Why are young adults absent from state exchanges?

Differences between state-exchange and employer-sponsored health insurance

The affordable care act created state health exchanges a market place where many working-age people can obtain health insurance.  This post describes differences between the size of the state-exchange market and the age composition of the state-exchange markets compared to private employment-based insurance.

Questions:  How many people obtain health insurance through state exchanges?   How many people obtain health insurance through their employer?

How does the age composition of the people insured in state exchanges differ from the age composition of people who obtain health insurance through their employer?

What are the policy implications of these differences between the two markets?

Short Answer:  The post presents and discusses three findings.

The first finding is that the employer sponsored health insurance market is much larger than the newly formed state exchanges.   As a consequence of this size differential it is quite easy for major insurers to leave the state exchanges and concentrate on the employer-sponsored sector of the industry if they perceive the state exchange sector as unprofitable.

The second finding presented here indicates that the share of people insured on state exchanges, that are 26 or under, is lower than the share of people in employers-sponsored plans that are 26 or younger.  The higher percent of young adults in the employment-based market is partially a consequence of a provision of the ACA that allows young adults to remain on their parent’s health plan.

Third, the percent of people with private insurance who obtain their health insurance from an exchange plan is larger for the 55 to 65 year old age group than any other age group.

Data:   The data used in this study was obtained from the PERSONX file for 2015 from the National Health Interview Survey.   I look at the relationship between two variables on the interviews.   The first question involves whether a person with private health insurance obtained the private health plan from a state exchange or some other source, presumably the person’s employer.   This question was only asked of people with private insurance.

Since I was interested in people with households where the head of household was working age I only considered people less than or equal to age 65.   (Most people over age 65 get their primary insurance through Medicare.   Some of these people may also have private Medigap plans but this market is not the focus of the ACA issues studied here.)

The second variable is age category.   I use the age variable to create age categories  — less than or equal to age 21, 21<age<=26, 26<age<=35, 35<age<=45, 45<age<=55, and 55<age<=65.

There are 3,392 people in the sample obtaining private insurance from state exchanges and 57,579 people in the sample obtaining private health insurance from some other venue, primarily their employer.

A weighting variable WTFA was used to translate these sample numbers to estimates of age category by insurance type for the entire country.

The analysis in this post involves evaluating the relationships between these age categories and the two types of insurance.

Results:   The age patterns of people with private health insurance obtained on state exchanges and private health insurance obtained from some other source are presented below.


Number of People with Private Insurance from State Exchanges and From Other Source (Primarily Employer)
age_cat Exchange Plan Not Exchange Plan Total
<=21 1,999,788 48,204,273 50,204,061
21<age<=26 697,760 13,419,295 14,117,055
26<age<=35 1,544,447 23,290,719 24,835,166
35<age<=45 1,665,307 26,388,265 28,053,572
45<age<=55 2,090,070 28,775,752 30,865,822
55<age<=65 2,220,015 25,602,310 27,822,325
Total 10,217,387 165,680,614 175,898,001
Percent of people with private insurance by market source
age_cat Exchange Plan Not Exchange Plan Total
<=21 4.0% 96.0% 100.0%
21<age<=26 4.9% 95.1% 100.0%
26<age<=35 6.2% 93.8% 100.0%
35<age<=45 5.9% 94.1% 100.0%
45<age<=55 6.8% 93.2% 100.0%
55<age<=65 8.0% 92.0% 100.0%
Total 5.8% 94.2% 100.0%
Age Composition of Health Insurance Markets
age_cat Exchange Plan Not Exchange Plan Both Markets
<=21 19.6% 29.1% 28.5%
21<age<=26 6.8% 8.1% 8.0%
26<age<=35 15.1% 14.1% 14.1%
35<age<=45 16.3% 15.9% 15.9%
45<age<=55 20.5% 17.4% 17.5%
55<age<=65 21.7% 15.5% 15.8%
Total 100.0% 100.0% 100.0%




 The estimates reveal that a little over 10.2 million people get private health insurance from state exchanges compared to 165.7 million from other sources.   This is a 16.2 to 1 ratio.

 Comment on Observation:  In many states, the state exchange share of private policies sold is even smaller than indicated by the national average.   In these states most major insurance firms are exiting the state exchange markets.

 The share of state exchange market less than or equal to 21 years old is 19.6% much less than the 29.1% share for insured that are not sold on state exchanges.  The share of state exchange participants who are young adults (age 21 to 26) is 6.8%.   By contrast, this share is 8.1% for people who get their private insurance through their employer.

Comment on observation:  The higher proportion of younger people (minors and young adults) covered through employment-based insurance is not a consequence of choice by the covered person because most of these young people get their coverage based on their parent’s plan.    One of the reasons that there are so many young adults in the employment-based market is that the ACA allows young adults to stay on their parent’s plan until age 26..  This provision has helped sharply reduce the uninsured rate among young adults but it has had the side effect of increasing the age composition and the risk of the state-exchange market.

 The share of the exchange plan sector that is 55 to 65 years of age is 21.7%.   The share for employment-based insurance sector is 15.5%

Comment on observation:  The membership p of the state exchange market is a lot older than the membership of the employment-based market.   Premiums in the state exchange market are age rated.   A comparison of the age-rate premiums to age-associated health expenditures will have a large impact on the viability of the state exchanger markets.

Final Thoughts:  The differences in the age composition of the two markets suggests that many people will get a better insurance buy in employment based markets than state exchange markets.   People who get a job with employment based insurance will drop their exchange plan for the new plan from their employer.   (In fact, they have to drops their state exchange insurance because insurance on state exchanges is only available to people that do not have offers of qualified employment-based insurance.)

The rules defining eligibility for state exchanges insure that these markets will be the poor cousins of employment-based insurance.  The withdrawal of major insurers from state exchanges is the latest evidence that state exchanges are under great financial stress.  This financial stress cannot be alleviated without changes in eligibility rules and financial incentives that lead to the expansion of state exchanges.




President Trump’s Approach to Student Debt

President Trump’s Approach to Student Debt

The Trump Administration is pushing forward a broad range of policies that will impose substantial financial costs on student borrowers.   The policy levers include changes to the tax code, changes in rules governing student loan programs, and reduced consumer protections for borrowers.

Proposed Policy Change and Actions

The Elimination of Subsidized Student Loans

Currently, subsidized student loans are available for low-income students. The government pays all interest on subsidized loans while a student is still enrolled.  The Trump Administration’s budget proposes the elimination of all subsidized student loans.  As a result, low-income students will accrue interest even when in school.

Comment on Proposal to Eliminate Subsidized Student Loans: Subsidized student loans are only available for lower-income students.   The build-up of interest payments while a student is in school will have the largest impact on students who fail to graduate on time.   This provision may discourage students who leave school after their freshman or sophomore debt to reenter school later in life.   This provision will also have a large impact on low-income students in complex fields (medicine, science and law) because interest will accrue for years prior to the initiation of repayment.

The Modification of the Income Based Replacement Loan Program:

The Trump Administration is proposing a uniform set of rules for Income Based Replacement Loan programs.   People with an undergraduate education would pay more annually but would be able to receive loan forgiveness after 15 years rather than 20 years.   However, debt incurred in graduate school would not be forgiven until after 30 years.

Comments on Income Based Replacement Loan Programs:    The current IBR program has many flaws.   The modifications proposed by Trump worsen the program. 

Many people enrolled in the IBR program because they temporarily have low income and they are trying to prevent a loan default.  These people pay more under iBR than under a 10-year loan plan. Many people who enroll in IBR fail to receive any debt relief because obtaining debt relief requires that a person stay in the loan program every year.

Many borrowers will be unable to make the new annual IBR payment.   These borrowers may default or may sign up for a 20-year loan, which will cause them to pay more student loan interest over their lifetime.  It is highly likely that a substantial number of student borrowers will select 20-year repayment options because of higher debt totals and the increases in the annual IBR payment.

The Elimination of Public Loan Forgiveness Programs:

Current law provides loan forgiveness to borrowers who have been certified to work in a public service job after 10 years of on-time payments.   President Trump’s budget proposal would end public loan forgiveness for loans issued after July 1, 2018, except for loans needed to finish the current program.   Current law provides loan forgiveness to borrowers who have been certified to work in a public service job after 10 years of on-time payments.

Comment on Abolishing Student Loan Forgiveness Programs:  Some economists including staff at the Government Accountability Board have forecasted large costs for the current Public Service Loan Program.  Around 500,000 people have enrolled and many jobs are potentially covered by the program.   I believe the number of people receiving public service loan forgiveness may be lower than anticipated because people who leave public service employment prior to ten years do not receive any loan forgiveness.

This program will encourage some people to stay in a public service job even when more productive opportunities exist elsewhere. Proposals providing partial loan forgiveness for people serving in public service jobs for a period smaller than ten years should be considered.

Denying Access to Enrollees in Public Loan Forgiveness Programs Prior to the Elimination of the Program:

The Department of Education under Betsey DeVos has denied student borrowers with existing loans access to the public loan forgiveness program.   This administrative change is being applied to people who have already taken on debt and are currently working.  A law suit is currently challenging these denials and claims that the Administration has arbitrarily changed eligibility requirements for the public service loan program.

Comment on Denial of Access to Public Service Loan Programs:  The Trump Administration position favors taxpayers over students.   The savings to the taxpayer may be smaller than anticipated if many people do not stay 10 years in a public service position.

Consumer Protections:

Reducing Protections for Defrauded Students:

Under President Obama, the Department of Education put into place rules that provided defrauded students debt relief.   Betsey DeVos stopped work with the CFPB on student loan fraud efforts, proposed changes to the Obama-era rule that would limit the amount of debt relief given to defrauded borrower and delayed applications of debt relief until the new rule is finalized.

Comment on Reduced Protections for Defrauded Students:   The Trump Administration appears to oppose most regulations of for-profit colleges evens when there is documented abuse.

Enforcement of IBR loan application rules:

The CFPB recently found that loan servicers were illegally denying students access to Income Based Replacement loan programs. The CFPB ordered loan servicers to improve procedures to guarantee

Comment on CFPB Ruling:   The Trump Administration and many Republicans oppose the existence of the CFPB.   The Administration named an interim director who opposes the agency.   

The lack of regulation of applications to the IBR program is important because applications must be renewed annually and no debt relief is offered to debtors who do not remain continuously enrolled.

Taxing free tuition waivers, ending the tax deductibility of student loan interest and other student loan tax preferences.  

The House tax bill, which has been supported by President Trump, proposes to treat tuition waivers for graduate students and sons and daughters of university employees as ordinary income for tax purposes. The House bill also eliminates the tax deductibility of student debt, the exemption from tax for lifetime learning, and exemption from tax for employee tuition assistance.

Most of these proposals were removed from the final tax bill, which was enacted into law.  

Links to Articles Documenting These Policy Changes:










Why is the price of insulin so high?

Why is the price of insulin so high?

There have been several news articles on price increases for Insulin?  Here are two.



These articles raise more questions than they answer.

Insulin is a very old drug, first used in 1922.  There are several different types of insulin but most modifications or tweaks appear to be minor compared to ground breaking discoveries of brand new drugs.

Why has our government granted new patents for relatively minor modifications to this drug?

Why have foreign governments been less receptive to new patents for revisions to insulin?

Pharmaceutical firms have in the past decade created several new drugs other than insulin to treat diabetes.   Since insulin is a substitute for non-insulin diabetes drugs, the higher price of insulin allows pharmaceutical firms to charge higher price for non-insulin drugs.

Would a lower price of insulin lead to price decreases for other types of diabetes medicines?

How effective are the new diabetes drugs compared to insulin?

Are there instances where pharmaceutical firms are persuading doctors to prescribe new medicines when insulin would have the same or better outcome?

Is there a relationship between patent policy on insulin modifications and the price of and utilization of new diabetes drugs?

Do patients on new non-diabetes drugs get better health outcomes than patients on insulin?

Review Question:  Is it possible that control of insulin prices brought about by more stringent review of new patents or greater competition from generic forms of insulin would decrease utilization of new diabetic medicines or decrease the price of new diabetic medicines?

I would like to learn more about the economics of insulin and new diabetes drugs. Please contact me at Bernstein.book1958@gmail.com with some citations of literature that I should read on this topic.



Student Debt and College Cost Reforms


 Introduction:   This post is a quick list of fiscally prudent policies that could alleviate problems associated with increased college cost and student debt.

The proposals presented here involve two approaches to the problem.  The first approach (proposals one and two) entail policies ideally designed to decrease student debt totals or at least control the growing use of debt.   The second approach entails policies (proposals two through seven) designed to assist overextended student borrowers.

All policies presented here are designed to be fiscally prudent and to balance benefits and costs of taxpayers with student borrowers.   The proposals for additional assistance to students are a fraction of the cost of proposals for free or debt-free attendance at public universities offered in the 2016 Presidential campaign.   The new proposals to assist overextended student borrowers are more effective and less burdensome to tax payers than current debt-relief policies.

I have also worked on ideas on how to lower college costs by improving on-time graduation rates and lower the number of people who fail to complete college.   These ideas will be presented in a separate memo.

People who are interested in learning more about this topic should go to my student debt book at Amazon and Kindle.

Print Version:


Kindle Version:


Proposal One:  Increased Financial Assistance for First-Year Students:  The primary goal of this proposal is the elimination or substantial reduction in loans taken out by first-year students.  Each state would create and administer a tuition assistance fund.   Money in the fund would come from three sources – the federal government, the state government and private donors.  The rules governing disbursement of the additional assistance would be determined by each state.


First-year students generally do not have a credit history and do not have a post-secondary academic record.  Many first-year students who fail to finish their degree have low incomes and substantial difficulty repaying their loans.  As a result, targeting assistance towards first-year students is more progressive than additional assistance spread over all students.

Increased financial assistance to the highly vulnerable first-year student population will result in a larger reduction in default rates than increased assistance to the general population of students.

Debt reduction targeted towards first-year students is an effective way to reduce interest accrued on student debt.

States and schools would be allowed significant latitude in designing benefits for different populations of students; although, the reduction in first-year student loan default and delinquency rates would remain an important objective of the program.

This proposal is substantially less expensive than free-college or debt-free college discussed during the 2016 Presidential campaign.  The program is not an entitlement.  The cost of the program would not exceed allocated funds.

Proposal Two:  Allocate around $100 million to a pilot program that will fund internships at start-up tech incubators.

Advantages:   Many people are taking unpaid internships to gain workforce skills. This option either adds to debt or is unaffordable for low-income students.

This program provides funds to startups with relatively little cash who might not otherwise be able to hire talent.

Only actively enrolled students seeking a degree are eligible for these positions.   The program does not take away jobs from people who are currently in the workforce.

The size of the program and the number of firms and students served is determined by funds available.   First come first served.

Proposal Three:  Interest rate reductions for older student debt balances:   Set the interest rate on guaranteed student loans to 1.0 percent after 15 years of active payments including negatively amortized payments.

Advantages: Under current law some debt forgiveness can be obtained for people who enroll in the income contingent loan programs. The automatic interest rate reduction after 15 years is easier to administer and fairer than programs offering loan forgiveness.

The interest rate reduction occurs automatically 15 years after loan repayment begins.

Interest rate reduction could not be blocked by loan servicers who currently often block annual re-enrollment in income contingent loan programs.

Loan servicers frequently fail to properly administer debt relief claims under loan forgiveness programs.

Under this program, all borrowers with outstanding student debt after 15 years will receive a lower interest rate.

This program does not provide loan forgiveness.   People who take out a 10-year student loan and pay on time will pay less than people who take out a longer maturity loan that leads to the interest rate reduction.

Under income contingent loan programs some people can increase the amount they borrow without increasing their lifetime repayment amount.  By contrast, under this proposal even with the interest rate reduction starting at year 15 total loan payments are larger for people who borrow more.

Proposal Four:  Reduce the link between interest rates on government guaranteed student debt and market interest rates: 

 Rules would be changed to create an interest rate floor 4 percent and cap 6 percent regardless of the 10-year interest rate.

Note on current law:   Current law links the interest rate on student debt to the 10-year government bond rate.

Advantages:  High interest rates on student debt was a pressing problem in the 1980s and 1990s.   A return to high interest rates would be much worse today because education costs, the proportion of students taking out debt and the amount of student debt per borrower have all gone up.

Failure to alter the link between market interest rates and student loan rates could reduce access to education or increase costs for an entire cohort of students.

This is a potentially pressing problem now that the Federal Reserve has begun raising interest rates.

Proposal Five:  Change rules governing PLUS loans to parents:  Limit parent guarantor obligations on Parent Plus Loans and Private Student Debt to Five Years after initial payment.   The student borrower would be exclusively responsible for the loan at the end of the five-year period.

Advantages:    Currently parents on a PLUS loan are responsible for the loan until they die.   Many of the parents who cosign PLUS loans for their children have low income.  In 2012, an estimated 6.2 percent of parents of dependent undergraduate students with income in the bottom quartile had taken out a PLUS loan.   More alarming, in 2012 over 11 percent of graduate students with parent + student income in the bottom quartile had taken out a PLUS loans.

Many of the parents with PLUS loans are nearing retirement.   Limiting their responsibility would reduce the number of older Americans with unpaid student debt.

There appears to be some bipartisan support for changes in laws that would provide some debt relief to parents who sign PLUS loans.   Under current law, parents who take out PLUS loans can only have the loan discharged if they become disable or if their child dies.  Under current rules, parents with PLUS loans with children borrowers who become disabled and cannot have their loan discharged.  A bipartisan bill in Congress seeks to allow discharges of PLUS loans for parents of students who become disabled.


Proposal Six:    Reconsider treatment of student debt in bankruptcy including rules governing priority in chapter 13 bankruptcy and discharging of private student loans in both chapter 7 and chapter 13.

 The general goal is to assure that student debtors who enter chapter 13 bankruptcy leave bankruptcy after seven years with a substantial reduction in the amount of student debt they owe.

Advantages:   Many student borrowers who currently enter chapter 13 bankruptcy will exit bankruptcy without substantially reducing their student debt obligations.

This change will increase student debt payments for people in chapter 13 bankruptcy by allowing for reductions in payments on credit card debt and other consumer loans.  Total payments in Chapter 13 bankruptcy would remain unchanged but taxpayers would receive more payment and other unsecured creditors less payment.

This change would reduce the number of occasions where a student borrower dies prior to repaying his or her entire student loan.   This represent a direct gain to taxpayers because student debt, like other consumer loans, is forgiven when the borrower dies.

The new rule could be applied to both publicly guaranteed debt and private student loans.   The 2005 bankruptcy law made it difficult to discharge student debt in bankruptcy.  A return to the pre-2005 bankruptcy rules by allowing for the discharge of private student loans would allow student borrowers to accelerate payments on government guaranteed student debt.   This change would also benefit taxpayers.

Proposal Seven: Revise Public Service Loan Programs: New program will provide up to $40,000 in loan forgiveness after four years in a public service job.  Current law provides more loan relief after ten year.


The budget offered by the Trump Administration proposes to eliminate the public service loan program starting in 2019.   It is not clear how this proposal or any which passes Congress will affect people who are currently applying for assistance through the public service loan program.


The new law by providing limiting loan relief to $40,000 allocates more relief to people with modest debts and modest incomes, rather than relatively high-income professionals.

The shorter period for debt relief allows people to move to a more productive opportunity and reduces job lock.

Concluding Remarks:  The progressive wing of the Democratic party want free college and debt forgiveness programs.   The Trump Administration is advocating weakened consumer protections, changes to income contingent loan programs, elimination of subsidized student loans and the elimination of the public service loan program.

This centrist approach, presented here, differs sharply from both the policies offered by the progressive wing of the Democratic party and by the Trump Administration.




Fixing the U.S. Retirement System

Fixing the U.S. Retirement System

A 2014 Harris Poll found that around 3 of 4 Americans are worried about having enough funds for retirement


This memo asks how policymakers might improve retirement outcomes for future generations of Americans.

Problem One:  How can policy makers create incentives to simultaneously expand 401(k) participation while limiting distributions prior to retirement age?

Solution to problem one:   Make two changes to rules governing disbursement of 401(k) funds.

  • Allow 25 percent of contributed funds to be distributed without tax and without penalty at any age.
  • Prohibit any disbursements from the other 75 percent of funds prior to age 59 ½.


At first glance, there is a potential tradeoff between rules encouraging increased 401(k) participation and contribution and rules assuring that funds are not disbursed prior to retirement.  Policy makers could prohibit all disbursements from 401(k) plans prior to retirement and prohibit 401(k) loans.   This would cause some people fearing an emergency from stopping all contributions.   A reduction or elimination of the penalty could cause more people to contribute and increase disbursements.

Some people with high debt and limited liquidity choose to make 401(k) contributions but find that their debt spirals.  When debt becomes unsustainable or when an emergency occurs these people often take out a 401(k) loan or disburse all funds and pay the tax and penalty.  Plans require workers to repay their 401(k) loan upon leaving employment.    Loans that are not repaid during workforce transitions are treated as disbursement subject to income tax and penalty.

The rate of return on 401(k) investments obtained from the immediate tax deduction and the employer match is substantial.   Many people with high debt levels and limited liquidity choose to forego these generous returns.  The current rules by subjecting all disbursements prior to age 59 ½ to income tax and a tax penalty discourage many younger workers with student debt from contributing to their 401(k) plans.

In many states, people with 401(k) plans are not eligible for food stamps or Medicaid.



These rules discourage low-income workers with variable income from making 401(k) contributions.

The current financial penalty discourages some people from enrolling in 401(k) plans or increasing contributions.   The current rules also result in many 401(k) enrollees disbursing funds prior to retirement and paying a penalty on top of tax due.   Some of these people would have been better off by never contributing to their 401(k) plan.

The proposed rule will do a better job encouraging 401(k) contributions and limiting pre-retirement distributions than current law.

Problem Two:  What can policymakers do to increase retirement savings options for workers at smaller firms, which do not offer 401(k) plans?

Solution to problem two:  The lack of pension coverage for workers at small firms and for workers who change positions frequently could be resolved by expanding the role of IRAs.  The rules governing IRAs could be altered to allow employers to match IRA contributions, and to increase contribution limits for employees.

Discussion of problem two:   Small firms often forego 401(k) plans because of high administrative cost and their cash levels are low.   Employees at small firms can save for their retirement by opening and contributing to an Individual Retirement Account (IRA).   However, the allowable contribution to IRAs is far smaller than the allowable contribution to 401(k) plans.

  • The current annual total contribution limit to 401(k) plans is $55,000 with a limit of $18,000 on the employee contribution.
  • The limit for contributions to IRAs for people under $50 is $5,500 per year. This IRA contribution limit is $6,500 for people over 50.  No contributions are allowed from employers.

The most straight forward ways to expand retirement savings for workers at firms that lack 401(k) plans is to increase the amount which can be contribute to IRAs and to allow and encourage contributions from employers.

There are proposals in Congress to create multi-employer 401(k) plans.  It is not clear why new multi-employer 401(k) plans would be preferable to an expanded role for IRAs.  In fact, workers could be worse off if the multi-employer 401(k) plan offered limited investment options and high fees.  Investment firms like Vanguard and Fidelity are well positioned to offer expanded IRAs with low-cost fees.

Current 401(k) rules allow for workers to be automatically enrolled in a 401(k) plan unless they opt of automatic enrollment.   Automatic enrollment with an opt-out provision could also be applied to IRAs.

Problem Three: What can policymakers do to help investors protect their savings from a simultaneous increase in interest rate and decline in equity values?

Solution to Problem Three:   This problem could be minimized by decreased use of bond funds and increased use of zero-coupon bonds or I Bonds inside 401(k) plans and IRAs.  Government regulations should guarantee that government zero coupon bonds are a standard option inside 401(k) plans.

Discussion: Investors are currently moving investments in target-date funds, which automatically increase the share of investments placed in fixed-income assets as the person ages.  Many market observers believe that over the next decade equities will underperform and that interest rates will rise.  Target-date funds expose investors to substantial financial risks if interest rates rise when they retire.

The value of zero-coupon bonds also decreases when interest rates rise.  However, investors in zero-coupon bonds will receive the full face value of the bond when the bond matures.  By contrast, the value of shares in a bond fund or a target-date fund depend on the interest rate on the date of sale.

Another way to reduce interest rate risk inside 401(k) plans would be to include I Bonds as an investment in 401(k) plans or to encourage employers to match employee purchases of I Bonds outside 401(k) plans.

An excellent discussion of I Bonds can be found at link below.


Problem Four: What can policymakers do to help investors reduce fees on 401(k) plans?

Solution to problem four: Investment companies report average fee ratios but do not report lifetime fees for a typical investor.  It is very difficult to take the average cost ratio of a fund or portfolio and understand the amount this implies in fees paid over a lifetime.  Investment companies should be required to report the lifetime fees paid by an investor who contributes $5,000 per year into a fund for 30 years based on annual returns for a given cost ratio.

Discussion:   Many funds charge fees substantially higher than index funds.   Often these plans do not realize larger returns.   A more aggressive solution to this problem outlined here involves enforcement of fiduciary rules to challenge funds with excessive fees.

Yale Law Journal article on fund fees:


 Problem Five: What can policymakers do to provide more stable income during retirement?

Solution to Problem Five:   Allow people who have invested in private 401(k) plans to transfer funds to state defined contribution plans or the FERS plan for federal employees and purchase the same annuity offered public employees.  Allow people to irrevocably commit a portion of their retirement to an annuity purchase at an early age.

Discussion:  The Trump Administration is focused on expanding the use of private annuities inside 401(k) plans.    There are two problems with this approach.  First, private annuities are expensive.  Second, the stability of the annuity depends on the financial status of the insurance firm behind the annuity, which can change over time.  Annuities associated with FERS or state defined contribution plans are likely to have less default risk.

The market for annuities is impacted by adverse selection because individuals who choose to purchase an annuity tend to live longer than individuals who choose to disburse from their 401(k) plan when they need cash.    The annuity provided by Social Security and large defined benefit pension plans are less expensive than voluntary annuities because all people, regardless of future life expectancy, purchase it.  A rule requiring that all people use some of their 401(k) funds to purchase an annuity would lower average annuity price and reduce the share of people with inadequate retirement funds.

Problem Six: What can policy makers do to reduce tax burdens in retirement for workers who have most of their funds in a 401(k) plan?

Solution to Problem Six:  Funds disbursed from a 401(k) and IRA to pay off or reduce a mortgage should be untaxed or taxed at a reduced rate.  Alternatively, employer subsidies for the purchase of Treasury I bonds should be untaxed compensation for workers, similar to the tax treatment on employer contributions to 401(k) plans.

Discussion:   Most financial advisors currently advise clients nearing retirement to prioritize 401(k) contributions over mortgage balance reductions.   This approach is supported by the current tax code, which provides a generous tax savings for 401(k) contributions during the working years. This approach leads to increased tax obligations because the larger 401(k) disbursements are fully taxed during retirement.   People with large mortgage balances in retirement can quickly deplete their 401(k) plan.

One way to reduce tax burdens on people with mortgages who must make large 401(k) disbursements is to reduce taxes for funds spent reducing the mortgage balance.  Another approach would be to persuade people to reallocate investments from 401(k) plans to accounts subject to a lower tax rate in retirement.

Authors Note:  I hope this discussion is of interest to some of the people who will run for political office in 2020.   I would like to contribute to a campaign by creating policy proposals.

Also, readers of this blog are likely to be interested in my book on student debt, which is available on both Kindle and Amazon.

Go here and buy my book:











Reconsidering Use of 401(k) Funds for Emergencies


Current tax rules governing 401(k) plans allow workers to distribute funds for hardship expenses prior to age 59 ½. The distributed funds are fully taxed at the ordinary income tax rate and subject to a 10 percent penalty.

Should rules governing 401(k) plans be changed to allow for the allocation of limited 401(k) funds to an emergency fund and new restrictions on the bulk of 401(k) contributions prior to age 59 ½?

In many states, people with assets in 401(k) plans and IRAs are not eligible for government benefits including food stamps.

Should these rules be altered so that funds not available for immediate disbursement do not impact eligibility for government benefits?

Specifics of the proposed rule changes are as follows:

  • Workers may allocate 20 percent of their 401(k) contribution or IRA contribution to an emergency fund.
  • Funds placed in the emergency fund could be distributed for emergency expenses without being subjected to income tax or a tax penalty.
  • Disbursements from all 401(k) or IRA contributions not in the emergency fund prior to the age of 59 ½ would be prohibited.
  • Future 401(k) loans would be eliminated.
  • Funds in 401(k) plans and IRAS that were not available for immediate disbursement would not be counted toward Medicaid or food stamp eligibility.

Background:  Many workers, especially those entering the workforce, must choose between establishing an emergency fund or saving for retirement through a 401(k) plan.   The financial advantages associated with 401(k) plans, both in the form of an employer match and tax savings can be substantial.   However, many workers have insufficient funds to pay rent, health bills and outstanding loans.  Some workers with limited liquidity choose to create a retirement fund and delay saving for retirement.

The IRS allows workers to withdraw money from their 401(k) plan prior to retirement but the practice is discouraged through the imposition of a 10 percent penalty.

Around 87 percent of 401(k) plans allow workers to borrow funds form their 401(k) plan.  Around 18 percent of workers in plans allowing 401(k) loans had loans outstanding.   The average outstanding loan balance for 401(k) loans at the end of 2015 was a bit lower than $8,000.

Go to the ICI web site for some information on 401(k) plans.


Workers with 401(k) plans who leave their current position must either repay their loan or be subject to additional tax and a financial penalty.

In many states, people with 401(k) plans are not eligible for food stamps or Medicaid.




These rules discourage low-income workers with variable income from making 401(k) contributions.


Contributions to 401(k) plans, unlike contributions to traditional pensions or Social Security, are voluntary.  Some people with limited liquid assets and high debt levels are reluctant to tie up funds in a retirement account.   The early disbursement option (albeit with taxes and penalty) and the loan option can encourage some people to contribute to their 401(k) plan.

Individuals who disburse funds from 401(k) plans prior to age 59 ½ may have insufficient resources in retirement.  Moreover, individuals who take disbursements prior to age 59 ½ and pay taxes and a penalty may become worse off than individuals who never contributed to their 401(k) plan.

 The emergency fund feature of the new 401(k) would provide substantial incentives for people with limited liquidity and large debts to make 401(k) contributions.   However, the prohibition against early disbursements from the bulk of 401(k) contributions could reduce the number of people with insufficient funds in retirement.

 Under the new rules, 401(k) or IRA funds not available for immediate disbursement would not affect eligibility for any government benefits.   This change would encourage low-income people to make additional contributions to 401(K) plans and IRAs.






The Politics of Student Debt

In a recent episode of Madam Secretary, the daughter of the Secretary quits her volunteer position on a Congressional campaign because her candidate did not have a bullet point on forgiving student debt.   The candidate explains to her that debt forgiveness is too controversial because it takes money from workers and taxpayers and give money to students.  The Secretary lectures the daughter and persuades her to vote despite her problems with this candidate on this one issue.

This episode relives one of the flash points of the 2016 Clinton/Sanders contest.   Bernie Sanders supported an expensive and unrealistic free college program. This idea was first scorned and then matched by Clinton.  Clinton continued to struggle with the issue by coming up with ideas like let’s forgive debt for employees at start-up firms an idea that was laughed at by virtually everyone who has studied the student debt problem.

Student debt is a growing problem much larger for the current cohort than for previous generations.

  • The percent of graduate with student debt went from 50 in 1989/1990 to near 70 today.
  • The percent of borrowers leaving school with more than $50,000 in debt went from 2 percent to 17 percent over same period.
  • The number of Americans over age 65 with student debt increased by a factor of 4 between 2005 and 2015.

High student debt levels have long term financial consequences.  People with high student debt levels often either delay savings for retirement or delay loan repayments.   Often student debtors also delay marriage, forego having children and choose to rent rather than purchase a home.

Trump Administration proposals will worsen student debt problems.  The Trump Administration is proposing to eliminate subsidized student loans, a change that will increase debt costs and cause many to forego college.  The Trump Administration has rejected loan forgiveness applications under the public service loan programs and their actions will weaken the Income Based Replacement loan program.   The Trump team does not support of enforce rules protecting students from fraud.

Student debt like health care should be a big wining issue for Democrats.  Unfortunately, Democrats are divided between keeping the status quo and giving free college to everyone.

Doing nothing should not be an option.  Part of the solution involves increased financial assistance to students, especially for first-year students.

Many students leave college after their first year because of academic performance.  Problems associated with first year students who fail to continue their education could be substantially reduced in a cost-effective way by expanding assistance to first-year students.

Part of the solution involves policies and programs which improve on-time and early graduation rates.

Many students either fail to graduate or take more than the allotted time to complete their program.  These students tend to take on more debt and are more likely to incur payment problems.

Realistically, improvements in and expansion of debt forgiveness programs must be part of the solution because many borrowers become hopelessly overextended.  Some Democrats are currently focused on expanding the Income Based Replacement loan program.   Loan servicers regularly ignore the IBR options and debt forgiveness programs centered on the IBR program are likely to fail.

There are other more cost-effective ways to assist overextended borrowers.

Granting priority to student debt over consumer loans in Chapter 13 bankruptcy:     Currently, many applicants for Chapter 13 bankruptcy reduce student loan payments to repay credit cards and other consumer loans.  Often the student borrower leaves bankruptcy with an increased student debt balance.  The quicker repayment of student loans in bankruptcy benefits both taxpayers and student debtors.

The elimination of the link between market interest rates and interest rates on federally guaranteed student loans.   Under current rules student debt interest rates are tied to market interest rates.   This policy automatically increases costs for an entire cohort should Treasury rates rise.  This is a timely problem given recent Fed statements and moves.

Modification of the standard contract on student loans to allow for interest-only payments rather than forbearances and to allow for reduction or even elimination of interest rates after 15 years of payments:   The IBR program allows some people to borrow more without increasing the amount they repay.  By contrast, under the proposed interest elimination plan, people who borrow more repay more.  This program has better incentives and is less expensive to the taxpayer than the IBR program.

Restricting parental guarantee obligations on PLUS loans and cosigned private student loans to 5 years from repayment date:   Many of the most severe financial problems associated with student debt involve PLUS loans guaranteed by parents.   This change would reduce these problems.

 Removal of the prohibition against the discharge of high-interest private student loans in bankruptcy: This proposal returns us to rules that existed prior to the enactment of the 2004 bankruptcy law.   The discharge of private student debt in bankruptcy could accelerate payment on government guaranteed debt and assist taxpayers.

Creation of a modified public service loan program, which will allow for partial loan forgiveness after 2 to 5 years rather than 10 years of public service:   The current program creates job lock by forcing applicants to wait at least 10 years for loan forgiveness.  The shorter period for partial loan relief for the new program reduces job lock.  This program will be less expensive and have lower administrative costs than the current program.

Issues like student debt and health insurance are core issues to Democratic voters, which should drive voters to the polls.  However, there are huge differences in the way the Sanders wing and the Clinton wing approach the problem.   The Sanders proposals would cause either a fiscal crisis or unsustainable tax increases combined with stagnation.   The Clinton wing is proposing a band aid for the sake of appearances.

I understand why the screen writers of the show on Madam Secretary are frustrated at the Sander’s supporters who chose to stay home in 2016 rather than vote for an imperfect candidate who is a thousand times better than Trump.   However, Democratic candidates must have a comprehensive vision and set of policies on student debt.   College costs and debt are an existential problem for current students and recent grads.   The cost of college will deter many from getting necessary education.   The debt incurred will have long term often crippling impacts on household finances and even happiness.

There are common sense centrist solutions to this problem that increase access to education, reduce costs for overextended students and are fair to workers and taxpayers.

The failure of the Democrats to address student debt issues is sort of like a football team deciding to punt on first down.  This is not an effective way to either win the game or excite your fan base.


Authors Note:

David Bernstein is the author of Innovative Solutions to the College Debt Problem.   Get his book on Amazon or on Kindle.



David has also written on health care and the ACA.


Go here for a Centrist Health Plan:




I would love to work for a centrist Democrat in 2020.  Contact me at Bernstein.book1958@gmail.com or on my cell 202 413 5492.



Unemployment, Labor Force Participation, and the Government Deficit

Unemployment, Labor Force Participation and the Government Deficit

Issue:   The Chart below has data on three important economic variables – the unemployment rate, the labor force participation rate and the government deficit as a percent of GDP.   The unemployment and labor force participation rate variables are observed on three dates   — July 2009 (near the peak of the recession) January 2017 (the month of President Trump’s inauguration), and September 2009 (the most recent month at the time of this writing.

What does this data say about the recovery after the recession under President Obama?

What does this data say about the impact of President Trump’s economic policies on the labor market and on the government deficit?

How does information from the unemployment rate and information obtained the labor force participation rate differ regarding, evaluations of the economic records for Obama and Trump, an assessment of the current strength of the economy and projections of the likely path of debt to GDP?

Three Economic Variables
Unemployment Rate
Date Value
Jul-09 9.5
Jan-17 4.8
Sep-18 3.7
Labor Force Part. Rate
Jul-09 65.5
Jan-17 62.9
Sep-18 62.7
Government Deficit as % GDP
Date Value
FY 2009 -9.8
FY 2016 -3.2
FY2018 -4.2


The unemployment rate fell from 9.5 percent during the recession to 4.8 percent at the end of President Obama’s term.

The unemployment rate has continued to fall under President Trump and is currently at 3.7%.   This is the lowest level since 1969.

The labor force participation rate was higher during the recession than at the end of President Obama’s term.

The labor force participation rate has not risen under President Trump despite the tax cut.


The government deficit fell from 9.8 percent of GDP in 2009 (recession year) to 3.2 percent in 2016 (last Obama year.)

The FY 2018 deficit as a percent of GDP is 4.2 percent, substantially higher than when President Obama left office.


An analysis of economic conditions and the labor market based on the unemployment rate alone would conclude that the job market and economy are red hot.   The unemployment rate has not been this low since 1969.  President Trump’s tax cut is one reason why the unemployment rate fell to its current level.

An analysis of the recovery from the recession and current economic condition incorporating information about the labor force participation rate, indicates the economy is not over heated.

Many critics of President Obama claimed that recovery was weak because the labor force participation rate remained very low.


The labor force participation rate is lower under President Trump than under President Obama.   President Trump’s economic policies have failed to increase the labor force participation rate.

President Trump’s economic policies have increased the government deficit as a percent of GDP.  The 2018 fiscal deficit is over 30 percent higher than the 2016 fiscal deficit.

Concluding Thoughts:

My view is that the LFPR has decreased due to population aging and further stimulus will not expand the workforce.  Moreover, the decrease in unemployment which coincided with the tax cut will not persist for much longer.   The loss of revenues from the tax cut will be larger in FY 2019, 2020 and 2021.   The budget deficit could be larger than 9 percent of GDP prior to the start of the next recession.

President Trump by reducing taxes and expanding deficits in a strong economy has weakened the ability of fiscal authorities to stimulate the economy when the next recession hits.

Authors Note:   I hope you will try my book

Innovative Solutions to the College Debt Problem:










A Red Tide and a Blue Wall 

There is a lot of discussion, hope and prayer for a blue wave leading to the Democrats retaking the house.  The House is very hard to predict.    Now I am focused on two other aspects of the election – a Red tide controlling outcome of the Senate and the rebuilding of the blue wall.

The Red Tide:

A red tide occurs when algal blooms become so numerous the coast gets discolored and water becomes unpleasant to swim in.   The Republicans by suppressing the vote in numerous states and by colluding with the Russians have created the political equivalent of the red tide.

Political pundits are claiming many Senate sears are in play.   Mitch McConnell lists 9 senate seats that are dead even.

I list 5 seats (AZ, FL, IN, NV, and MO) that are dead even.  Polls are going back and forth in these states.  I am concerned that FL could flip if the voting irregularities that helped Governor Scott in 2014 reoccur.


Two seats (MT and ND) are not even but are in play.  The polls are close but consistently favor the Democrat in MT.   Poll averages are deceptive in ND as proven when Heitkamp fueled by a large Native American vote pulled out a surprise victory in 2012.  Also, the RCP average in ND was affected by two large outliers.

This time many Native Americans will not be able to vote.


Republicans in red states are getting very good at voter suppression.    Have you read about the exact match program in Georgia?

Exact Match in Georgia


The pundits believe that TN and TX are in play.    My view is that Republicans are highly likely to hold both states.

  • Breedsen cratered when he stated that he would support Kavenaugh. Volunteers quit.  Last three polls were abysmal.
  • TX is highly polled. Polls are relatively close but Cruz leads in just about every poll.

There have been some accusations about voter suppression in Texas but some articles say this problem is being fixed.  We’ll have to see.


Voting in Texas:



Senate control depends on these races but objectively the Republicans have many more paths than the Democrats.

This is supposed to be the year of the woman. but sadly two senior female Democrats Macaskill in MO and Heitkamp in ND are in dogfights.   The number of female democrats could fall depending on these outcomes and results in AZ and NV.

Restoring the Blue Wall: 

There is some good news for the Democrats.   The blue wall in Michigan, Wisconsin and Pennsylvania is being repaired.  The Democratic incumbent running for reelection is up by double digits in all three states.

All three states which were blue for decades, went for Trump over Clinton in 2016.

Many of the people in these states appear to regret their vote for Trump.

Even more surprising is that Democratic Gubernatorial candidates are leading in the polls in Ohio and Iowa against two strong GOP candidates.  Obama won both states twice but Trump won both states by large margins.

It does appear as though some voters want to send Trump and the GOP a message

The ability of the GOP to stop Democrats from voting may be too much for the Senate contest.


Some RCP Data:


Senate Race RCP Averages
State RCP Average Red – Blue
AZ 0.3
FL -2.4
IN -2.5
MO 0.4
NV 0
MT -3
ND 8.7
WV 9.4
TN 5.5
TX 7
OH -16
WI -10.6
PA -16






Discussion of a Centrist Health Care Plan

The Republican and Progressive views on the future of health care are clear.   Republicans want to repeal the ACA and move us towards a system with fewer regulations.   The Trump Administration has taken us towards this goal by ending the individual mandate, ending reinsurance subsidies, and legalizing bare-bones health plans.

The Progressives want either a single-payer system or a Medicare-for-all option.   Republicans are attacking Democrats for their support of the single-payer option.   Some of these attacks may stick because centrist Democrats have not put forward a clear centrist plan that improves health insurance and health care.

A Centrist Health Care Plan is the topic and name of my new paper, available at SSRN

A Centrist Health Plan:


The proposals discussed here include – (1) new incentives to encourage continuous health insurance coverage, (2) alterations to rules governing health savings accounts and high deductible health plans, (3) rule changes leading to reduced reliance on employer-based insurance, and (4) government subsidies for certain expensive health care cases, which are not easily treated by narrow-network HMOs.

The ACA was a good first step towards expanding and improving health insurance coverage.  Republicans failed to totally repeal the ACA but under Trump the nation is moving backwards.   The individual mandate and reinsurance subsidies have been eliminated and new bare-bone insurance policies undermine comprehensive insurance.

The individual mandate as previously structured was unpopular.   It could be replaced with a tax credit exclusively for people with comprehensive health insurance.

The new temporary bare-bone insurance plans can be eliminated by executive order.

Many health care problems were not affected by the ACA.   The trend towards higher deductibles and larger out-of-pocket expenses was accelerated by the introduction of health savings accounts coupled with high-deductible health plans.    Many Americans now actively debate whether they should reduce contributions to 401(k) plans to maintain contributions to health savings accounts.  Other Americans actively consider foregoing needed prescription drug regimens so they will have funds for their retirement.

Financial instability and health problems caused by the increased use of health savings accounts coupled with high-deductible health plans can be reduced by a new tax credit and by more flexible rules governing contributions to health savings accounts.

Issues caused by narrow-network health plans, which do not allow access to top doctors and hospitals predate the ACA.  Narrow-network health plans provide great health care for the vast majority of health care conditions.   However, access to certain specialists for certain diseases like cancer is often limited.   This issue can be called the breaking bad problem after the fictional chemistry teacher who manufactures and sells meth to fund his cancer treatment.

The Republicans maintain reinsurance or risk-adjustment payments are subsidies to insurance companies, a form of corporate welfare that must be eliminated. Under the Centrist proposal, the government subsidy for expensive health care procedures would be sent directly to the out-of-network provider on behalf of the patient.  These subsidies would allow the narrow-network health plan to contract out complex procedures, concentrate on basic health care problems and maintain low premiums.

The ACA attempted to create a viable individual health insurance market by changing rules governing coverage for pre-existing conditions and underwriting of health insurance premiums.   However, ACA rules still substantially favor employer-based health insurance over the new state exchange market places.   A centrist Health plan would cautiously reconsider these rules to strengthen the nascent state exchange market places.

The new subsidies for contributions to health savings accounts and expensive health care cases are partially paid for by reductions in tax expenditures on ACA and employer-based insurance.