Jane the Actuary Retirement

Forbes post, “Can The Dutch Example Help Us Improve Long-Term Care And Manage Its Costs? Maybe.”

Originally published at Forbes.com on September 1, 2020.

 

Yes, the Netherlands! Some time ago (almost exactly a year ago, in fact), I started researching what eldercare looks like in other countries, and had put this article together but waited to publish it until I could provide a series of such articles. At the time, my interest was in eldercare per se, and especially how it fits into broader issues of “Medicare for all”/universal health care. But, in light of Trump’s (barely thought through and soundly attacked) proposal to pay for Social Security through general tax revenues, I’m looking at this in a new light, because it really addresses bigger questions of what the right way is to fund social insurance programs in general.

The Netherlands, as it happens, ranks tops in long-term care provision among developed countries — if your metric is total spending level, where it ranks first at 3.7% of GDP or projected future spending, or total projected spending in 2070, where it comes out at 6% of GDP, second only to Norway (7.1%). But are they getting their money’s worth from that spending, and are they protecting elders from the impoverishing effects of out-of-pocket spending, and their children from the burdens of caregiving? Let’s do a deeper dive.

It is not hard to find articles praising the Dutch approach to eldercare. Its “Dementia Village” has received considerable press (for example, at The Atlantic in 2014) for its patient-friendly approach of creating a secure, Truman Show-style community in which residents can spend time at the town square or the grocery store as well as individual homes styled in the manner of their youth. Likewise, an expert on eldercare at Access Health International described her experiences in a visit to the country in glowing terms:

“I visited a number of different care homes, homecare organizations, academic institutions, and eHealth providers, as well as the University Medical Center in Groningen. Throughout my time in the Netherlands, I noticed that innovative groups all shared fundamental ideas upon which they centered the delivery of care. The organizations I visited focused on wellbeing, wellness, and lifestyle choices. They focused less on the medical aspects of chronic and long term care. These groups did not consider themselves to be part of the curative branch of the healthcare system. These healthcare professionals wanted to focus on patients’ individual capabilities, freedom, autonomy, and wellness.

“For example, the care homes wanted to provide a nice home environment, with home cooked meals, small groups, interior design choices, and a personalized care routine. The care homes focused on providing tasty food, the freedom to go to bed and wake up at will, and an exterior environment that feels just like the environment in any city neighborhood. The homecare organizations strove to provide assistance, but only when individuals could not manage on their own. The nurses look first at a person’s capability to care for him or herself. Next, the nurses look to the neighborhood and what help neighbors might provide. Then the nurses reach out to relatives to see if they can be of assistance. As a final step, the nurses provide care.”

But it’s not quite that simple.

Here’s a brief overview of the FICA-equivalent taxes in the Netherlands, courtesy Social Security Programs Throughout the World, at the Social Security website.

  • For old age, disability, and survivor’s benefits (American Social Security-equivalent), the Dutch contribute 20% of pay up to a ceiling of EUR 33,994 (about USD 37,700). Employers pay 6.27% of pay up to EUR 54,614 (USD 60,600).
  • For medical, the system is a hybrid one and workers purchase private insurance. Employers pay 6.90% of covered payroll (no ceiling), and the government subsidizes benefits.
  • And for long-term care, workers pay 9.65% of earnings up to EUR 33,994 (about USD 37,700).

 

(Yes, that ceiling puts the American debates about the unfairness of the Social Security ceiling into perspective.)

Are you ready to pay nearly 10% of your paycheck up to a ceiling, to fund long-term care?

World Bank consultant Laurie Joshua provides a more detailed review of the Dutch system in her 2017 paper “Aging and Long Term Care Systems: A Review of Finance and Governance Arrangements in Europe, North America and Asia-Pacific” (yes, that’s a mouthful, and a handy source for information on other countries, too). The first social insurance benefit for long-term care, the Exceptional Medical Expenses Act (or AWBZ in its Dutch initialism) was implemented in 1968 and, in 2014, 5% of Dutch people received benefits through the program. However, the cost of the system had escalated, which the government initially attempted to control with budget caps until a 1999 ruling prohibited these, and costs grew from EUR 15.9 billion in 2001 to EUR 27.8 in 2014, despite cost-control efforts such as increases in copays required from middle- and upper-income families and tightening of eligibility criteria.

In 2015, the government wholly reformed the system through the Long-term Care Act (WLZ in its Dutch initialism), with a new administrative structure, shifts in which levels of government pay for which services, a move to home support rather than nursing homes wherever possible, and general cuts/freezes in reimbursement rates. One consequence? The English-language site Dutch News reported in 2017 that

“At least 40% of Dutch nursing homes and home nursing organisations are making a loss and overall profitability across the healthcare sector has more than halved, according to accountancy group EY,”

as reimbursement rates drop and (since the less-frail elderly are more often being cared for at home) nursing home residents need more help.

Separately, municipalities are required to provide care services, either directly or through a “personal budget” as well as providing support and coordination.

Finally, elder care is not free of charge, though its rates are based on income and, at a maximum, still considerably lower than American private-pay nursing home or home care costs, at EUR 2,301.40 (USD 2,500) per month. As a result, copayments by families amount to 8.7% of total spending.

So, on the one hand, taxes are higher but the direct out-of-pocket costs of care in the Netherlands are substantially lower than in the United States, and its systematized provision of home care and the efforts put into home-like nursing homes are appealing. On the other hand, the jury is still out whether its 2015 reform has managed to control costs to ensure its programs are sustainable in the long run — and the very fact that this reform was needed confirms that an expansive government program isn’t as simple as its proponents would like it to be.

 

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, “A Tale Of Two Multi-Employer Plan (Systems)”

Originally published at Forbes.com on November 27, 2018.

 

Readers, I have been remiss.  Taft-Hartley multi-employer pension plans and the deeply-in-the-red PBGC guaranty fund which is meant to cover them but cannot because of their financial trouble, are an important part of the overall landscape of pension plans in America, and I am long overdue in giving the lay of the land in terms of the trouble they’re in.  But we’re fast approaching a key deadline, as a special congressional committee is due to report on its recommendations on November 30; as reported by the Washington Post, their proposal includes $3 billion in benefit subsidies along with benefit cuts and increased contribution requirements by participating employers.

The $3 billion is, of course, a drop in the bucket considering the fund’s deficit of $53 billion, and its projected insolvency in 2025, according to the most recent actuarial report — financial troubles which are not shared equally by all such multi-employer plans but by a small percentage of the total which are “red zone” and “deep red zone” plans, which make up 17.1% and 6.6% of all such plans; in general, these “red zone” plans are ones in declining industries or industries in which the share of the workforce that’s unionized is declining, most notably mining and transportation.

So let’s back up:  what are multi-employer plans?  These are union-sponsored plans.  In principle, they’re actually a great concept:  because for certain occupations, a worker will be employed with a number of different employers over his or her lifetime, but stay with the same union, they enable that worker to accrue benefits in a stable way rather than worrying about vesting or about the backloading I discussed in a recent article.  Each employer negotiates a contribution rate with the union and then workers accrue retirement benefits based on those negotiated benefits, which may vary based on the specific contract the union has with a given employer, but still allow workers to reliably accrue benefits even while switching employers.

Essentially, these plans, called Taft-Hartley after the legislation which first formalized their structure in 1947, are the American version of a type of union-managed pension plan common in other countries.  For instance, in the Netherlands, there are plans called “Collective Defined Contribution” plans in which employers are able to avoid the risks inherent in offering traditional pensions, but workers still receive benefits which look very much like traditional pension benefits.  (See this profile at the U.S.-based Pension Rights Center.)  And large industries have their own “industry pension funds” to which employers contribute as part of their collective bargaining agreements.

As it happens, at pretty much exactly the same time as the Post was reporting on U.S. multiemployer plans, a trade publication on international pensions reported on these Dutch industry funds, with the headline “Dutch metal industry schemes inch closer to benefit cuts.”

But this is not what it seems, some sort of proof that these plans are troubled in some global fashion.

Instead, they offer a dramatic contrast to US plans.

These Dutch plans are required to cut benefits if they are deemed insufficiently funded for five years in a row.

The required minimum funding percentage?  104.3%.

The required interest rate?  1.5%.

The ratio at which the particular plans in question are actually funded?  101%.

Yes, you’re reading those numbers correctly.

And here’s the contrast with American multiemployer plans:

Unlike the mandatory overfunding in Dutch plans, until 2006, American plans were actually prohibited from building up overfunding as reserves against future market downturns or other unfavorable experience.

The full scope of the explanation for the multi-employer system’s woes is complex and deserving of multiple articles (though the impatient can read the report prepared by the Center for Retirement Research).  But here’s a brief explanation of one piece of the puzzle:

You are likely aware that the government requires that employers make contributions to the pension plans they sponsor.  Beginning with the Employees’ Retirement Income Security Act of 1974 (ERISA), Congress has passed various laws intended to protect pension plan participants (and the PBGC) from the consequences of companies being unable to pay out benefits.  But at the same time, because employers’ contributions to pension funds are tax-deductible, Congress has limited the degree to which companies can contribute to their pension funds, with an excise tax applied if a plan contributes more than legally permitted.

This is what that meant for multi-employer plans (the rules are somewhat different for single-employer plans):

From 1974 until 1994, based on the original ERISA provisions, employers could not make any additional contributions to a plan once it was deemed 100% funded, using a valuation interest rate based on the plan’s asset return assumption.  This was called the Full Funding Limitation.

From 1994 to 2006, based on a new law, the Retirement Protection Act, plans could  use an alternative measure and fund up to 90% of the “current liability,” if greater, an amount which might or might not be higher than the original funding maximum, because (among other differences) it used a long-term government bond rate instead of the plan’s funding rate.

Only beginning in 2006, with the Pension Protection Act, were plans finally permitted to fund up to 140% of the “current liability” funding level.

What’s more, for some plans, not only were plans prevented from building up a level of overfunding that would have protected them in downturns, but the nature of the union contracts that were the basis of these plans meant that the employers continued making contributions on behalf of their employees.  In order to avoid violating the maximum funding rules during boom times when assets were doing well, plans had to make themselves less-well funded.  Some plans gave one-time benefit boosts; others unwittingly created the conditions for a deeper hole in the future by increasing benefits overall.

Would those plans have built up such a reserve, had they had the option?  That’s another question.

But pension funding legislation essentially presumed that pension plans would always be around; even if individual plans might fail, the overall universe of pension plan sponsors would always be there able to absorb the losses of a reasonable percentage of companies.  The legislation itself did not foresee pension plans becoming a legacy cost without future generations contributing to offset periodic losses.

Which means that, to a real degree, however unpleasant it may be to contemplate a bailout, Congress owns this problem.

 

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.