Jane the Actuary General Interest, Retirement

Forbes post, “Here’s Why, Actually, The IRS $600 Bank Reporting Proposal Is Entirely Reasonable

Originally published at Forbes.com on October 16, 2021.

 

Over the last several days, we’ve seen the Outrage Machine in action over a new Treasury proposal to require banks to report to the IRS new information on U.S. bank accounts, in addition to the existing reporting of interest payments. This proposal, as described at CBS News (among, of course, many other sites) would require banks to report the gross annual inflows and outflows in bank accounts, ostensibly to catch high-income tax-dodgers. Because the threshold for reporting was set at $600, skeptics are, well, skeptical of the assertion that this change would only affect, as the Biden administration claims, those earning over $400,000 per year.

At the Heritage Foundation, a commentary claims that this change would be “invading your privacy and putting more of your financial data at risk,” citing past leaks at and politicization of the IRS. A group of 40 banking/credit industry organizations likewise objected that Americans’ financial privacy was at risk and claimed that this new requirement would deter unbanked households from establishing accounts. And other politicians, as cited in fact checks, mischaracterizing the proposal, claim that it would result in the IRS examining the particulars of every $600 transaction. Whether the very low threshold is an indication that the administration is being dishonest in its claims that their objective is only to catch wealthy tax cheats when they are, in fact setting the stage for a wider pursuit, or whether this is more a matter of failing to think through the implications of such a low threshold, who can say.

But at the same time, the other day, while driving home, I listened to a fairly generic conservative radio talk show host angry about this proposal. He was not angry about privacy concerns, and certainly not about whether people at the margins would be deterred from opening bank accounts, nor about the cost to banks of compliance with the new regulations. No, what he was up in arms about was the fact that Americans would be obliged to pay tax on their moonlighting self-employment income.

So here’s the plain-and-simple reality: Americans owe FICA tax on all their income up to the ceiling, and are obligated to report all their income in calculating their income tax. There is no legal, moral, or ethical right to underreport just because your income came from some other source than a “real job.” A babysitter, an Ebay reseller, someone who picks up handyman jobs on the side — all these folks have an obligation to report their income. (As a parent and Band Mom, I’m personally learning the ropes here, as our group navigates sending Form 1099s to college students and local musicians who are hired periodically.)

And — without wishing to wade into the entirely separate issue of high-income tax cheats — the “shadow economy” in the United States is substantial. Estimates are hard to come by, but one guesstimate is that the underground economy amounted to 11 – 12% of US GDP in 2018. A 2012 survey indicated that 91% of nannies reported being paid under the table. Among all household workers, another estimate found rates of between 74% and 97%, depending on methodology. And of course, the under-the-table workforce extends far beyond household workers, though it gets harder to quantify when we’re talking about other sorts of self-employed people not reporting their income, or small employers paying under the table. (A brief perusal of reddit suggests this is not unusual for restaurants.)

But consider this: some time ago I discussed a book, Downhill from Here by Katherine S. Newman, which lamented gaps in the retirement system, such as multiemployer pension insolvencies and the retirees of Detroit, whose pensions were cut modestly with the city’s bankruptcy. I didn’t place too much credence in her arguments, lamenting as she did, for example, that the city of Detroit did not, in fact, sell art from the Detroit Institute of Arts to preserve pensioners’ benefits in full.

But in addition to these stories, she featured profiles of Americans who were working well past traditional retirement age, including Leslie, who ran a home daycare “off the books” and built up so little official employment history that her Social Security benefit was “almost nothing,” and Marissa, who was mostly paid under the table for housecleaning work and likewise had no meaningful Social Security benefit. In case case, Newman implies that it is a matter of unjust Social Security plan design that these women have no/few benefits rather than acknowledging that it was an intentional decision not to report their income.

In the same way, there are periodic sympathetic news reports of women formerly employed as nannies or housecleaners who became unemployed in the wake of the pandemic — but it doesn’t occur to those journalists that, to the extent that those women were employed, rather than self-employed, they should have qualified for unemployment benefits, or would have, had they been paid on the books. And, of course, again, people who are employed, rather than self-employed, under-the-table lose access to workers’ compensation should they be injured.

Yes it’s unpopular to talk about this. There’s a presumption that people working under the table are poor, so that it would be unfair to enforce the requirement to pay taxes. Certainly, many of these workers would have incomes low enough that they would not be obliged to pay income taxes, though payroll/FICA taxes apply to all income. But for others, this is a sideline, and in yet other cases, they are genuinely employed, not self-employed, and have an employer who profits from the ability to escape taxation on some of their payroll.

And it’s not just a matter of lost taxes, or lost Social Security benefits. There’s something more fundamental that’s lost in our society when we treat participating in taxation and social insurance systems as somehow optional.

 

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, “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.

Jane the Actuary Retirement

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.

Jane the Actuary Retirement

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.

Jane the Actuary Retirement

Forbes post, “The Massachusetts ‘Essential Worker’ Pension Boost Proposal Is A Case Study In Public Pension Failures”

Originally published at Forbes.com on August 19, 2021.

 

23 out of 40 Massachusetts state senators support it by signing on as co-sponsors.

126 out of 160 Massachusetts state representatives have done the same.

But the legislation, a bill to pay a bonus retirement credit to in-person public workers in that state, is still a terrible proposal.

The text of the bill, H. 2808/S. 1669, is brief. All employees of the state, its political subdivisions, and its public colleges and universities, a bonus of three years “added to age or years of service or a combination thereof for the purpose of calculating a retirement benefit,” if, at any point between March 10, 2020 and December 21, 2020, they had “volunteered to work or who [had] been required to work at their respective worksites or any other worksite outside of their personal residence.”

During a hearing on July 21, sponsor Rep. Jonathan Zlotnick explained his purpose in bringing the bill forward:

“This was the time when these essential services were most important, the people being asked to perform them were most at risk coming into contact with members of the public and with co-workers. They continued to do their jobs, often exhibiting flexibility and creativity and an effort to ensure that those needs were met. It is in recognition of that effort that we offer this bill.”

However, at the time, Rep. Ken Gordon “questioned Zlotnik on whether or not a financial or fiscal analysis had been conducted relative to the cost that would be incurred if the legislation was signed into law,” and Zlotnick admitted that no such calculation had been made, and “Zlotnik said he recognizes that many details associated with the proposal still need to be contemplated.”

In subsequent reporting, government watchdog group The Pioneer Institute voiced its opposition. In a statement posted on their website, they criticized the broad coverage — acting as an unfunded mandate for municipalities, including workers even if they had worked outside their home for a single day, encompassing both blue collar and white collar workers. They estimate the bill’s cost at “in the billions of dollars” and point to a massive boost even for a single individual, the president of the University of Massachusetts, whose lifetime pension benefit would increase by $790,750.

In response to these objections, Zlotnik “said the bill is still ‘very early in the process’ and said cost would be a ‘major determining factor’ in any bonus payout to public workers, in an e-mail to the Boston Herald.

And left out of Zlotnik’s proposal is a recognition that the state’s main retirement fund is 64% funded, and the teachers’ fund, 52%, as of 2019.

Now, whether this bill ultimately becomes law is still unknown. But, again, 79% of Massachusetts state representatives are on board with their support without taking any interest in the cost of the proposal, and even Zlotnik himself is not troubled by having brought forward a bill with such serious deficiencies. It is not even clear whether he would have pursued any cost analysis, had he not been called out on this. What’s more, nowhere in any of the discussion does Zlotnik or any of the bill’s supporters suggest that among the revisions would be any notion that the state should pay for the added cost up-front.

In fact, regardless of one’s opinions on the various proposals to give teachers, for instance, bonuses for their year of remote teaching, it is nonetheless a far more fiscally responsible choice to make, than this proposal, which is no different than borrowing money for the same purpose. And, again, 126 state representatives and 23 state senators were willing to sign onto this because the symbolism of the gesture was more important than assessing whether it was a financially responsible decision. Will those sponsors be willing to vote down the measure? Will those in power recognize this would be an embarrassment and simply never bring the bill to a vote? One way or the other, this is a prime case study in how pensions become so underfunded, as it is always far more popular to promise benefits than to pay for them.

Update: as of December 2024, this bill was reintroduced in 2023, and as of March 2024, is sitting in committee.

 

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.