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Lotterman: What's the real deal with benefits?

When people receive a benefit over many years, they begin to regard it as an unquestionable right. Economists call these "acquired rights." Such rights are not strictly defined in law, and thus generate much conflict if changed. The arguments center on exactly what the implicit deal was.

Take Social Security. No legislation establishes the benefits as a constitutional or contractual right. Congress could dramatically cut benefits or even terminate the program. None-theless, hundreds of millions of people have seen others receive benefits over many decades. They have had FICA taxes withheld from their own paychecks for years. They understandably believe that they themselves have a right to eventual Social Security payments.

Most interpret that as the right to get retirement payments beginning at age 62 or 65. Following the Alan Greenspan commission's advice in 1983, the normal retirement age is gradually increasing to age 67, but many people are still unaware of that change. The implicit deal is that "If you pay into Social Security, you have the right to a monthly check from about age 65 until you die."

Improved health has changed circumstances, however. In 1940, when the first Social Security payments went out, 65-year-old men could expect to live another 12.7 years and women 14.7 years.

By 2006, life expectancy had increased to 17.1 years for men and 19.7 years for women. Length of retirement increased by a third.

So, should the deal be "you get payments from age 65 until you die" or "you get payments for about 14 years?" If you have $100,000 to buy a private annuity, you will get a lower payment per year if the insurance company calculates you are likely to live 17 years than if they think you are apt to die after only 13. Should Social Security be any different?

The public seems to think not, and Congress apparently agrees. That means, however, that the program's funding problems will only get worse as people live longer.

Or, consider employer-provided health benefits. A generation ago, many large companies and units of government provided their employees and retirees full health coverage with minimal co-pays or deductibles. But the range of available treatments was far smaller than now.

Heart or lung transplants, stents, implantable defibrillators, fertility treatments and long-term drug therapy for chronic conditions were rare or unknown. Plus, just as the duration has increased for Social Security payments, longer life expectancy means longer outlays for health.

So is the deal, "We will pay for basic medical treatments that were available in 1960 or 1970?" Or, is it, "We will pay for every treatment that medical research ever may possibly develop?"

Again, most people see the deal as the one most favorable to themselves. But decisions have consequences.

If we decide that employer-provided health benefits must include all possible procedures, drugs or devices that could emerge, such benefits will inexorably grow more expensive. Fewer employers will offer them.

It is natural to want some other party to absorb unforeseen consequences of demographic or technological change. But until we are willing to discuss the fundamental bargains in retirement and health care, we are not going to solve these problems.

Economist Edward Lotterman teaches and writes in St. Paul, Minn. Write him at ed@edlotterman.com.

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