Jane the Actuary General Interest

What Medicare for All actually looks like

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

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

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

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

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

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

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

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

Here’s the scoop:

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

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

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

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

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

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

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

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

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

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

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

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

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

Jane the Actuary General Interest

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

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

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

so maybe I’m actually signaling some optimism here.

Here’s the scoop:

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

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

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

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

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

Here was his answer:

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

Second, Ald. Ed Burke will be gone.

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

Jane the Actuary Retirement

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

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

 

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

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

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

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

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

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

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

 

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

Jane the Actuary Retirement

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

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

 

Is retirement back on the agenda?

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

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

But here’s the challenge.

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

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

Jane the Actuary General Interest

Paul Vallas and roads not taken


Paul Vallas is, for readers outside Chicagoland, one of the 14 candidates for mayor in the election that’s coming up in a couple weeks.

I don’t really have much of a sense of the outcome of that election, what with frontrunner Cook County Board president Toni Preckwinkle tainted by connections to Burke, and unwilling to pledge the abolition of aldermanic privilege as the others have, but nonetheless advantaged by name recognition, deep union support and, along with BIll Daley, a substantial pot of money for TV commercials. (See the most recent Chicago Tribune article.) I would like to believe that Chicagoans would be dissuaded by her Machine connections, but I don’t know that it matters enough to enough people, especially when the large number of candidates, and of viable candidates with significant resumes, means that the final results can be a bit unpredictable.

Separately, in my last article at Forbes, I wrote that Paul Vallas was the candidate who appeared to be taking the pension funding crisis most seriously (though, to be sure, I also give Bill Daley a ton of credit for being willing to put pension reform on the table). Do I have a comprehensive understanding of how he compares to the others on other issues important to city residents, such as education, crime/police conduct, economy development in struggling neighborhoods, etc.? No, not really — and in particular I can’t claim to really be able to put myself in the shoes of a Chicagoan.

But if I were a Chicagoan, Vallas would have my vote. Partly that’s a matter of looking at his resume, for example, as detailed at Wikipedia. He was not a traditional politician, climbing the ranks, building clout, doing favors for others and getting favors in return, but instead built a track record as CEO of Chicago Public Schools, then moving on to Philadelphia and the Recovery School District of Louisiana. I don’t know if he would use the phrase, “facts don’t care about your feelings,” but you don’t build that resume without having a solid understanding of, well, facts. Besides which, of course, his website is chock-a-block full of policy proposals that go well beyond a few bullet points and assertions of care and concern and professions of social justice and hometown pride.

But here’s something from — well, long enough ago that it predates not only my blog, but blogging in general. Seems to me that at the time we still had a dial-up internet connection — not that I had much time for the internet, anyway, with a toddler already and a second baby on the way. Yup, I’m talking about the 2002 gubernatorial election, when Paul Vallas fell short by a mere two percentage points in the three-way Democratic primary, which Rod Blagojevich won and where Roland Burris had a strong third-place showing. (Again, see Wikipedia for a recap.)

On the Republican side, Attorney General Jim Ryan swamped his opponents in the primary, but Blago won the general election by 7 percentage points. Did Ryan really stand a chance? Checking Wikipedia again to aid my memory, the bribery indictment occurred after the election, but it seems to me that it was already widely understood that outgoing governor George Ryan was a crook, and let’s face it, it’s a tough sell to ask the people of Illinois to elect a man from the same party, with the same last name, as the outgoing crook-governor. (How many voters thought he was that man? How many intellectually knew otherwise but still couldn’t get past it? Should party leaders have taken Jim Ryan aside and said, “look, man, you either have to change your name or accept that as a stroke of bad luck, you simply can’t run because you won’t make it in the general election?” Maybe it only became more apparent after the primary how crooked George Ryan was.)

So instead Illinois got its next crook-governor.

Why did Democratic voters choose Blago over Vallas? (Remember it was 36.5% vs. 34.5%, not exactly overwhelming margins.) Again, my memory fails me. A Google link tells me that one factor, at least, was that Vallas simply failed to campaign downstate to nearly the same degree as Blago, which makes sense, or at any rate, I can picture Blago excelling at the retail politics aspect of the whole thing.

And, of course, we know what followed. A pension obligation bond. Blago playing Savior of the Elderly by demanding that Chicagoland mass transit give all over-65s not just reduced-priced but free rides as a precondition for a dedicated sales tax. Blago expanding state-paid kids’ health insurance to middle-class families, without regard for the state budget and, in fact, using all manner of gimmicks to nominally balance the budget when in fact he brought the state further into debt without even an excuse of a poor economy. Accusations of pay-to-play that were never quite proven. And then, of course, the “f***ing golden” attempted sale of a Senate seat that made Illinois the laughingstock of the nation.

All of which means that, yes, near as I can tell, Paul Vallas is the best candidate in the election. But here’s where I also admit to some sentimentality: for him to win the election would be some bit of redemption for the path the state took instead in 2002.

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

Jane the Actuary Retirement

Forbes post, “No, Pension Obligation Bonds Aren’t A Form Of ‘Refinancing'”

Originally published at Forbes.com on February 1, 2019.

 

That’s the claim, for instance, made by outgoing mayor Rahm Emanuel about the benefits of creating Pension Obligation Bonds, in his December City Council speech, as reported at the Sun-Times:

“We can refinance a portion of that debt at lower rates, locking in savings of as much as 2.5 percent over 40 years. Now, that works out to between $6 billion and $7 billion in savings for Chicago taxpayers,” Emanuel said.

Chicago Alderman Patrick O’Connor, the new Finance Committee chair, repeated that phrasing more recently in an interview promoting the need to prepare for a future bond offering:

“So, in order to avail yourself of the opportunity to refinance, you would need to have this thing in place to do it when the new council comes in.”

Are you scratching your head wondering what this means?  Yes, it’s time for more actuary-splaining, but I really think it’s important to understand what’s going on here — and that’s true for decisionmakers and for voters alike.  (Not sure what I’m talking about?  Get up to speed with my prior article on the topic.)

Certainly, promoters of Pension Obligation Bonds are hoping to capitalize on the perception of “refinancing” as an ordinary household money-saving tool.  Consumers with credit card debt can reduce the amount they spend on interest by taking out a home equity loan with a lower interest rate, then paying off their debt.  Likewise, if your mortgage has an 8% interest rate and you have the chance for a 4% interest rate, you can reduce your spending on interest by paying off the 8% mortgage with the proceeds from a new 4% mortgage.

The city owes pension liabilities.  Are they going to pay these off with money borrowed at a lower interest rate?

In principle, they could indeed “pay off” the benefits, if they purchased annuities for retirees, or if they offered lump sum buyouts to plan participants.  And corporations are doing this increasingly often, have determined that they can save money this way, or, for the same cost, reduce their risk.  They do the math and compare their pension funding projections, which includes the direct plan liabilities as well as administration expenses and the premiums they pay to the PBGC (the government agency that protects pensions), to the money they’d spend to buy annuities or on participant buy-outs, and if the latter is a better deal they implement a program.  (Incidentally, when employers offer buyouts, they have to offer an actuarially-fair lump sum, and are not permitted to make lowball offers.)   This is as close as a plan sponsor can come to “refinancing” because they truly “pay off” their pension debt, whether they use cash-on-hand or even issue bonds to do so.

But the city can’t do that.  Here’s why: public pensions are, with few exceptions, valued using the expected return on assets as their valuation interest rate, rather than, as with corporate pensions, a bond rate.  As long as they invest in risky/return-seeking assets, this means that, for the same set of obligations in terms of future benefit payments owed, a city’s reported liability will be lower than that of a private-sector company.  When a city does the same math, the cost of buying annuities is considerably higher than the (artificially) lower liability valuation.  And workers would be foolish to accept a lump sum at lower value.

So why does POB supporters use the label “refinancing”?

If you squint hard, it makes sense.  What’s going on is this:  they are reducing the annual expense reported in their financial statements.  Here’s my best attempt at explaining this for non-experts.

Let’s start with the basic financial data for the largest Chicago plan, the Municipal Employees’ Annuity and Benefit Fund, that I’ve been digging into in previous articles, based, again, on the latest actuarial report as well as my own calculations.

MEABF Core financial reporting data

 own work

The key balance sheet figures are the liability, assets, and the funded status.  But the city also discloses its cost for the year, using the Service Cost — the employer’s share of new benefit accrual, after subtracting out employee contributions — and the net interest cost, that is, one year’s interest accrual on the unfunded amount.  (If you read my prior actuary-splainer, you’ll recall that this is a key driver in the increasing unfunded amount.)  In addition, there are additions or subtractions based on gains and losses in investments, plan experience, changes in assumptions, benefit increases, but that doesn’t really factor in to this question.

But what happens if the city issues a $10 billion bond and directs the proceeds into the pension fund?  For simplicity, let’s assume that the total amount goes into this one pension plan.  We’ll assume the city has to pay interest of 5% on this bond.  What happens?

Here are those same numbers, with a pension bond added in:

POB effect

 own work

Here’s where the cost savings comes in:  because assets are boosted and the funded status drops, the magnitude of the interest cost (at 7%) drops by a relatively greater degree than the additional interest from the pension bond at 5%.  The city records on its books for the year an amount that’s $200 million less than it otherwise would have been.  It looks like a huge win, before even taking into account the hoped-for asset return in excess of the interest paid out to bondholders.

But this is all contingent on using a liability valuation interest rate that’s higher than the bond rate the city hopes to pay.

Here’s the same calculation repeated using a 4% interest rate, which is closer to what a private-sector business would be using to disclose its pension liabilities.  (This calculation was based on sensitivities disclosed in the actuarial valuation and a pension math-specific extrapolation.)

Municipal Employees at 4%

 own work

At this rate, liabilities are 50% higher than what’s in the city’s financial reporting, and the funded status drops from 28% to 19%.  The Service Cost increases, too (and the amount of increase is actually greater than shown in this estimate, due to its approximations).  But the interest cost actually drops, because it is based on the interest rate being used — though in this case, the lower amount is not enough to offset the higher Service Cost.

Finally, one more table:  what would happen to the Pension Obligation Bond savings if the city used a more conservative valuation rate, similar to private-sector accounting?

uncaptioned

The answer, of course, is that it would vanish.

What does all this mean?

To back up for a minute:  the city’s debt for this plan does not consist of $16 billion in liability at 7% or $24 billion at 4%, or $12 billion or $19 billion after subtracting out assets.

That’s just a set of numbers used to report those liabilities in a standardized, transparent way.

The real liability of this plan is the 975 million anticipated to be paid out in benefit payments in 2019, the billion in 2020, the 1.1 billion in 2021 and so on.

Whether a 4% rate or a 7% rate or another rate is chosen to determine the present value of those benefits for financial reporting purposes will not change the future benefit payments.  And issuing a bond and reducing the expense reported, in total, because of a lower interest rate, does not impact the ultimate cost of those benefit payments.

The liabilities are still out there.  The bonds have to be paid back.  The taxpayers gain only if the actual return on the money invested with those bonds exceeds the interest rate the city pays to bondholders.  If the expected return is overstated, then the city will record asset losses in future years.  On the other hand, if the city reported at the lower 4% rate, and actually saw returns on its investments greater than that rate, the city would be reporting gains instead.

So the next time a politician says that Pension Obligation Bonds are a way to refinance to save money, be very wary of their claims.

 

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

Fun fact: the rest of the world does not have “Medicare for All”

“Medicare for All” is in the news again, with Kamala Harris’s statement yesterday that she backs the proposal, even to the point of eliminating private insurance altogether. And this topic always brings up comments along the lines of, “in every other civilized countries, the government provides healthcare for everyone.” So, because in my old job I worked not only with pensions but also with employee benefits, comparatively across countries, I wanted to dig out an article I wrote at Patheos a couple years ago which I think is still relevant. I called it “Your handy-dandy guide to health care outside the United States.”

The original article referenced a 2012 OECD table on public vs. private healthcare spending. Here’s that table, updated to 2015, from the OECD publication, “Health at a Glance“:

OECD Health at a Glance

Now, to be honest, I’m not certain what’s going on with the differention between “government schemes” and “compulsory health insurance” for the United States, this is the first year that they’ve split these categories out this way, and the U.S.-specific report doesn’t explain further. It is not, however, the case that the 23% refers to exchange-purchased or Obamacare plans, because in the old 2012 chart, pre-Obamacare, the numbers were split in much the same way. My guess is that this may be treating Medicare as its own independent program.

There are also countries showing very small percentages of “voluntary health insurance” where this doesn’t seem right relative to my understanding and I’m wondering if some of this is classified as “out of pocket.”

But here are some other noteworthy countries (text cribbed from my prior article and updated):

The U.K.

Yeah, 20% non-public spending isn’t huge, but it’s not nothing:  middle-management and higher-level employees are provided private health insurance by their employers.  Not for them the NHS horror stories!  They have access to private clinics and treatments, and “upgraded” spots at public hospitals, whenever NHS is insufficient, has too long a wait list, doesn’t cover a treatment, or is just generally icky.

Switzerland

They’re actually the most Obamacare-ish country:  a standardized basic level of private insurance is mandatory, with subsidies for the poor.  No practice of employer provision — you just buy it on your own.  The catch?  They’re the second-highest-spending country, and are struggling with growing costs.

Germany

Health insurance is managed through regional quasi-public entities, which set (very low) reimbursement rates.  How low?  When we lived there, there was a protest march by doctors upset at their low pay.  But hey — medical school was free.  It’s paid for by a payroll tax.  But if you make over a given income level (I think about 50K-ish), you have the option to opt out of the payroll tax and buy your own insurance, with the stipulation that you’re then obliged to continue buying private insurance, rather than switching back and forth.  In addition to potentially cheaper coverage, private insurance gives you such benefits as top-tier doctors and the ability to select a private, rather than three-bed room at the hospital.

France

Employer-provided health insurance is customary (and I think not just for management but in general); it picks up the not-trivial copays.  In addition, the reimbursement levels provided by the national health insurance are low enough that providers often have a surcharge which the private insurance covers.  This system of surcharges at the “good doctors” and private clinics, paid for by private health insurance, is, it seems to me, fairly common, say, in Italy, as well.

Canada

Historically, insurance was not permitted to pay for any service that the national healthcare system covered, so that you couldn’t use it to get coverage at a private provider to skip waiting lists.  It seems to me that I read recently that this has changed.  In any case, what private health insurance does do is cover everything that the national healthcare system doesn’t:  prescription drugs primarily, and upgrades from ward to semi-private or private rooms, and various sorts of therapists and other providers that aren’t covered otherwise.  In addition, private insurance covers out-of-country treatment, and policies specify either all out-of-country treatment or only in cases of emergencies.

Australia

Again, single payer, but with a policy of encouraging upper-income folk to buy private insurance — it doesn’t allow you to opt out of payroll tax contributions, but does give you a modest rebate.

Korea

Yeah, they’ve got a large percentage of private spending; it seems to me that this is because the State healthcare provision has a lot of holes, copays, etc., which private insurance, routinely a part of employee benefits, covers.

Mexico

Strictly speaking, there’s comprehensive medical coverage.  But in practice, well, it’s like being obliged to use Cook County hospital for everything.  Again, salaried employees expect to have insurance provided by their employer, to get them access to private, first-world hospitals.  Same with Brazil, which is a huge health insurance market for white collar employees,  and I think even blue collar employees at large employers, in order to escape the poor quality and wait times of the “free” national healthcare system.

One more, also not on the table — Singapore

Singapore’s system gets frequent mention by supporters of “market-based” systems, because one component is a “savings account” similar to the HSA savings accounts that accompany high-deductible plans in the U.S.  See this older post, for instance.  The reality is that “universal” coverage has a lot of copays and employer-provided insurance fills these gaps.

So there you have it:  a world tour of health insurance.

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

Jane the Actuary Personal

An update for readers

from https://pixabay.com/en/writing-postcard-letter-pen-hands-923404/; public domain

Here’s the scoop: this is a site which I primarily use to invite comments on the retirement-focused articles I write at Forbes. (My intentions to add in more reference material to increase the usefulness of the site as a source of reference material for interested readers are still largely sitting on the to-do list.)

Separately, I write as Jane the Actuary at Patheos.com; it’s a mix of Catholic-specific content, more political blogging, some personal items here and there, a few recipes.

I am playing around a bit with this, though, and will be experimenting with using this website as a means of writing more policy-specific articles that aren’t suitable for Forbes (because they’re not retirement-related) and aren’t really suitable for Patheos, either (because they’re too nerdy).

Venting (and opining, generally speaking), however, will still be reserved for the Patheos blog.

In any event, your comments and suggestions are welcome.