical-insurance costs increasingly burdensome. They tried all sorts of schemes to bring those costs under control, from health-maintenance organizations, which added administrative costs, to employee wellness programs, which helped keep workers alive long enough to develop the diseases of aging. Employer costs, in short, went up instead of down. Behind closed doors, executives remarked that it might be better if workers died before they retired, to ease the strain on the corporate pension fund.

Aside from all this lay a great inequity. People with corporate jobs got (relatively) affordable group insurance, subsidized by the two tax exemptions. People without such jobs had to buy unsubsidized and therefore more expensive individual insurance.
Future reforms, then, ought to get employers out of the healthcare business entirely, since they are there by accident and add nothing of value to the health of the nation. The tax deduction should go to the individual, not the employer.

Obamacare provided health-insurance subsidies to individuals without employer coverage; House Speaker Paul D. Ryan’s bill would have given those same individuals a tax deduction or refundable credit. But until the government removes the double tax deduction that encourages employers to provide insurance — not to mention the mandates forcing them to do so — corporations will retain the real leverage in healthcare finance. Only when the individual wields the power of the purse will his needs come first.

A second worthwhile reform would be to encourage the rebirth of the mutual health-insurance company, such as Blue Cross Blue Shield used to be. Like the Victorian Friendly Societies, early American health insurers were just vehicles for pooling risk. Everyone knew that he or his family was subject to serious illness, but no one knew whether he would be among the lucky or the unlucky, so it made sense for all to pool their money to pay the expenses of those among them unfortunate enough to contract one of the thousand natural shocks that flesh is heir to.

In the 1940s and ‘50s, the owners of these insurance companies were the policyholders, and their employees were just administrators who calculated the risks, collected the premiums, and paid out the benefits. Blue Cross and Blue Shield were in the insurance business, not the investment business, and they needed no high-paid top executives to make investment decisions to enrich non-policy owning shareholders. There were none. No insurance company presumed to tell a doctor how to treat his patient to promote the interests of the insurance company, for the interests of insurer and patient were identical. The demutualizing of these companies was a huge policy mistake, vastly increasing the cost of health insurance in order to reward public shareholders and executives, not policyholders. Now the tail wags the dog.

I’ve said nothing about healthcare for the poor. I’d only point out there were always doctors who wouldn’t charge patients who couldn’t pay, always charity hospitals staffed by the same doctors who staffed the fancy hospitals, always union clinics and company doctors, always emergency rooms that would treat first and ask about ability to pay later. And all these delivery systems, in midcentury America, arguably provided better care than Medicaid.

The ruling concept in America’s technology companies is continuous improvement. Health-insurance reformers, starting now, ought to make it their watchword as well.

Myron Magnet is editor-at-large of the Manhattan Institute’s City Journal, from which this essay was excerpted.