So how do we solve this problem?  It’s very simple, but the answer varies between pension and retiree medical expenses.

Pension Benefits

The future pension obligation for an employer is determined with the following factors taken into account:

• The pay taken into account and against which the formula will be applied;
• The assumed level of pay increases for current employees;
• The percentage of pay that will be provided;
• The life expectancy at retirement age;
• The investment return on monies in the pension trust;
• The discount factor applied to future year obligations; and
• The cost of living increases applied to pension payments.

Many employers also provide for a lump-sum pension payment right from their plans.

I want to zero in one of these factors: life expectancy.  The fundamental assumption under the laws governing pensions is that individuals “retire” and draw a pension when they are no longer working.  The end result is that employers are paying retirement benefits to individuals no longer delivering any services to them.  This is also true of other post-employment benefits, but, other than retiree medical coverage, these benefits tend to be temporary.

When the Social Security system and private pension plans were created in the 1930’s, the life expectancy for a benefit recipient retiring at age 65 was around 5-7 years.  Today, many organizations have agreed to retirement benefits at age 55, and the life expectancy is around 27 additional years.  In effect, pensions are paid over a much longer period of time than they were decades ago, both because of earlier retirement and longer life span.

Moreover, in the early days of Social Security and private pension plans, people truly stop working when they retire.  Today, many retirees from one employer, especially at age 55, go to another employer and work full-time.  This is sometimes called “double-dipping.” We want to provide income for the elderly who cannot work, but many pensions go to people who are working or are able to work.

Many solutions have been proposed to reduce the pension obligation burden, among them:

• Changing the pay calculation formula to reduce the wage or salary base subject to the pension formula;
• Reducing cost-of-living adjustments;
• Requiring an individual to work longer to begin collecting retirement benefits; and
• Reducing the percentage payout.

The common element of all these solutions is that they require employees or retirees to give something up. Inevitably, these solutions get resisted by employees or their union representatives.  But what if there were a solution that actually increased someone’s take-home income and cost the employer less?  There is such a solution.

The solution requires the tax law to be changed to allow someone to keep working, although at a reduced pay rate, but get enough of his or her pension benefit to take home more money in the current year. Current law allows someone to work part time for the employer and collect a pension, but limits that work to 750 hours a year.  We need a solution that allows an employee to collect a portion of his or her pension and work full time, although at a reduced pay rate.

How would this work?

Today, if someone makes $100,000 a year and has a pension that equals 75% of his or her pay, and gets the right to retire with a full pension at age 55.  In effect, the employer pays $75,000 per year for 27 years, plus cost-of-living adjustments.  Without adjusting for pay increases for an active employee or cost-of-living adjustments for a retiree, the employer is responsible for $1,725,000 if the employee lives to age 82.

However, imagine a law that allows the employer to start to pay down the pension immediately, but only if the employee takes a pay reduction.  For example, let’s assume the law allows the employer to pay $30,000 a year for the employee from the pension and $75,000 in base pay. The employee would get 5% more. The employee decides to work 10 additional years.  The first ten years cost the employer $300,000 instead of $750,000, and the employer can take an immediate reduction in its pension costs.

Why has this not been seriously pushed before?

• Historically, companies wanted older workers to retire so that they could replace them with younger workers.  The reduced pension cost of keeping an older worker was more than offset by the reduced cost of replacing the older worker with a younger work.  However, in my proposed solution, the employer can effectively replace a $100,000 worker in place with a $75,000 worker, without losing that older worker’s skills and experience.
• In many cases, the older workers were not as productive as those who replaced them.  Today, there is ample data to show that older workers are more productive, more loyal, and do higher quality work than those who replace them.
• Moreover, in many industries, it is extremely difficult to replace older workers, because there are fewer younger people with the same skills.  Such positions as mechanical and aeronautic engineers are particularly hard to replace.
• People always thought of pensions as a very small post-employment benefit that did not burden the employer.  Because of a combination of lower investment returns, higher percentage payouts, much lower discount rates on future benefits (which makes them higher), and longer life expectancy, the per-year cost of future benefits has grown dramatically.  This was not as attractive a solution under earlier conditions, but the math makes it much more attractive now.
• The math might be more complicated if the average employee can retire at age 55, but actually retires at age 62.  In that case, the program can be implemented at the average retirement age, rather than the initial retirement age.  There is still a savings, but it might be smaller, although still significant.

This is not a solution for every organization, because many employers simply need to shrink their workforce or to replace older workers with people who have very different skills. However, it should be available to employers who can make it work.

There needs to be another change in the law: employers need to be able to offer this kind of program to some workers, perhaps those over a certain age or a certain level of experience, but not other workers.  Right now, tax and labor laws severely limit discrimination within a workforce.  This is a great transitional strategy to help employers move away from defined benefit pension plans that no longer work for them..

Retiree Medical

I have talked about the easy solution to the retiree medical problem: helping people stay healthier longer, so that they do not have the long, slow decline with multiple chronic diseases that adds $200-300 thousand dollars to lifetime medical costs, relative to healthier retirees.  Taking the medical inflation rate down by 1-2% per year would significantly reduce what employers have to set aside for retiree medical coverage.  Moreover, healthier employees are more productive and do better quality work.  Employers just need the will and the skill to fix the problem by focusing on a culture of health for both employees and retirees.

The challenge for managing retiree health is more complicated, because retirees are more geographically scattered, but there are many opportunities for retiree outreach, especially if “corporate practice of medicine” laws can be modified to give employers an opportunity to provide primary care clinical services to retirees who do not have their own primary care physician.

These are win-win solutions, as opposed to solutions that involve cutting back benefits, and creating resentment by employees or retirees or their families.

I would hope this is a first step to getting government finances in order.  Like many people with discretionary assets, my wife and I own tax- exempt bonds.  We are deeply concerned about whether we are getting accurate and complete information about the state of finances in Connecticut, and in the few other states in which we have government bonds.

According to an editorial in the Friday, August 20, 2010, Wall Street Journal, entitled “The SEC’s Jersey Score” Congressman Barney Frank believes that the credit-rating agencies should apply different standards to government securities issuers because they rarely default.  He is wrong.  They do default, and California defaulted last year by paying in IOU’s instead of cash for a period of time.  During the Great Depression, many units of government were essentially insolvent.

The issue is much bigger than whether states and localities pay their bondholders on time.  They are cutting back vital services to their citizens and punitively raising taxes and user fees and reducing their base of employees in clumsy and dysfunctional ways to meet their payment obligations.  They are essentially becoming nothing more than conduits for payments from all the citizens to a much smaller group of militant, well-organized state and local employees and retirees who are receiving excessive benefits.

This is not an income transfer from the rich to the poor, but from all the citizens, rich, middle class, and poor, to a small group of citizens who are taking a greater share of the citizens’ wealth than is justified by the type and duration of services they perform for the state and its citizens.  The reason this income transfer system has arisen and persists is because it is the path of least resistance for government officials.  More state and local employees, particularly as union members, means more votes and more campaign contributions, and a greater chance of being re-elected.

Only time will tell whether this lawsuit is an aberration or whether it scares risk-averse public officials into doing the right things in terms of disclosing the true story regarding the financial health of the governmental entities they lead.

As a result, I was gratified to see an incredibly incisive and thoughtful article on this subject by Dr. Atul Guwande of Harvard Medical School in the August 2, 2010, issue of The New Yorker. The subject of end-of-life care for individuals with terminal illnesses or diseases is not a new one, but Guwande brings new insight to it.

For example, he points out that many people have the mistaken belief that more intensive hospital-based care generally prolongs life, whereas hospice care shortens it.  Hence, many people make the decision to employ all possible life-prolonging measures for themselves or their loved ones, believing that, in so doing, they are buying time for something else to work on their behalf.  Yet Guwande states:

“Like many people, I had believed that hospice care hastens death, because patients forego hospital treatments and are allowed high-dose narcotics to combat pain.  But studies suggest otherwise.  In one, researchers followed 4,493 Medicare patients with either terminal cancer or congestive heart failure.  They found no difference in survival time between hospice and non-hospice patients with breast cancer, prostate cancer, and colon cancer.  Curiously, hospice care seemed to extend life for some patients; those with pancreatic cancer gained six weeks, those with lung cancer gained six weeks, and those with congestive heart failure gained three months. The lesson seems almost Zen: you live longer only when you stop trying to live longer.”

The second point Guwande makes is that there is often a trade-off between extending life and being mentally alert: those who receive hospice care are often able to manage their affairs without losing mental alertness, and are able to make plans for themselves and others with competent professional assistance.  Those who receive hospital care are often in situations in which they are removed from loved ones, lapse into unconsciousness, and experience completely debilitating pain and discomfort.

We tend to think of end-of-life issues mostly in terms of the elderly, but Guwande’s story focused on the terminal illness of a woman who was delivering her first child.  What none of us can know is whether, by opting for more aggressive treatments, she and her husband missed opportunities to discuss longer-term questions about the dying mother’s preferences as to how her daughter would be raised.  I lost a wonderful cousin to breast cancer 22 years ago when she was 41 years old.  She left behind a husband and a 4-year-old daughter when she died.  However, she had ample time and alertness to have many discussions with her husband that enabled him to gain the value of her insights on raising a daughter to adulthood as a single parent. The value of those conversations was incalculably large, but, in many instances, aggressive hospital care makes these conversations almost impossible to have.

The question Guwande’s observation begs is: why, if the more aggressive treatments shorten life, reduce the quality of life, and reduce the ability of patients to spend valuable time with loved ones, would patients choose more aggressive treatments?  He gives two answers:

• Every prognosis for a terminal disease contains a traditional bell-curve distribution with an average life expectancy for the patient, but with wide variations from a few weeks to years or even decades.  Although the size of the curve for those with the disease living a very long life indicates that few people survive for a long time, many people convince themselves that they will be the exception, rather than the rule.  When they opt for aggressive, expensive treatment, they are effectively buying a lottery ticket for the biggest jackpot of all, a long life, but often with the odds associated with buying a lottery ticket for a $200 million lottery prize.
• Physicians, either out of desire to keep up hope for patients, or out of the desire to keep patients from going elsewhere for treatment, or because they simply do not know the appropriate life expectancy, routinely overestimate survival times, often by over 500%.

Guwande pointed out that people seem willing to explore hospice options, as long as more aggressive treatment options are not foreclosed to them.  He cites a Johns Hopkins pilot program that reduced hospital care and costs for patients who opted for hospice care, but knew that they could receive hospital care at any time.  He recommended that Medicare and other health plans eliminate the irrevocable either-or decision for terminally ill patients.

He also has an interesting set of recommendations for changing the decision criteria and process for patients opting for end-of-life decisions.  Clearly, getting individuals to discuss their options with physicians and loved ones in advance is preferable to getting decisions made when a person is already terminally ill. That recommendation is not new.

However, the insight he brings to it is that the dialogue is as much about giving reassurance to the loved ones as it is to getting a particular decision from the patient.  Even loved ones who want to respect the wishes of the patient will feel guilty using less than the most aggressive treatments.  The discussion that, in advance, addresses their deepest concerns of guilt is extremely productive.  Similarly, a discussion between the patient and the physician, which helps the physician understand when being overly optimistic or recommending the most aggressive treatments is not helpful to the patient, is also desirable.

How do policymakers avoid getting caught up in the “death panel” trap?  The simplest answer is to broaden the dialogue beyond end of life treatment discussions.  There are many circumstances in which individuals are incapacitated and unable to register their preferences when a situation is not life threatening, but decisions have to be made quickly.  For example, the physician often encounters something unexpected during a surgical procedure when the patient is under a general anesthetic.

There are also many situations in which all treatment options are imperfect, and in which there is no ability to get a better answer even after all medical risks and probabilities are assessed.  This is the current situation with prostate cancer treatment options.  The discussion about the patient’s broader values and preferences is probably one that cannot be handled fully at one time or in one circumstance.  It would be most helpful for health plans and Medicare to cover an annual discussion that is free flowing and that simply enables a physician to get to know the patients far better than he or she can in the context of individual office visits designed to diagnose, treat, or decide on a treatment option.

Although many people legitimately criticized those who raised the “death panel” argument, the “death panel” advocates’ concerns could have been addressed, and the right kind of dialogue could have taken place if it had been framed as a way of increasing patient empowerment, as opposed to a piece of a larger program to increase government control over the health care system.

Nevertheless, the biggest conceptual breakthrough toward which Guwande takes us is that more aggressive care is not better care, and, in many end-of-life situations, it may actually shorten life and worsen the quality of the life that is led immediately before death.  Moreover, because of the inability of patients to engage with loved ones on transitional issues, it may have negative long term consequences.

The problem those who want to produce broad societal change face is that, to the extent they honor and defend the retirement benefit obligations and other huge financial benefits demanded by the unions and the political classes, the funds available for the much broader agenda drop well below critical mass.  In fact, it is fair to say that, absent a major pullback from these long-term retirement benefit obligations, almost no money will be available for the or below broader agenda.

While liberals like to believe that tax increases on wealthy people will provide a pool of funds for their broad agenda, most economists across the entire political spectrum would agree that there simply is not enough money to carry out this agenda.  There are not enough wealthy people, and the tax rates could not be raised high enough, to enable transportation infrastructure to be rebuilt, educational funding to be raised, climate change investment to be effected, welfare payments to be increased, and workforce readiness programs to be enlarged.

The reason for this is quite simple: the retirement benefits are so large that they crowd out almost any other spending opportunity.  For example, there was a news item in the last few weeks about the City Manager of a small, relatively impoverished town, Bell, California, (2009 population 36,664) Robert Rizzo, who drew an $800,000 salary before he retired, and who will collect over $30 million in pension benefits if he should leave a normal life span.  The town has about 25% of its population living at or below the federal poverty level, but the government officials clearly milked the taxpayers to an extortionate degree and have secured a commitment that either the town, the state, or the Federal Pension Benefit Guaranty Corporation will have to meet.

Clearly, when one looks at broader societal needs, the rebuilding of the nation’s infrastructure, the need to upgrade our educational system, the need to invest in more energy-efficient and sustainable technology, and the need to expand workforce readiness programs, the funds needed are certainly in the hundreds of billions of dollar, if not the trillions.  Tax rate increases will not bridge the gap, nor will discretionary spending cuts.

There are only two solutions:

• Reduce the absolute levels of spending on retiree medical programs by improving the health of the elderly population and by reducing the cost, inefficiency, and intensity of health care; and
• Reduce pension obligations by getting people to work longer or to create new laws and regulations that allow for more phased-in pension benefits.

Both of these solutions are win-win situations:

• Healthier elderly people are more productive and happier.
• Better health care quality at lower cost is better for most of society.
• Someone who can work on a reduced salary and draw a partial pension can actually do better than either a full-time employee or full-time retiree, at a lower cost to the pension system.

Who loses if we adopt these solutions?

• Healthier people who use the health care system less often and less intensively use fewer hospital beds and other hospital resources.  Hospitals are major job and revenue providers for communities.  Communities will need to develop better alternatives for economic development than large, marginally profitable, or even unprofitable, hospitals.  Fewer and shorter hospital stays mean fewer jobs, which increases unemployment.
• The volume of business available for insurance companies, pharmacies, test equipment and other medical device manufacturers and operators, outpatient centers, and other parts of the health care system in which revenues are volume-dependent will be adversely affected.
• With respect to pensions, delayed retirement means that younger people who might have had those jobs will be delayed in getting them, although the ratio of younger to older workers has declined over time.

The hardest problem to address, by far, is the problem of improving the health of the older population, followed by the population of reducing the volume and intensity of care for that population.  The elderly population has been schooled in the idea that unlimited care from an unlimited selection of providers available whenever the elderly want that care is the best possible situation for them.  Getting them weaned from the notion that more care is not always better for them will be very difficult.

However, we have no choice, except to implement solutions like these.

Government officials have become more risk-averse over time, and less effective as a result, precisely because, in varying degrees, they are judged by different standards from private sector employees.  Over a decade ago, I had dinner with an executive who had been fired by the U.S. Postal Service, after he had worked in the private sector for a good part of his career.

His observation about being a government executive was that the highest risk situations for a government employee were either unwanted media scrutiny, the threat of a government investigation, or the threat of a Congressional hearing.  There was another long-term Postal Service executive who was fired a few years later because of a relocation package he received, which received excessive media scrutiny, even though it had been approved by the Postal Service’s Office of the General Counsel, its chief ethics officer, and the Inspector General.  One thing I learned about the Postal Service is that, after a 1992 scandal involving vendor-related events at the Barcelona Olympics, it operated at the highest ethical standards.  The firing was unfortunate, but the Postal Service apparently felt that it had to eliminate even the appearance of ethical problems.

The trouble with the Sherrod firing, as well as other incidents like it, is that as Mr. Jones put it most eloquently:

“Life inside the Beltway has become a combination of speed chess and Mortal Kombat: one wrong move can mean political death. In the era of YouTube, Twitter and 24-hour cable news, nobody is safe. Even the lowliest staff member knows that an errant comment could wind up online, making her name synonymous with scandal.

The result is that people at all levels of government are becoming overly cautious, unwilling to venture new opinions or even live regular lives for fear of seeing even the most innocuous comment or photograph used against them, all while trying to protect and improve the country.”

Not only is he right, but, unfortunately, the Sherrod incident will be remembered for a long time, and will affect behaviors all over all levels of government.  Government officials and employees will attempt to figure out not only whether what they said or did could get them into trouble, but whether someone could misinterpret and distort words or actions to hurt them.  They will refrain from doing or saying something, rather than doing something that needed to be done.

I had that experience a few times while I served as CEO.  It was unnerving.  People literally heard something different from what I said, and, on two occasions, an otherwise competent and well-meaning attorney told me that the company could get into trouble not only for what I said, but for what people incorrectly thought I said.

Having people live in perpetual fear is a bad way to run government, business, a non-profit organization, or any other grouping of people.  It is a bad way to force people to live their lives.  The notion that people should be held accountable for distortions that other people might create or project on to a situation is dangerous.

The Obama Administration has to realize that it did severe and probably irreparable damage to the effectiveness of government at all levels, and needs to pull back from knee-jerk behaviors based on appearing to defend the highest standards of ethics and race relations.  It actually achieved the opposite effect: individuals will be scared to talk constructively about race issues in situations in which a dialogue could help race relations.  Moreover, the impact will be felt in a wide range of other situations and on a wide range of other issues.

The President should take the step of framing how he thinks about the level of initiative he wants from government employees, and have a concrete set of actions, which he should announce in a prime time nationally televised address.  He should then follow through on his commitments, and make it clear to government employees that a misinterpretation and distortion by someone else will never again subject an employee to disciplinary action.

I may come across as an alarmist, but I really think this situation has far more serious consequences than might first meet the eye.

The telephone and Internet service were so bad for the eight days we were away that we were effectively cut off from communicating with others except for very brief periods when we could find a signal at a handful of locations.  Moreover, when there were power outages because of weather and horrific heat, we also were unable to use the landline phones in the rented house or the wired Internet service the owners had provided us.

My purpose for telling this story is not to complain about Internet or cell phone service, but to point out the vulnerability we face in our modern, high-tech society.  People make the faulty assumption that paper-based communications, TV and radio communications, and face-to-face communications are less necessary and can even be allowed to deteriorate because we have electronic communications available.  The cover story in the July 3-9 issues of The Economist, entitled “Cyberwar: the threat from the Internet” highlights only one of the many risks associated with our increasing dependence on the Internet, the vulnerability of the Internet infrastructure to cyber-warfare tactics.

After the events on September 2001, cell phone service, as well as landline telephone communication became useless because the demand quickly overtook the supply.  ATT has created a similar ongoing problem by its success in marketing Iphones: it has insufficient capacity to address the huge increase in system demand for data downloads.  The GAO issued a report in October, 2009, which found that, in the event of a pandemic, and a quarantining of  a significant part of the working and school-age population, the Internet would break down, especially in residential areas, largely because school children staying at home would overload the system downloading YouTube videos and accessing Facebook pages.

There are four critical actions the federal government needs to take:

• It needs the power to shut down recreational uses of the Internet in times of national emergency, especially recreational uses that consume a huge amount of bandwidth.  Amtrak already precludes the use of YouTube when it provides Wi-Fi services on its Acela trains.  This is a simple example of what needs to happen everywhere during emergencies.
• If we are to become much more dependent on wireless Internet services for uses like having electronic health records on cell phones, we need to make it far easier and less expensive for common carriers like ATT, Sprint, Verizon, and T-Mobile to build cell towers.  Too many communities have a “not in my backyard” mindset that significantly reduces cell phone coverage.  This is actually what was a major part of the problem in Cape Cod: there are very few cell towers relative to the demand across Cape Cod and Martha’s Vineyard.  There are many advocacy groups who think that cell towers cause cancer in surrounding populations or simply depress property values.  There is no credible evidence to support the cancer fears, and the property values argument goes out the window if cells are essentially located in every community. Today, cells can be built in such a way that they are not visible to anyone who does not already know they are in place.
• Carriers have to be persuaded to charge for data usage.  The notion that a person who accesses billions of gigabytes of data by playing YouTube videos on a cell phone should pay the same fee as someone who uses the cell phone solely for low-bandwidth-consuming voice conversations is crazy.  In fact, if we believe that having real-time universal access to wireless communications is critical for national security, public health emergencies, and effective interstate commerce, the government may have to require the carriers, by law, to eliminate pricing systems that invite overload, and prevent wireless systems from being broadly used. We have a difficult time changing to usage-based pricing when something has been priced at either a fixed amount or given away, but our collective wellbeing depends on having the Internet shared in a thoughtful way.
• The public needs to be educated to the fact that the Internet does not contain unlimited capacity everywhere.  This is a myth propagated by advocates of electronic communication.  Ironically, when former Vice President Gore referred to the “information superhighway” in the 1990’s, he was being more accurate than he realized.  Superhighways are almost always overloaded, because they invite more people to drive than the available capacity can allow.  Bandwidth, especially wireless bandwidth that depends on the building of cells in residential areas, cannot stay apace with bandwidth-hungry uses of the Internet that result from downloading or viewing of color and sound intensive videos.  The Internet is like the proverbial commons in the center of a rural town: the more cows that graze on the commons, the more quickly the grass that provides nutrition for the cows gets used up.

People sometimes forget that the concept of the Internet was invented by the Defense Department in the 1960’s to protect us from the consequences of having our traditional landline phone systems incapacitated in the event of a war.  We have to get back to basics and protect both our wireless communications and wired Internet systems for everyone’s benefit.

The usual solutions are to put supermarkets in the inner city, or to have farmers markets in the inner city or urban gardens in abandoned lots.  While all of these solutions are excellent long-term answers, all have problems or limitations.

Supermarket chains are increasingly reluctant to begin an effort to put a supermarket in an underserved low-income, inner city area.  There is an old saying that “No good deed goes unpunished” and that certainly applies to supermarket chains that try to do the right thing.  Almost always, labor unions and community coalitions try to force the chain to make various kinds of concessions as a condition of withdrawing objections, and small businesses who perceive they are threatened by the supermarket fight to the death to keep it out.  Last September 29, The New York Times published a story about a supermarket chain that tried to open a store in the Bronx, and was stalled by several different special interest groups.

The farmers markets and urban gardens are good solutions for growing foods during the growing season, but they do not provide a complete solution for population food needs during colder weather.

What works all year around is a delivery service that regularly trucks food that is ordered online from the supermarket to convenient locations in the inner city that only need storage space and security from break-ins and thefts.  Churches, schools, community centers, and industrial warehouses located in inner cities all can serve this purpose. The Baltimore City Health Department is actually pioneering this idea in a program it calls the “Virtual Supermarket Project.”

When I have spoken with people who have attempted to solve the food desert problem with delivery services, they always say that the “economics of the proposed service do not work for the delivery service.”  That strikes me as a phony argument.  Certainly, if a delivery service tries to copy a door-to-door service it provides in a wealthier area, the economic argument would make sense.  However, delivery to a location that clusters or groups multiple orders, but is convenient for local residents makes a whole lot more sense.

This whole discussion reminds me of the economics of mail delivery, which, by the way, is a way of delivering fresh fruit over long distance from gourmet services like Harry and David.  Postal services that have more freedom to change their delivery model, such as the Emirates Post, deliver to clusters, and charge extra for door-to-door delivery.  When I was at Pitney Bowes, the major corporate customers we served through our mail delivery services increasingly wanted delivery to clustered mailboxes rather than to individual desktops or mail cubicles.

In some European countries in which postal unions are large and powerful, the delivery obligations are far greater than what we have here in the United States.  For example, in the UK, on some routes, letter carriers have to walk up several flights in apartment buildings and deliver mail through slots on the doors of individual apartments.  This preserves postal jobs, but it makes delivery service extremely expensive.

The reason I prefer delivery services as a near-term or even a medium-term solution is that the construction of a supermarket, even when the supermarket owner can run through the gauntlet of community special interest groups, locks residents into the choices that supermarket offers.  Delivery services give the residents an ability to buy from any grocery store or supermarket within a reasonable radius of the community, which creates more competition.  When a supermarket comes into a community, it adds a single competitor, often one that displaces some or all of the small food stores already in place.  A delivery service keeps local competitors in place, and adds competition from the outside.  Moreover, over time, it can even incorporate long-distance online purchases of non-perishable items to put even more competitive pressure on the local bodegas or convenience stores that fail to offer adequately healthy food.  Having access to delivery services makes everyone more willing to be competitive in their pricing and their services for poorer communities.

• Excessive benefits for government employees and their families;
• Excessively high payments to vendors; and
• Excessively high welfare payments.

I would also suggest that states, over time, because of well-intended, but poorly conceived, laws, substituted unproductive clerical and bureaucratic rules-oriented employees for those who did productive work.  For example, governments today very likely have more clerical and administrative employees, but lack skilled professionals of all kinds to manage projects and programs.  In schools, there are many more administrators and service employees relative to teachers than there were a generation ago.

Benefits

Let’s look at each of these quickly.  Retirement benefits ballooned out of sight everywhere in government for a simple reason:  they largely escaped capture in a current budget year’s presentation.  The private sector has had to account for the totality of pensions and retiree medical obligations on its income statement since 1992, but government, to this day, only has to account for the current year’s costs, not any portion of future year obligations.  Like the stock option grants given to executives of large companies, which appeared to be “free,” and which were abused as a result in the 1990’s and in the first half of the past decade, current year salary increases could be traded off for future year retirement benefits, and politicians could look good for “balancing the budget.”  In effect, they were mortgaging the future.

For example, in Connecticut, a state with about 52,000 state government employees, our future retirement obligations are over $40 billion, or almost $800,000 per employee, and the collective bargaining agreement that granted these excessive benefits started in 1997 and runs through 2017.  Governor Rowland was irresponsible in doing this, but few members of the public knew about it at the time because it did not show up in any income statement.

Vendor Costs

State and local governments routinely pay more for goods and services, despite their larger purchasing power.  The reason is that they have so much bureaucratic process built into procurement that many potential vendors refrain from doing business with them, and those that do add significant dollars to the bids to cover the additional costs of doing business.

When I chaired the Governor’s Reform Commission on the Connecticut Department of Transportation, we did a confidential survey of vendors, who told us that they routinely added about 25% to their normal prices when doing business with the State because they were paid later and had to spend more money complying with useless processes and rules.

Many of these processes exist either because of pressure from special interests, or because the State has been forced by its legislators to put into place processes to insure “fairness” in contracting.

Welfare Payments

I strongly believe that government needs to help its poorest citizens, but I also believe that governments do a very poor job managing the welfare payment and service processes.  I was on the board of directors of a small social services organization last year, and I was amazed at the degree to which the State government loaded this organization with requirements that added cost and actually made service delivery more difficult.

State Workforces

If I think back to the early 1990’s and my dealings with the State of Connecticut, it had highly competent employees.  Even today, those who work for the State are driven to do the right things for the public.  The difference is the mix of workers the State has today, versus what it had a generation ago.

My interactions with the State in the last few years in serving as a volunteer on transportation and health boards have caused me to interact in a different way from the way I did 10-15 years ago.  At that time, when I was dealing with the Department of Transportation, the people with whom I dealt were subject matter experts who were focused on the core mission.

Today, I am more likely to work with lawyers and other clerical and administrative people who are assigned to enforce compliance with an administrative process.  In my current assignment as Co-Chair of a Prevention Advisory Committee, I have observed many dedicated and highly intelligent State employees reduced to communicating frequently with highly energized and very smart volunteers about process requirements.  Whereas these employees used to be able to help, they are now forced into roles that turn them into a hindrance.

Unfortunately, this is an all-too-familiar story: a governmental entity that irresponsibly agreed to rich pension benefits to allow government workers to retire very young, receive an exceptionally high percentage of their pay, and have taxpayers feel the financial burden decades later.  However, the example provided relative to Yonkers, New York, is especially outrageous.

Final Year Overtime

A pension is usually determined by multiplying a percentage determined by the number of years of employment by a number called the “final average earnings.”

Many governmental pension plans calculate final average earnings to which a pension plan percentage is calculated in terms of pay earned in the last year of a worker’s employment. The percentage calculation is usually in excess of what private sector workers get. The final year is always the highest year of pay for government workers, and the calculation of earnings based on the final year’s W-2 income invites abuse.  Most private plans prevent abuse by averaging the highest five years of earnings.

Many government workers volunteer for more overtime work and pay in their last year of employment than at any other point in their career.  As a result, one retired Yonkers worker, whose base pay is $74,000 a year, started receiving a $101,233 pension when he retired at age 44.  To put age 44 retirement into perspective, the worker’s life expectancy at retirement is around 81, which means that Yonkers taxpayers will carry him at his inflated pension for another 37 years, after he worked 20 years.

Overtime for Moonlighting

Moreover, many cities and towns stuck the taxpayers with pension obligations for work performed for private firms.  One example was the pension obligation for overtime work police officers performed as flagmen for Con Ed, the large private utility.  Con Ed paid the wages and work-related expenses for the police officers, but all the overtime pay went into the workers’ earnings base for pension plan calculations.

“Low-Ball” Estimates

One comment from a spokesperson for the mayor of Yonkers may have been the most outrageous of all.  The individual was quoted as saying that pension cost estimates were “often lowballs,” presumably so the city could agree to get stuck without arousing attention from the public.  Throughout the article, there were several points at which it was clear that estimates were wildly low of their eventual cost.  For example, according to the article, Yonkers city officials were told, and communicated to the public, that the richer pension formula for police would cost $1.3 million a year, but the yearly cost is now $3.75 million and rising.

One fundamental problem with government today is that we have excessive transparency for issues that do not matter, and no transparency on issues like pension and retiree medical costs that have huge financial implications.  Some of the assumptions on government pension liability are transparent:

• Financial reports typically reflect the discount rate used on future liabilities and the investment return assumptions;
• They identify the life expectancy tables used; and
• They also tell us whether pension benefits are subject to cost-of-living adjustments.

What is not transparent are the following:

• How numbers underlying the assumptions are derived;
• How the cost-of-living adjustments are calculated; and
• How compensation increases are determined.

The pension padding results from a total control breakdown on compensation increases in the last year of employment.  Employees who are part of a pension system that calculates pay according to the compensation obtained in the last year of employment will become expert at manipulating the system to maximize their compensation.

Cost-of-Living Adjustments

Cost-of-living adjustments, which are included in almost every government pension plan, prevent a government from growing its way out of the pension liability problem.  If the pension accounts for 10% of the government’s budget, and the economy grows by 5%, the pension liability will likely grow, after cost-of-living adjustments, at a rate comparable to the 5%, thereby negating the benefit of the growth.

Remedies

What can we do?

• Stop the bleeding. Governments should radically renegotiate these pension obligations for new hires, and for those far away from retirement.  At Pitney Bowes, we amended our defined benefit pension plan in 1997 to eliminate unsustainably rich benefits, but we provided a transition plan to protect those within a few years of normal retirement age.
• Increase transparency. Calculations should be shared with the public.  These calculations involve a certain amount of strongly supported scientific analysis, like life expectancy.  However, pension calculations also require plan administrators to estimate investment return on pension assets, which involves a huge amount of judgment.  Government plan administrators routinely overestimate investment returns.
• Modify cost-of-living adjustments.  Government retirees typically have health plans protected from inflation, and are usually not saddled with tuition increases and increases in costs of shelter.  In fact, many economists point out that both the absolute costs of living and the rate of increase in these costs is lower for the elderly (other than the cost of health insurance prior to age 65 when they do not have access to either Medicare or a retiree medical program through their employer).  Any cost-of-living adjustment should be modified to reflect this.
• Change the actuarial estimates by requiring actuaries to factor in behavioral responses to pension plan provisions. Common sense tells us that if someone can volunteer for overtime pay in one year to increase their income for the next 35 years, they will do that.  However, actuaries not only do not take this “gaming of the system” into account, they are probably not allowed by traditional actuarial pension calculation principles to do so.  They are required to take voluntary and involuntary employment turnover into account, but, for whatever reason, they leave voluntary overtime decisions out of the calculation.   This has to change.

This pension calculation issue illustrates a much bigger problem with government: the boring and highly technical work on budgets and cost forecasting is the most important and the least understood part of government.  There are many examples of flawed government cost forecasting that have profound implications:

• The Congressional Budget Office (“CBO”) costing of the recent health insurance reform legislation, which is already believed to have been $115 billion too low;
• The flaws in pension forecasting across all levels of government.  I saw this first hand relative to the U.S. Postal Service, where the federal Civil Service Retirement System overestimated postal service pension liabilities by $78 billion until the industry and the Postal Service found the problem in the Fall of 2002.
• The CBO assumption that preventive health practices and services would save no money in the Medicare system.  This may be one of the most monumentally stupid and consequential failures of the budget scoring system.  The CBO only looked at selective preventive screenings and looked out only three years (even though it forecast the rest of the legislation out 10 years), and did not take into account benefits for any other part of government beyond that covered by the legislation.

This defies common sense, but it had profound consequences. It caused growth-killing taxes to be added to the health insurance legislation to make the budget appear to balance.  It reduced the potential pool of money that could have gone to prevention.  It also reduced the opportunity for other vital investments in health care system transformation.

We have to get these flawed systems fixed, or else government will make some very big mistakes in its attempt to be stewards of taxpayer and bondholder money.

Supporters of these pieces of legislation consider them a necessary first step toward longer-term health care system transformation.   Many point to a September 2009 Harvard Medical School study which estimated that lack of health insurance cost 45,000 American lives each year. If this admittedly imperfect legislation saved those 45,000 lives, how could it be negative? Moreover, how could anyone who cares about human life not enthusiastically support this legislation?

The flaw in their thinking is that they assume that the legislation has no other consequences that might result in reduced health care access, and, therefore, a potentially greater loss of lives for other reasons.

People fail to seek out health care for many reasons, of which the fear of financial ruin is only one:

• A significant reason for failing to get health care is lack of convenient access.  Many low-income people who get health insurance through Medicaid or SCHIP (two federally-funded state-managed programs) or other state-funded programs for the poor and uninsured find that they cannot get access to physicians because those programs do not pay the physicians an amount that allows them to make a profit on those office visits, and many physicians refuse to accept Medicaid or even Medicare patients.  In fact, based on the Massachusetts experience, the increased demand on scarce health care resources in Western Massachusetts and Cape Cod has actually reduced access to physicians for these populations.
• Some people, including those with insurance, wait to get diagnosed for medical conditions or fail to adhere to drug treatment plans that would treat their conditions because they are afraid to confront the reality of their condition.
• Some people do not know that they are at higher risk for a particular disease, and, therefore, do not get screenings that would detect that disease in time to get treated.  One unintended consequence of regulations issued under the Genetic Information Non-Discrimination Act is that the process of gathering family history information outside the physician’s office is far more constrained, and, therefore, will happen less frequently.  While everyone should get medical advice from his or her primary care physician, a significant part of the population does not have primary care physicians, and, therefore, will never get that advice.  Since this legislation has made it harder to get appointments with physicians because it has increased demand, but not the supply of physicians, it has probably worsened this problem.

While supporters of these pieces of legislation can envision the improved access health insurance creates, they cannot easily comprehend the reduced access the greater demand-supply imbalance creates.

If 32 million Americans get added to the ranks of those seeking health care and we do not change the number of health care professionals, that means that physicians have to do one or more of five things to manage the increased workload, four of which definitely worsen the overall quality of system health care:

• Lengthening their work days and weeks, which means that they are delivering more diagnoses and treatments while fatigued;
• Spending less time with each patient, which means that they will gravitate toward quicker diagnoses and treatments, as opposed to a more holistic approach to the patient;
• Delaying scheduling appointments for discretionary care, such as preventive screenings, in order to deal with acute care problems of their patients, especially the newly insured; or
• Deciding to drop patients for whom they are paid the least or who are the most challenging (Medicaid and SCHIP patients).

The fifth tactic is to delegate more tasks to nurses and nurse-practitioners, which would not degrade care quality or access, but there is a shortage of these professionals as well, so it is not clear that this is a viable alternative for many physicians.

In Massachusetts, it appears that most physicians are either delaying non-emergency appointments or dropping Medicaid patients altogether.  Why is this significant?

• If, for example, I am not excited about getting an invasive screening like a colonoscopy, and I find that I have to wait six months, I might simply skip the procedure.  We also have to ask whether delays in getting patients in for colonoscopies, mammograms or blood tests because of increased demand will cause individuals to reach stages of disease progression that they would not have reached if the physician’s office were less busy.
• Under the best of circumstances, Medicaid patients fail to show up for appointments in private physician offices almost half the time. Both pieces of legislation create incentives for physicians to drop Medicaid and Medicare patients to absorb newly-insured patients coming from higher-paying insurance exchanges, especially since the Medicaid patients take the most time and have the most challenging medical problems. Putting low-income patients in a position in which they have to travel longer distances (especially if they do not own an automobile), seek out new physicians, wait longer for appointments, or wait within a doctor’s office longer even when they have an appointment makes it more likely that they will skip needed care.

We need an objective study by the Harvard Medical or a similarly reputable research organization that analyzes the behavioral responses of physicians and patients to an increased patient load, and that determines the health effects from those behavioral responses.  Will patients who would have been saved through their current access to health care now see that access decline so much that they either delay or skip needed preventive screenings and end up dying because of that?  I believe this is likely, but, obviously do not know whether it will end up being more or fewer than the arguable 45,000 lives that could be saved through giving people access to health insurance.

That is why I felt that the most compelling priority for lawmakers was to address the imbalances between health care demand and health care availability, not to do a massive health insurance expansion program and leave the health care availability problem largely untouched.

Many pieces of the federal legislation attempt to increase the supply of physicians and nurses, particularly in under-served areas.  However, many major obstacles to health care capacity result from a variety of state and local laws, regulations, and practices that this legislation did not touch, such as Connecticut’s certificate of need process, which is often used as a weapon to protect small, local physician practices against perceived competition from small retail clinics.

I do not advocate centralizing the health care system, but the real obstacles to health care access, which is what matters more than health insurance access, relate to many policies and practices yet to be addressed.

It took much political will for the President and the Congress to enact this well-intentioned piece of legislation.  I just wish they had staged the insurance expansion more in parallel with health care capacity expansion, rather than jumping out ahead with insurance and leaving the health care piece to be addressed more slowly.