Month: January 2019

Comparison of Obama and Trump IBR Payment Formulas

 

Question:  Under the Obama IBR program, a person is required to pay 10 % of disposable income.  The Trump proposal payment requirement is 12.5%.  Obama’s plan offers debt relief after 20 years.  The Trump proposal offers debt relief after 15 years.

Consider a single person with no dependents making $50,000 per year.   The person has $35,000 in student debt at a 5 percent annual interest rate.

What are the monthly student debt payments under the two plans?

What are the loan payments on a 10-year and a 20-year standard student loan?

What are the income levels where there are no loan payment reductions from IBR compared to a standard 10-year loan and a standard 20-year loan?

 

Analysis:

The calculations for the monthly payments on IBR loans and traditional student loans are laid out below.

IBR Payments and Break Even Obama Versus Trump
Obama Trump
AGI $50,000.0 $50,000.0
FPL One Person Household 2016 Figures $17,820.0 $17,820.0
150% FPL $26,730.0 $26,730.0
Disposable Income $23,270.0 $23,270.0
Annual Loan Payment as a Percent of Disposable Income 0.1 0.125
Annual Loan Payment for IBR $2,327.0 $2,908.8
Monthly Payment IBR $193.9 $242.4
  • The Obama-formula IBR payment is $194.   The Trump-formula IBR payment is $242.  The Trump proposal would increase IBR monthly payments by 25 percent in this example.

Comparisons of IBR payments to 10-year loan payments are presented below.  I have also calculated the AGI level where 10-year loan payment is equal to IBR payment for both the Obama and Trump formulas.

Obama Trump
Loan Balance $35,000.0 $35,000.0
Interest Rate 0.05 0.05
Traditional Monthly Payment Ten Year $371.2 $371.2
IBR Payment – Traditional Payment (Monthly 10-yr) -$177.3 -$128.8
Breakeven calculation IBR Versus 10-yr $71,277.52 $62,368.0
Check of breakeven calculation 371.2 371.2
  • Under Obama-formula IBR the borrower in this example with income less than $71k will have a reduced monthly payment compared to a 10-year loan.   Under Trump-formula IBR the cutoff is around $62k.

Comparisons of IBR to 20-year loans are presented below.

Loan Balance $35,000.0 $35,000.0
Interest Rate 0.05 0.05
Traditional Monthly Payment Twenty Year $231.0 $231.0
IBR Payment – Traditional Payment (Monthly 20-yr) -$37.1 $11.4
Breakeven callculation IBR Versus 20-yr $54,448.14 $48,904.51
Check of breakeven calculation 231.0 231.0
  • The potential reductions in loan payments from IBR are really small compared to a 20-year loan.  Under the Trump proposal the calculate IBR payment exceeds the 20-year loan payment for this borrower.

Concluding Remarks:

The Trump alterations to IBR are very clever.   He offers loan forgiveness in 15 years rather than 20 years.   However, in many cases if income for the student borrower rises, the payment on the IBR could exceed the payment on a 20-year loan.  In my view, the main objective of the Trump proposal is to reduce the number of people who might claim IBR benefits.   The Trump Administration has not been very good to student borrowers.

More on Trump student loan policies can be found here:

http://financememos.blogspot.com/2018/02/president-trumps-approach-to-student.html

And Here:

http://financememos.blogspot.com/2018/02/public-service-loan-programs.html

The Trump plan does offer the possibility of debt relief at an earlier date.   The higher IBR payment could reduce the amount of debt relief provided to the student.  Forgiven debt is taxed as ordinary income under both plans.

Whether a person is better off under IBR or a traditional loan depends on future disposable income over the course of the loan.  This calculation can be impacted by marriage and the IBR decision can alter tax filings.   In short, it is impossible for applicants to determine whether they will be better off under IBR or a traditional loan when they are asked to make this decision.   Often applicants with little income at the time of graduation simply sign up for IBR because it is the only way they can remain current on their loan.

I am working on alternative simpler debt relief proposals.  More to follow.

Common Ground on Social Security COLAs?

Is there common ground on Social Security COLAs?

Social Security benefits are adjusted for inflation each year.  President Obama is on record for supporting changes to the way the Social Security COLA is calculated.  I suspect that the proposal to modify the current Social Security COLA will receive strong consideration by Congress after the 2014 midterm elections.   

This post has my comments on both the economics and politics of proposals to adjust Social Security benefits:

Comments:

Impact on Beneficiaries:

 Under current law, the Social Security benefit is linked to the traditional CPI.  President Obama is supportive of a change that would link the Social Security COLA to a chained CPI.  On average, the growth in the chained CPI is around 0.2 percentage points lower than the growth in the traditional CPI.  It is of course possible that the percentage point difference between the traditional and chained CPI would be higher in a high-inflation environment.

Estimates in my math blog reveal that the difference in benefits due to the adjustment in the CPI could be around 4 percentage points in a low-inflation environment and around 14 percentage points in a high-inflation environment.

http://dailymathproblem.blogspot.com/2013/04/how-important-is-social-security-cola.html 

 Impact on budget in short term and long term:

Social Security has a major impact on both the current government budget and the future debt to GDP ratio for the nation.

In fiscal year 2013 Social Security accounted for $808 billion in expenditures, around 25% of federal expenditures. It is the single largest federal program.

In calendar year 2010 outlays from Social Security exceeded revenues.   This is the first time outlays have exceeded revenues since the Social Security reform law of 1983.

https://cbo.gov/publication/44972

The size of the this program makes it an important consideration in annual budget talks.  

Impact of future cuts on Social Security:

Under current rules, Social Security benefits are paid solely by Social Security taxes and assets in the trust fund.  However, according to the actuaries at the Social Security Administration the trust fund will be unable to pay full benefits starting at around 2037.

http://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html

“As a result of changes to Social Security enacted in 1983, benefits are now expected to be payable in full on a timely basis until 2037, when the trust fund reserves are projected to become exhausted.1 At the point where the reserves are used up, continuing taxes are expected to be enough to pay 76 percent of scheduled benefits. Thus, the Congress will need to make changes to the scheduled benefits and revenue sources for the program in the future. The Social Security Board of Trustees project that changes equivalent to an immediate reduction (bold added by me) in benefits of about 13 percent, or an immediate increase in the combined payroll tax rate from 12.4 percent to 14.4 percent, or some combination of these changes, would be sufficient to allow full payment of the scheduled benefits for the next 75 years.”

Would an adjustment to the Social Security Administration substantially delay the future benefit cuts?

I have not seen any work on the number of years an adjustment in the Social Security COLA would delay the future benefit cuts.  I believe the short answer is that COLA adjustments by themselves would result in a relatively small delay in future forced reductions in Social Security benefits.   

The reason the delay in benefit cuts is likely to be small is that much of the impact of the COLA adjustment occurs after 2037. Note that the Social Security projections on extending the life of the Trust Fund to 75 years is based on a scenario that assumes an immediate reduction in benefits.   The COLA adjustment does not result in an immediate benefit reduction.

One year after the adjustment to the COLA the estimated impact on all Social Security beneficiaries is only 0.2 percentage points.  As noted above, 20 years above the impact in a low-inflation scenario for those who have lived 20 years in retirement will be around 4 percentage points.  It will take around 38 years for the maximum annual impact of the COLA adjustment to be realized.

The long run solution to the Social Security problem will involve benefit cuts, revenue increases dedicated to Social Security, and shifts of revenue from the general fund to Social Security.  Population aging will inevitably lead to an increase debt to GDP ratio.  

The proposed COLA is a substantial decrease in benefits which does not preclude other cuts in the future. In fact future benefit reductions would still be mandatory once trust fund assets expired.  Moreover, the proposed benefit reduction is not linked to a commitment for needed revenue increases of any kind.

The Retirement Crisis:

It is increasingly obvious that the current approach to saving for retirement is not working for a large number of workers.

This interview with Teresa Ghilarducci provides some evidence on this point.

http://www.pbs.org/wgbh/pages/frontline/business-economy-financial-crisis/retirement-gamble/teresa-ghilarducci-why-the-401k-is-a-failed-experiment/

 

Research by the Employee Benefit Research Institute found that between 4% and 14% additional baby boom workers had their retirement become at risk due to the 2008/2009 crash.

http://www.ebri.org/pdf/briefspdf/IB.Feb11.Post-Crisis_RetIncAd.FinalFlow.pdf

Future crashes would also lead to an increase in workers with retirement at risk.

The COLA adjustment would also increase the percent of workers, both current and future, who would end up with inadequate retirement savings.

Senator Warren from Massachusetts appears to be one of the few politician who has grasped both the severity of the current retirement crisis and the impact of the proposed COLA adjustment on the adequacy of retirement savings.  Below is a link to a recent speech where Elizabeth Warren proposes to expand Social Security.

http://www.washingtonpost.com/blogs/plum-line/wp/2013/11/18/elizabeth-warren-dont-cut-social-security-expand-it/

An expansion of Social Security is not likely to occur.  However, liberals can and should insist on substantial improvements in the nation’s retirement system, which must coincide with and offset future cuts to Social Security.

Politics:  

President Obama broached the issue of changes to the Social Security COLA during the fiscal cliff negotiations.  My first post at this blog was about President Obama’s COLA adjustment proposal offered during the fiscal cliff debate.  It was my first post at this blog.

http://policymemos.blogspot.com/2012/12/thoughts-on-fiscal-cliff-and-social.html

A new crisis over the debt limit is likely to occur after the November election.  Many in the House and the Senate will only have a few more months to serve, either because of  a planned or unplanned retirement.  Given the possibility of a debt default and the lame duck status of many in the House and Senate it is likely there will be considerable support for a COLA adjustment after the 2014 elections. 

Conclusion:

President Obama has placed liberals at disadvantage by endorsing the COLA cut without firm concessions on future revenues and restrictions on future future cuts. Most in the Republican party oppose the use of any additional revenue to offset Social Security imbalances.  In my view, the long run solution to the Social Security problem will involve benefit cuts, revenue increases dedicated to Social Security, and shifts of revenue from the general fund to Social Security.  Moreover, even if a comprehensive Social Security reform plan is implemented sooner rather than later it is likely that population aging will still lead to a substantial increase in the debt to GDP ratio over the next few decades.

The passage of a COLA adjustment does not prevent future cuts to Social Security, which will be automatically triggered when the trust fund is depleted.  A case can be made for adjusting the Social Security COLA but only if this change is made in conjunction with other changes that guarantee the survival of Social Security and improve the current retirement system.

Comparing traditional and chained CPI

Question:   What is the expected value of lifetime Social Security benefits for females and for males when benefits are linked to the traditional CPI and when benefits are linked to the chained CPI.

Discuss the reasons why women might prefer a switch to the chained CPI over proposals to partially privatize Social Security.

Short Answer:

Answer is contingent on several assumptions laid out below.  I find that changing from the traditional CPI to a chained CPI would reduce the expected value of lifetime Social Security benefits by around $16,000 for males and $21,000 for females.

The actual impact is invariably different from the expected impact.  Regardless of gender, people with the longest life span get the most from Social Security.

However, Social Security is really essential for females because private annuities are more expensive.  See my previous post on this topic.

http://dailymathproblem.blogspot.com/2014/01/gender-differences-in-life-expectancy.html

Analysis:

Key assumptions:

The key assumptions in this analysis are

  1. Person retires at age 62 and receives an initial Social Security retirement benefit of $15,000 per year
  2. Traditional CPI grows at 2.42% per year
  3. Chained CPI grows at 2.09% per year.
  4. In year of death person receives ½ year Social Security Benefit
  5. Probability of surviving from age 62 to age y> 62 is determined by the CDC life tables for females and males.

Readers interested in the discussion of assumptions on difference between traditional and chained CPI might want to look at this post.

http://dailymathproblem.blogspot.com/2014/02/comparing-traditional-and-chained-cpi.html

The expected lifetime Social Security benefit is E(SSB)=Sum(Pyr x CByr)  where Pyr is the probability of surviving to a particular year and CByr is the cumulative benefit from the retirement age at 62 to the year of death.

The logic behind the calculation of the probability a retiree survives to a specific date is similar to the logic behind the geometric distribution.   The probability of surviving to age y > 62 is the product of the probability of surviving to age y-1 and the probability of dying at age y.

Calculations:

The chart below has data on likelihood of surviving to age y+0.5 for males and females and the cumulative Social Security Benefit to age y+0.5 under both the existing COLA and a chained CPI COLA.

Survivor Probabilities and Cumulative Benefits
Age y Probability of surviving to exactly age y+0.5 for males Probability of surviving to exactly age y+0.5 for females Cumulative Benefit With Existing COLA Cumulative Benefit With COLA linked to chained CPI
62 0.01321 0.00831 $7,500 $7,500
63 0.01405 0.00896 $22,682 $22,657
64 0.01496 0.00965 $38,230 $38,130
65 0.01599 0.01044 $54,156 $53,927
66 0.01713 0.01133 $70,466 $70,054
67 0.01830 0.01227 $87,171 $86,518
68 0.01946 0.01322 $104,281 $103,327
69 0.02062 0.01422 $121,805 $120,486
70 0.02178 0.01526 $139,752 $138,004
71 0.02306 0.01647 $158,134 $155,889
72 0.02458 0.01783 $176,961 $174,147
73 0.02620 0.01929 $196,244 $192,786
74 0.02780 0.02077 $215,993 $211,816
75 0.02935 0.02224 $236,220 $231,243
76 0.03079 0.02380 $256,936 $251,076
77 0.03230 0.02547 $278,154 $271,323
78 0.03392 0.02732 $299,885 $291,994
79 0.03557 0.02926 $322,143 $313,096
80 0.03691 0.03112 $344,938 $334,640
81 0.03791 0.03288 $368,286 $356,634
82 0.03876 0.03473 $392,198 $379,088
83 0.03954 0.03677 $416,690 $402,011
84 0.03996 0.03858 $441,774 $425,413
85 0.04032 0.04017 $467,464 $449,304
86 0.04010 0.04170 $493,777 $473,694
87 0.03929 0.04275 $520,727 $498,594
88 0.03787 0.04322 $548,328 $524,015
89 0.03584 0.04302 $576,598 $549,967
90 0.03325 0.04209 $605,551 $576,461
91 0.03021 0.04041 $635,206 $603,509
92 0.02681 0.03798 $665,578 $631,123
93 0.02321 0.03490 $696,685 $659,313
94 0.01957 0.03128 $728,544 $688,093
95 0.01604 0.02730 $761,175 $717,474
96 0.01276 0.02314 $794,596 $747,469
97 0.00984 0.01903 $828,825 $778,091
98 0.00734 0.01513 $863,882 $809,353
99 0.00529 0.01163 $899,788 $841,269
100 0.01012 0.02606 $936,563 $873,851
1.00000 1.00000

The expected value of lifetime benefits for males/females under traditional/chained CPI is simply the dot product (the sum product function in EXCEL or NUMBERS) for the relevant probabilities and cumulative benefits.

Impact of Change in COLA by Gender
Males Females Difference Females- Males
Traditional CPI $392,077 $463,804 $71,727
Chained CPI $376,005 $442,772 $66,767
Difference Traditional-Chained CPI $16,072 $21,032

The change in the COLA formula from the traditional CPI to the chained CPI leads to a reduction in expected lifetime benefits of $16,000 for males and $21,000 for females.

Social Security still provides longevity protection under a chained CPI.

http://dailymathproblem.blogspot.com/2014/01/gender-differences-in-life-expectancy.html

This is especially important for females because of their longer life expectancy.

Concluding Thoughts:

The issue of the Social Security COLA is important and complex.   I am of the view that a change in the COLA could be part of a package of Social Security and retirement reforms.  Social Security reform must also encompass additional revenues and rule changes that eliminate future automatic cuts in Social Security benefits.   Pension reform must encompass improvements t0 401(k) plans and additional sources of low-cost annuity income.

Some readers might be interested in my views on the politics of the COLA debate.

http://policymemos.blogspot.com/2014/01/common-ground-on-social-security-colas.html

Impact of altering indexation of Social Security for females vs males

Question:   What is the expected value of lifetime Social Security benefits for females and for males when benefits are linked to the traditional CPI and when benefits are linked to the chained CPI.

Discuss the reasons why women might prefer a switch to the chained CPI over proposals to partially privatize Social Security.

Short Answer:

Answer is contingent on several assumptions laid out below.  I find that changing from the traditional CPI to a chained CPI would reduce the expected value of lifetime Social Security benefits by around $16,000 for males and $21,000 for females.

The actual impact is invariably different from the expected impact.  Regardless of gender, people with the longest life span get the most from Social Security.

However, Social Security is really essential for females because private annuities are more expensive.  See my previous post on this topic.

http://dailymathproblem.blogspot.com/2014/01/gender-differences-in-life-expectancy.html

Analysis:

Key assumptions:

The key assumptions in this analysis are

  1. Person retires at age 62 and receives an initial Social Security retirement benefit of $15,000 per year
  2. Traditional CPI grows at 2.42% per year
  3. Chained CPI grows at 2.09% per year.
  4. In year of death person receives ½ year Social Security Benefit
  5. Probability of surviving from age 62 to age y> 62 is determined by the CDC life tables for females and males.

Readers interested in the discussion of assumptions on difference between traditional and chained CPI might want to look at this post.

http://dailymathproblem.blogspot.com/2014/02/comparing-traditional-and-chained-cpi.html

The expected lifetime Social Security benefit is E(SSB)=Sum(Pyr x CByr)  where Pyr is the probability of surviving to a particular year and CByr is the cumulative benefit from the retirement age at 62 to the year of death.

The logic behind the calculation of the probability a retiree survives to a specific date is similar to the logic behind the geometric distribution.   The probability of surviving to age y > 62 is the product of the probability of surviving to age y-1 and the probability of dying at age y.

Calculations:

The chart below has data on likelihood of surviving to age y+0.5 for males and females and the cumulative Social Security Benefit to age y+0.5 under both the existing COLA and a chained CPI COLA.

Survivor Probabilities and Cumulative Benefits
Age y Probability of surviving to exactly age y+0.5 for males Probability of surviving to exactly age y+0.5 for females Cumulative Benefit With Existing COLA Cumulative Benefit With COLA linked to chained CPI
62 0.01321 0.00831 $7,500 $7,500
63 0.01405 0.00896 $22,682 $22,657
64 0.01496 0.00965 $38,230 $38,130
65 0.01599 0.01044 $54,156 $53,927
66 0.01713 0.01133 $70,466 $70,054
67 0.01830 0.01227 $87,171 $86,518
68 0.01946 0.01322 $104,281 $103,327
69 0.02062 0.01422 $121,805 $120,486
70 0.02178 0.01526 $139,752 $138,004
71 0.02306 0.01647 $158,134 $155,889
72 0.02458 0.01783 $176,961 $174,147
73 0.02620 0.01929 $196,244 $192,786
74 0.02780 0.02077 $215,993 $211,816
75 0.02935 0.02224 $236,220 $231,243
76 0.03079 0.02380 $256,936 $251,076
77 0.03230 0.02547 $278,154 $271,323
78 0.03392 0.02732 $299,885 $291,994
79 0.03557 0.02926 $322,143 $313,096
80 0.03691 0.03112 $344,938 $334,640
81 0.03791 0.03288 $368,286 $356,634
82 0.03876 0.03473 $392,198 $379,088
83 0.03954 0.03677 $416,690 $402,011
84 0.03996 0.03858 $441,774 $425,413
85 0.04032 0.04017 $467,464 $449,304
86 0.04010 0.04170 $493,777 $473,694
87 0.03929 0.04275 $520,727 $498,594
88 0.03787 0.04322 $548,328 $524,015
89 0.03584 0.04302 $576,598 $549,967
90 0.03325 0.04209 $605,551 $576,461
91 0.03021 0.04041 $635,206 $603,509
92 0.02681 0.03798 $665,578 $631,123
93 0.02321 0.03490 $696,685 $659,313
94 0.01957 0.03128 $728,544 $688,093
95 0.01604 0.02730 $761,175 $717,474
96 0.01276 0.02314 $794,596 $747,469
97 0.00984 0.01903 $828,825 $778,091
98 0.00734 0.01513 $863,882 $809,353
99 0.00529 0.01163 $899,788 $841,269
100 0.01012 0.02606 $936,563 $873,851
1.00000 1.00000

The expected value of lifetime benefits for males/females under traditional/chained CPI is simply the dot product (the sum product function in EXCEL or NUMBERS) for the relevant probabilities and cumulative benefits.

Impact of Change in COLA by Gender
Males Females Difference Females- Males
Traditional CPI $392,077 $463,804 $71,727
Chained CPI $376,005 $442,772 $66,767
Difference Traditional-Chained CPI $16,072 $21,032

The change in the COLA formula from the traditional CPI to the chained CPI leads to a reduction in expected lifetime benefits of $16,000 for males and $21,000 for females.

Social Security still provides longevity protection under a chained CPI.

http://dailymathproblem.blogspot.com/2014/01/gender-differences-in-life-expectancy.html

This is especially important for females because of their longer life expectancy.

Concluding Thoughts:

The issue of the Social Security COLA is important and complex.   I am of the view that a change in the COLA could be part of a package of Social Security and retirement reforms.  Social Security reform must also encompass additional revenues and rule changes that eliminate future automatic cuts in Social Security benefits.   Pension reform must encompass improvements t0 401(k) plans and additional sources of low-cost annuity income.

Some readers might be interested in my views on the politics of the COLA debate.

http://policymemos.blogspot.com/2014/01/common-ground-on-social-security-colas.html

Impacts of shift from traditional to chained CPI on Social Security Benefits

Question: What is the potential annual impact and cumulative dollar impact of a policy change that links Social Security benefits to the chained CPI rather than the traditional CPI?

Assumptions:

Analysis presented here pertains to a single retiree who retires at age 62 with a $1,250 per month Social Security retirement benefit.

The traditional CPI grows at 2.42% per year.  The chained CPI grows at 2.09% per year.     These statistics were based on BLS data over the 1999 to 2013 time period.  Economists at the Bureau of Labor Statistics at the Department of Labor informed me that they did not have data on the chained CPI for years prior to 1999.

See the link below for statistics on the traditional and chained CPI.

http://dailymathproblem.blogspot.com/2014/02/comparing-traditional-and-chained-cpi.html

Analysis:  Information on the growth of the annual Social Security Benefits adjusted for the traditional CPI and adjusted for the chained CPI is presented for a retirement potentially spanning from age 62 to age 100 is presented in the table below.

In this table, the first column is age, the second column is the Social Security benefit adjusted by the traditional CPI, the third column is the Social Security benefit adjusted for the chained CPI, and the fourth column is the cumulative change in the Social Security benefit due to the adjustment process.

Path of Social Security Benefit With adjustment based on the traditional CPI Path of Social Security Benefits with Adjustment based on the chained CPI Reduction in Benefits for Age Due to Switch from Traditional to Chained CPI Cumulative Reduction in Benefits
$15,000 $15,000 $0 $0
$15,363 $15,313.50 $50 $50
$15,735 $15,633.55 $101 $151
$16,116 $15,960.29 $155 $306
$16,506 $16,293.86 $212 $518
$16,905 $16,634.41 $271 $788
$17,314 $16,982.06 $332 $1,120
$17,733 $17,336.99 $396 $1,516
$18,162 $17,699.33 $463 $1,979
$18,602 $18,069.25 $533 $2,512
$19,052 $18,446.90 $605 $3,117
$19,513 $18,832.44 $681 $3,797
$19,985 $19,226.03 $759 $4,557
$20,469 $19,627.86 $841 $5,398
$20,964 $20,038.08 $926 $6,324
$21,472 $20,456.88 $1,015 $7,338
$21,991 $20,884.42 $1,107 $8,445
$22,523 $21,320.91 $1,202 $9,647
$23,068 $21,766.52 $1,302 $10,949
$23,627 $22,221.44 $1,405 $12,355
$24,198 $22,685.86 $1,513 $13,867
$24,784 $23,160.00 $1,624 $15,491
$25,384 $23,644.04 $1,740 $17,231
$25,998 $24,138.20 $1,860 $19,091
$26,627 $24,642.69 $1,985 $21,075
$27,272 $25,157.72 $2,114 $23,189
$27,932 $25,683.52 $2,248 $25,437
$28,608 $26,220.31 $2,387 $27,824
$29,300 $26,768.31 $2,532 $30,356
$30,009 $27,327.77 $2,681 $33,037
$30,735 $27,898.92 $2,836 $35,873
$31,479 $28,482.01 $2,997 $38,870
$32,241 $29,077.28 $3,163 $42,033
$33,021 $29,685.00 $3,336 $45,369
$33,820 $30,305.41 $3,515 $48,884
$34,638 $30,938.79 $3,700 $52,583
$35,477 $31,585.42 $3,891 $56,475
$36,335 $32,245.55 $4,090 $60,564
$37,215 $32,919.48 $4,295 $64,859

Some observations:

  • The annual impact of the change from the traditional to chained CPI grows over time.
  •  The annual impact is $463, at age 70 $1,302 at age 80 at age 80, $2,532 at age 90, and $4,294 at age 100.
  • The cumulative impact of the change in the COLA formula is $1,979 at age 70,  $10,949 at age 80, $30,356 age 90, and $64,859 at age 100.

Some Implications:

  • The change from a traditional to chained CPI would have a very large impact both on household and national finances.
  • The fiscal impact of the change in the COLA formula would grow for 38 years until it reaches a constant rate.   (After 38 years the new COLA fully impacts all retirees based on their age.)
  • The change phases in slowly which gives people time to respond and change spending patterns.
  • The annual and cumulative impacts are largest for people near the end of their life when expenses both from increased medical needs and a need to change living arrangements are largest.

You may be interested in my policy blog on the Social Security COLA.

http://policymemos.blogspot.com/2014/01/common-ground-on-social-security-colas.html

PLUS Loans for Parents and Parent Income

PLUS Loans for Parents and Parent Income

Question:  How has the use of PLUS loans for parents changed over time for parents of student attending undergraduate institutions and for students attending graduate schools?   What is the share of PLUS loans taken out by parents with income in the bottom quartile?

Does it appear that parents taking out PLUS loans for students have adequate income to repay their obligations?

Why this issue is important:  Parents who have problems repaying PLUS loans are not allowed to default on the loan.   Increasingly, many parents with PLUS loan obligations have had problems repaying and in some cases the government has garnished Social Security benefits from these borrowers.   It is possible that many of the financial problems caused by use of PLUS loans could have been prevented if lenders had considered the adequacy of parent income prior to making the loan.

Data and Methodology:

I addressed this issue with TRENDSTATS from the NCES DATALAB.

https://nces.ed.gov/Datalab/trendstats/trends.aspx

TRENDSTATS allowed me to get data on use of parent plus loans by income quartile for five different survey years  — 1996, 2000, 2004, 2008 and 2012.

I created separate analysis for parents of undergraduate students and parents of graduate students.

The table on PLUS loans for undergraduates only involves parents of dependent students.

The table on PLUS loans for graduate students uses the combined income of the student and the parent.

Results:  Two tables on PLUS loan use and income quartiles over time are presented below.

Percent of Dependent Parents with PLUS Loans by Income Quartile
Year Lowest 25th  Percent Lower Middle 25th  Percent Lower Upper 25th  Percent Upper 25th  Percent Total
1996 2.96 5.56 6.38 5.65 5.06
2000 3.56 5.48 8.61 6.76 6.07
2004 3.92 6.53 9.34 8.34 6.98
2008 4.33 6.73 9.37 8.86 7.25
2012 6.22 9.17 11.33 10.87 9.27
Percentage Growth 1997 to 2012 109.91% 64.96% 77.57% 92.49% 83.27%

Sample is all parents of dependent undergraduate students

Parent Plus Loans for Graduate Student by Quartile of

Sum of Parent and Student Income
Year Lowest 25th  Percent Lower Middle 25th  Percent Upper Middle 25th  Percent Upper 25th  Percent Total
1996 6.83 3.94 2.36 0.80 3.48
2000 7.37 5.75 4.14 2.90 5.07
2004 7.98 6.18 3.44 3.87 5.51
2008 9.82 8.14 5.48 3.88 6.76
2012 11.47 7.87 5.23 3.27 7.13
% Change 67.85% 99.63% 121.73% 308.91% 104.82%

Analysis of Percent of Plus Loans Across Income Quartiles:

Undergraduate Students:

The lower upper 25th percentile had the highest share of students dependent on PLUS loans for parents in all years.

Growth rate in use of PLUS loans for parents is highest in the lowest 25th percentile.

Graduate Students:

The lowest 25th percentile consistently had the highest percent of people dependent on PLUS loans for parents.

The upper 25th percentile had the highest growth rate in the use of PLUS loans for parents; although, the PLUS loan share for this quartile remained lower than all other quartiles in 2012.

Share of PLUS Loans Taken Out by Parents in First and Second Income Quartile:

Above I discussed the percent of students in each quartile that used a PLUS loan.

Here I look at the percent of students using PLUS loans that are in particular quartiles in each income quartile.

PLUS Loans for Parents Usage
Number out of 1,000 per income quartile
Q1 Q2 Q3 Q4 Total
Undergraduates 62.2 91.7 113.3 108.7 375.9
Graduates 114.7 78.7 52.3 32.7 278.4
Share in Each Quartile
Q1 Q2 Q3 Q4 Total
Undergraduates 16.5% 24.4% 30.1% 28.9% 100.0%
Graduates 41.2% 28.3% 18.8% 11.7% 100.0%

Calculations above are for 2012

Observations on use of Parent PLUS Loans Across Income Quartiles:

Lower-income people take out a lot of PLUS loans.

16.5 percent of PLUS loans taken out by parents of undergraduates are in the lowest income quartile.

41.2 percent of PLUS loans taken out by parents of graduate students are in the lowest income quartile.

Methodological Note:

I wanted the software to provide numbers of students in each income quartile based on population weights.   I would have obtained contingency tables based on population weights in SAS or STATA if I had access to the raw data files.  TRENDSTATS does not appear to have this capability.   Alas, I don’t have access to the raw data so this could not happen.

I attempted to switch the row and column variables in TRENDSTATS but the TRENDSTATS software does not allow for automatic creation of income quartiles when parent income of dependent variable is the column variable.

How then did I get the share of loans for all income quartiles?

By definition, each quartile has the same number of observations so I assumed each group had 1000 students.   I multiplied 1000 by share of students using PLUS loans for each quartile to get PLUS loan use per 1,000 students.

The sum of these numbers is total PLUS loan use across all students.   I divided PLUS loan use by income quartile by total PLUS loan use in the population to get quartile shares.

I am very interested in understanding the advantages and limitations of the POWERSTATS and TRENDSTATS education department software and will continue to make comments that might lead to improvements in the on-line databases.

Concluding Thought:

Barring really exceptional circumstances, student debt including PLUS loans obtained by parents is not forgiven or discharged even in bankruptcy.   Lenders happily give PLUS loans to lower-income parents because the loans are guaranteed even if the lender cannot make repayments.

The combination of government guarantees for loan payments and a prohibition on discharge of loans in bankruptcy has led to a thriving debt market geared towards people with little chance of repayment.

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%

 

 

Observations:

 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:

https://www.nytimes.com/2017/11/15/us/politics/house-tax-bill-higher-education-increases-tuition.html

http://www.denverpost.com/2017/11/08/gop-tax-bill-student-loan-interest-deduction/

http://time.com/money/4784214/trump-2018-budget-education-cuts-student-loans/

https://www.usnews.com/news/politics/articles/2017-05-22/budget-seeks-end-to-subsidized-student-loans-forgiveness

https://www.washingtonpost.com/news/grade-point/wp/2016/12/20/lawsuit-accuses-education-department-of-reversing-course-on-student-loan-forgiveness/?tid=a_inl&utm_term=.b62d5935222e

https://studentloanhero.com/news/betsy-devos-delays-closed-for-profit-colleges-student-loan-forgiveness/

https://www.marketwatch.com/story/cfpb-student-loan-companies-are-illegally-denying-borrowers-right-to-make-lower-payments-2016-10-31

https://www.politico.com/story/2017/11/27/consumer-financial-protection-bureau-fight-mulvaney-english-190862

http://thehill.com/policy/finance/349223-education-dept-ends-agreement-to-work-with-consumer-bureau-on-student-loan

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.

https://www.webmd.com/diabetes/news/20180725/spiking-insulin-costs-put-patients-in-brutal-bind

https://health.usnews.com/health-care/for-better/articles/2018-06-29/whats-behind-the-rising-costs-of-insulin

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.