ReedyBear's Blog

Social discount rate

Apparently future money is worth less than current money, even if we pretend inflation doesn't exist.

Say the government wants to invest $1,700 into a child's medicaid, then in the future they want to make at least $1,700 back via taxes that kid will pay as an adult, that they might not have otherwise paid.

I don't fully understand the next part, and some of my maths are probably wrong, but I think I get the basic concept, and I try to communicate it here.

But the kid paying back $1,700 in 20 years isn't worth as much, because it's being paid back in the future, and future money is worth less than current money. (again, we're ignoring inflation)

So because of that, the government might want $2,000 back in the future, or $3,000 or more. The amount of return on investment depends on the "social discount rate".

The Biden-Harris admin reduced the social discount rate from a choice between 3% and 7% to a flat 2% in February 2024.

If the social discount rate is 7%, then for the government to justify spending $1,000 today, then they need to make back $1,070 a year from now. If it's 2%, then they only need to get back $1,020 a year from now.

So when the government is deciding if medicaid is a worthwhile program, they apply this social discount rate.

Meaning, at the 7% discount rate, if they spend $1,700 this year on a child's medicaid, then they need to make back something like $6,578.46 in 20 years to justify it, assuming a newborn won't be paying taxes for 20 years. ($19,759 if you include inflation)

At a 3% discount rate, if they spend $1,700, they need to make back $3,070.39 in 20 years. ($9,222 if you include inflation)

Or at a 2% rate, $1,700 will need to turn into $2,526.11 in 20 years. ($7,588 if you include inflation)

This removes human suffering from the question when government asks "Should we do XYZ?" and instead makes it a math problem about getting a financial return on their investment.

#blog #politics