The Biden Family Leave Plan: Good Intentions, Bad Policy, Worse Implementation Plan
Originally published at Forbes.com on September 23, 2021.
Parental leave has been on the agenda not merely of Democrats but also of moderate Republicans for quite some time. To be sure, Republican proposals have been far more restrained — Marco Rubio’s ill-fated 2018 proposal to allow parents to “borrow” from their Social Security benefits never went anywhere, but at about the same time, the Brookings Institute and AEI, two think tanks generally on opposite sides of the political spectrum collaborated on a paid leave proposal. And, yes, even the Heritage Foundation has a hard time saying, “no,” to the idea itself, suggesting instead that programs should be left to states and employers.
As with any social insurance program, there are bound to be winners and losers, and families who make the intentional decision that one parent will leave the workforce to care for children may grouse that wages are taken out of the wage-earner’s paycheck to support those making the opposite decision, but some level of grousing is pretty much unavoidable and the wider consensus seems to be that the idea is sound but the implementation must be done smartly.
Which means that when the Biden administration announced back in April that it was including Family Leave in its American Family Plan, I criticized the details, however limited they were at the time, for failing as a social insurance program because it did not have a dedicated payroll tax. The typical family leave program in a typical Western European country is funded based on a dedicated payroll tax, as was the case in the original “Family Act” (though even there, the proposed payroll tax was not sufficient to fully fund the benefit). Even in those countries where leave programs are provided through general tax revenues, the funding source is not a special “soak the rich” tax but an income tax system in which everyone pays more.
We now have more details on the Biden plan, which is now intended to be funded through the Reconciliation bill. The legislation itself contains many of the characteristics of the spring proposal — 12 weeks of paid leave to “qualified caregivers.” Specifically, the program would provide benefits for pretty much any sort of caregiving as long as it was “in lieu of work” and without compensation, for the equivalent of 12 weeks (all at once or spread out over time) per year, at a pay-replacement structure with bend-points similar to Social Security. This means that someone earning about $35,000 would get about 80%, someone earning $72,000 would get 67% of pay, and someone earning $100,000 would get about 55% of their pay by the benefit, with a de facto cap at that pay level but a trivial level of benefit up to $250,000. (This vaguely resembles proposals for hiking Social Security benefits, as if it was intended originally to be based on a payroll tax to $250,000.) In addition, benefits would be paid for any of the eligible reasons of the Family and Medical Leave Act, so not just for newborns or newly-adopted children but for medical caregiving as well, which suggests that in the case of long-term needs, individuals could collect benefits year after year.
And, indeed, not only is the program not funded by a payroll tax, but it is not really funded in any real way at all, since it is part of a spending plan with tax increases that are intended to cover only half of the new spending in the first place — $3.5 trillion in new spending with $1.75 trillion in new debt. In fact, the overall level of new debt is even worse when considering that many of the proposed spending programs in the Reconciliation bill, which include child tax credits, free preschool and community college and heavily subsidized child care, are nominally authorized for only a portion of the 10 years, so that the Committee for a Responsible Federal Budget has estimated that a true 10 year cost would be more like $5 – 5.5 trillion. The official “framework for the FY 2022 budget resolution” indicates, for every new spending proposal, that “the duration of each program’s enactment will be determined based on scoring and Committee input.” The very prospect that any of these programs would be implemented using the “10 year sunset” that is part and parcel of how Reconciliation works, is appalling. Once these programs are implemented, families should be able to reliably make future plans in a way that just isn’t possible when Congress plays games with sunsets and extensions. Implementing family leave through a Budget Reconciliation bill is the wrong way to create the program — and by that I do not just mean that it is an imperfect way, but that it would do more harm than good.
In a commentary at the Boston Globe last week, Vicki Shabo and Jacob S. Hacker said of this proposal, “Done right, paid leave could be Democrats’ Social Security for the 21st century” — a “social policy landmark that could cement the loyalties of a new generation of voters.” Yet they cite FDR’s famous quote that “no damn politician can ever scrap my social security program” while omitting the fact that this very quote is about FDR’s perception of the importance of financing the Social Security program through payroll taxes rather than general revenue.
The bottom line: yes on family leave as an extension of social insurance policies, if done right with appropriate plan design and funding. But by no means should it be debt-financed and certainly not with an expiration date to hide its cost.
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.
Forbes post, “How Will The Biden Medicare Dental Plan Affect The Trust Fund Solvency?”
Originally published at Forbes.com on September 20, 2021.
Among the changes coming if the Democrats succeed in their $3.5 trillion reconciliation bill would be the inclusion of dental, vision, and hearing coverage through Medicare, possibly in 3 – 5 years due to implementation challenges, and with suggestions of a voucher/cash payout in the meantime. There is not yet an official cost estimate as the details are still being negotiated, but a similar proposal in 2019 would have cost $358 billion over 10 years.
At the same time, late last month, the latest Trustees’ Report for Medicare determined that the Medicare Part A Trust Fund will be exhausted in the year 2026, which, if you do the math, is a mere five years from now. At that point, Medicare would have to cut reimbursement rates for doctors by 9%, increasing to 20% in 2045, or even more if the report’s assumptions don’t pan out.
How will the new dental benefits — assuming they remain in the bill — affect Medicare Part A and its trust fund? Strictly speaking, not at all. The new benefits would be a part of Part B of the program, that is, doctors’ charges, rather than Part A, which covers hospital charges. In one respect, it would be its own benefit structure entirely, since, unlike “regular Part B” Medicare, the proposal would have the federal government pay 100% of the benefit’s costs, rather than requiring participants to pay a 25% cost-share premium. It would, in a way, become Medicare Part E.
All of which means I am increasingly convinced of my prediction from back in June: the future shortfalls in revenue for Part A benefits will not be dealt with by increasing dedicated Part A funding sources, or by changing reimbursement rates, but simply by allocating general tax revenues to pay for these benefits. It simply makes no sense to imagine that Congress and the administration, while in the middle of implementing a brand-new benefit funded wholly through general revenues, would feel any need to solve the wholly-artificial problem of an evaporating Medicare Part A trust fund.
Again, you heard it here first: the Medicare Part A trust fund is a red herring. It is irrelevant. And I suspect that the policy experts really know this. In fact, immediately after the Trustees’ Reports were issued, I listened to a webcast by experts on the subject, and I asked this very question: in a world in which Part A of Medicare is only one part of a bigger picture with Parts B and D being funded through general revenues and through premiums, how relevant is the Trust Fund, anyway? And the experts’ answer was simply this (paraphrased, of course): “the value of the Trust Fund is that it captures the public’s attention in a way that isn’t possible simply by saying that overall government spending on Social Security and Medicare is increasing unsustainably.”
And they might be right. Our national debt rises year after year, and those warning against its long-term risks are Cassandras, ignored while alternatingly Republicans promise their base that tax cuts will pay for themselves with economic growth and Democrats promise their base that social welfare government spending increases are “investments” which will pay for themselves. Worse, according to the Committee for Responsible Federal Budget, the current Reconciliation spending proposal “fit[s] $5 trillion to $5.5 trillion worth of spending and tax breaks into a $3.5 trillion budget,” through gimmicks such as legislating an extension of the child tax credit only through 2025 but with tax-increase pay-fors stretching over 10 years, and with the expectation that Congress will be compelled to make the credit permanent with some other funding source in the future, as well as delaying the implementation of other benefits to later in the 10 year period to declare the “10 year cost” to be low. Add in the pundits proclaiming that low interest rates mean we can borrow as much as we want, and it is certainly a heck of a lot easier to get Americans’ attention with reporting that “the Trust Fund will run out of money!” than “our debt level is growing year after year and the economic consequences could be devastating, though we don’t know exactly what will happen or when.”
It’s nothing new for politicians to promise their constituents free lunches, but it is new territory to do so for Medicare, which individuals have tended to believe they have “earned” (just as with Social Security) through the payment of their FICA tax and by paying the Part B and D premiums (though that only covers 75% of the cost). It’s hard to underscore how significant a change it is to create a new Medicare benefit which wholly untethers Medicare from even this partial degree to which Americans earn their benefits, let alone doing so in the context of a bill with “tax (only) the rich” funding and massive deficit spending that further reinforce the message, “this is free money” and would destroy the very notion of social insurance as “we’re all in this together.”
As Americans, we have benefitted tremendously from the dollar’s status as the global reserve currency, from low interest rates, and from other circumstances which have insulated us thus far from direct effects of persistent deficit spending. But imagining that will last forever means the eventual fall will be all that much harder.
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.
Forbes post, “Mismanagement Compounding Underfunding: The Chicago Police Pension Forensic Audit”
Originally published at Forbes.com on September 6, 2021.
Readers, when I first read that retirees and employees in the Chicago Police pension system were pursuing a “forensic audit,” that seemed like nothing more than wishful thinking. It seemed plainly obvious that the plan’s massive underfunding was explained by the lack of a commitment to fund the plan properly, and by years of delusion that future favorable investment returns would solve the plan’s problems. But it turns out that there are serious issues with how that plan was managed that compounded these underlying issues, as revealed in a new report released at the end of August.
The background to the report is this: after this rapid decline in pension funded status over the past two decades (the police pension was, after all, 71% funded as recently as 2000), a group of retirees, widows, and active officers formed a group called the CPD Pension Board Accountability Group in February 2020, asking for a full audit of the fund. Their requests were denied, even when they offered to pay the full cost themselves, so they hired the author, Christopher Tobe, who set about doing the research based on publicly-available information as well as through making a series of Freedom of Information Act (FOIA) requests, the largest number of which, Tobe says, were illegally denied.
Here are some of the highlights of the report:
It is reasonably well-known that the pension plan has been underfunded for years, and that the state, in setting a new funding plan, allowed a “funding ramp” in 2011 and then re-set that ramp in 2016, so that funding according to the “90% funded by 2055” target only began in 2020. However, Tobe alleges that “Chicago has consistently underfunded the plan more than the statutory amount, blatantly breaking the law, with no consequences.”
Regarding fees and management, Tobe alleges that the pension fund has “failed to monitor and fully disclose investment fees and expenses” and that “fees and expenses could be 10 times that which they disclose” because the fund’s disclosure “omits dozens of managers and their fees.” He also reports that the Fund claimed that “hundreds of contracts for the investment managers” are exempt from FOIA, and denied him access to the fund’s own analysis of fees. He concludes that “PABF may have over 100 ‘ghost managers’ in funds of funds,” that is, the fund is required to disclose its managers but it fails to do so, even though Tobe has identified them through other sources.
Tobe also found that “pay to play” is alive and well in Chicago. A 2014 report found that “former Mayor Rahm Emanuel received campaign donations of over $600,000 from investment managers who manage accounts for the PABF and other city funds.” In addition, Mayor Lightfoot has received $200,000 in donations from firms managing Chicago pension funds.
In addition, while poor performance is never a proof of failure in isolation, Tobe found that the pension fund had well-below-average investment performance, compared to other funds — at the 90th percentile (bottom 10%), which he attributes to the fund’s use of alternative investments, with high fees not compensated for with high returns. He also raises concerns of cooked books, but cannot confirm this because of the city’s repeated denial of records requests.
With respect to governance, the fund violates a fundamental aspect of prudent governance because its Chief Investment Officer is not a professional with qualification in the field, but simply a trustee and active-duty policeman, and, what’s more, one who has “22 allegations of misconduct as a police officer including one for bribery/official corruption.” Further, no staff members hold the credential of a CFA charter, another marker of professionalism. Another related governance issue is the use of offshore investments, e.g., in the Cayman Islands, which lack key governance and transparency protections of US-based funds.
Finally, with respect to financial reporting, “the Chicago Police Pension has decided to stop issuing Comprehensive Annual Financial Reports,” issuing a report neither in 2019 nor in 2020 (though it has made public the actuary’s reports for those years and makes available the valuations back to 2007 on its website).
There’s more, but I’ll stop here, as this is more than enough to illustrate that there are troubling practices at the fund that only compound the already-serious funding issues. It is not possible to know how much these mismanagement issues have effected the plan’s investment returns and plan expenses, but regardless of the magnitude, none of this should be happening. The city of Chicago wants us all to believe that the corruption which has been part of the city’s legacy for so many years, is in the past — but this report calls that into question. And, regrettably, Tobe’s report has gone practically unnoticed in the local media, with, to the best of my knowledge, coverage only at the local CBS affiliate.
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.
The layman’s guide to the new pro-mask research study
Do we now have conclusive proof that masking works? No. Do we have data that strongly suggests this to be the case? Yes. Is it all wrapped up in questions of how to interpret such studies, and the inherent difficulty of studies that can only attempt to approximate an experiment rather than truly being one? Also yes.
Here’s the background: a group of researchers and aid workers from Poverty Action, funded by the charity Give Well, undertook a massive study in Bangladesh to test mask-wearing — but you can’t simply force one group of people to wear masks and prohibit another group, particularly at the village-by-village level, so what they undertook were a series of actions designed to promote mask-wearing.
To begin with, they designated certain villages “control” and others “treatment” in the same way as, with a test of a medication, a certain group would get the placebo and others, the real medicine. The control villages received, nothing, but the “treatment” village, through a process of randomization, either were given cloth masks or surgical masks, for the duration of a 10-week period, and, with further randomization, were given further inducements to wear masks, such as encouragement from imams and other “village elders,” or texts from experts encouraging mask-wearing as an altruistic action or for one’s own benefit, or other such encouragements. They then measured the degree to which these inducements resulted in more mask-wearing, by having observers count the number of people wearing masks in public places, and found that they were able to triple the rate at which people wore their masks in public.
Now, to be clear, the entire “package” was implemented for the main test group: free mask distribution alongside encouragement to wear the masks and role-modeling by public officials and community leaders, which included a video with the head imam and a national cricket star shown when the masks were distributed, as well as promotion by local imams during Friday prayers using a scripted speech and further unspecified “mask promotion in public spaces.” Some villages also received monetary or non-monetary incentives for village-wide compliance, a program of asking households to commit to mask-wearing with a pledge and a front-door sign, and a set of text messages; and villages were also randomly assigned to receive either cloth or surgical masks. After 8 weeks, they stopped the “intervention” but kept tallying mask-wearing for a further two weeks.
The result was that mask-wearing in the treatment villages increased by 29 percentage points or, using a different method of analysis, 28.1 points, relative to a baseline of 13.3%. Surprisingly, the additional boosting efforts had no effect: none of the by-village monetary incentive, text-encouragement, or public front-door sign program made a difference – in fact, these most likely reduced levels of mask-wearing. The only factors that were associated with greater rates of mask-wearing were being given a surgical (rather than cloth) mask and being given a mask that was blue rather than green or purple rather than red.
(Yes, really – the effect on mask-wearing of having a purple cloth mask was quite substantial. The mask colors were used to identify people who had received different sorts of “private” nagging in terms of the text messages, but the meaning of the color used was varied between village. Green symbolizes Islam; was this color seen as sacrilegious? Was there a different, negative connotation to red, or positive connotation to purple? This unexpected difference is a bit disconcerting, because it suggests that the researchers did not have the understanding of local culture that they should have to conduct research, even if there’s nothing else fishy about it.)
But this was only the first step in their study. Their larger objective was to measure the degree to which the free-mask/mask-encouragement-induced greater mask-wearing reduced covid cases – and, indeed, they find substantially lower rates for the treatment than the control groups, based on testing everyone who reports covid symptoms during the study period. (Two complications here: first, they only tested those who reported symptoms, and only about 40% of those reporting symptoms agreed to be tested.)
The results here are fairly dramatic, or are so at first glance, at least: relative to the control villages, those villages given surgical masks had an 11% reduction in (symptomatic) covid prevalence over the 10 week period. For those above 60, those at highest risk, the results are even more dramatic, a decrease in infection of 35%. Considering that, even with these interventions, fewer than 50% of people observed wore masks, this suggests that consistent mask-wearing by everyone would have an even greater effect. And, in fact, the authors do the math of how much it cost them to provide the masks, the mask-promotion, and the mask-wearer counting, to conclude that it is entirely feasible, in terms of lives saved, to expand these efforts.
The study also looked at the impact of mask-wearing on physical distancing – not so much because it was their goal to push Bangladeshis into more distancing but because one theory was that mask-wearing would, due to risk-compensation, result in people distancing less. Instead, within mosques, people distanced as much as before, but in other circumstances, distancing increased.
But the study left a number of questions unanswered – or, at least, I didn’t see the answers.
We know that treatment villages were given masks and non-treatment villages were not – but the latter villages were still surveyed by phone and asked about symptoms, then those reporting covid symptoms were asked to test, which about 40% consented to. The study did not indicate what percent of villagers responded to the survey, or how they perceived the study, or whether they resented being called and asked questions when only the neighboring village, not they themselves, received masks.
The study also did not report on any issues of variation within the treatment villages, except to the extent that standard errors are reported for mask-wearing (and, honestly, I’m not good enough at the stats part to get a sense of interpretation here). Was there an (inverse) correlation between village-wide mask-wearing and covid prevalence? That would make the relationship between masks and covid-reduction clearer. Is there a reason why this statistical calculation/test would be invalid? The villages are all also presented as simply generic “one no different than the next” villages, and maybe that’s indeed true, or the randomization process makes differences irrelevant, but I would imagine that there are still real differences, whether they be a matter of some regions of the country being richer or poor than others, or having different age pyramids (different fertility rates, different rates of out-migration to the city).
Also, all observations were conducted outside except for mosques, because there simply weren’t non-mosque indoor spaces. But it is generally not considered particularly risky to wear masks outdoors, and the paper doesn’t state whether villagers were told to wear masks any time they were outside their own homes, or what instructions in particular they were given regarding times and circumstances in which it was necessary to wear a mask, and when the risk was low enough not to. Or is Bangladeshi public/outdoor life as crowded as indoor American life?
Another surprising element is the two pilot studies that informed their ultimate large-scale study. In the first study, they had free masks and an educational campaign, and boosted mask-wearing rates by 10.9 percentage points. In the second pilot, they added the presence of workers whose role was to “remind” villagers to wear their mask, and they boosted the rate to a level matched in the final study, 28.4 percentage points. Honestly, I have trouble making sense of this – isn’t a village in Bangladesh exactly the sort of place where outsiders would be very visibly “outside” and not able to persuade much? Or were “locals” hired in this role? This seems to be another “cultural” issue. As it happens, one of the criticisms of the study is that symptoms were self-reported rather than based on objective testing, so that if the villagers in test villages believed that there was a particular reason to minimize symptoms (to prove they were compliant, to avoid dishonoring the village, to show loyalty to village elders, etc.), this would cause problems with the study, and their surprising degree of responsiveness to individual “persuaders” suggests to me that this is possible.
Another issue is the differentiation between surgical and cloth masks. The key data element is, again, that control villages had a prevalence of covid of 0.76% cloth mask villages had a prevalence of .74%, and surgical mask villages, .67%. There was therefore no statistically-significant effect from cloth masks – which of course should raise concerns for places such as the US where “even a bandana will do” has been the operative approach. But in any case, there was a higher rate of mask-wearing for surgical mask villages, even though the difference wasn’t statistically-significant. It does nonetheless raise the question of whether the surgical mask was what made the difference, or the greater likelihood of mask-wearing in surgical-mask villages.
Another issue: age group differences. For surgical mask villages only, they split out covid rates by age. For those younger than age 50, there was no difference in covid infections between this villages and the control villages. For those 50 – 60 years old, there was a decrease of 23%. For those over age 60, there was a decrease of 35%. What would account for this difference? The study does not identify different mask-wearing rates for different ages (presumably they did not attempt to guess the age of the mask-wearers or non-mask-wearers they saw), and, in theory, this shouldn’t matter, as the theory of mask-wearing is that it protects others, so that the entire community should see declines. However, the study (to prove risk compensation was not happening) showed that there were greater degrees of physical distancing in treatment villages. Did the project of mask-wearing result in overall greater degrees of caution, especially among older Bangladeshis?
This is a point of contention among critics, as well as the general element of the increased physical distancing. If physical distancing could be the cause of reduced spread, or if other elements explain the reduction only among the old, then did the intervention “work”? Or, rather, what does it mean to say the intervention “worked” if it was plausibly the knock-on effects of mask-wearing and what we want to demonstrate is that masking can substitute for undesirable alternate interventions like distancing or lockdowns?
Here are some other criticisms I’m seeing.
First, from an anonymous commenter on twitter: the difference between cloth and surgical mask-wearing isn’t statistically significant when measured with something called an “intervention prevalence ratio,” which is more-or-less the difference in rates provided above. On this basis, a confidence interval for either cloth or surgical mask shows that there is definitely a decrease in covid prevalence, but, because of the necessary differences in standard error for the smaller sample sizes for each group individually, the confidence intervals for cloth vs. surgical individually are wider, overlap, and are not even definitively proven to be effective, with only the surgical mask being significant at the 10% level. Even with the large number of villages recruited into the study, the overall prevalence rates were low enough so as to not definitively establish the desired conclusions. Given the uncertainties in the study in general, you’d really like to see some slam-dunk numbers here.
Second, a substack site “bad cattitude” levies a number of criticisms. Some of them are, I think, too nit-picky, for example, leaning very heavily into complaints that the authors did not definitively establish that the villages were truly sufficiently identical to each other for the randomization to be effective. In particular, they did not have a starting value for covid-prevalence, just the ending point. It seems unlikely to me that there would have been such a difference as to have invalidated the study but he says “this is a tiny signal (7 in 10,000) [so] we need a very high precision in start state” and “even miniscule variance in prior exposure would swamp this.” It would be helpful to have seen some math demonstrating the possible effect of different levels of variance that are within statistical possibility.
This author’s larger criticism is of the self-reported nature of symptoms that I observed earlier. Now, we already know that there are two elements of Bangladeshi village culture that are “non-WEIRD” — the fact that mask color has a statistically-significant effect on whether villagers choose to wear them, and that mask-reminders have a dramatic impact on use. (Just try to imagine that happening in small town USA!) The substack author also points out that there was a very wide discrepancy between self-reports of mask-wearing (80%) in their own prior survey and actual use. It seems to me likely that Westerners cannot necessarily predict how Bangladeshi villagers would respond to being given masks, then being called and asked to self-report whether they have any of a set of symptoms, but it also seems to me that there’s a good chance that their response would not be the same as Americans, in one direction or another. That site also quotes twitter account @Emily_Burns_V, who says, “Is it possible that highly moralistic framing and monetary incentives given to village elders for compliance might dissuade a person from reporting symptoms representing individual and collective moral failure — one that could cost the village money? Maybe?” And, indeed, the study’s authors say that there was no effect of the text-nagging or the incentives, on mask-wearing, but do not report whether there are differences between these groups, and the symptom-reporting.
Finally, Bad Cattitude has an interpretation of the age-differences which seems more plausible than “masking had a greater effect on the old”: “the odds on bet here is that old people were more inclined to please the researchers than young people and that they failed to report symptoms as a result.”
One last set of comments on the study, from researcher Lyman Stone, again via twitter. He defends the study authors against the accusation that they failed to pre-test to establish a baseline, by saying that the study authors themselves acknowledged that this was still underway, and this was, after all, a working paper, not the final product, and reports that it is the norm to provide preliminary reports even when the data analysis is complete.
Stone also observes that the differences in results between cloth and surgical masks is an indicator that there was a sort of unplanned “blindness” to the study, in that both the cloth and surgical mask recipients were aware they were a part of a study, so if the effects we see are a result of their response to this, we’d see the same effects for both cloth and surgical — but we don’t. (Of course, Stats with Cats observes that the difference between the two groups is not a slam dunk because of confidence intervals, and, as tempting as it may be to do otherwise, it is important to take the confidence intervals seriously.) (For what it’s worth, Bad Cattitude rebuts the rebuttal in a follow-up piece.)
The bottom line: when this study first came across my twitter feed, I enthusiastically retweeted it. Now I’m disappointed — I would have really liked to have seen more answers, and be left with fewer questions that mean it becomes “one data point among many” rather than the slam-dunk evidence that some of its promoters think it is, especially since the whole debate has now resulted in mask-promoters asserting that mask-wearing is always and everywhere cost-free while ignoring that for some people it creates real health issues and for children, poses risks of developmental delay.
Finally, as a reminder for those who don’t know my background, very early in the pandemic I was not merely an enthusiastic mask-wearer, but a die-hard mask-maker, donating some 150 of them to healthcare workers and others, which means that anyone who judges these comments as those of a crazy anti-masker wholly misunderstands them.
Forbes post, “More Than An Insolvency Date: What Else To Know About The Social Security And Medicare Trustees’ Reports”
Originally published at Forbes.com on September 1, 2021.
I suspect that after years of reciting the same headline numbers, we tune them out:
The Social Security Old Age and Survivor’s Insurance Trust Fund will not be able to pay full scheduled benefits after the year 2033, one year earlier than forecast in last year’s report; when the Trust Fund is exhausted, it will only be able to pay 76% of benefits.
The Medicare Part A Trust Fund, which pays inpatient hospital benefits, will be fully funded through 2026 — no change from last year — and will be able to pay 91% of benefits at that point.
Each year we hear hand-wringing; each year those dates get one year closer. And, to be fair, this new date for Social Security is not as bad as various worst-case predictions earlier in the pandemic. But that’s not even the whole story.
Social Security
In the 2020 report (released in April and reflecting no impacts of Covid), the actuaries forecast that Social Security (OASI)’s cost rate would increase from 12.05% of taxable payroll in 2020 to 15.03% in 2040, decline slightly to 14.81% in 2045, and increase again, peaking at 16.19% in 2080. Income rates would rise only much more slowly, producing deficits of .88% (2020), 3.54% (2040), and 4.59% (2080).
This year, Social Security’s deficit is unusually high due to lower revenues and higher benefits: 1.75%. In 2040, the deficit climbs to 3.70% rather than 3.54%. In 2080, the deficit stands at 4.87% rather than 4.59%.
Put another way, if there were no Trust Fund accounting mechanism now, the OASI program would have been able to pay 93% of benefits. This would drop to 76% in 2035 – 2040 – 2045, then drop further to being able to pay 70% of benefits.
What’s more, this year, the actuaries changed several assumptions. They assume that by the year 2036, fertility rates will increase to 2.00 children per woman, an increase from the 2020 report’s assumption of 1.95. They also assume a long-term unemployment rate of 4.5% rather than 5%. At the same time, they calculate alternate projections with more pessimistic assumptions, including a continuingly low fertility rate (1.69), a higher rate of mortality improvement (that is, longer-lived recipients), a higher rate of unemployment (5.5%), and others. In these alternate calculations, the 2040 deficit becomes 6.47% rather than 3.7% (benefits 64% payable), and the 2080 deficit becomes 12.39% rather than 4.87% (benefits 50% payable).
Also consider that, at the moment, there are 2.7 workers for each Social Security recipient (2.8 in 2020). This is forecast to drop to 2.2 in 2040 and ultimately down to 2.1. But if the population trends are those of the pessimistic scenario, then that 2.1 would drop to 1.5 by the year 2080.
And, yes, once again, I continue to question the reasonability of the actuaries’ assumption with respect to fertility rates. In fact, in 2020, the actuaries had begun to reflect the ever-declining rate, which stood at 1.68 in 2019, even prior to the pandemic, by dropping the assumption from 2.0 to 1.95. This year, not only do they assume that every woman who deferred childbearing during the pandemic, will make up for it by having those “missing babies” in coming years, but they boost the fertility rate up from the 2020 reduction, back to 2.0, with no explanation offered!
Medicare
One would anticipate that Medicare’s finances would have been worsened considerably by expenses for covid patients in 2020, but, surprisingly, decreases in costs for non-covid patient care were greater than the increases in costs for covid patients, especially with respect to elective surgeries. However, the report itself acknowledges that the degree to which those expenditures will increase in the future as patients seek care that was foregone in the past, is highly uncertain.
In any case, projections in the future must estimate not only the same demographic and economic trends as for Social Security, but also changes in the cost of healthcare.
Taking into account only the Part A (HI) program, the only one with a “true” trust fund, the deficits are not particularly different in 2021 vs. 2020: a maximum deficit of 1.06% of payroll (remember there is no cap for Medicare) in 2045 vs. 1.08 in 2045 as of 2020, then declining to roughly half that. This works out to enough funds to pay 80% of scheduled benefit in 2045 and 91% at the end of the projection. But, again, in the high-cost alternate set of assumptions, Medicare would be able to pay only about 40% of benefits — and recall that isn’t anything that can be fixed with drug-cost negotiation or any similar promises, because these are hospital charges, the prices of which are already fixed at low levels by the government.
How urgently are fixes needed?
With respect to Medicare, the answer is, cynically, there’s not really much of a hurry. As I wrote back when the Biden administration introduced its 2022 budget, the administration’s willingness to fund an expansion of Medicare to younger ages simply through the use of general tax revenues rather than any dedicated payroll tax source, suggests that there is no fundamental reason why any part of Medicare at all needs this connection to the “Part A payroll tax.” Indeed, even with respect to Part A itself, there have already been transfers into the system with the CARES Act and similar legislation. There’s also no meaningful degree to which early action now will help us “save up” for expenses later — while we certainly do need a better way to run the system, one that improves health outcomes rather than paying blindly, but one that does not involve the degree of cost-shifting that occurs with Medicare’s reimbursement rates now, this has nothing to do with the trust fund itself.
With respect to Social Security, one aspect of the situation demands some kind of action: there is not even a legal mechanism for the Social Security Administration to respond to the depletion of the Trust Fund by deciding who does and doesn’t get benefits, or whether benefits would be reduced across the board or only for higher-income recipients. However, in principle, a “Social Security fix” could legislate some alternate funding source at any time.
At the same time, because government deficits are forecast to rise, year after year, and the demographic bulge of peak-earning Baby Boomers is long gone, there is no meaningful benefit to “saving up” for future benefits by trying to “rebuild” the Trust Fund.
Further, the “Social Security Reform” proposals of some individuals simply wish for the federal government to expand the benefits provided. That’s Biden’s proposal (which, incidentally, doesn’t even fully fund the system, suggesting a relative indifference to this question), among others.
But here’s where it does matter: it is not only my proposal, but, in various iterations, that of others, to re-invent Social Security to focus on providing a basic level of benefits while other legislation provides a framework for enhanced retirement savings by individuals, through retirement accounts or some sort of pooled system. This sort of new system would require a substantial phase-in period to enable workers to build up their balances. And this means, the sooner a reform happens, the better.
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.