Jane the Actuary General Interest

Chicago’s Mayoral Election – A Call For Ranked-Choice Voting

https://commons.wikimedia.org/wiki/File:University_at_Buffalo_voting_booth.jpg; public domain

The election in Chicago, dear readers, is half-over and headed to a run-off in April.

The results, per Chicago Tribune reporting:

Self-declared reformist progressive Lori Lightfoot, 17.5%.

Union and machine-backed, machine-disowning self-declared progressive Toni Preckwinkle, 16%.

Tribune-endorsed and business-backed Bill Daley, 14.7%.

Self-made millionaire businessman Willie Wilson, 10%.

Followed by assorted technocrats, community activists, anti-machine/anti-corruption activists, law-and-order candidates, and the like with lower vote totals.

Now, I am not a Chicagoan, but the well-being of the city affects the rest of us, too, not least because of the inevitable squabbles between city and state about money.  And the race has been discouraging for multiple reasons, among them the fact that the sheer number of candidates involves an awful lot of the game of supporting multiple candidates from a constituency not your own, to dilute their vote.

And the end result: the top two vote-getters are, in many ways, clones of each other.  Oh, I don’t mean the fact that they’re both black women.  That doesn’t particularly interest me.  But the very headline on today’s Tribune article speaks for itself:  “Hours after historic election, Lori Lightfoot and Toni Preckwinkle each argue they’re more progressive than the other.”  Perhaps readers who are wiser than I will have a better sense of how they fit into the overall political landscape, and maybe it is indeed the case that Chicago voters are indeed so ready for a progressive that they are largely happy at the choice between machine progressive and non-machine progressive.  As far as I could tell, the only difference between the two on their websites was the exact year by which they intend to convert the city into all-electric buses, and whether they promise all-renewable or merely all-clean electricity for the city.   Perhaps, again, Chicagoans can identify nuances important to them that I don’t see.

Here’s another Tribune article, by columnist Dahleen Glanton, “Two black women will face off in Chicago’s mayoral runoff, but mostly white voters put them there.”  What’s she mean by that?  She writes:

What makes this mayoral race so unique is that neither of the black women heading to the runoff was the first choice of voters in wards where the majority of the city’s African-Americans live.

Preckwinkle won only four of the city’s predominantly black wards, according to unofficial results. Though she emerged as the front-runner, Lightfoot didn’t win any.

Voters on the South and West sides overwhelmingly supported Willie Wilson, a black self-made millionaire who never had a real chance of winning citywide support. But Wilson won 14 predominantly African-American wards.

Instead, Preckwinkle’s base was Hyde Park and the neighborhoods surrounding it, and Lightfoot “won with the help of affluent white voters on Chicago’s North Side lakefront.”  Now, Glanton continues by lamenting (if I follow her correctly) that there was not a single candidate supported by a unified black community, but what I’m taking from her column is that neither of these finalist-candidates had strong support among the black community, despite their race/ethnicity.

And here’s a fourth article, “A broken alliance: Did Jerry Joyce spoil Bill Daley’s mayoral bid?”  Billy Daley had 7,000 fewer votes than Preckwinkle; cop and firefighter-heavy wards from which Daley had hoped for support instead swung to Jerry Joyce, who picked up 7% of the vote in total.  The article doesn’t definitively deem Joyce a spoiler, and quotes a supporter who rejected that claim.  But the math checks out:  if Joyce supporters would uniformly, or even partially supported Daley, he would have been in the run-off rather than Preckwinkle.

Which brings me to ranked-choice voting, or preferential voting.

Here’s the description of this voting method at Fairvote.org:

With ranked choice voting, voters can rank as many candidates as they want in order of choice. Candidates do best when they attract a strong core of first-choice support while also reaching out for second and even third choices. When used as an “instant runoff” to elect a single candidate like a mayor or a governor, RCV helps elect a candidate that better reflects the support of a majority of voters.

The system is used in a growing number of municipal elections (as listed by Fair Vote), and was also used in Maine for their 2018 congressional elections.  But it’s not an experimental system — ranked-choice voting has been in place in Australia for over 100 years.

And, courtesy the website ChickenNation.com and author Patrick Alexander (and explicitly made available for sharing when not for commercial use), here is an explanation of that system:

http://www.chickennation.com/voting/?fbclid=IwAR2vl7IM9kJqUy-0_K6rJjrODDUx9RdaHDa-SGONeFVuG_RZ97NdgxdH5mY
http://www.chickennation.com/voting/?fbclid=IwAR2vl7IM9kJqUy-0_K6rJjrODDUx9RdaHDa-SGONeFVuG_RZ97NdgxdH5mY
http://www.chickennation.com/voting/?fbclid=IwAR2vl7IM9kJqUy-0_K6rJjrODDUx9RdaHDa-SGONeFVuG_RZ97NdgxdH5mY
http://www.chickennation.com/voting/?fbclid=IwAR2vl7IM9kJqUy-0_K6rJjrODDUx9RdaHDa-SGONeFVuG_RZ97NdgxdH5mY

So I find myself thinking of all the ways in which this system (however much it might take some getting used to) would have led to a different dynamic in the Chicago election.  Yes, there are risks that voters would find the system too confusing (but they’d surely get used to it) and, yes, voting itself would take longer, but it might well have led to a very different outcome, and in any event would have meant that Chicago’s voters could have had a much more meaningful say in their next mayor.

 

Jane the Actuary Retirement

Forbes post, “Three Steps To Fixing Illinois’ Pension Crisis”

Originally published at Forbes.com on Febraury 26, 2019.

 

If this were a clickbait article, I’d have titled it “three easy steps” or “one weird trick” or the like.

But the fact of the matter is that as much as I’ll break down the necessary solutions into three steps, they are not easy.  They are, in fact, difficult, and will require real sacrifice and the expenditure of political capital rather than platitudes, because, however much Gov. Pritzker might wish otherwise, there are no “weird tricks” (asset transfers, re-amortizations, pension bonds) to escape the problem.

But here’s a reminder of the seriousness of the problem, even if Pritzker and his allies think it can be dealt with by accounting games:  an article yesterday from The Bond Buyer, “Why Illinois budget proposal raises new rating concerns.”

 Illinois has faced deeper deficits and its bill backlog has been cut in half from its high of $15.7 billion in November 2017, but it no longer has room for any missteps that could lead to a downgrade.

 Moody’s Investors Service and S&P Global Ratings have the state at the lowest investment grade rating; both assign a stable outlook. Fitch Ratings has Illinois two notches above junk and assigns a negative outlook.

The MMA report warns that the risks associated with the uncertainties over the valuation of asset transfers and the arbitrage gamble on POBs are ideas that “can become gimmicks that pose credit negatives potent enough — scaled to management’s desperation to shape its spreadsheets — to smother the plan’s benefits to the state’s credit profile.”

The article further highlights the ways in which the governor’s proposed can-kicking actions risk bringing the state’s bond ratings down below investment grade.  However much Pritzker, Hynes, etc., might wish it to be otherwise, however much they appear to see funding requirements as nothing more than a nuisance, they should trust that the experts in the matter, who say that it matters vitally, are right.

That being said, here are the three steps.  Not “easy steps.”  Difficult steps.

Step 1:  Provide a benefit to new employees which is both fair, financially-sustainable, and fully funded from Day One.

What does this mean?

To begin with, Illinois is one of 15 states whose teachers do not participate in Social Security.  Neither do state university employees.  (A majority, but not all, of the state employees do participate.)   This needs to change.  However much Social Security has its own issues, all public employees should participate in its basic safety net programs just as the rest of us do.

Next, the retirement benefit provided by the state should be

  • Fixed and defined at the time of accrual;
  • Obligatorily-contributed at that point with consequences as severe as skipping a paycheck;
  • Accrued in an even way over the course of the employee’s career rather than backloaded (see “Pension Plan 101: What Is Backloading And Why Does It Matter?“); and
  • Vested within a timeframe that’s short enough not to impair the ability of job-changers to accumulate retirement income.

Yes, a defined contribution, 401(k)-equivalent plan meets all these requirements.  But that’s not the only option.  Wisconsin’s public retirement system (subject of a forthcoming article) includes risk-sharing mechanisms that accomplish some of these objectives while still pooling risk among participants.  Other proposals exist, as well as a proposed modernized multi-employer plan design (also a now-draft article), with the intention of removing risk from plan sponsors and ensuring that they make the required contributions, when required, while creating risk-sharing and risk-smoothing among participants.

It may also be the case that Tier II employees, hired in 2011 or later, especially teachers who in the current system are actually subsidizing everyone else, want in on the new system, and this can be sorted out as well, not least because over time the decline in the real value of their pensionable pay cap will affect more and more participants.

Step 2:  Reform benefit provisions for existing participants to reduce liabilities in a fair and responsible manner.

This does not mean across the board cuts.  There are a menu of possible options available, which preserve the dollar value of participants’ benefits.

At present, all participants, except those hired in 2011 or later, are guaranteed 3% annual benefit adjustments on their entire retirement income, regardless of the year’s actual inflation.  It should go without saying that the very first benefit reform is to replace the fixed 3% with a true CPI adjustment with a maximum of 3%.  A benefit reform could also include COLA holidays for those employees who have benefitted from the above-inflation increases of the past, to reset their benefits over time, in inflation-adjusted terms, to something resembling what they’d have, absent this generous provision.

In addition, when Rhode Island reformed its pension, they created a cap, so that only the first $25,000 in pension income is COLA-adjusted each year.  Such a cap — which might reasonably be set at the level of a typical Social Security benefit, to mirror private sector employees’ retirement income — would provide protection for retirees at a more sustainable cost for the state.

Here’s another potential benefit reform:  eliminate the generous early-retirement eligibilities and move everyone onto the same retirement schedule as the Tier II employees.  Yes, this will require a commitment by the state to reassign to desk jobs and make appropriate accommodations for arduous-occupation employees who would have simply retired at young ages in the past, but it’s a reform that will eliminate the tremendous disparities between these employees and, well, everyone else.

And finally, the core benefit formula itself is considerably richer than a typical private sector plan ever was, even taking Social Security benefits into account.  If the above changes are insufficient to play their part in shoring up the system, then the core benefit formula might need to be reduced, in a manner that protects accrued benefits; for example, the formula might be the greater of 1.8% per year of service with final pay, or 2.2% per year of service with pay as of the date of the enactment of the reform.

As it happens, there has been a bill filed by Rep. Deanne Mazzochi of Westmont, which proposes to amend the state constitution to enable just these sorts of reforms, with a provision that, per the bill synopsis,

limits the benefits that are not subject to diminishment or impairment to accrued and payable benefits [and p]rovides that nothing in the provision shall be construed to limit the power of the General Assembly to make changes to future benefit accruals or benefits not yet payable, including for existing members of any public pension or public retirement system.

(What specific changes Rep. Mazzochi has in mind I can’t say; these are only my personal recommendations.)

Is Gov. Pritzker championing this proposal?  No, of course not.  But he should.

Step 3:  Deal with legacy debt.

Step one moves future employees into a new system.  Step two moves current benefits from the current overpromised, overgenerous levels to a more sustainable structure.  These two moves eliminate the “pay-as-you-go” mindset which appears to have taken hold, and make it clear that what’s left is legacy debt, and should be treated no differently than any other debt.  That debt will need to be paid off/prefunded over time, in a way that’s fair to future generations without causing undue harm to taxpayers right now.

Will the state raise taxes?  If yes, then the state should choose equitable and transparent methods of doing so, rather than a hidden tax of, for example, selling (long-term leasing) the tollway and authorizing exorbitant tolls.

Will the state issue bonds?  If yes, then those bonds should be used to purchase annuities for retirees in a manner similar to private-sector plan sponsors, rather than promising that the bonds will pay for themselves through investment returns.

In no event should the state simply plan to defer pension funding to some future time of imagined greater wealth, by claiming that money spent now on infrastructure or business-development programs are “investments” which will pay dividends.  Illinois is losing, not gaining population, and it’s wrong for politicians to shrug this off, claim their policy solutions will bring a brighter (and more populous) future, and risk saddling an even-smaller population with larger per-capita debt.

So there it is:  three steps.  Three very difficult but necessary steps.

 

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary General Interest

Minimum wage, median wage: some data and thoughts

So, readers, I would love to pound out an article about Illinois’ recent minimum wage hike and its future effect on the state economy.  For reference, here’s the Chicago Tribune’s summary:

Under the law, on Jan. 1 the statewide minimum wage increases from $8.25 to $9.25 per hour. The minimum wage again will increase to $10 per hour on July 1, 2020, and will then go up $1 per hour each year on Jan. 1 until hitting $15 per hour in 2025.

That’s a big jump.

Minimum wage supporters cite all manner of beneficial effects — a New York Times article floating around twitter today claimed that

A $15 minimum wage is an antidepressant. It is a sleep aid. A diet. A stress reliever. It is a contraceptive, preventing teenage pregnancy. It prevents premature death. It shields children from neglect. But why? Poverty can be unrelenting, shame-inducing and exhausting.

Its supporters also marshall studies to claim that it will have only beneficial effects on the economy — but skeptics point to the fact that studies finding this are unsatisfactory for a variety of reasons, for instance, a boost in the minimum wage in one locality in a region where wider economic effects might be offset by lower minimum wages in surrounding areas.  And I’m not going to try to produce an analysis of the literature, nor to make any particular claims of expertise as an (armchair) economist.

But I do want to use my platform, however small it is, to point to the magnitude of the increase.  To be sure, in the event that there is significant inflation, some of that increase will be moderated, but at today’s low inflation rates, $15 per hour in 2025 dollars won’t be that much different than $15 per hour in 2019 dollars.

So consider this:

The median wage in the Chicago metro area is $19.67.

In Springfield, Illinois:  $18.35.

In Peoria:  $18.14.

Decatur:  $16.80

Rockford:  $16.55

Carbondale:  $15.77

West Central Illinois nonmetropolitan area:  $15.41

(You can use the main BLS link to view all all metro area median wage data.)

In other words, once you leave metro Chicago and the midsized cities of Illinois, median wages drop to very nearly the level of the future minimum wage.

The BLS link also provides median wages for particular occupations — and the occupations with median wages below the new minimum extend far beyond fast food and retail workers.

In the West Central Illinois nonmetropolitan area:

Ushers, Lobby Attendants, and Ticket Takers earn a median wage of $9.10.

Childcare workers, $9.38.

Hairdressers, hairstylists, and cosmetologists:  $9.74.

Court, Municipal, and License Clerks:  $10.43.

Tax preparers:  $11.12

Nursing assistants:  $11.54.

Pharmacy aides:  $11.77.

Tellers:  $12.72.

Butchers and Meat Cutters:  $13.50.

Emergency Medical Technicians and Paramedics, $14.30.

Phlebotomists, $14.91.

and so forth.

What happens when the state mandates a minimum wage in excess of the wages that each of these occupations, at median, actually pay in this part of the state?  I simply lack the imagination to forsee the impact, but it’s surely not as simple as each of these occupations in fact paying $15.00.   These are in many cases jobs requiring specialized training; I find it difficult to imagine that EMTs would accept a wage that’s equal to what a McDonald’s worker gets the first day on the job, without specialized training.  And I likewise can’t fathom a situation in which every wage-earner’s wages are simply boosted by $6.75, across the board, and prices similarly simply reset at the level necessary for businesses to cover their costs.

Now, looking at this list of occupations, I seem to have selected service occupations which are connected up with the local economy, rather than the sorts of jobs associated with manufacturing or other industries which stretch beyond the local area.  And I am limited in my understanding of the nature of the economy in these sorts of small towns and rural areas, but — well, to the extent that it depends on the sorts of small manufacturing facilities scattered throughout middle America, those manufacturers will have to cope with a changed dynamic that could well lead to them leaving or automating, and to the extent that they provide a support structure that ultimately works its way down to the family farm, well, farmers are self-employed, aren’t they?  And their earnings won’t increase as a result of a minimum wage law, only their costs.

And, yes, I have selected the lowest-wage region from which to list by-occupation median wages.  Of course those numbers are higher in Springfield and Peoria, for example.   Childcare workers in Springfield, for example, earn $10.75 at median, pharmacy technicians, $13.77, and phlebotomists, $16.66.

So I don’t have an answer.  I’m not going to and I’m not able to build out a model of precisely which bad things will happen.  But I do think that looking at these sorts of BLS listings is a useful way of, even as a non-expert, getting a sense of the magnitude of the increase, and the potential for far-reaching unintended effects.

 

Image:  Marseilles, Illinois, population 5,094.  https://commons.wikimedia.org/wiki/File:Marseilles_IL_downtown1.jpg; IvoShandor [CC BY-SA 3.0 (https://creativecommons.org/licenses/by-sa/3.0)].

Jane the Actuary Retirement

Forbes post, “Are Illinois Public Retirement Systems Pension Funds Or Pyramid Schemes?”

Originally published at Forbes.com on February 22, 2019.

 

The evidence continues to mount:  Illinois’s new elected officials and their advisors simply don’t believe that it matters that public pensions are pre-funded.  They view pension funds as something that exists on paper, and pension reporting as a nuisance to be avoided where possible, and ignored otherwise.  Through their actions — and indeed their words — they are showing that they think of public pensions as pyramid schemes, in which new participants pay the retirees’ pensions.  And while that’s true of Social Security, it’s a terrible and terribly harmful approach for state-employee pensions.

What justification do I have for saying this?

First, Prizker plans to revise the funding schedule from a target of 90% funding in 2045 to 90% funding in 2052.  But it’s not just a matter of redoing the math for a standardized formula, like refinancing a mortgage and adding more years to the payoff period.  His office reports a reduction in contributions of $878 million in the 2020 budget, relative to what existing law would require.  But the office has not made available the underlying contributions, and even Ralph Martire, executive director of the Center for Tax and Budget Accountability and member of Gov. Pritzker’s Budget and Innovation Committee, said on the February 20, 2019 edition of Chicago Tonight (about the 18 minute mark) that

he didn’t publish enough material for us to weigh in on those pensions and either support or not support what he did.  One major concern we have is they reamortized, changed the ramp, the payment schedule, and they didn’t point out what the new payment plan looks like, so I don’t see what that new ramp is and we want the state to go to a level dollar so it doesn’t always have this increasing payment obligation.  That’s what strains the fiscal resources.

Sure seems as if “change the target funding schedule” is really a rationalization for yet another pension contribution reduction to plug a budget hole.

Second, an answer Deputy Gov. Dan Hynes gave to a follow-up question, on potential asset transfers into pension funds, at his City Club of Chicago speech last week has been nagging at me (about the 22 minute mark):

Pension benefits must be paid with cash.  How will you pay benefits with non-liquid assets?

We’re not going to pay benefits with assets.  I mean, the assets will go in, they will lift up the funding ratio of the system, but obviously we’re still going to be putting billions of dollars in revenues from the income tax into the system, and those will be used, and employees will be putting millions and billions of dollars of their paycheck into the system which will be used to pay benefits.

This is a very troubling mindset.  This suggests that Hynes, and Gov. Pritzker, view the pension fund as a pile of money which needs to exist for arbitrary matters of accounting, but that, in the end, they believe future benefits are paid by future state revenues.  It’s even more troubling to view employee contributions as paying for these benefits, rather than contributing to the funding of those same employees’ future retirement accruals —

but, sadly, he’s not entirely wrong there.

The largest Illinois public pension plan is the Teachers’ Retirement System.  Teachers hired under the Tier II system, as of 2011 and later, had such severe benefit cuts that the latest annual report (from 2017) shows that in making their 9% of pay contributions (though, to be fair, in many cases, their school districts pay this on their behalf) they are actual paying in more than the actuarial value of the benefits they accrue.  Although, to be sure, the math would work out differently if the discount rate were lowered from its current 7%, in the report’s calculations, the value of Tier II employees’ benefit accruals is 7.11% of pay — that’s 1.89% less than the 9% contribution.  (The story is different for the other major retirement systems which have more generous benefit structures relative to employee contributions.)

What’s more, the Tier II benefits for all systems cap pensionable pay.  That cap rises each year at a rate that’s half the inflation rate.  By the time Prizker’s new 90% funded status target is reached in 2052, that cap will have reduced so much in value that it will be equal to the median teacher pay.

Finally, a new report was published on February 19 by three scholars at the University of Illinois at Urbana-Champaign and at Chicago rejects the very notion of a “pension crisis” based on funded status.  Instead, they argue, a pension system is only “in crisis” when it ” is insolvent and unable to make benefit payments to current retirees.”  Instead, they claim, what matters is not whether the state pays for the accruals it promises its employees or leaves that to future generations, but whether Illinois’ spending on pensions from year to year is level and manageable, in this case, at about 1% of state GDP.

But even this report acknowledges the problem with the teachers’ pensions, though they do so to lament what they call the “‘crisis’ framework” — that is, that legislators were in too much a rush to fix benefits that they didn’t do any reasonable analysis.

There is also a potentially serious and costly flaw in the Tier II plan. If the rate of inflation is high enough, Tier II benefits will be so low that they will violate federal law, which requires that they be at least equivalent to social security benefits. Consequently, Illinois could be required to increase the benefit of approximately 78 percent of the employees not currently enrolled in Social Security (State of Illinois Report of the Pension Modernization Task Force, House Joint Resolution 65, 2009).

The “crisis” framework led lawmakers to create Tier II without much consideration of its potential pitfalls. A belief that something needed to be done in the present led to too little time and consideration of the future implications of what was being implemented. The Tier II plan passed through both state chambers in a single day. Lawmakers never saw detailed projections from pension system actuaries of the plan’s impact. Sara Wetmore, vice president and research director at The Civic Federation, pointed out “They passed this so quickly that there really wasn’t any way for anybody to know if there would be any problems in the future” (Mathewson, 2016). A few short years after its creation, the problems of Tier II are widely acknowledged (Secter and Geiger, 2015).

Longtime readers will recall that one of the first issues I addressed was “Why Public Pension Pre-Funding Matters.”  I cited the risk of legacy costs — the examples of such places as Detroit and Puerto Rico tell us that we can’t take it as a guarantee that a city or state’s tax base will always increase, never decrease.  I explained that once it’s accepted that pensions are funded at some point in the future, it creates conditions for gaming the system, a form of borrowing from future generations in which lawmakers can hide the full extent of their promises from taxpayers, and enable a whole chain of benefit-boosting practices such as pension spiking.

But let’s put this in more concrete terms.

The Teachers’ Retirement System needs reforming; in fact, all the plans need to have the cap unwound or tied to the full inflation rate.  The professors are indeed correct that no such benefit should have ever been implemented without actuarial analysis (and don’t get me started on the never-implemented Tier 3).  And even absent the cap and the other benefit restrictions, teachers, university employees, and a minority of state employees don’t have the uniform safety-net protection that Social Security provides.  If they move out of state before they have 10 years of service, they lose their benefit, receiving only a refund of their contributions (and even then, for teachers, without interest); even if they are vested, midcareer cross-state moves hurt their retirement benefits because their pensionable pay is frozen.

What should happen?  In the first place, all new employees in these retirement systems should be moved onto Social Security, as is already the norm for teachers in 35 other states.  Then, their employer-provided benefits should be provided in the form of fixed contributions, either via a benefit structure that’s the equivalent to private-sector 401(k) plans or via some version of a hybrid plan which provides for pooled investments and benefits but in which participants share and smooth risks rather than the state bearing the risk.

But as long as state funds are being spent paying out current benefits, it is not possible to implement this fix because it requires double-paying, first, for existing benefits, and second, for the restored future accruals of Tier II employees via fixed contributions.

Complaining, as Priztker and Hynes do, that it’s unfair for the state to have to repay this debt, does not fix this problem.  Blaming it all on a single Republican governor, rather than a legacy of both Republicans and Democrats, who over the space of 25 years, declined to fix, and in fact made the “Edgar ramp” worse, does not fix it.

What does fix it?  Accepting the need for an amendment to the state constitution.

What do you think? Share your opinion at JaneTheActuary.com!

UPDATE:  I’ve now heard from several commenters that Illinois school districts/public employers do not “pick-up” their employees’ contributions.  For clarification, the TRS website reports that there’s about a 50/50 split, at least as of 2011 (with a 2017 update).  Of course, they legitimately point out that even where the school district “picks-up” the employee contribution, it’s still a part of an overall negotiated total compensation package.  Whether the pick-up, when it exists, should be taken into account when discussing whether there is a real and meaningful employer-provided benefit to appropriately replace Social Security, is a question for another day.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary General Interest

What Medicare for All actually looks like

Yeah, I know, I’m being excessively clever, like the time in my multi-employer pension plan rabbit hole series (to be revisited soon!) that I proclaimed Central States to be fully-funded, because, in addition to the troubled, nearly-insolvent plan by that name, another plan with the same exists, is 108% funded, and offers some instructive comparisons.

And with respect to healthcare, too:  every Democratic presidential candidate and all manner of interest groups have proposals for “Medicare for All,” though, by and large, they don’t actually intend to simply provide the same benefit provisions as Medicare includes (Part A deductibles, Part B coinsurance, Part C Medicare Advantage, Part D drugs) to the under-65 American population, but have concluded that it’s a way of speaking about a public healthcare system/single-payer system that generates more positive polling than the words “public healthcare system” or “single-payer system.”

A recent article that came across my twitter feed purports to be “The Only Guide to ‘Medicare for All’ That You Will Ever Need” and differentiates between what it deems to be the “bad” M4A bills, which allow some sort of buy-in to Medicare or Medicaid or another “public option,” and the “good” M4A bills.  To meet author Timothy Faust’s requirements, such a program must compel all residents to participate, ban any sort of private health insurance, and cover every form of health/medical care, including “medical, dental, mental, vision, reproductive, long-term, and more,” and Faust notes that “long-term” encompasses all forms of elder care, including in-home services; the system’s expenses would be managed by “negotiation” (which the article itself makes pretty clear means dictating prices to providers).

And Faust acknowledges that this exceeds the norm in the rest of the world, but makes the expansive claim that “we are capable of, and should, provide a higher standard of care than any currently-existing single-payer program on the globe.”

But it does matter what happens elsewhere.  It is important to understand what “universal healthcare systems” actually look like in the rest of the world.  In a prior article I shared an OCED chart on health care expenditures in developed countries, split by payor, and made some general comments on a number of countries.

So — getting back to my title — there is a real “Medicare for All” system in the world today, because “Medicare” is the name Australia gives its public healthcare system.

And according to that chart, Medicare covers 67% of healthcare costs.  Who pays the rest?

20% comes from out-of-pocket charges.  10% comes from private health insurance, which nearly half (46%) of Australians elect.  And 2% comes from “other” sources.

Here’s the scoop:

Australian Medicare covers public hospitals and doctor’s visits, as well as x-rays and other diagnostic tests, surgery, eye exams, some dental surgery, at a rate of 100% of the scheduled fee, for general practitioners and 85% of the scheduled fee for specialists.  Doctors may choose to accept these rates as payment in full and bill Medicare directly, or if they charge in excess of these rates, bill patients directly, who then seek reimbursement from Medicare (for instance, through a mobile app) for the covered amounts, and pay the excess themselves.  Medicare does not cover ambulance services, most dental care, most therapy services, glasses, hearing aids, or home nursing.  Drugs are also only covered with a patient cost-share.

Private health insurance is a very popular option to cover these additional charges.  In addition, Medicare-only patients cannot choose their own doctors, but private health insurance provides this option.  Private health insurance also affords patients the ability to have a private room rather than a multi-bed room (shared with as many as five others), and to receive treatment, in general, at a private hospital, with charges equivalent to what public hospitals would cost, covered by Medicare, and the rest paid by the insurance/out of pocket.  Finally, private health insurance allows patients to skip waiting lists.  For example, public patients waiting for knee replacements waited for 203 days on average, but everyone else had a wait of 67 days.  An Australian I know shared his personal experience when I said I was drafting an article:

The private insurance is essentially to get you to the front of the queue for elective or non essential surgery, or to get you a private room in a private or public hospital. It also helps a lot with the stuff that isn’t covered by Medicare.

As an example our son was 18 months old and barely saying a word. We applied through the public system for speech therapy but it was a 3 to 6 month waiting list. So we went to a private speech therapist and got seen within a week. The private health insurance covers part of the cost of speech therapy. In the end he was seeing both speech therapists because one was free on the public system and the other we weren’t out of pocket all that much for.

But as much as private insurance systems are reviled by single-payer promoters in the U.S., in Australia, the government encourages its citizens to purchase private health insurance, through the Medicare Levy Surcharge, an extra tax of 1% of income or more for anyone with over AUD 90,000 (about USD 64,000) in income without a private insurance policy, and through the Private Health Insurance Rebate, a means-tested government subsidy of 26% of the premium, for those with less than AUD 90,000 and younger than age 65, increasing to 36% for the older 70s, and phasing out to 0% at AUD 140,000.

One other noteworthy element of the Medicare system is that the government wholly circumvented any constitutional battles similar to what we’ve faced, by actually amending their constitution in1946, to give their federal government the power to provide hospital and medical services.

(Information on the system can be found at the following links:  PrivateHealth.gov.au, the Australian Government Department of Human Services Medicare website, and Wikipedia. I also referenced two links provided by my Australian friend, “Benefits of Private Health Insurance,” and “Do you really need private health insurance? Here’s what you need to know before deciding,” which spell out some of the practicalities from an Australian perspective.)

This is the primary point I want to drive home:  the dream of having the government pay for all healthcare consumed by its residents simply doesn’t exist.  Markets for private-sector health insurance continue to exist even in “universal health care” countries, for multiple reasons.  To refer back to the OECD chart, even among the most generous countries, government spending seems to top out at 85%, almost as if there’s some sort of economic law that means it’s simply not possible to exceed this.  (And there is likewise not a communist utopia to point to, either, though that’s a subject for another time.)

“Medicare for All” advocates think this is a bad thing. In fact, it’s not.

Now, for the time being, I’m going to sidestep the question of whether any form of “Medicare for All” or “enhanced Obamacare” or whatever you’d like to call it, is a good idea in general.

However, if we take a shift to a more state-paid system as a given, a hybrid system solves many problems with respect to wait lists, rationing, etc., while still providing a base level of care to all.

Yet, at the same time, the demon of path dependency may well prevent it — not only in terms of the existing healthcare infrastructure (e.g., the new hospitals with all-private rooms, and semi-private the norm everywhere) and the untold number of employees who would not stand, politically, for losing their jobs or having their salaries halved, but also because of the expectation we have that, whatever might ail our system, wait lists or determinations that a procedure is not cost-effective are too high a price to pay.

Image: http://www.dodlive.mil/2017/10/03/usns-comfort-how-the-hospital-ship-helps-during-disasters/(U.S. Air Force photo by Staff Sgt. Courtney Richardson).  public domain.

Jane the Actuary General Interest

Is “reformist Chicago mayor” an oxymoron? A conversation with Paul Vallas.

Yes, readers, I know:  I might be overly fond of rhetorical questions in headlines.  But Betteridge’s Law of Headlines says

Any headline that ends in a question mark can be answered by the word no.

so maybe I’m actually signaling some optimism here.

Here’s the scoop:

I’ve written on my Forbes platform about Chicago’s pension funding woes (with links in a single Jane the Actuary post), and in particular on the prospects of any of the mayoral candidates having a solution to the problem.  Separately, I wrote an article at this site observing that, had Paul Vallas won the 2002 primary instead of Blago, Illinois might have had a very different history indeed – one fewer governor in prison, in any case.

So I wanted to share with you some of the things I learned from a conversation I had with Paul Vallas, on such topics as ethics, government reform, and the election itself.  I will caveat this by saying that I am not an expert in Chicago politics, but I will remind readers that I grew up in the Detroit area in the era of Coleman Young and Robocop.  I understand that cities can be deeply troubled.  But — well, here’s an experiment to try:  go to your favorite search engine and type in Chicago machine, then Detroit machine.  The latter brings up machine tool companies; the former, links about machine politics (as well as links to Chicago Machine, an ultimate Frisbee club).  Google “pay to play” and attach Detroit or Chicago to the search terms; for the former, you’ll get articles about ex-mayor Kwame Kilpatrick’s conviction in 2012; for the latter, you’ll get hits pointing to far more instances of pay to play accusations or convictions, up to the present day.  Perhaps Chicagoans can be Chicago-y about it and say, “woo-hoo, our corruption is so much more organized than elsewhere!”

Oh, and let’s not forget that the University of Illinois at Chicago’s political science department issued a report (Anti-Corruption Report #11 at the link, a download) deeming Chicago the most corrupt city, as measured by judicial districts (in this case Northern Illinois) with the most federal public corruption convictions from 1976 to 2016; on a per-capita basis, Illinois as a state ranks third after Louisiana and the District of Columbia, out of 94 total such districts — and that’s not even including the expected future convictions for Burke and unknown others.  

So, to begin with, I asked Vallas how to make sense of the election with its double-digit number of candidates, 14 in total.  (For the benefit of non-Chicagoans: the election takes place on February 26th, but will almost certainly require a runoff election on April 2nd.)  In his view (and perhaps this is common knowledge among those better-versed in Chicago politics), this is a result, at least in part, of the interplay between machine politics and Mayor Rahm Emanuel’s late decision, on September 4th of last year, not to run for re-election after all.  The first dynamic was that it was a given that Emanuel would not have the support of the black community due to his administration’s handling of the Laquan McDonald shooting, so the multiple black outsider candidates who announced their candidacy before Emanuel’s surprise announcement (I looked it up on wikipedia:  Willie Wilson, Lori Lightfoot, Neal Sales-Griffin, Amara Enyia, as well as later-disqualified Dorothy Brown) were welcomed by the Machine because they’d split the vote, instead of a single consensus candidate emerging and posing a risk to Emanuel.  At the same time, the candidates who are now leading the polls hung back, waiting for “their turn,” but when Emanuel made his announcement, there was no “default” candidate and each of them — Toni Preckwinkle, Susana Mendoza, Bill Daley, Gery Chico — decided that it was indeed their turn.

Then, since he is running as that candidate, above all others, willing to reform city government, I asked him how he would repair Chicago and undo its history of corruption and what he called its “for-profit political system” that drains the city’s finances.  After all, at the candidates’ forums I watched via livestream, candidates generally professed their desire to do away with aldermanic privilege, that is, the ability of the alderman to control what can and can’t be built in his/her ward.  But how much can a mayor, however reformist, persuade aldermen to vote to undo a system which profits them?  

Here was his answer:

First, he was optimistic about the new aldermen coming in, even if simply due to retirements.  The new faces will be a boost for ethics reform.

Second, Ald. Ed Burke will be gone.

Third, aldermanic privilege is not, as I had thought, the result of any city ordinance.  It’s just an established practice that they approve or reject projects in their wards.  A mayor could simply choose to overrule an alderman’s action without needing any sort of enabling legislation and, Vallas said, “banning that will take an important component of pay-to-play out of the equation.”

Fourth, while aldermen’s service as such cannot be restricted by term limits, the duration of their control of committees can be.

Fifth, to prevent conflicts of interest, individuals appointed to the various boards can be prohibited from representing anyone as a client who receives contracts from the city or other agencies.

And finally, there is so much corruption in the system simply because the process to appeal property taxes, zoning, signage, etc., is so onerous that people have to hire a middleman.  If these processes were simplified so that people could do this on their own, it would “take the profit out of it.”

Beyond these issues of corruption, I’ve also heard repeated promises by candidates to return to an elected school board, rather than one in which the mayor appoints members, as has been the case since 1995.  So I asked Vallas what he’d do.  He first provided a few words of context, that in the days of elected school boards, the public schools were in a state of “financial crisis” and “academic failure,” though, at the same time, the mayoral appointed school boards have been a mix of good and bad.  The key, though, is for the mayor to have “skin in the game,” and have some control over the management of the schools in order to be held accountable for their success, rather than being able to duck education issues while using the schools as a source of influence and a means of enriching cronies through contracts. 

At the same time, though, there should be “civilian representation” to ensure transparency and accountability, to avoid a repeat of prior apparent conflicts of interest.  Vallas’s proposal is a hybrid system, in which half the school board would be mayoral appointees and half community elected.  What’s more, the elected members would come from a pool of candidates made up of members of local school councils, and should be selected by those local school councils, so that they have a stake in the system. Likewise, each advisory board, such as the police board or the McCormick Place board, should be a mix of experts and civilians, to maximize both expertise and accountability/transparency. Further, he proposes new boards, such as one for the environment, and one for people with disabilities.

So what’s Vallas’s pitch to voters, when it comes down to it?  It’s three-fold, he told me.

First, he’s got a track record of going into challenging situations and solving problems  — during his tenure at Chicago Public Schools, in Philadelphia, New Orleans, and in Haiti.  There is, he says, “no one better equipped to get a handle on the city’s finances.”  

Second, he says, beyond merely stabilizing the city financially, his “whole approach to government has been to take the resources available and develop long-term plans that are investment vehicles to create conditions for growth and prosperity,” for instance, by being smarter about TIFs and opportunity zones, deploying, for example, the $2.5 billion that was intended as incentives for Amazon to locate in Chicago.

And, third, he says, “no one has demonstrated more independence of the play to play culture than me.”

Longtime readers on my various platforms will not be surprised that I like Vallas’s combination of ethics and policy expertise.  It’s simply not enough, for a city with problems as complex as those of Chicago, to profess you’re the best candidate because you care the most or have the most longstanding ties to the city. 

At the same time, I simply don’t know how to make sense of the dynamics at play with so many candidates statistically tied.  After all, in a more normal race, you’d be asking yourself not just who the best candidate is, but, of those candidates who have a chance of winning, who is the least-bad, even if not your favorite.  Can you do that, in this case?  (Was that, in fact, the Chicago Tribune‘s reason for endorsing Bill Daley?)  I don’t know whether the election outcome will in the end bear any resemblance to the polling results which themselves are so variable.  Will it all come down to turnout and the GOTV efforts of campaigns?  

And, as a final reminder, I am not a Chicagoan and by no means an expert on Chicago politics.  But even though, again, I grew up in the Detroit suburbs and so am accustomed to the idea that a metro area can do well economically even as the city core goes to pot, Chicago’s success or failure still matters, not just to city residents but to Chicagoland and to the state of Illinois.

 

Image:  from the Vallas campaign Instagram account https://www.instagram.com/vallasforallchicago/?hl=en.

Jane the Actuary Retirement

Forbes post, “How To ‘Scrap The Cap’ The Right Way”

Originally published at Forbes.com on February 13, 2019.

 

It is, so Twitter tells me, “Scrap the Cap Day” — the day when Social Security expansion activists are out in force promoting the idea that, because someone earning a million dollars in wage income would hit the Social Security ceiling today, it’s a clear proof that we need to eliminate the ceiling itself.  The Center for American Progress chose today to issue a report on the topic and Senator Bernie Sanders chose today to unveil his Social Security legislation, which, as described by CNN, boosts benefits by means of an additional 12.4% payroll tax on earned income above $250,000 as well as a 6.2% tax on investment income for singles with total income above $200,000, or $250,000 for couples, in the same fashion as the existing Medicare surtax.

(This legislation is further described as a reintroduction of his 2017 bill, which sets a minimum benefit after 30 years of eligible employment at 125% of the single-person poverty measure, or $31,225 for a two-person household, indexed at national wage increases; indexes Social Security by the CPI – E, a form of CPI specifically reflecting the spending of the elderly; but does not make any provision for the indexing of the thresholds for the payroll or Medicare surtax.)

Now, this isn’t new, and I’ve addressed the issue in an article last year, but at the risk of repeating myself, sure, we can “Scrap the Cap.”  But if we do, we need to be honest about it.

First, we need to acknowledge that Social Security would no longer be a Social Insurance program as conventionally understood.  Readers of that prior article will recall that we are already outside the norm in terms of the way countries fund their pension systems, at least with respect to systems which resemble ours in terms of providing accruals based on pay and work history.  Their ceilings are much lower — to take one example, in Canada, the ceiling is CAD 57,400 (about USD 43,000).

Now, it does appear that the conventional wisdom that people won’t accept Social Security as a “welfare program” may no longer be true — after all, there is considerable interest in the federal government providing all manner of services for residents, from medical care to free child care and tuitionless-universities.  But without getting bogged down in that debate, we need to at least acknowledge what’s on the table.

Second, if we’re to abandon the Social Security ceiling, then there’s really no reason to tie Social Security taxes to specifically earned income or a payroll tax.  In that event, it’s far more practical to simply increase income tax rates the requisite amount and collect the tax revenues along with all other taxes.  (Again, I raised the issue with respect to Medicare earlier as well.)

And, finally, once we abandon the connection between earnings and Social Security that’s inherent in the elimination of the Social Security ceiling and the taxation of investment income, and once we demand that the upper middle class and wealthy “pay their fair share” — that is, pay more in than they get out in benefits — then the entire formula is due for a re-think, as, again, the most honest way to deliver benefits in such a system is with a flat dollar amount, whether that’s means-tested and phased-out with income (Australia), part of a two-element system alongside a wage-based system (Canada), or a simple flat benefit for everyone (the Netherlands).  And the size of such a benefit will have to be determined, not in isolation, but by evaluating the system’s cost and retiree living standards alongside the needs of families with children, the disabled, and the poor.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “It’s Time To Go Big On Social Security Reform”

Originally published at Forbes.com on February 7, 2019.

 

Is retirement back on the agenda?

Two weeks ago, Rep. John Larson reintroduced his Social Security 2100 Act (which I discussed previously), with great hopes that under a Democratic-controlled House, the bill would progress forward in a way that hadn’t happened in prior years.

And yesterday there were not just one but two hearings in Congress about retirement, the first at the Ways and Means Committee, on the topic of “improving retirement security for America’s workers,” and the second at the U.S. Senate Special Committee on Aging, ““Financial Security in Retirement: Innovations and Best Practices to Promote Savings.”  At the (livestreamed) Ways and Means hearing, the discussion was wide-ranging, including Social Security itself, private savings, the impact of the so-called “gig economy,” multi-employer plans, and more, and representatives from both sides of the aisle affirmed their desire to deal with the multiple issues at play.

But here’s the challenge.

On the one hand, there are calls to increase the extent of Social Security benefit provision; Larson’s bill, for example, increases Social Security benefits for all participants by a flat 2%, above and beyond other changes.  Other proposals call for increases in benefits for survivors, the addition of caregiving credits, and the like.

On the other hand, Andrew Biggs of the American Enterprise Institute observed, both in his written testimony and in person, increases in pension benefits for the middle class are correlated with decreases in personal savings, rather than an overall increase in retirement provision.

Diane Oakley’s testimony as the Executive Director of the National Institute on Retirement Security pointed to low levels of retirement savings among Millennials.  Biggs responded that (paraphrased), it’s simply not true that 100% of the population needs to save for retirement 100% of the time, because low-income folk see good income-replacement levels from Social Security and Millennials choosing to repay student loans might be making reasonable decisions relative to their financial situation.  (Incidentally, the data on the level of retirement savings turns out to be murky, with different sources producing different answers.)

And many of the Congressmen and witnesses alike invoked the defined benefit plans of the past without due recognition that this system only benefitted those who were lucky enough to work a full career at a single, large employer, and that it was an unsustainable system in any event.

What’s the solution?  We need to Go Big in Social Security reform.  These discussions repeatedly reveal the design flaws of Social Security itself.  In any other situation, we wouldn’t hesitate to say that an 84-year old system could be overhauled.  FDR was not a saint who created a system under divine inspiration, nor a genius whose insights our intelligence is too limited to surpass.

Too many pundits and politicians want Social Security to accomplish two goals:  to keep the elderly out of poverty, and to ensure that middle-class retirees can maintain their standard of living.

We are already moving towards a recognition that making savings easier is a key ingredient in solutions to the latter problem.  In fact, one of the witnesses was a small business owner, Luke Huffstutter, who was one of the first participants in OregonSaves and was enthusiastic about its success in helping his employees save.  While I’ve shared my concerns with these programs in the past, the overall objective is sound:  to increase the degree to which workers save for retirement even if their employer doesn’t provide access to retirement savings.  There are efforts, too, through defined contribution multiple employer plans, to reduce employers’ administrative costs to increase the feasibility of plan offerings.  What’s missing are innovations to help American workers understand how much they need to save, given their individual situations, and solutions to help them spend down their money so as to avoid either outliving their assets or over-reducing their standard of living in an effort to stretch their savings unnecessarily much.

All too often, and even at the hearing itself, we still hear that employers are not meeting their responsibility to provide for their share of their workers’ retirement benefits.  But we need to abandon the idea of the three-legged stool once and for all, or at least discard the notion that Social Security, employer, and personal savings income sources are interchangeable stool-legs.

The economic system of the 1930s no longer exists.  And Social Security’s design, and its “stool” concept, is a relic of a time when industrial America was imagined simply to continue to grow, when employers and the Social Security Administration alike would benefit from the same literal pyramid effect of high birth rates and comparatively low post-retirement life expectancy, when individual employers would likewise only continue to grow their workforce, once the temporary economic conditions of the Depression were behind us.   (Incidentally, many low-fertility countries, such as Germany, are now forecast to have inverted-pyramid population distributions, and the U.S. may follow suit depending on immigration levels.)

Instead, we need to refocus Social Security on the first of these objectives, ensuring retirees are protected from poverty, and, to reach that goal, it would be an entirely fair trade-off to reduce Social Security provision for middle-class income and above, in order to ensure that Social Security meets its objective of keeping American elderly out of poverty/near-poverty.  That might be through a simple flat-dollar benefit for everyone, or a means-tested benefit that phases out at higher retirement income levels, or a hybrid benefit.

Then we can work out the best means of ensuring middle-class Americans are able to save for retirement and are able to spend-down their savings in retirement appropriately.

Only in this way can we move past the same old, tired debates about benefit cuts vs. tax hikes and, increasingly benefit increases, debates that never make progress because the terms of the debate are so ossified.

(And, yes, if this sounds familiar, this is indeed, in broad outlines, my own pet Social Security reform proposal.)

 

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.