Jane the Actuary Retirement

Forbes post, “Taking Labor Shortages Seriously – Economywide”

Originally published at Forbes.com on June 21, 2021.

 

“Emilio Enriquez has climbed from busser to line cook during his seven years working in restaurants, and he still dreams of becoming a chef.

“But he hasn’t worked during the COVID-19 pandemic and won’t look for a job until fall, once unemployment benefits no longer pay more than he would likely earn working and, he hopes, more people are vaccinated.

‘This is what I want to do in the long haul,’ said Enriquez, 25. ‘I’m just not ready to do that yet — especially since I’m making more at home.’”

These paragraphs — the opening paragraphs of a front page article in the Chicago Tribune earlier this month — are a rare instance of a journalist openly citing a nominally-”unemployed” individual choosing to stay out of the job hunt until after unemployment runs dry; far more often newspapers claim that these individuals just don’t exist, that the folks continuing to collect unemployment are truly unable to find work or truly prevented from working due to child care difficulties.

The remainder of the article discusses the labor shortage in the restaurant industry, from servers and bartenders to dishwashers and cooks. Industry experts reported that former employees had found work in other fields: “cannabis, distribution centers like Amazon and UPS, delivery services,” and the article interviewed half a dozen people, most of whom indicated plans to return to college in the fall instead of returning to a restaurant-industry job. Among the complaints cited by these workers, as well as by an advocacy group, One Fair Wage, were low pay, unpredictable and late hours, harassment from customers or co-workers, failure to follow safety requirements, and the health effects of exposure to sanitization chemicals.

What’s the fix? The industry representatives cited did not promote ending the bonus unemployment benefits. Instead,

“The biggest fix, [Hopleaf owner Michael] Roper said, would be “a rational immigration policy” that welcomes the people who do much of the hard labor in the United States. [Illinois Restaurant Association president Sam] Toia also championed immigration reform to boost the service industry, including an immigrant work visa program endorsed by the National Restaurant Association.”

But let’s set aside the issue of the $300 weekly unemployment bonus. Let’s take people at their word that this is a longer-term issue that has to do with the unattractiveness of restaurant work rather than government benefits, paid out on the premise that no work is available, leading people to turn down work. What’s to be done? It would seem obvious that the answer is simply for those complaining restaurants to boost their wages to a level that makes those jobs attractive despite the late hours. The reality is, of course, that to do so would require boosting menu prices, a change which results not only in fears of inflation, but (and this is less discussed) will sooner or later result in customers dining out less often or choosing less expensive restaurants. But that’s not necessarily objectively a bad thing; there is, after all, no need for any given frequency of restaurant dining for one’s well-being, and a change in pay scales would simply change norms and expectations about frequency.

Yet, at the same time, the industry’s proposed solution, increases in immigration, hardly seems like the ethical and responsible solution if, indeed, the worker shortage is due to poor pay and job conditions in an objective sense, rather than due to a spectacularly-booming economy in which workers have their pick of any number of jobs with “living wage” salaries and benefits. Why would it be appropriate for a restaurant to obtain a work visa with which to pay an immigrant low wages, if those wages would create a class of workers with living standards which we deem too low for Americans? Is it ever acceptable to create a set of jobs with low pay rates (that is, by using immigration increases to prevent wage increases which labor shortages would otherwise generate), with the rationalization that the families those workers are supporting live overseas in countries with lower costs of living?

Right now we’re discussing this with respect to restaurants, because that’s highly visible to those of us economically prosperous enough to visit restaurants and see the labor shortage play out: the host who says, despite clearly empty tables, that it’s a wait to be seated. But readers can likely guess where I’m going with this: there has been a longstanding labor shortage with respect to home care workers and caregivers at nursing homes and related facilities. Is the solution to boost wages? To hire workers from overseas? To do both — boost wages and hire immigrant workers?

Wage hikes, of course, increases costs both for the government and for families who pay their expenses on their own. Where there are fixed governmental budgets, that means more families on waiting lists. For families, that means more making-do, family members providing care, or going without or with less care, and, ultimately, means finally answering the question of whether the federal government should pay eldercare expenses for middle-class elders as well as for the poor, and whether children of those elders have obligations to support their parents (in Germany, for instance, those earning over EUR 100,000 have a legal obligation to pay their parents’ eldercare costs).

The latter — well, it’s a whole ‘nother kettle of fish. In 2019, the organization LeadingAge launched an initiative it called the IMAGINE Initiative, which proposed a set of immigration changes to boost the number of immigrants working in elder care. The proposal cites models overseas, such as 5 year temporary employment for foreign eldercare workers in Israel and a program giving eldercare workers permanent residency in Canada if they complete two years of live-in caregiving. For the United States, they suggest a six-year guest worker program specifically for elder caregivers, carve-outs in the EB-3 professional immigrant program for CNA and RN positions, creating a loophole in the R-1 program for religious workers to include non-US elder caregivers employed by religious organizations, the creation of an au-pair-equivalent program requiring eldercare rather than child care, allowing more temporary immigration in the NAFTA-replacement free trade agreement with Mexico, and directing an increased number of refugees towards eldercare employment.

These proposals bear no little resemblance to guest worker programs in oil-rich countries, in which foreign, temporary workers account for the largest part of the workforce and in which, except for professional workers, those workers much leave spouses and children behind in their home countries. We tend to think that in these countries, the prevalence of foreign workers is a marker of the spectacular wealth of those countries, but that’s not necessarily the case: in Saudia Arabia (or at least as of a decade ago), 90% of all private-sector workers were foreign workers, while at the same time 40% of all Saudi citizens lived in poverty.

Adding to these issues the overall uncertainty about the impact of future fertility rates and automation on the economy, and there simply is no easy solution here.

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

Should, would, could the Bears move? The view from Arlington Heights

When we first moved to Arlington Heights, 23 1/2 years ago, we lived a mere three blocks away from Arlington Park, the race track.  In fact, the neighborhood itself was called Arlington Park, and was platted at the same time as the racetrack, which is just a few years shy of its 100th birthday.  (No houses were actually built until after the war, as only speculators bought lots, but that’s your obscure trivia for the day.)  Shortly after we moved in, the racetrack shut down for two years — Wikipedia states, unfootnoted, this was “due to contract disputes,” but the disputes were not with some sort of union but with the state, as management had said they simply couldn’t run the track at a profit, and the state eventually promised that some cash from casino profits would go to enhanced purses — or maybe that happened later; I’m not sure.  In any case, there were a few concerts held there in the meantime, and there was talk of auto racing or other uses for the property before racing restarted.

Now Churchill Downs, the owner, has announced they are selling the track.  There were suggestions initially that this was just a bargaining position, an attempt to get the state to reduce its taxes, and there were likewise hopes that other investors could purchase the track and keep the tradition of racing alive.  Perhaps it is still possible to make a profit, in terms of operating costs, at the racetrack, but, presumably, such a group of investors wouldn’t be able to top bids of those hoping to put the 350 acre property to more lucrative uses.  Is this a matter of the state unjustly making racetracks unprofitable by expanding casino gambling excessively?  Is this, rather, a matter of the state simply relenting on its prior restrictions on gambling?  Or were the state’s taxes on the racetrack indeed unreasonably high and the difference between profitability and loss, in an era when the number of people who visit the racetrack and the sums of money they spend out of enjoyment of that form of entertainment isn’t supplemented by people who simply want to gamble in any fashion available?  I don’t really know, but in any case, there was no discussion of whether regulations needed re-writing, and we seem to be past that point.

Which brings us to the Bears, who have put out a statement that they have made a bid on the racetrack.  Tom Hayes, the mayor of Arlington Heights, thinks it’s dandy.  Mayor Lightfoot, not so much.  Even a year ago, a columnist at Sports Illustrated addressed the question, concluding that the owners, the McCaskeys, didn’t have the deep pockets necessary to fund a new stadium so would stay with the low-cost deal with Chicago, and the consensus, at least of many people who claim to know what they’re talking about, is that the Bears are just using this threat to push the city for more enhancements to the stadium.

But let’s consider the question: what if they are serious?

On the local Facebook pages, some of my fellow Arlington Heights-ians are getting excited about the prospect. They imagine it would be an engine of prosperity, and bring us a magnificent new entertainment showpiece — but really?  8 games a year and a few concerts are not going to provide enough predictable revenue for restaurants, hotels, etc.  It doesn’t make sense.  To be sure, my fellow Arlington Heights-ians have plenty of other fantasies as well, dreaming of a nature preserve or a botanic garden or a museum, or other uses that require that some billionaire be interested in buying the property just to fritter away money rather than to make a profit off of the investment, but none of this is realistic.

At the same time, well, Soldier Field, or at least its shell, has a 100 year old-ish history, but the Bears have only played there since 1971.  This is not some unbreakable bond.  Is an infrequently-used stadium surrounded by a sea of parking lots really the best use for Chicago’s lakefront?  If it isn’t, Arlington Park is probably as practical a place to locate a new stadium as any, with its proximity to Route 53 and the Metra station — so, given the principle that a city has no business getting in the way of a business transaction if it doesn’t do harm to the community, I don’t see what grounds Mayor Hayes and the city would have for blocking the transaction.

But on the third hand — again bearing in mind that the rebuild from 2002 was $600 million funded by the city, rationalized as money to be paid back by out-of-towners through hotel taxes and the like — I am tremendously leery that the mayor and the trustees will be able to resist the lure of fame, the promise of something that puts Arlington Heights on the map, some consultants’ calculation of enormous sums of money to come in the future, and rationalize tax breaks, bonds the city would be on the hook for, tax hikes crafted in a way that’s meant to hit only out-of-towners (but it never really does), and so on. After all, consider what happened to Bridgeview, which thought it would create a moneymaker by building a stadium for the Chicago Fire soccer team at a cost of $100 million; instead, residents’ tax bills had tripled, as of 2012 reporting, with the expectation that the costs would grow even more.

And it’s easy to say, “oh, Arlington Heights would never be so foolish,” and, indeed, Bridgeview’s decision was as much about corruption as foolishness; as the Trib reported, “Once Bridgeview started borrowing the cash, millions flowed to those who contribute to political funds controlled by town leaders.”  Surely Arlington Heights isn’t corrupt!

But are we really so protected from this sort of bad decision-making?  If the Bears are serious, and if they have made an offer to Churchill Downs that beats their alternatives, and if the Bears condition that offer on tax breaks designed in such a way to allow promoters to claim they “pay for themselves,” then Hayes and the trustees may find it hard to resist the temptation of that national name recognition, especially in their pursuit of something “special” rather than a generic mixed-use development or, heaven forfend, a commercial or (light) industrial use instead.

Which means I’d just as soon not take that chance.

https://commons.wikimedia.org/wiki/File:Chicago_Bears.jpg; Mike Morbeck, CC BY-SA 2.0 <https://creativecommons.org/licenses/by-sa/2.0>, via Wikimedia Commons

 

Jane the Actuary General Interest

The crucial reason why Pritzker should say “no” to an elected school board in Chicago

An elected school board, it would appear, is headed for Chicago.  As Capitol Fax reports, the Illinois House voted for the bill on Wednesday and passed it to Pritzker to sign.  This bill would create a 20 seat bill, initially split between mayoral appointees and elected members, with a phase-in to a fully-elected board and a board president elected by the entire city.

Boards members would be elected from individual districts rather than at-large, which the bill’s supporters claim would help ensure that the candidates are people involved in the community rather than outsiders or special-interest-supported people (and in particular counter claims that the school board will be union-dominated in this way), but each board member would represent about 135,000 people, which is a number that’s far higher than that threshold (whatever it is) at which people are elected by being known in their community vs. being elected by gathering the funds for mailers.  For reference, each state House representative represents about 110,000 people, and no one imagines they are elected by “communities” who choose that one person who most closely represents their concerns due to intimate knowledge of them.  The reality is that when the Democrats were building their maps, they openly stated that their view of the election was “party first” — here’s Stephanie Kifowit of Oswego, per Capitol Fax:  “The party is what connects with voters, represents the voters and therefore gets elected by the voters. That is the true essence of being an elected official.”  And here, too, the General Assembly would draw those maps, presumably based similarly on, perhaps not partisan geographies, but concentrations of various ethnic minority groups.  How precisely this all plays out — whether there are factions, parties, and slates even in a nominally non-partisan election, and how much power the board president has and which faction has the power to win that election, is yet to be seen, but in any case, the notion of a community sending as its representative a dedicated parent known and cherished by all, is a bit of a fantasy.

But nonetheless, supporters say that it’s a matter of having “an elected representative school board that is accountable to us,” according to Rep. Delia Ramirez of Chicago and a move towards “providing democracy and voice to students and their families,” according to the CTU’s statement.

Is it really?

Does the current school board structure lack democracy?

Not at all.

You’d think the Chicago Public Schools are run by outsiders, or by some sort of dictator, or maybe a billionaire or two has seized control.  But in fact, it is the elected mayor of the city of Chicago who, at present, controls the schools, who has ultimate authority over key decisions such as union contract negotiations and the recent union negotiations over school reopening processes.  And, frankly, that’s as it should be.

Schools, after all, do not exist in a vacuum.  While they set their property tax revenues independently (more or less), the level of property tax levied is part of a larger picture, and schools cannot simply boost their revenues endlessly and expect the city to moderate its taxes to keep the overall tax burden in check.  And at the same time, especially in a city like Chicago, schools and other governmental bodies work together to provide services: should schools be a source of healthcare for students?  What about mental health treatment or referrals?  Referral for other sorts of social services?  Finally, there are aspects of CPS expenses which are funded by the city.  (Don’t ask me for the details.)  Especially when enhanced social services has been such a key part of Lightfoot’s promises to the community, it makes far more sense for these sorts of decisions are made by a single governmental body, rather than setting up clashes between the mayor and the board president.

So, yes, suburbs have elected school boards.  But that’s more of a historical anomaly, due to the fact that school district borders do not generally pair with city borders, and that even unincorporated areas have school districts.  And (yes, speaking from experience) an elected school board does not ensure community representation; all too often, it is the unions which, through their activism and their money, ensure their candidates win their seats.  This is not a model to follow for a city where it is an uphill battle to ensure that poor students have a level of education that enables them to improve their lot in life.

school bus
school bus, public domain, https://www.maxpixel.net/Bus-Vehicle-Education-Transport-School-Bus-School-4406479
Jane the Actuary Retirement

Forbes post, “The FDA Approves The Alzheimer’s Drug Aducanumab — And Reminds Us Of The Herculean Task Of Medicare Reform”

Originally published at Forbes.com on June 7, 2021

 

Earlier today, the FDA gave its approval to a new Alzheimer’s medication, the first to be approved in nearly 20 years: aducanumab, given the brand name Aduhelm. The wife of one patient, cited in the New York TimesNYT -1.4% credited it with slowing disease progression “enough to allow him to participate in tasks like choosing an assisted-living facility.” Another, cited at Sky News, said it “changed my life.” A third, at Stat News, described “improvements in his cognition and ability to focus, he said, which has been massively positive for his family.”

But the reality is that the relevant studies submitted to the FDA are troubling. As described at the Times (above, as well as here) and at Stat News, and in a commentary piece by experts at the Times, the drug’s initial trials were deemed a failure. They were halted in March 2019, but afterwards, the company, BiogenBIIB 0.0%, analyzed the data and announced that one of the trials showed evidence of effectiveness. Because they only submitted this one effective study, rather than the two the FDA usually requires, they will be required to conduct additional studies — though it seems unlikely they would be able to recruit particularly many patients if the drug is already on the market, and study participants wouldn’t know if they have the drug or a placebo. What’s more, it is simply not appropriate, from a statistical analysis perspective, to cherry-pick studies, and rationalize reasons why the studies showing an effect are “good” and the ones showing no difference are not. As one expert, Dr. G. Caleb Alexander from the Johns Hopkins Bloomberg School of Public Health, explained at the Times,

“Biogen’s interpretation of data using after-the-fact analyses was ‘like the Texas sharpshooter fallacy — the idea that the sharpshooter shoots up a barn and then goes and draws a bull’s-eye around the cluster of holes that he likes.’”

What’s more, the FDA used a special process called accelerated approval, “using a regulatory pathway that lets the agency accept different types of evidence in areas where patients lack options,” as described at Bloomberg.

And this approval comes despite the latest scientific research calling into question the very theoretical explanation for how it might work. Aduhelm removes the amyloid brain plaques long believed to be the cause of Alzheimer’s. But this explanation has been never been proven, and, in fact, according to other researchers, “almost 40% of patients with dementia do not have amyloid plaques in their brains while many people who die with normal cognition do have them.”

And there is real harm to this development. In the first place, this treatment is not without side effects, including brain swelling. In the second place, the list price for the medication is expected to be $56,000 per year, not including the cost of brain scans used to assess eligibility. Because it’s an injection administered at a doctor’s office, rather than a pill, it’s covered under Medicare Part B — and, yes, while the Biden administration pledges to cut the cost of drugs through “negotiation,” existing Medicare Part D rules tie insurer’s hands with a long list of drugs that must be covered, limiting negotiating power.

But we cannot even begin to travel the path towards lowering the cost of medications and of Medicare spending, generally, if that path includes covering drugs with benefits that may be more mirage than real. To be sure, the FDA’s mission is not to evaluate cost-effectiveness of drugs, but there is no other agency with this role in the United States, and the FDA’s bend-the-rules approval suggests that anyone who truly dares suggest that the path towards lowered Medicare costs must necessarily include a more skeptical eye and greater demands of proof of effectiveness, will struggle to find a receptive audience.

 

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, “The Chicago Park District’s 30% Funded Pension Plan – And More Tales Of Illinois’ Failed Governance”

Originally published at Forbes.com on June 7, 2021

 

The Illinois legislature ended its regular legislative session on May 31, in a flurry of legislation passed late into the night. One of those bills was a set of changes to the 30% funded pension plan of the Chicago Park District. Were these changes long-over due reforms, or just another in the long line of legislative failures? It’s time for another edition of “more that you ever wanted to know about an underfunded public pension plan,” because this plan illustrates a number of actuarial lessons.

To start with the basics, the Chicago Park District is a separate entity than the city of Chicago, although its commissioners are appointed by the mayor. Its liabilities are not included in the city’s accounting; if they were it would be a small sliver, only 3%. But that’s still over $800 million in debt.

Some history

The Chicago Park District pension, as with the other city pensions, has its benefit provisions fixed by state law. In addition, also by state law, it has a dedicated property tax levy sufficient to contribute to its pension 110% of employee contributions, which themselves are set at 9% of pay. Just as was the case for other state and local pensions, legislators created a Tier 2 pension benefit for those hired after 2010. And just as there were reductions to other state and state-legislated pensions for Tier 1 workers and retirees, the same was true here: regarding COLA, the retirement age, and disability benefits, as well as an increase to the required employee contribution, which the court struck down in 2018. (This was later than the ruling for other state and city pensions, because the reform legislation was passed later and park district workers waited until the court decision on the other reforms was finalized before filing their lawsuit.)

That reform legislation also contained changes to pension funding. However, unlike the other plans, those changes did not set a funding target, neither using the public-pension concept of Actuarially Determined Contribution, nor the approach of other Illinois pensions, setting a target date 30, 40, or 50 years into the future and setting contributions as that percent of payroll that would reach full (or mostly-full) funding at that date. Instead, the law merely prescribed new multipliers, in which the district would have to pay 2.9 times employee contributions until the plan was sufficiently funded.

In any case, that new funding requirement was lost when the reform law was struck down, and the plan has been on a path to insolvency in 2027 since then.

Some deeper history

In many respects, the history of this plan is similar to the Municipal Employees’ pension. In both cases, this woeful level of debt was not always so. As recently as 2001, according to actuarial reports, the plan was essentially fully funded.

This chart looks very similar to that of my 2019 Municipal Employees’ pension analysis, in which the early 2000s full funding is actually a peak after a steady climb from 45% in the early 70s. In that case, the path to full funding was explained in part by an increase in the funding valuation interest rate from 5% to 8%, and likely as well not just increases in interest rates but a shift to equities from a prior traditional fixed-income investment strategy. In the case of the Park District, older reports are not available online, so we don’t know whether the same pattern held true, and whether that near-100% funding level was a consistent one in the past or a one-time aberration due to the confluence of favorable investments and demographics.

In any case, it’s been downhill since then. What happened?

The easy answer is that the city did not make its Actuarially Required Contributions, or Actuarially Determined Contributions — the label changed in 2014 to reflect that this is merely a standardized method of calculating contributions that amortizes debt over a fixed number of years, not an amount required by law. By the time the city started making the temporarily-higher contributions as prescribed by the reform law, it was too late.

Pension plans, of course, grow in liabilities regardless of what the law says should happen regarding contributions. In fact, here’s what’s happened over the past 20 years:

Believe it or not, this twenty-year doubling of the liability is actually less steep than for the municipal plan, indicating that the bonanza of benefit provision increases in the latter plan did not take place here to the same degree.

But, again, the actuarial math remains unforgiving.

And thus we have Lesson 1:

A pension plan which promises guaranteed benefits to its recipients must be willing to make all prescribed contributions. There is no getting around this math. A plan which is not firmly committed to these contributions, however much they may swing due to market changes and demographics, or which does not have the ability to make this commitment, simply must have some flexibility in its plan design.

This is made all the worse with a disproportion of retirees. That’s true with multiemployer pensions, and that’s true with public pensions, whether that’s due to a generous early retirement age or a declining population. In the case of the Chicago park district, there are virtually identical numbers of retirees/beneficiaries and active workers.

Consider, too, this rather dramatic change in fortunes:

The 2013 pension reform’s increased multipliers did not provide any guarantees that the pension would reach full funding. However, in 2014 and 2015, actuaries calculated that the plan would reach 90% funding in 2048. But in 2016, it was a different story. At that time, the court had ordered that one of the reform changes, reductions to COLA, be un-done, even though the entirety of the law was not yet struck down. This change in itself was enough to set the pension on a path towards insolvency, declining to a 6% funded status in the last year of the report’s projection, in 2055.

And, again, to say that public pensions must be funded seems fairly obvious, but, regrettably, some people who hold themselves out as experts and gain attention as such, still manage to claim the opposite, that it’s acceptable to leave public pensions un- or under-funded as long as they can be deemed “sustainable,” with future pension payments projected to be a tolerable level of the state or local budget. That’s the claim made by Brookings scholars James Lenney, Byron Lutz, Finn Schuele, and Louise Sheiner, which has been picked up by such media as Reuters and MarketWatch.

But the speed with which a public pension can find itself in such a serious hole means that it simply is not reasonable to shrug off debts as tolerable as long as a projection determines it to be so under ideal circumstances.

And that’s not the only issue. Here’s lesson 2: a pension plan is not sustainable without proper governance and actuarial analysis.

Let’s revisit that 1.1 multiplier: this was the property tax levy prescribed by the Illinois state legislature. But the Chicago Park District was never restricted to only this contribution level. At any point, the city could have chosen to use its operating budget for higher contributions, and, in fact, in fairness, the city has done so at times. Even after the legislative mandates were ended, in 2019, the park district contributed an extra $13.1 million beyond the designated property tax levy, and in 2020, the park district had budgeted a supplemental contribution of $20.6 million. Pension funding was also an issue in a narrowly-averted park district union strike in 2019, though the specifics were never made public, except with the implication that the district was constrained in the amount of increases it could offer due to its need to fund the pension.

But at the same time, in 2004 and 2005, the Illinois state legislature authorized the park district to cut back its pension contributions, siphoning off $5 million in each year from the dedicated tax levy to ongoing operating expenses. (”Parks ‘06 budget raises flag,” Chicago Tribune, Dec. 1, 2005).

Can any local entity be trusted to fund its pension plan, when other groups are clamoring for money right now, pension benefits must be paid in the future, and the risks of population decline or other issues feel so intangible?

At the same time, the legislature’s reform attempts repeatedly fall short.

Consider, again, the Tier 2 reform, in which state and local pensions in Illinois provide lower benefits for those participants hired after 2010. I’ve discussed in the past the issues facing the Illinois Teachers’ Retirement System, in which the Tier 2 changes pared away benefits so much that the state likely faces a lawsuit in the future for failing to provide benefits even at the level of Social Security itself for some teachers.

For the Chicago Park District, the Tier 2 benefits are, for the workers as a total group and based on all the plan assumptions, pretty much equal to the contributions the workers pay. The sole benefit those workers receive is due to the guaranteed nature of the benefit, in the form of, basically, a guaranteed 7.25% investment. But benefits are highly unequal; because all workers must have 10 years of service to receive Tier 2 benefits, based on the plan’s valuation assumptions, only about 30% of Tier 2 workers will ever collect a retirement benefit at all. In fact, turnover in the first few years is so high that even for Tier 1 workers, nearly half aren’t eligible for retirement benefits — and in either case, all they get back is their employee contributions without even earning any interest on them.

No actuary would have designed a plan like this. And no private-sector plan would be legally allowed to have such a strict vesting requirement as 10 years; ERISA requires the private-sector DB plans vest after 5 years, and 401(k)s after 3 years.

And now, finally, we get to the last-minute legislative changes, with the legislative text filed on the 19th, passed by the State Senate on the 27th, and passed by the State House on the 31st, the last day of the session. There are three major provisions: a new funding schedule, authorization of pension bonds, and a new Tier 3 group of participants. None of these appear to have been based on actuarial analysis (inquiries to the Pension Board and to the office of sponsoring state senator Robert Martwick were not responded to).

Most egregiously, the Tier 3 benefit simply increases employee contributions by 2 percentage points, from 9% to 11%, and reduces the retirement age two years, from 67 to 65. As it happens, this is similar to the Tier 3 for the Chicago Municipal Employees’ pension, but there are two key differences: first, employees in the latter system only pay contributions at this higher rate until funded status improves, and, second, employees are guaranteed to pay a contribution rate that is no higher than the normal cost (annual benefit accrual) rate, so that they are not obliged to subsidize other employees. This new Tier 3 has no such provisions, and it is wholly unknown whether new employees will benefit or merely subsidize the system.

Second, the plan provides for a new contribution schedule: the amounts necessary to reach 100% funding in the year 2058. For the years 2021, 2022, and 2023 (in each case, paid a year later), there is a “ramp” in which only 1/4, 1/2, and 3/4 of the amount otherwise due must be paid. In addition, not later than November 1, 2021, another $40 million must be paid, though the law specifies that this sum “shall not decrease the amount of the employer contributions required under the other provisions of this Article.” (Does that mean that the projected employer contributions to 2058 must be done as if this $40 million didn’t exist?) This, it turns out, is a lot of money — approximately the equivalent of 60% of payroll or 25% of the total budget (making some estimates based on valuation data). It is the inevitable consequence of past failures to fund and of poor plan design — but I wonder how many of the legislators who cast their votes truly knew what they were voting for.

And, finally, the bill authorizes pension obligation bonds, in the amount of $250 million in total, or $75 million in any one year, and, like the additional $40 million in 2021, the law specifies that “Any bond issuances under this subsection are intended to decrease the unfunded liability of the pension fund and shall not decrease the amount of the employer contributions required in any given year under Section 12-149 of the Illinois Pension Code.” Does this mean that the park district would be required to make contributions on a schedule as if the bonds didn’t exist, so that they would accelerate the funded status of the plan to a point earlier than 2058, while being paid off outside the plan? It is again wholly unclear, and this legislation was passed without any discussion on how these pension bonds would actually work.

This is not how to pass pension legislation. Regardless of whether it’s the $230 billion in liability of the five Illinois state systems ($137 billion unfunded) or the comparatively small $1.2 billion in liability here, no such legislation should be passed without actuarial analysis laying out the impact of the changes, and without making this available to the public.

 

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, “Prediction: Biden’s Answer To The Medicare Trust Fund Insolvency Is Hidden In His Budget Proposal”

Originally published at Forbes.com on June 1, 2021

 

According to the most recent report, from 2020, the Medicare HI (Hospital Insurance, or Part A) Trust Fund is projected to be emptied in the year 2026. That’s well before the Social Security Trust Fund’s projected insolvency in 2034, and when that happens, Medicare will only be able to pay 90% of Part A benefits, dropping down to 80% in 2038.

So why aren’t our elected officials, and why aren’t Americans themselves, more concerned?

When it comes down to it, I’ll suggest to readers that they don’t really believe that it matters. And with the Biden administration’s 2022 budget proposal comes a fairly strong indication that this is their point of view as well, that they expect, when the Trust Fund well comes dry, to simply tap general federal revenues for the necessary funds, in exactly the same manner as is done for Parts B (doctors) and D (drugs).

Here’s the key sentence:

“The President supports providing Americans with additional, lower-cost coverage choices by: creating a public option that would be available through the ACA marketplaces; and giving people age 60 and older the option to enroll in the Medicare program with the same premiums and benefits as current beneficiaries, but with financing separate from the Medicare Trust Fund.”

To be sure, this is more aspirational than concrete, and wholly lacks a cost estimate. But previous proposals from Biden or other Democrats had been unclear about the nature of the proposal and its financing, with various iterations suggesting that the near-retirees would pay “at cost,” benefitting from Obamacare subsidies as well as the lower cost of a buy-in, relative to private insurance, due to the low provider reimbursement rates fixed by Medicare.

This single sentence makes it clear that’s not the case: the only premiums paid by Medicare recipients are partial-cost payments for Parts B and D. For Part B, this is 25% of the cost for most retirees; for those with income above $85,000/$170,000 single/married, premiums are higher, reaching as much as 85% of the total cost for the highest earners. For Part D, the premium is set to cover 25.5% of the standard drug benefit, plus any extra costs charged by particular private providers for enhanced benefit levels, and an extra flat charge for higher earners. The remaining cost, 75% of Part B and 74.5% of Part D, is funded by the federal government through its general revenues.

What’s more, Part A is premium free, paid for by the contributions of workers through their Medicare FICA taxes. (There’s a small exception, in the form of workers with so little work history in the US, either on their own or by their spouses, that they do not qualify for any Social Security benefits, who must pay either $259 or $471 per month to receive Part A, depending on the number of quarters of coverage earned by the individual or his/her spouse.)

To declare that Medicare Parts B and D will be funded from general revenues for individuals ages 60 – 64, is simply to expand existing government-funded benefits.

To provide Medicare Part A, premium-free, to those ages 60 – 64, likewise funded from general revenues, is to create a path, whether intended or not, towards the funding of Part A from general revenues, for everyone, to the extent that the dedicated FICA revenues fall short. It is simply inconceivable that Congress could establish a system in which hospital charges are handled differently for the two groups of ages 60 – 64 and 65+, and apply a cap or alternate reimbursement rates for the second group. The only way this proposal makes sense is if is paired with a plan, or, less concretely, at least an intention, generally speaking, to meet future shortfalls in Part A, with general tax revenues, rather than any more elaborate cost-control and dedicated tax revenues approach.

And that’s not necessarily a bad thing. Given the complexity of Medicare funding as it stands, and the intertwining of Medicare expenditures with ordinary public health spending, perhaps the entire concept of a Trust Fund and fixed, dedicated, funding for one, but only one, part of Medicare, doesn’t really continue to make sense. (For example, the fact that it is Medicare that funds the hospital residency system for the training of new doctors, and that there is a cap on the numbers of residencies, may be contributing to a shortage of physicians. Does this make sense?) It will continue to be crucial that the government find a way to pay the medical costs of the elderly in a manner that maximizes their well-being while being financially prudent and responsible, but that does not necessarily mean that the artificial construct of a “Trust Fund” should be an ongoing part of this effort.

 

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.