Could the Fight Over Marriage Affect Welfare and Tax Reform?
Posted: June 15, 2012 Filed under: Columns, Income and Wealth, Race, Ethnicity, and Gender, Taxes and Budget 4 Comments »Could the debate over gay marriage force the federal government to correct the crazy ways our broken welfare and tax systems treat the institution? So far, the marriage discussion has focused on the rights of different couples to wed, but the issue stretches way beyond this rather limited focus. The government today spends hundreds of billions of dollars annually both fining and subsidizing marriage. Yet the funds are distributed unevenly and poorly, typically penalizing married couples during their childraising years and rewarding them when the children are grown. They also tend to penalize marriage more for those who are poorer. Those who can gain the most from this system are those who, legality aside, consider a marriage vow optional.
As social pressure for adults to marry has declined, government marriage penalties have risen and reinforced that decline. Though many forces are at play in both developments, these trends have made a huge equity issue loom ever larger. Congress gives primary status in our social welfare and tax systems to those who don’t care for marriage that much one way or the other. They can opt not to marry when there are penalties and opt into the system when there are bonuses. As one result, what used to be called a marriage penalty should now be relabeled the marriage vow penalty. Couples who choose to marry—for love, family, religion—despite the penalties they’ll incur are the ones who lose.
What makes the fight over gay marriage so interesting in this respect is that it is between two groups who hold marriage vows sacred but do not want the other group defining who is qualified to take them. Yet when it comes to the state, and how it bases support on marital and family status, neither group is the most advantaged in the current system; rather it is those who treat the marriage vow as secular or utilitarian, not sacred.
A little explanation. Marriage penalties today largely arise in spending and tax subsidy programs largely as a byproduct of historic efforts to support children. Outside of public education, these supports for children are largely means tested—that is, the benefits are removed as family income increases. And marriage tends to increase that income. (Historically penalties also arose for some joint returns filing income tax returns, although less so than in the past.)
Take a low-income mother who makes about $10,000 a year. If she simply marries or remains married to a moderate-income worker who makes about $25,000, their family income goes up and she can lose earned income credits, supplemental nutrition assistance (formerly called food stamps), Medicaid, and, under recent health reform, subsidies to buy health insurance. By not marrying, the couple’s combined income often can be $5,000 or $10,000 higher.
Many of those benefit programs are available to everyone raising children, including you and me, in months or years when our incomes fall low enough. If households further qualify for welfare or housing or other assistance that is not so universally available and sometimes requires coming off a waiting list, the penalties are even higher.
In some low-income communities, marriage is now the exception rather than the rule. In effect, not taking the marriage vow is the primary “tax shelter” available for low- and moderate-income individuals, and aggregate incomes in those communities would fall substantially should they start to marry in greater proportions. At the same time, a very large percentage of our children are now raised by one parent. Isabel Sawhill, a Senior Fellow at the Brookings Institution recently reminded us of the negative societal consequences of this trend.
On the flip side of the social welfare ledger, Social Security provides very large subsidies for spouses. Unlike private pensions, spousal and survivor benefits are paid for by all workers, including those who are ineligible because they were married for less than 10 years. And workers get these benefits for their spouses independently of raising children or paying a dime more than other workers. As a result, many workers, especially low-income women raising children, pay more taxes and raise more children than many Social Security spouses and survivors who do neither but still get higher benefits. Think of this marriage bonus as a penalty for singles, including abandoned parents.
In effect, the single parent gets penalized for marrying when raising children, then for not marrying when close to retirement.
The income tax rate schedules, in turn, now mainly provide marriage bonuses for middle, upper-middle, and some richer families, especially where one partner receives a disproportionate share of the earnings. When these tax and subsidy systems are considered together for the working population, penalties are more likely to apply to poorer households and bonuses to richer households.
These structures, unfairly and inefficiently designed in the first place, have become increasingly outdated relative to the conditions and needs of the modern society. Yet year after year, both political parties have indiscriminately created and added to these various marriage penalties and subsidies. Because so much money is at stake, they have been afraid so far to engage in any fundamental reform.
As wedding vows become more of an optional item for those who do not believe in the institution of marriage, one wonders how long this increasingly inequitable structure can stand.
The Pointless Debate Over the Social Security Trust Fund
Posted: March 24, 2011 Filed under: Aging, Columns, Income and Wealth, Taxes and Budget Leave a comment »Once again, policy-watchers and policymakers are fired up over whether Social Security needs to be fixed anytime soon. Some resort to pretty arcane debates over the trust fund to make their point. Won’t it take years to exhaust the trust fund? Are the bonds in the trust fund real? Is the trust fund a fiction? Was the trust fund raided? You know, it scarcely matters. All these debates are over a tiny sliver of the Social Security System—not over where the real action is.
What does matter is that Social Security expenses are expected to rise by about 50 percent—from about 4.3 to 6.3 percentage points of GDP—from 2008 to 2030, and taxes aren’t. As the baby boomers retire, higher expenses and less tax revenue mean that the national deficit will rise year after year.
Let’s take a quick look at the history of Social Security expenses and income. As the figure readily shows, Social Security has always been roughly a pay-as-you-go system. There was a tiny buildup of the trust funds at the beginning when people paid into the system but beneficiaries had not become eligible. In most years, the trust fund’s purpose was simply to cover potential cash flow problems if a recession or other major economic event hit. Then, in the mid-1980s, there was a slight buildup again as the large cohort of baby boomers swelled the ranks of the working population. But never have these trust funds held enough money to cover more than a tiny fraction of Social Security’s obligations.
Those who say we can wait 20 years to address Social Security’s solvency even though the system will soon be spending over 30 percent more than it collects in taxes have turned a blind eye to current and growing deficits. They seem to think that (1) we can count on income tax payers to raise more taxes, or we can cut other spending, or we can borrow more and pay interest to the trust funds as they move toward decline; or that (2) we can draw down assets (say, by borrowing more from China to pay off bonds in the Social Security trust fund) without consequences.
This is the mindset of a household that has saved $50,000 for retirement but has $300,000 in credit card debt and keeps charging more every year without paying down the balance. The parents in such a household plan on retiring for decades, earning less, and spending down their meager retirement savings in a few years, so they’re counting on their kids to bail them out. The parents keep insisting that the assets in their “fund” were real. The kids think the retirement fund is an accounting fiction. The parents remind the kids that they’d be in a worse pickle if it weren’t for the parents’ retirement fund. You can see how fruitless this conversation is when the operative fact is that the household is in a big financial hole that the decline in income and increase in expenses will only deepen.
How about raiding the trust fund? Those railing against this financial sin say that the country would have been better off without running a lot of non-Social Security debt even while it was accruing a tiny pot of money temporarily in its trust fund. That’s true, but then whose taxes were lower and other government benefits higher as a result? Often, the same people who cry foul that the (tiny) trust fund was raided. By that bizarre logic, the parents in our hypothetical household could claim that the kids should support them in retirement because the parents had raided their retirement fund by running up credit card debt.
So where did all the Social Security tax dollars go? Basically, to previous generations of retirees. Money in, money out. Did people get something out of their tax dollars? Yes, they did—support for their parents. Having already received that benefit, they can’t really lay claim to the same money twice. They can make a case that their kids should support them, just as they supported their parents. But it’s not that simple: newly retiring generations have fewer kids to support them and live many more years as retirees—21 years on average— than their parents did.
Those who would put off this debate may not have time on their side either: the Social Security problem will be fully ripe by about 2030—not 75 years from now. That’s well within the lifespan of people retiring today, not to mention most workers. If only politicians could see that far ahead!
Can Budget Offices Help Us Address Demographic Pressure?
Posted: September 20, 2010 Filed under: Aging, Columns, Income and Wealth, Taxes and Budget Leave a comment »As pressures mount on the nation’s long-term budget, the Congressional Budget Office now views the aging of the population as the main stressor and health care costs as a close second. Yet, CBO and the Office of Management and Budget (OMB) have traditionally offered only limited analysis and estimates on addressing these demographic concerns, often leaving them to the Social Security Administration, which focuses only on the Social Security piece of the budget puzzle.
Accordingly, when groups like the president’s budget commission meet, they get too few options on how government might adjust to the two distinct forces mistakenly put under a single “aging” banner: (1) longer lives and (2) fewer children (new workers) than previous generations. For better and often worse, reform groups frequently stack up reforms by their budget impact. But where there’s no estimate, there’s no political traction and, alas, no action.
If we want real budget reform, we need to get over this hurdle.
To start, we have to understand what puts it there in the first place. Put simply, we may soon see a fairly dramatic drop in the proportion of workers in the population and the taxes they pay, along with a commensurate increase in the number of people who depend on government for support. As baby boomers retire, this triple whammy on output, revenues, and spending intensifies.
The hit on government is most often discussed as a Social Security problem. That’s misleading. The real, far bigger problem is fewer people producing less output and generating far less income for themselves. In turn, these individuals start saving less, spending down their savings sooner. When it comes to government, they start paying less income tax and start relying more on programs like Supplemental Security Income (SSI) and Medicaid—close to half of the latter’s budget pays for long-term care. All these repercussions are in addition to any effect on Social Security taxes and benefits.
If policymakers could relieve some of this demographic pressure—particularly by avoiding some of the projected drop in employment rates among those in late middle age and older—then revenues rise without tax rate hikes, and those higher revenues support additional benefits at any tax rate. Such a win/win scenario should be easy for both Republicans and Democrats to embrace.
So what’s stopping them? For one, the ingrained habit of raising this issue strictly as a Social Security problem even though the Social Security Trust Fund balance doesn’t tell the whole story.
But there’s another, more complicated reason. Budget offices seldom project changes in national output and income from reforms. Politicians assert that their every proposal promotes growth by helping people, improving incentives, or reducing deficits. As Congress drafts and redrafts bills, estimators don’t have the ability—or the time—to rank every proposal by its impact on growth. Also, evaluating all legislation affecting the budget by very uncertain impacts on national income gives estimators too much power over issues that require a broader legislative debate.
In practice, there are exceptions. The Social Security actuaries do project some changes in long-term behavior when it affects Social Security. And unified budget projections (as opposed to cost projections of congressional bills) do incorporate some estimate of where the economy is headed.
Still, more generally, the budget impacts of a populace that works more and longer aren’t going to emerge from traditional budget and Social Security analyses. A recent CBO report on Social Security reform options that affect Trust Fund balances, for instance, didn’t touch on proposals to bump up the early retirement age or to backload benefits more to older ages. These proposals trade off fewer benefits in early retirement for more benefits in later retirement, but they generally don’t help the Social Security Trust Fund balances unless they increase work effort. Thus, once CBO excluded estimating behavioral shifts, as well as impacts on income tax revenues, it effectively excluded the proposals from the report. Such proposals, by the way, have another non-Trust Fund objective: improving protections for the frail by reorienting payments to when people are truly old.
As another example, a few years ago the CBO staff wisely decided to check out statements that budget problems were driven almost solely by health care cost growth. But even when the analysts provided credible measures of the relative budgetary effects of health cost growth, demographic shifts, and their interaction, they didn’t venture to estimate the impact on general revenues of any projected drop in share of the population employed.
Of course, estimating these impacts is no piece of cake. Budget offices lean toward conservative estimation on grounds that large behavioral shifts, however frequent or powerful, are hard to predict. That’s one reason budget offices have underestimated the cost of, say, Medicare as implemented or guarantees for Fannie Mae and Freddie Mac. But budget analysts often underestimate upside potentials of legislative actions as well.
My work with Brendan Cushing-Daniels, for instance, suggests that the signal government sets by fixing Social Security retirement ages significantly affects the decision of when to retire—independently of whether there are any real economic gains from retiring at those ages or later (see http://www.urban.org/publications/412201.html). But think about trying to estimate the ultimate effect of changing those signals amid demographic shifts unlike any the developed world has ever seen. (I’m emboldened a bit here because one of my past predictions is proving correct: Social Security underestimated the work efforts of older workers once earlier retirement was not so easily supported by baby boomers and women entering the workforce in droves.)
Since budgeteers have to live with some uncertainty, one key to successful reform is not to depend so much on estimates being right, but to set in place triggers that keep a system in balance as behavioral patterns shift. If reform increases work, for instance, then fewer other benefit cuts or tax increases would go into effect.
Such reform options won’t even be considered as long as the budget offices can’t improve ways to analyze and estimate proposals addressing these demographic shifts. But with looming deficits threatening to hamstring growth, opportunity, and the safety net itself, there’s no longer much time to wait.
How Social Security Can Costlessly Offset Declines in Private Pension Protection
Posted: June 30, 2010 Filed under: Columns, Economic Growth and Productivity, Income and Wealth, Race, Ethnicity, and Gender Leave a comment »Here’s a well-kept secret: the Social Security Administration today offers one of the best investment options anywhere. This great deal allows individuals to add to the Social Security annuities that they already qualify for at age 62. Since the classic pension plans that used to provide workers with private annuity payments until death are fast disappearing, this option gets more valuable by the day.
This add-on, like the basic Social Security annuity, is as insured as an investment can get, doesn’t fluctuate with the stock market or economic downturns, and rises in value along with inflation. The rate of return is decent too.
So where’s the rub? This option is buried in Social Security’s overlapping and confusing provisions. That’s why so few people who could really use this extra protection end up understanding, much less buying, it.
My suggested reform: daylight this hidden concoction of provisions and convert it into an open, understandable, and far more flexible option. Doing so would favor saving and reward work while better preparing elderly people for their very high likelihood of living to age 80 and beyond. And it needn’t cost anything.
How? As part of a broader Social Security reform of the retirement age. Instead of confusing notions of early retirement at 62 and normal retirement at 66, surrounded by formal “earnings tests” and “delayed retirement credits,” adopt a simpler annuity option. (Stay tuned for some definitions of terms, but keep in mind that the very fact that most people misunderstand how all these provisions interact proves the need for reform.)
Under my plan, the Social Security Administration would simply tell people their benefit at a specific retirement age (either an earliest age or a “normal” age). Then it would show a simple set of penalties or bonuses for withdrawing money or depositing it with Social Security. It could fit on a postcard.
Although not essential, I would sweeten the deal for people who not only delay benefits but also work longer and pay extra taxes. With this additional option, the penalties would be higher and the bonuses greater for workers than nonworkers. For instance, the employee portion of Social Security tax could be credited as buying a higher annuity. These extra bonuses could be financed by making the up-front benefit available at the earliest retirement age a bit lower for higher-income beneficiaries who stop working as soon as possible. This combined strategy backloads benefits more to later years when people are older and frailer, and it encourages work—an approach I have advocated, as does Jed Graham in his recent book, A Well-Tailored Safety Net.
The simple, easily understood bonuses would basically be annuities with higher payouts than standard Social Security benefits. They could be purchased whether a worker quit work or not. As people can today, many would purchase these fortified annuities by forgoing all their Social Security checks for a while. But, unlike today, they could also specify how much of their Social Security check they would forgo or send a separate check to Social Security.
How would the poor fare under this new approach? To protect them, let’s increase minimum benefits under Social Security so most lower-income households end up with higher lifetime Social Security benefits—regardless of what other reforms may be undertaken. Say, for example, we accept the additional option of lowering the up-front benefit for those who totally stop work as soon as possible in their 60s by 10 percent but bump up a minimum benefit to $900. Then someone who used to get more than $1,000 could get less in those early years but has a great option for beefing up the annuity in later years. Someone formerly getting $1,000 or less would not lose out at all, even in early years of retirement.
Helpful employers (or 401(k) account managers, financial planners, or banks) could help workers take advantage of this great annuity option. As one example, they could easily map out a range of schedules for drawing down private assets or taking partial Social Security checks for a couple of years in exchange for better old-age protection—higher annual, inflation-adjusted payments—in later years.
Setting up a similar payout trade off today is sometimes possible if you’re not easily discouraged, but you wouldn’t get much credit for additional taxes. In fact, you can even send back Social Security money received in the past to boost future benefits. (Who knew?)
Too bad most people believe that if they hit age 62 in 2010, the “earnings test” they face is a “tax” up to the age 66 that reduces benefits by 50 cents for every extra dollar they earn between $14,160 and $37,680. But that’s what they think, and they calculate this “tax,” add it to their other tax burdens, and quickly decide that they’re better off retiring. Yet, that’s not really right. In truth, if they forgo some benefits now, they have just bought an additional annuity, and their future annual Social Security benefits go up permanently by roughly $67 for every $1,000 in Social Security benefits they temporarily forgo for one year.
Today, those age 66 to 70 have different options than when they were younger than 66. This only adds to the confusion. They no longer must purchase the annuity (face the earnings test) if they work, but they are free to take a delayed retirement credit—this time, $80 in every future year of retirement for each $1,000 of Social Security benefit forgone for one year . But they often don’t realize that they don’t need to start benefits at retirement. By living off other assets awhile, even a month or more, they can convert some of their riskier assets into a higher Social Security annuity asset.
Just to further complicate things, Social Security administrators often tell people to “get your money while the getting is good” when, in fact, it’s risky to draw down benefits too soon when one member of a typical couple is likely to live for 25 or 30 years after age 62.
The type of reform I’m proposing could never be timelier. Had more older individuals taken advantage of this simplified option before the stock market crashed, they’d be a lot more secure today. Similarly, folks retiring today with many of their assets tied up in either risky or very low return investments could sleep better if they take this option.
Why wait? Let’s redesign and simplify the Social Security super-structure surrounding retirement ages, related earnings tests, and delayed retirement credits. Let’s help more retirees build up additional annuity protection in old age, make more transparent the advantages of delaying benefits, reward better those who work longer and pay more taxes, and create simpler and more flexible options for depositing different sums of money to purchase larger annuities in Social Security.
And Now Something for Our Most Recession-Weary Workers
Posted: April 1, 2010 Filed under: Aging, Columns, Income and Wealth, Job Market and Labor Force, Taxes and Budget Leave a comment »With economic recovery from the deep recession in view, a double-headed challenge remains. Reducing the deficit requires cutting back government spending, but we still need to promote employment and work, and that won’t come free. Given this administration’s progressive leanings, its attention to low- and moderate-income workers is surprisingly modest.
So how hard is it to spend less overall but more on lower-income workers? Presidents George H.W. Bush, Bill Clinton, and Ronald Reagan all expanded wage subsidies for some low-wage workers through the earned income tax credit (EITC) while and reforming taxes and significantly lowering the deficit.
Shifting policy toward low-income workers brings other benefits, too.
It increases employment more per dollar spent than many current subsidies that go to higher-income individuals and to those who do not work at all.
It helps reduce the long-term costs of added crime and depression borne of long spells of unemployment.
Done right, it can reduce the marriage penalties in many wage subsidies and welfare programs.
This administration and Congress have hoped that their biggest initiative—saving and subsidizing Wall Street and lowering borrowing costs—would trickle down benefits for everyone else. Maybe so, but more money for low-income workers can also trickle up. And it costs far less to subsidize a low-wage job than a high-wage job.
The biggest direct wage subsidy enacted so far has been the Making Work Pay tax credit. For most eligible working households, however, it’s just a $400 credit ($800 for married couples). It’s really not a jobs subsidy so much as an across-the-board tax cut to spur consumption.
The Obama administration’s latest ventures include such items as a $5,000 tax credit for small businesses for each new employee hired this year. Puny relative to the economy’s size, this incentive also gets mired in all sorts of definitional issues. What is a small business? (Your maid service? Your friendly billionaire’s 20th venture?) Who’s new? (Your kid? Someone already on your to-hire list?). Why discriminate against struggling businesses? And why not count the worker they would otherwise let go?
Wage subsidies for low- and moderate-income earners, by contrast, traditionally have fans on both the left and the right. More progressive than most other subsidies, they also offer an alternative to welfare and unemployment insurance, which can discourage work. Indeed, past EITC increases helped give low-income households a foothold that allowed President Clinton and the Republican Congress to reform and deemphasize welfare in 1996.
The Obama administration does support expanding EITC for families with three or more children a bit. And, arguably, its proposed extension of the child credit to include some very low earning households who generally don’t owe taxes subsidizes part-time or part-year work. Nonetheless, most moderate-income workers are excluded from these expansions, which send money mainly to one-parent households and only to households with children.
What’s the most sensible approach? For my money, it’s concentrating additional work support to the largest groups now left out: low-wage single workers and many married, two-earner, low-wage families. Especially key is an EITC-like subsidy for the low-wage worker based mainly on his or her earnings.
That way, we reach single people with no kids, including many of the males hardest hit during this recession and still ineligible for most government programs. And we reach many households who marry or contemplate marriage, only to realize that tying the knot means losing or jeopardizing thousands of dollars worth of EITC, Medicaid, welfare, and housing subsidies annually. Better to stay unmarried, even if living together.
And if we don’t take these steps? For starters, we ignore the fundamental policy lessons that leaving millions of productive people jobless has long-lasting costs. Unemployed people are more depressed, less entrepreneurial, more risk averse, more bored, more inclined toward substance abuse, and more likely (especially if they are young men) to turn to crime. Just as failing to create jobs for more Iraqis right after Saddam Hussein’s fall was a big foreign policy mistake because many turned to more violent pursuits, neglecting job creation now could be a colossal domestic policy mistake that plays out long after our economy is back on its feet.
Our national sense of fair play is at stake here too. The recession hurt low-income workers most, but they were largely left out of most stimulus programs.
Policy two-fers are often rare. But this policy shift is a five-fer that appeals to both liberal and conservative principles: reduced spending, greater progressivity, higher employment per dollar spent, reduced crime and depression, and fewer penalties for marriage. And with predictions of only slow employment growth ahead, the timing is right for confronting unemployment more strategically.
Lessons Unlearned? Who Pays for the Next Financial Collapse?
Posted: January 11, 2010 Filed under: Columns, Economic Growth and Productivity, Income and Wealth, Taxes and Budget Leave a comment »It’s an old story. Come a financial collapse, somebody’s got to pay to get the nation’s financial house back in order. While many on Wall Street made millions losing money for their companies, every young American is now saddled with tens of thousands of dollars of additional government debt. While buyers walked away from homes when they went underwater, others who had mustered large down payments simply absorbed their losses—in some cases, wiping out years of saving. While speculators who borrowed to buy stock or real estate shrugged off debt by declaring personal or corporate bankruptcy, those who invested in their 401(k)s helplessly watched their retirement savings erode.
Real loss and suffering run through the country’s financial straits, and so does a profound sense of unfairness. Once the downward spiral started, prudent investors, savers, and reasonable risk-takers got little direct government help, mainly because they were still standing. But their losses were no less real. First, the recession hit their pocketbooks and portfolios. Then many of them lost their jobs or watched friends and families lose theirs. Next, interest rates on their bank deposits fell, while fees on credit cards rose.
The crowning blow, of course, came when these model taxpayers got the honor of subsidizing the big risk-takers who got us into this mess. A Treasury Department watchdog says that taxpayers probably will never recoup tens to hundreds of billions of dollars transferred to failing companies. The Government Accountability Office released a study stating that the federal government is unlikely to recover much of the $81 billion invested in automobile companies and their related financing companies.
The apparent lesson from all of this? Irresponsibility pays. The ironic truth? Building a more vibrant economy requires fewer, not more, people playing by the “heads I win and tails you lose” rule. It means “de-leveraging” the economy: reducing the extent to which some people, through borrowing and similar efforts, can undertake unnecessarily risky gambles with others’ money. This isn’t easy, since at the same time we want more borrowing if it helps stimulate saving flowing to sound investment, we also want investors, financial managers, and financial institutions to exercise due prudence by having more of their own money at risk.
Why de-leverage? Recessions are less severe when more investors, risk-takers, and consumers can stand fast like dominos that don’t fall once a potential crisis gets under way. This helps explain why the burst of the stock bubble in 2000 didn?t lead to nearly so severe a recession: more of the losses were borne directly by those who first incurred the losses.
All this means that some unity exists behind seemingly disparate headlines about financial, corporate, and tax reform. In effect, those fights rage over who bears the costs of the next recession.
One well-publicized battle has been over opening up financial institutions’ books—especially where the government makes explicit or implicit guarantees that these companies won’t go under. While some officers at large financial institutions worry that regulation could stifle innovation and growth, others twist that legitimate fear into an excuse to resist reforms that would expose their freedom to gamble with our money and our guarantees.
Some of the same financial institutions that once ate our lunch also oppose stricter capital standards. But they are wrong. To protect against future collapses, we must demand that lenders keep greater reserves on hand relative to the size and riskiness of their portfolios. Similarly, we need greater ownership of banks by stockholders who would bear a larger share of the cost of failure.
Paul Krugman, among others (“Bubbles and the Banks,” http://www.nytimes.com/2010/01/08/opinion/08krugman.html) looks to reforming banks to help deter future financial collapses. But the implications of financial reform extend far beyond the banks.
Across the board, individual and corporate borrowers must also put more of their own skin in the game. This means higher down payments for homes and greater collateral and equity stakes for those who flip real estate or whole corporations for quick profit. If the government continues offering new homebuyers’ credits, it needs to ensure that they get added to minimum down payments, thus reducing risks of default later. And the auto industry must dump lending strategies that turn their financial arms’ IOUs into public obligations whenever the economy slows and throngs of car-buyers can’t pay off their loans.
Meanwhile, corporate and financial managers—just like the rest of us—need to experience risk’s perils, not just its rewards. While Kenneth Feinberg, Washington’s pay czar” for bailed-out corporations, may have trouble enforcing cuts in the compensation packages of top managers, he clearly set one right example by requiring that extravagant cash bonuses be converted into incentive pay in company stock that can’t be sold for years. Stockholders and mutual fund managers need to demand similar reform across the entire corporate sector.
Finally, the president and Congress—just barely getting their toes wet on this issue—need to look hard at how our tax code subsidizes borrowing so heavily and then do something about it. Any future tax reform clearly should remove the ingrained bias that favors corporate debt and discourages corporate equity.
Even then, major incentives remain for individuals and partnerships to borrow heavily—deducting interest payments while avoiding tax on gains in the value of their assets. Gaming like this leads to far too many financial transactions that make little or no real economic sense, while once again shackling everyone else with additional risks and tax burdens.
Now that a recovery is under way, some lobbyists probably hope public pressure for financial, corporate, and tax reform will subside or that the confusing technical details behind reform will weaken Congress’s will to act. But, in many ways, reform is needed more than ever during a recovery, when growth requires getting savings into the hands of sound investors who can spur more growth. Without reform, there’s little to prevent losses from the next recession being laid, once again, at the feet of the prudent investors, businesses, and consumers.
When Health Reform Violates Standards of Equal Justice
Posted: November 10, 2009 Filed under: Columns, Health and Health Policy, Income and Wealth Leave a comment »Many families with moderate earnings pay 20 percent or more of their income for health insurance. By Congressional Budget Office estimates, a family making $54,000 a year can expect a moderate-cost insurance policy to cost about $14,700 in 2016. True, employers often contribute a big chunk of the total. But most economists believe that the family really pays by accepting lower cash wages.
Of course, families in this income bracket pay far more than $14,700 for health care. They get hit by uninsured expenses or covered expenses they have to share-perhaps an average of $5,100 with the $14,700 policy just noted. They also pay fairly large amounts of tax to cover others, such as retirees. In fact, Americans spend about 24 percent of monetary income (wages and interest and the like) on health care. Using a more familiar metric, the total comes to 16 percent of the gross domestic product (GDP), though GDP includes many items that aren’t typically reported as income (such as the rent you save by owning a home).
Congressional health reformers believe that most households shouldn’t pay that much. They propose something closer to tithing. That way, no more than a tenth or an eighth of household income would go to purchase health insurance. This has a nice political ring to it, but here’s the reality: the 24 percent burden is rising and can’t drop without lower cost growth. Congress can only change who pays or temporarily borrow more from China and other creditors.
The problem gets serious when these arithmetical contradictions get woven into legislation. And we’re already on a slippery slope there.
Take the Senate Finance Committee efforts at health reform that have garnered so much attention. Under one version, households with $54,000 of income would get a subsidy of almost $10,000 toward the $14,700 health insurance policy that Congress has decided that they can’t afford. The first catch 22 is that since these subsidies are so expensive, Congress plans to exclude from getting the subsidy those households that get health insurance in lieu of higher cash wages from their employer.
This is unfair. It violates the fundamental principle of equal justice. People in similar circumstances should be treated similarly under the law.
It also contorts and distorts the labor market. If this new subsidy were the only incentive or disincentive around, employers would drop health insurance so they could boost cash wages and allow employees to bag the subsidies. But it’s not. To prevent this massive migration to the new government-subsidized insurance, Congress also plans to penalize employers who don’t provide health insurance and to maintain a fairly inefficient incentive for employer-provided insurance.
The next problem? An employer mandate to pay for employee coverage can work for some employers like a minimum wage increase. Congress doesn’t really like that either, so it limits the mandate—for instance, by capping the “tax” on employers who don’t provide insurance—in one case, to a maximum of $400 per employee. The trouble is a small penalty might not stop many employers from dropping health coverage.
Meanwhile, small employers object even to that much tax. So Congress plans to exempt employers with less than 50 employees and provide yet another layer of subsidy to some of them.
Here’s yet another complication. Congress is holding fast to today’s regressive tax subsidy for employer-provided health insurance, which can be worth $2,000 to $6,000 per family. This benefit, an exclusion from tax of compensation received as health insurance, would be valuable enough to some employers—especially those with highly paid employees who aren’t eligible for the new individual subsidies—to keep them from dropping insurance coverage. It is also probably one reason why the Congressional Budget Office estimated that a Senate Finance Committee version of health reform would cause a drop of only about 3 million in employer-provided coverage over the next 10 years. John Shields and Randy Haught of the Lewin Group, in a study for the Peter G. Peterson Foundation, estimated that when fully implemented, this same Senate Finance bill would cause one set of employers to drop insurance coverage for 19 million people but another set to add coverage for 12 million.
Considering the new and old subsidies together gets complicated. Still, many low- and middle-income earners paying through an employer by accepting lower cash wages would lose out big time. They would get thousands of dollars less in subsidy than families making an equivalent amount of total compensation in cash and then getting insurance from the type of insurance exchange that the reform bills would establish.
Here is the bottom line on how employers and employees together can maximize what they get from government. Many employers who don’t provide insurance today will probably just choose to pay the tax ($400-per-employee under one scenario in the Senate Finance bill) for not carrying health insurance. Some small employers might be enticed back into the market by yet another subsidy they would get. Large employers will react by outsourcing more low- to middle-wage jobs and switch more workers from full-time to part-time employment. Such incentives toward a two-tiered labor market, partly segregated by income, aren’t new, but they will expand under this type of reform.
A big question for the long run is how small employers who become tomorrow’s big employers will behave. In many ways, small and new employers led the movement away from classic pension plans (rather than 401(k) plans) by not offering them in the first place. As these small firms became bigger ones (think information technology and discount retailers), they never retreated to the traditional pension world. Might they do the same with health insurance and never offer an employer plan?
Of course, nothing here is easy to predict—not least because further reform is inevitable given Congress’s unwillingness to seriously tackle the unsustainable growth
Still, there are solutions to this problem within a problem within a problem.
The most important step is to accept the standard of equal justice. Move toward a system where everyone with the same income is eligible for the same size subsidy. This means integrating new and old subsidies, rather than forcing millions of workers and employers into shifting jobs and sources of insurance coverage to game a multilayered and distorted system of subsidies.
Done the right way, I believe that Congress could get more equal justice, higher levels of basic insurance coverage for Americans, and lower costs all in the same package.
The Psychology of Health Reform
Posted: May 26, 2009 Filed under: Columns, Health and Health Policy, Income and Wealth Leave a comment »If we are to achieve health reform—that is, affordable, sustainable, and constantly improving health care available to all—we need to start looking as much to the psychology of the issue as to the economics and politics.
Psychology tells us that we almost always want to take actions that, at least for the moment, make us feel good. Yet, cost-conscious health reform must curb unsustainable growth in costs and is therefore guaranteed to take something from someone. If we slow the rate of growth of health costs, arithmetic demands that we either deny individuals some services or, more likely, pay providers and intermediaries less money. In the latter case, talent might move to other industries, so we still get less care. Very few doctors, hospitals, politicians, voters, patients, insurers or even health policy reformers want to play that game.
Why not? We all want to make the world a better place, and it’s a lot easier to feel good about increasing benefits than reducing them, almost regardless of costs. You’re a doctor. Do you want to go home to your spouse and brag, “Honey, let me tell you about the care I denied today”? You’re the head of Health and Human Services. Do you want to be known for denying people access to some new expensive drug that they believe will make them better? You’re a politician. How long will you last in politics if you vote to pay providers less or deny benefits to individuals?
None of this should surprise us. We don’t need formal training in psychology to know that positive trumps negative. We find it more fun to give our kids gifts than to deny them something they want. We’re more tempted to indulge ourselves than abstain. And we’re tempted to let health costs rise automatically under existing programs and policies rise rather than rein them in and spend the saving on other needs, whether investment in our children or paying down our national debt.
Analysts and would-be reformers often blame the politicians for their failure to act, but we are just as trapped by this psychological barrier. We want more health care for children and better quality. We want nurses to be treated better and for doctors to have more time to treat us like humans. We want everyone to have the best health care possible.
Look at most health studies sponsored by funders like foundations. Those studies seldom address cost head-on, and when the cost factor is considered, it is typically as a footnote to a discussion about how to improve access or care or insurance coverage. At least until recently, a typical funder wanted to hear about how its grants directly helped individuals or persuaded government to spend more on families, not how it helped lower the rate of cost growth (even though lower costs make insurance more affordable).
The complication is not that we can’t provide people more and better health care over time. It’s that the psychological wish to do more than we are doing runs headlong into an existing promise that we will do more than we can do. Relative to infinite care a zero cost, good care at reasonable cost doesn’t always look so good.
A first line of defense against psychological angst is to dodge it by pretending that we can have it both ways. We look for changes that reduce costs while increasing quality and access. We want costs to go down with no loss of benefits or benefits increase at no additional cost.
If you work in government, your member of Congress or cabinet secretary especially wants you to provide information on changes so efficient that everyone wins, such as spotting and eliminating needless health care.
That’s part of the appeal of the Obama administration’s current proposal to invest in comparative cost effectiveness and electronic health records. Initially we spend more, with the actual denial of payments held in abeyance for further reformers. Don’t misunderstand me: considered appropriately, such investments likely will improve the efficiency of the health care sector. In their hyped-up versions, however, these steps are oversold, the political equivalent of the perennial chimera of balancing the budget through future unspecified attacks on waste, fraud, and abuse.
There is a long-range way to adapt health policy-making to our psychological needs, but it still entails a short-run psychological cost. It requires a one-time cutting of the Gordian knot, not simply trying to convert it from a double to a single knot. Tough steps to curb automatic growth in health care spending entail such elements as converting to vouchers, strong regulation, caps on payments, caps on subsidies, single payments to integrated groups for all of an individual’s coverage and higher individual payments out of pocket. I’m not advocating all of these here, some have serious drawbacks. But each does attempt to redefine the base from which we measure progress.
A good health policy process must fulfill our psychological need to build more than tear down. As long as new legislation works off a base of unsustainable growth, we will continually be disappointed in the outcome.
