Category: Policy

Evaluating 2024 Social Security Reform Proposals

Republicans and Democrats are extremely far apart on how to reform the Social Security system and Medicare. This post examines and evaluates various proposals.


Findings:  

  • Two candidates, Haley and Christy, support phased in increases in retirement age and other changes in benefits for younger workers
  • Three candidates, Trump, DeSantis, Ramaswamy, do not support immediate actions.
  • Proposals by Democrats involve substantial increase in taxes on Americans with relatively high income and include expansions in benefits.
  • Republican proposals would not prevent automatic benefit cuts that are projected to occur under current law.
  • Democrat proposals could lower economic growth, reduce fiscal discipline, and increase the dependence of the elderly on Social Security.
  • There is a need for a compromise proposal that adjusts both benefits and revenues combined with improvements and expansions of private savings for retirement targeted towards households struggling to save.

Introduction:

The October 2024 Presidential debate helped clarify where Republican candidates now stand on entitlements – Social Security and Medicare.

Two candidates, Haley and Christie favor a higher retirement age for young adults now entering the workforce and for means testing Social Security benefits.  Haley also called for adjusting the rules governing the Social Security cost of living adjustments.

Haley supports increased use of Medicare Advantage plans to address imbalances with the Medicare Trust fund.

Trump, DeSantis, Scott, and Ramaswamy all appear to oppose reductions in Social Security benefits.

Ron DeSantis has said on the campaign trail that he would not mess with entitlements, but he had previously voted for an increase in the retirement age while in Congress.  DeSantis stated that part of his opposition to now raising the retirement age stems from recent declines in life expectancy.

Scott was concerned about the increase in the retirement age on people in jobs that required physical labor. 

Both Scott and Ramaswamy argued that cuts to the discretionary budget and economic growth could alleviate pending problems with the Social Security trust fund.  

The Biden Administration and Congress are grappling with the budget and there is very little active debate over ways to deal with the impending projected automatic benefit cuts to Social Security or long term reform proposals.

The Biden budget proposals includes higher taxes to fund Medicare but does not include a similar tax increase for Social Security.    Haley is supportive of increased use of Medicare Advantage plans to reduce costs.

Most Democrats do not support reductions in benefits or increases in the retirement age.  The approach preferred by many Democrats in Congress summarized here involves several substantial new taxes and more generous benefits.

The Congressional proposal includes three tax provisions. It would subject all wage income over $250,000 to the combined employer and employee Social Security tax.  Apply a 12.4 percent tax on investment income for high earners as stipulated by the provisions of the Affordable Care Act.  Apply a 16.2 percent net investment income tax on owners of S-corporations and limited partners.

The Congressional proposal includes several increases in benefits both for existing beneficiaries and future beneficiaries, increase the special minimum benefit, bases cost of living adjustments on a price index that reflects purchases by the elderly, and expands benefits for children of disabled and deceased workers until age 22.

Analysis:  

The Republican Proposals: 

One of the reasons why Social Security should be a high priority 2024 issue is that under current law and current revenue projections Social Security benefits will be automatically cut by 23 percent in 2033.   None of the Republican proposals would prevent projected automatic benefit cuts.

The proposals for a higher retirement age applied to new entrants to the workforce offered by Haley and Christy would not prevent the automatic benefit cuts in 2034 because these future cuts would not be implemented until the new cohort of workers retires in 30 or 40 years.   

Proposals to do nothing will not prevent the automatic benefit cuts if trust fund revenue projections are accurate.   The idea that Republican policies that lead to higher economic growth will lead to increased trust fund revenues that will increase trust fund revenue is wishful thinking contradicted by the past relationship between Republican policies and economic growth.

The implementation of automatic benefit cuts to Social Security would be an economic disaster leading to a sharp decline in aggregate demand and a sharp increase in poverty among the elderly.  The failure to implement meaningful changes to either Social Security benefits or taxes sooner rather than later will lead to a political and economic shock substantially more severe than the annual debt crisis or government closure disputes. 

The proposal to increase the retirement age for younger workers is premised on the view that younger workers will be able to increase private retirement savings prior to retirement.  However, younger workers are failing to save for retirement due to record levels of student debt and increased use of retirement funds prior to retirement.    

It is very difficult to evaluate proposals for means testing of Social Security benefits without knowledge of the means testing formula.  Specifically, how many high-wealth households will be ineligible for Social Security benefits under the proposal.  Also, the proposal could reduce charitable gifts since many wealthy families give away most of their wealth.

The Democrat Proposals:  

The Social Security Administration projects the Congressional reform package would lead to a balanced trust fund for a 75 year period. However, some of the revenue would likely be diverted to Medicare given that the current Biden budget includes a proposal to raise the high-earner tax on investment income from 3.8 percent to 5.0 percent for Medicare related expenses.   

Revenue will invariably be lower than projected by forecasters.  High earners will respond to the new taxes by increasing contributions to tax-deferred accounts, which reduce AGI and investment income.  The tax increases in the Democrat proposal could reduce economic growth, which could reduce projected improvements in trust fund solvency.   

The new Social Security taxes would likely motivate future congresses to spend more or reduce general taxes applied to the elderly since money is fungible and the new taxes reduce the amount of funds the Treasury must borrow from the public.

The Democrats claim that the new taxes only impact rich people but some people who have high income in one or a few years do not have high lifetime income.  An analysis of lifetime earnings and lifetime tax payments could reveal that the Democrat tax proposals adversely impact some households with modest lifetime earnings.

From a perspective on inter-generational fairness, it is difficult to justify the use of taxes on the next generation to fund current increases in Social Security benefits, even current wealthy Social Security beneficiaries.   

The proposal for linking cost of living adjustments to a price index geared towards a basket of goods consumed by the elderly does not account for the fact that due to differences in insurance coverage elderly American households have lower out-of-pocket health costs than working-age American households.  Go herefor an explanation.

The expansion of Social Security benefits for children of disabled and deceased workers would affect a small slice of the population in need while ignoring the large number of young adults who are leaving college with substantial student debt.  The proposal is not means tested, hence some of the beneficiaries would be quite wealthy and not in need of the additional funds.

In general, the Sanders Social Security reform package would increase the dependence of Americans on the Social Security system.  They are likely motivated by previous efforts described here, which appear to primarily benefit the affluent.  My view is that progressive changes to private retirement savings are an essential part of a Social Security reform package.

An Alternative Approach: 

An alternative approach would include both relatively minor phased in adjustments to the retirement age, new revenue sources for both Medicare and Social Security, and new incentives designed to increase private retirement savings by younger workers who must prepare for a higher retirement age.

Relatively minor additional taxes are needed to prevent automatic cuts to the Social Security in 2034 and the adverse impact of these benefit cuts on the general economy and the elderly poverty rate.

The existence of new revenue will reduce the increase in the future retirement age and reduce pressure on future workers who due to health considerations cannot increase the length of their careers.  This combination will reduce future demand for disability benefits relative to the Haley and Christy proposals.

A strong argument could be made that policies expanding private retirement savings among the portion of the population that is unable to save for retirement would be more effective than expansions of Social Security benefits.  These reforms include:

  • Savings incentives for new entrants to the workforce as early as high school.
  • Incentives for automatic enrollment and contributions to Roth IRAS for workers without employer-based retirement plans.
  • Changes to Flexible Savings Account and Health Savings Account plans to reduce loss of retirement income due to out-of-pocket health expenditures,
  • Limited student debt relief households to facilitate increased retirement saving.

A first draft of an alternative approach to Social Security reform was published here.

An evaluation of the debt-limit deal

The debt limit deal is a big economic and political win for Republicans. It solidifies the Republican fiscal agenda and gives Republicans clout in future fiscal disputes including disputes involving Social Security. Moreover, the decision to schedule the next debt limit dispute at the same time as the presidential certification decision could help decide the next presidential election.


Introduction:  The Biden Administration is attempting to sell the debt limit deal as a valid compromise that maintains major achievements enacted in the first two years of the Administration.  The reality is that many of the most important Biden-era achievements have been or will be phased out and the continued existence of the debt limit will facilitate GOP domination of future fiscal debates including the response to automatic Social Security and Medicare benefit reductions under current law.

Moreover, the decision to schedule the next debt limit decision with the next presidential certification decision gives an additional lever to senators and congressmen who want to challenge the next presidential election result.

Major Aspects of the Debt Limit Deal:

The President of the United States and the Speaker of the House of Representatives have an agreement in principle on a deal that averts a default on the national debt.  The major features of the deal are as follows.

  • Suspends debt limit until January 1, 2025.
  • Flat non-defense discretionary spending in 2024 and 1.0 percent growth in 2025.
  • Protects spending on veterans health care and defense.
  • Expands work requirements for food stamps.
  • Claws back some Covid 19 funds
  • Cut funding for Internal Revenue Service contained in the Inflation Reduction Act.
  • Restarts student loan payments.
  • Maintains climate and clean energy.
  • Expedites an energy project in West Virginia and streamlines future energy project approval project.

Comments:

Comment One:  The Biden Administration has argued that the suspension of the debt limit until after the election is a win. Wrong!  The Republicans would have been foolish to threaten a debt default or government closure prior to the election.  The January 1, 2025, deadline in the middle of the certification requirement for the results of the election could provide the Republican an additional tool to overturn an election result.  It is difficult to understand why the Biden Administration would agree to time the next debt limit fight with the next presidential election certification decision.   

Comment Two:  Second-term honeymoons are brief, if they exist. The binding debt limit early in the first term of a second Biden Administration (should the President win reelection) would make it very difficult to achieve any of the President’s priorities.  This provision makes President Biden a lame duck in his second term even before his inauguration.

Comment Two:  The freeze in non-defense spending and the one-year 1.0 percent increase in non-defense spending is a significant real reduction in the current 5.0 percent annual inflation environment.

Comment Three:  An evaluation of the debt limit deal must account for the fact that it is occurring when many of the most important progressive priorities – the expanded earn income tax credit and additional health care subsidies have already been phased out or are in danger of being phased out. The lack of permanent progress on expanding and improving the ACA is especially startling.  The American Rescue Plan included a provision for short-term COBRA assistance instead of a major expansion of ACA insurance.  The expanded ACA premium tax credit will expire in 2025, when Republicans could demand its elimination in exchange for an increase in the debt limit.  The Covid-era Medicaid expansion has already been eliminated.   This deal does not include work-requirements for Medicaid and the Biden Administration has eliminated some Trump-era Medicaid work requirement.  However, the number of uninsured will likely increase in the next few years and will not return to pre-Trump levels. 

Comment Four:  The deal does not cut environmental tax credits, many of which benefit affluent households and could be prohibitively expensive.  The deal facilitates additional energy projects.  The deal also does not eliminate ethanol tax credits, which have, at best, a small positive environmental impact.  My view, expressed here, is that government subsidies, like tax credits for EVs, will not have a major environmental impact because these subsidies only impact a small fraction of household spending on energy and products that cause carbon emissions or pollution.  A comprehensive environmental policy requires a carbon tax and/or cap and trade regimes, policies that are currently not under consideration.

Comment Five:  The continued existence of a debt limit will give the Republicans the upper hand in future fiscal debates including the debates over the future of Social Security and Medicare.    The Republicans will be able to extract major concessions on Social Security and Medicare when the debt limit is binding and current law mandates automatic benefit reductions.  Go here for a discussion of projected automatic cuts to entitlement programs.

Comment Six:  The deal requires the restart of student loan payments but does not overturn the Biden Administration’s student loan discharge proposal.  This is a good deal for the Republicans if as expected the Supreme court rules the president rules the student discharge program is unconstitutional.  My preferred solution discussed here; the elimination of all interest payments for two years was never considered.

An analysis of fiscal policy under a debt limit

The economic consequences of a default on the national debt would be catastrophic to the nation and the world economy. The debt-limit dispute has forestalled discussion of rational budget changes and entitlement reform. President Biden has the legal authority to ignore the debt limit and pay the nations bills. House Republicans have many other ways to pursue their agenda.


Introduction:  

The current standoff over the debt limit between House Speaker McCarthy and President Biden reminds me of the line in the movie Cool Hand Luke “What we have here is a failure to communicate.”

The Speaker’s position is that there will be no increase in the debt limit without substantial reductions in spending.

The President has refused to negotiate over the debt limit and would deal with Congressional efforts to trim the budget through the normal appropriation process.

This post evaluates the debt limit conflict.

The status of debt-limit proposals:

The Speaker of the House has taken the position that he will not support an increase in the debt limit unless it is accompanied by substantial reductions in spending.  House Republicans differ on the type of spending cuts they support.  Many of the cuts in a House bill would not pass the Senate.

The current House Republican proposal discussed here contains the following items:

  • An increase in the debt limit by $1.5 trillion or until March 2024, whichever comes first,
  • Cancellation of the Biden Administration student debt discharge proposal,
  • The reinstatement of student loan payments, halted by executive order during the COVID pandemic,
  • Prevention of the enactment of changes to Income Driven Loan plans,
  • Rescission of newly appropriated IRS funds,
  • Creation of a work requirement for federal assistance programs including SNAP and Medicaid,
  • Elimination of tax credits for electric vehicles and other solar and wind projects enacted in the Inflation Reduction Act,
  • Reduction in funding from 2024 levels to 2022 levels and a limitation of annual funding increases to 1.0 percent.

Several aspects of the debt-limit dispute are examined here in more detail.

Concern One: Economic Issues

 A debt default by the United State is an existential threat to the national and world economy

  • Federal benefits including Social Security and Medicare and Medicaid payments would be disrupted.
  • Substantial amount of world trade, which is denominated in dollars would be disrupted.
  • Investors would dump Treasury securities and interest rates would rise.  
  • The stock market would fall drastically.
  • The duration of the stock market decline and interest rate spike would depend on duration of default.
  • The dollar would likely lose its status as world’s reserve currency.
  • Recession and stagflation would likely ensue.
  • Assistance to Ukraine would be disrupted.

Concern Two:  Legal and Constitutional Issues

Legal experts differ on the ability of the President to pay bills, maintain benefits, and raise new funds should Congress fail to increase the debt limit.

  • The founders of our nation did not envision a situation where one part of a divided Congress could dictate massive policy changes to the other part of Congress and the Executive.
  • Many legal scholars believe the President has the authority to ignore the debt limit when congressional actions create unconstitutional doubt about the validity of the public debt.  See this note.
  • Congressional Republicans have many levers including the normal appropriation process, court action, government closure to reduce spending.
  • Supreme Court should stay out of this dispute between Congress and the President.  Congressional Republicans have an impeachment option if they believe the President’s actions are illegal.

Concern Three:  Fiscal and Budgetary Issues

Many items in the Republican agenda are severe and have little support in the Senate.  However, some items have merit and could be enacted in a different political environment.

  • The simultaneous enactment of the Republican fiscal agenda with Federal Reserve monetary tightening would result in a severe recession.
  • Fiscal policy is already becoming more stringent because of the end of COVID relief programs and automatic phaseouts of some programs.
  • The COVID-era Medicaid expansion has lapsed.  Go here for a discussion of the impact of the end of this benefit.  Additional Medicaid work requirements would further increase the number of uninsured.
  • The current proposal does not appear to target the ACA.  However, the elimination of the ACA subsidy cliff automatically phases out in 2025.
  • A strong case could be made for modification of the EV tax credits, which I have argued  here are regressive and a costly way to motivate more rapid introduction of EVs.
  • The Biden Administration student discharge proposal is not clearly connected to the COVID pandemic and could be eliminated by litigation currently before the Supreme Court.  The Biden Administration and Congress should consider revisions to student debt programs described here.
  • The reduction of SNAP programs would substantially increase hunger in America.
  • The limitation of future expenditures to an annual increase of 1.0 percent is problematic given that inflation remains above 5.0 percent.
  • The proposed recission of funds for the IRS would increase budget deficits.
  • The proposed reinstatement of the debt limit prior to the election is a political non-starter.
  • The debt-limit threat has caused the Administration to delay replenishment of the strategic petroleum reserve.

Concern Four:  The Role of Entitlements

The current budget debate ignores key issues pertaining to the future of Social Security and Medicare.  This is a huge mistake.

  • The trustees of the Social Security Trust fund project that declines in Trust fund assets will trigger automatic Medicare benefit cuts in 2028 and automatic cuts to Social Security in 2033.  Go here for part of this discussion.
  • The existence of a debt-limit dispute in a year where the Trust Fund balance dictates automatic reductions in either Medicare or Social Security benefits ncreases the likelihood of benefit reductions.
  • The delay in the entitlement discussion could result in abrupt entitlement benefits in the future.  Go herefor a discussion of why changes to Social Security need to be phased in slowly and coupled with improvements to private retirement savings.

The decision by both the Republicans and the Democrats to delay discussion of entitlement reforms increases the likelihood that the reform process will result in a less than optimal outcome.

Concluding Remarks:  Down-to-the-wire disputes over the debt limit are never good for the economy, for the markets and are not an effective way to deal with increased debt levels or wasteful spending.  Government closures also aren’t good for the country, but the economic consequences of a government closure are infinitely less drastic than a default on the debt.  

President Biden must make clear that the debt default is not going to happen.  The only way for the President to remove the uncertainty of a debt default is to announce that he will ignore the debt limit and pay the nation’s bills, an action supported by many legal scholars.

Comments on the SVP debacle

High interest rates did not cause the SVB collapse because interest rates remain below their historic average. Management of SVB and possibly other banks failed to implement their core responsibility – matching the duration of assets and liabilities. Efforts to deal with bank insolvencies will lead to higher and more prolonged inflation.


Prologue:  In 1991, the Treasury Department reviewed potential risks to the financial stability of Fannie Mae and Freddie Mac.  A government model had concluded that the companies would not face problems due to an increase in interest rates until rates rose to the 24 percent or 28 percent level.  

My review of this model found that the model understated interest rate risks for two reasons.  First, the model omitted information about annual and lifetime payment caps on Adjustable-Rate Mortgages, which reduce bank revenue when interest rates rise.  Second, the model did not fully consider the impact of interest rates on defaults and other outcomes that could exacerbate financial stress when interest rates rose.  

A revised version of the government model that I put together concluded an interest rate shock in the 12-14 percent range would lead to financial problems for the two companies.  Treasury officials were grateful for this input but were largely unconcerned because interest rates were on a downward trajectory.

The current generation of management at many banks takes extremely low interest rates for granted and understates risk associated, which exist when the duration of their asserts do not match the duration of their liabilities.

The 10-year Treasury interest rate a couple of years prior to the 2008 insolvency of Freddie Mac and Fannie Mae was around 5 percent, far lower than the interest rates that prevailed in most of the 1990s.

The 10-year interest rate at the time of the SVB debacle was around 4.0 percent and is now at 3.7 percent, below its historic average.

Comments

Comment One:  Don’t blame the Fed or high interest rates for this debacle.  High interest rates did not cause the SVP collapse because interest rates are not high as discussed in the post Should the Fed Pivot?

Comment Two:  It is hard to understand why anyone, let alone a sophisticated financial institution with short term obligations, would tie up funds in long-term bonds when the yield on the 10-year government bond was lower than 1.0 percent during the pandemic and remains below the long-term average. More information on the type of investments that lead to this debacle is needed. Note, even short-term bond ETFs invested in inflation protection bonds like VIPSX, VTIP, and STIP, have lost substantial value in the past year. Go herefor a discussion a discussion of use of bond ETFs in a low interest environment. The collapse of a bank due to an interest rate exposure when the 10-year bond yield remained at 4.5 percent could have occurred if the bank’s analysts had grossly miscalculated the impact of interest rates on certain assets.

 Bank officials purchasing these bonds and bond funds should have more carefully researched the impact of interest rates on all of their investments and realized there was more downside risk than upside potential from investing in fixed income assets when interest rates were at such a low

Comment Three:  SVP may be the canary in the coal mine.  The insolvencies of Freddie Mac and Fannie Mae were preceded by insolvencies of some smaller private mortgage insurers. The SVB closure occurred very quickly after the public became aware of the problems at the bank because there was a run for deposits.  The First Republic Bank, is now losing deposits.  Transparency causes depositors to flee but is necessary to assure better investments.

Comment Four:  Regulators need to actively monitor a second potential stress point — crypto Ponzi schemes like the ones at FTX and Silvergate.  Did crypto play a role in the SVB debacle? I wonder what impact if any exposure to crypto had on the SVB collapse.

Comment Five:  The CEO of SVB sold $3.5 million in stocks prior to the sale of the bank.  Federal regulators should move to claw back the proceeds of this gain.

Comment Six:  The blame game has started.  Republicans are blaming lax fiscal and monetary policy and have conveniently ignored their role.  Yes, Jerome Powell should have increased interest rates sooner.  However, there is a lot blame to be shared here.  The Trump era tax cuts and Trump’s threats to fire Chairman Powell if he did not lower interest rates had a major impact on the nation’s fiscal and monetary condition.  Also, Republicans have consistently argued for less regulation, a position that is hard to defend.   

Comment Seven:  The Fed is now in a tight box.  Inflation and the labor market remain robust.  A move by the Fed to prevent insolvencies, by lowering the cost of credit or by purchasing some of the long-term bonds owned by SVB, will lead to more inflation.  Bill Ackman is making the case that SVB is too big to fail and the Fed should consider some sort of bailout.   Dealing with the banking crisis could lead to higher inflation over a prolonged period.

Bring Back the Jackson-Vanik Approach to Russia

Many policy makers want to give Russia an exit ramp from the war. The existence of the exit- ramp option, gives the aggressor an incentive to continue hostilities because if events on the battlefield go poorly the aggressor can take the ramp. The United States and NATO need to convince Putin that consequences from this aggression cannot be easily reversed. Targeted economic sanctions have not caused western businesses to leave Russia. The key to resolution of the war in Ukraine is a difficult-to-reverse restriction on economic activity with Russia patterned after the Jackson-Vanik Amendment.


Background on the Jackson Vanik Amendment:

The Jackson-Vanik Amendment to a Trade Act passed in 1974 restricted trade with non-market economies that restricted Jewish emigration and violated other human rights groups.

The Jackson-Vanik restrictions on trade were repealed in 2012 in the same law that imposed trade sanctions on some Russian officials for the murder of Sergei Magnitsky.    The repeal of Jackson-Vanik led the United States to grant most favored nation trade status to Russia and Russia was granted entry to the WTO in August of 2012.

Russia remains a member of the WTO in good standing despite Russian involvement in the downloading of civilian airliner over Ukraine, the invasion of Crimea in 2014, and the current war in Ukraine.

The Current Situation:

Russian aggression and genocide In Ukraine haven’t been prevented by targeted sanctions that would be easily reversed.  Go here for a discussion of child abductions by Russia in Ukraine.  Go here for a discussion of Russian war crimes since 1991.  Go here for a discussion of recent civilian casualties in Ukraine.

Economic sanctions have not prevented many western nations from continuing business in Russia as discussed here.

The appeasement advocates claim to be motivated by fear of a wider conflict.  There already is a wider conflict.  Russia committed human rights violation in Georgia, a regime that jailed its former president.  Russia supports the dictator in Belarus.  Go here for an article on Belarus.

Bring Back Jackson Vanik:

Targeted economic sanctions have not affected Russian behavior.

The linkage of the Magnitsky sanctions to the repeal of Jackson-Vanik did not deter Russian aggression.  On balance the combination of the repeal of Jackson-Vanik with the enactment of Magnitsky sanctions was a good deal for Russia.

The WTO claims that it contributes to peace and stability.  Let’s be clear.  Russia’s entry into the WTO did not contribute to peace and stability.

Despite sanctions, western firms have not left Russia.  The western firms and the Russian government both believe sanctions can be largely ignored and will be reversed.

Only Congress and the Administration working together can send a signal to the Russians that they will not get away with aggression and crimes.  The way to do this is to abolish most favored nation trade status, remove Russia from the WTO, and prohibit trade and investment with Russia until Congress passes legislation removing these penalties. 

A key to ending the Ukraine war and deterring future Russian aggression involves broad penalties imposed on the entire Russian economy not narrow sanctions on the elite who will be compensated for their sacrifices.

A successful deterrent strategy requires penalties that cannot be reversed unless there is proof supporting the view that the aggression will end and will not be repeated.

We need a return to the Reagan philosophy of Trust but Verify.  A law similar to the Jackson-Vanik Amendment is a first step in instituting this approach.

David Bernstein is the author of A 2024 Health Care Reform Proposal.  

The Debt-Limit Debate and Entitlement Spending

The Republican party is linking increases in the debt limit to cuts in entitlement spending. This approach will not lead to beneficial entitlement reform. A default on the debt would lead to catastrophic economic and political impacts. The 2023 fiscal debate should concentrate on how to phase out COVID-era relief benefits, instead of entitlement reform.


Introduction: 

A debt limit crisis that leads the United States to default on its financial obligations would be catastrophic. A U.S. debt default would lead to the demise of the dollar as the world’s reserve currency, increase interest rates, and reduce American influence abroad.  MAGA Republicans, who supported the insurrection and are supportive of Putin’s war in Ukraine, may not be opposed to these outcomes. 

GOP members of congress are threatening to refuse to support a debt-limit discharge unless the Senate and the President agree to cuts in Social Security.  Go here for some Republican ideas on linking increases to the debt limit to changes in Social Security and Medicare.  

The Debt Limit and Entitlements:

Many older people have very little in private retirement savings and are totally dependent on both Medicare and Social Security.  Efforts to change retirement and Medicare benefits must be preceded by reforms that decrease the number of older households with low levels of retirement assets or reserves for health expenditures.  

A proposal to increase the minimum age for Social Security benefits from 62 to 63 or longer would reduce the future debt to GDP ratio.  Financial markets are forward looking, hence the future expected debt to GDP ratio is a more important financial variable than current-year government deficits.  Entitlement reform should be more focused on the more important debt measure.

Immediate changes to entitlement spending would be detrimental to the economy, would reduce current consumption and would increase poverty among older households.

Reductions in entitlement spending cannot be implemented until after private retirement savings is increased, especially for households that currently do not save enough for retirement.

Efforts to expand private retirement savings will increase government deficits. 

Restrictions on government spending and tax expenditures for pension, health and other savings incentives stemming from a stringent debt limit will delay efforts to increase private retirement savings and will delay the needed increase in the retirement age.

The debt limit is not the only lever to force changes in entitlement spending.  The Trustees of the Social Security Trust fund project the trust fund will be depleted in 2035.  The projected depletion of the Trust fund will, under current law, lead to the automatic benefit cuts.   The avoidance of automatic benefit cuts, not the debt limit, is the best way to motivate actions on entitlement reform.

Concluding Thoughts:

Republicans do not have the votes for benefit reductions including changes in mean testing or increases in the retirement age.  Immediate changes in benefit formulas would be disastrous to current retirees and worker nearing retirement.  There is no support for MAGA-style entitlement reform in the Senate or in the current Administration.  The Democrats can’t link any entitlement change to a temporary increase in the debt limit because such an agreement would only lead to demands for additional changes in entitlements once the debt reaches the new limit. 

The 2023 fiscal discussion should center on efforts to reduce COVID-era emergency expenditures rather than efforts to force immediate changes in entitlement spending.  These debates will also be difficult and could lead to a government shutdown, an admittedly undesirable outcome but one that is less catastrophic than a default on the U.S. debt.  

David Bernstein, an economist living in Denver Colorado, is the author A 2023 Healthcare Reform Proposaland Alternatives to Biden Student Debt Relief Proposals. 

Should gig workers be employees?

A proposed Biden Administration rule reclassifying gig workers as employees, which intends to expand health and retirement benefits, would have adverse consequences. The proposed rule would reduce opportunities for people seeking flexible work hours, reduce employment options during economic downturns, cause some firms to reduce benefits, and worsen health insurance outcomes for some workers. Modifications to the tax treatment of individual retirement accounts and health insurance premiums would more effectively expand benefits than reclassification of work status.

Introduction:   A proposed Department of Labor rule, described here, would make it more difficult for companies to treat workers as independent contractors instead of employees. The proposal would classify workers as employees instead of independent contractors if they are economically dependent on a company. 

The purpose of the new rule is to increase health and retirement benefits for people currently employed as gig workers.   The proposed reclassification of gig workers to full-time employees does not automatically lead to better benefits for all workers and could have the unintended side-effect of decreasing opportunities in the labor force. 

  • Cost to firms maintaining current benefits packages would increase.
  • Some firms would reduce benefit packages to reduce the increase in costs stemming from the new regulation. 
  • Some firms would respond to the regulation by hiring fewer full-time employees and more part-time employees.
  • Some workers might leave the workforce because they would be unable to obtain employment offering flexible hours. 
  • Some workers with state-exchange health insurance would lose access to a premium tax credit and could receive a less generous health insurance package from their employer.

The reduction of disparities between the retirement and health benefits received by gig workers and employees could better be achieved through modifications of the tax treatment and rules governing health insurance premiums and individual retirement accounts than by the proposed regulation.  

Labor Market and Macroeconomic Issues:  

Supporters of the gig economy point out that many workers need or prefer a position that offers flexible hours.  This need is especially pronounced for people with young children.  Lack of affordable and reliable day care and was the cause of a decrease in workforce participation during the pandemic.  The forced reclassification of gig workers to employee status could reduce available flexible positions.

The existence of the gig economy may reduce loss of employment during recessions, if people who lose full-time traditional employment can find work in the gig economy.  One recent article explored the relationship between county unemployment and the proportion of county residents working online at a particular platform.  The article found that a 1.0 percent increase in county unemployment is associated with a 21.8 percent increase in the number of county residents working on-line at the platform.  This finding suggests that new regulations that reduce access to the gig work option could increase unemployment during a recession.

Health Insurance Issues:

Most working-age employees and their dependents obtain their health insurance from their employer and many employers pay a substantial portion of the health insurance premium.    Since the enactment of the Affordable Care Act, workers without an offer of employer-based insurance are eligible for a premium tax credit for health insurance on state exchanges.  The employer mandate, created under the Affordable Care Act, fined firms with more than 50 employees that did not provide health insurance to their full-time workers. 

The reclassification of gig workers as employees would reduce the role of state-exchange markets.  There is substantial disparity in the cost and quality of employer-based insurance.

In some cases, the reclassification of a gig worker to employee status will improve health insurance outcomes.  In other cases, the converted gig worker would have worse or more expensive insurance.

The reclassification of gig workers to employee status could benefit young middle-income workers with no dependents when employers pay a large share of premiums.  Many young adults receiving their health insurance on state exchanges pay 100 percent of their health insurance premium because the premium tax credit is not available when premiums are less than 8.5 percent of income.  These workers would realize lower insurance costs if they were reclassified as employees and if their new employer paid a share of the health insurance premium.

In other cases, the reclassification of gig workers to employees worsens outcomes.  Many employers offer only one health insurance plan with limited benefits, narrow networks, and high premiums for workers.  The existence of the offer of employer-based health insurance makes employees ineligible for the premium tax credit and makes state-exchange insurance unaffordable. 

A regulation leading to the reclassification of gig workers to full-time worker would cause firms that do not change their health insurance or employment policies to either increase purchase of health insurance for workers or pay a fine for full-time workers who receive their health insurance from state exchanges.  

Some firms would respond to the regulation by reducing hours worked, by increasing the number of part-time employees, thereby decreasing fines under the employee mandate.   Some firms would reduce insurance costs by increasing plan deductibles or by adopting a narrow health provider network.  Some firms would reduce the amount of their premium subsidy.

A better way to assist workers in the gig economy is to expand and improve subsidies for premiums on health insurance purchased on state exchanges while merging the markets for employer-based and state exchange insurance.  Three reforms that deserve consideration are:

  • Provide tax incentives for employer subsidies of state exchange health insurance instead of employer subsidies of firm-specific employer-based health insurance.
  • Modify the premium tax credit to provide some subsidy for young adults without an employer subsidy.
  • Create a new employer mandate consistent with the new subsidies.

The modified health insurance subsidy outlined here reduces costs of state exchange health insurance for all young adults who do not currently receive a subsidy.

The merger of state-exchange health insurance and employer-based health insurance markets and the modification of the premium tax credit will assist workers with multiple part-time jobs and will allow workers to maintain continuous health insurance coverage through periods of unemployment and job transitions. 

The merger of state-exchange and employer-based health insurance markets allows all households to search for the most suitable health insurance plan.  It prevents a situation where a worker needs specialized care perhaps at a top cancer hospital is tied to a single employer-based plan that does not offer access to the desired provider.

A more complete discussion of this health care reform proposal can be found here.   

Retirement Plan Issues:   

Many firms offer full-time employees a 401(k) plan.  Workers at firms that do not offer a 401(k) plan and gig workers must save for retirement through an Individual Retirement Account.

401(k) plans are more generous to employees than IRAs.  First, employers are allowed to directly contribute to a 401(k) plan and/or match employee contributions to the plan but are not similarly allowed to contribute to a worker’s IRA.  Second, the maximum allowable employee contribution to a 401(k) plan in 2022, ($20,500 or $27,00 if over 55 years old), is substantially higher than the maximum allowable contribution to an IRA, ($6,000 or $7,000 if over 55).

The reclassification of gig workers to employee status could lead to higher costs for firms and firms could take actions to offset the increase in costs.

Some firms will respond to reclassification of gig workers by reducing the number of workers who are eligible for participation in the firm-sponsored retirement plan.  This could occur by increasing the share of employees working part time.

Some firms could reduce employer contributions to 401(k) plans or eliminate the 401(k) plan altogether.

An alternative superior way to expand retirement benefits for gig workers is to increase the generosity of Individual Retirement Accounts and to allow firms to contribute to individual retirement accounts owned by employees and accounts owned by contractors.  Specific changes that should be implemented include.

  • Allow firms to directly contribute matching funds to Individual Retirement Accounts for employees and for independent contractors. 
  • Increase allowable worker contribution limits into Individual Retirement accounts to the level that exist for 401(k) accounts. 
  • Replace tax exemptions and deductions for Individual Retirement Account contributions with a tax credit.

The use of a tax credit for contributions to an Individual Retirement Account favors low-income workers who are in a lower marginal tax bracket.   The change from a tax deduction to a tax credit will also disproportionately benefit gig workers who tend to be in a low marginal tax bracket. 

Contributions to Health Savings Accounts are also tax deductible. Distributions from health savings accounts used for qualified health expenses are not taxed. The replacement of a tax deduction with a tax credit for contributions to health savings accounts would benefit low-income workers and could also disproportionately benefit gig workers.   Firms should also be allowed to make direct contributions to health savings accounts owned by employees and independent contractors.

The pension reforms currently being considered by Congress, discussed here, appear to increase the role of 401(k) plan and could exacerbate the gap between gig and employee pension outcomes.  Congress is not currently moving towards the pension reforms outlined in this memo.

Concluding Remarks: The typical gig worker receives less in health and retirement benefits than the typical employee.  However, the newly proposed rule that would convert gig workers to full time employees is an economically inefficient solution to this disparity.  The new rule would reduce the availability of positions with flexible work hours, reduce labor force participation among parents with young children, and could worsen unemployment during economic downturns.  The rule would result in many firms reducing health and retirement benefits.  Also, some gig workers that lose access to the premium tax credit for state exchange health insurance could be made worse off depending on the quality of the employer-based health plan received after reclassification.

A better solution to the disparity between health and retirement benefits offered to gig workers and full-time employees could be achieved through modification of rules governing health insurance premiums and rules governing Individual Retirement Accounts.

2020 Policy Questions: Health Care

Progressives believe that revisions to the ACA would not substantially improve health insurance.  Centrists believe Medicare for All is fiscally unsustainable and could lead to unforeseen outcomes.  Guess What! They both might be right.

Questions for Centrists:  State health exchange markets created by the Affordable Care Act provides health insurance to roughly 5 percent of the working-age population.  Employer-based health insurance remains the dominant provider of health insurance to this segment of the population.   Do you favor reforms that would substantially expand the role of state exchanges in providing health insurance to more workers, especially workers at small firms? Would you acknowledge that a reform program that modestly increases the role of state exchanges but leave employer-based insurance as the dominant health insurance market will have a relatively modest impact on health insurance problems?

Many people have inadequate health insurance. Many health insurance policies have high deductibles and high out-of-pocket limits.  Many health insurance policies only provide benefit in a narrow geographic area have narrow networks and often do not cover services rendered by an out-of-network provider working in an in-network facility. These problems with existing health care plans leave many people with unanticipated health care debt, cause some people to reduce retirement savings and cause other people to forego necessary medical procedures and prescribed medicines.  What does your health plan do to improve coverage for people who currently have a comprehensive health plan?

Questions for Progressives:

The Medicare for All bill is entirely tax financed.   Under Medicare for All, health care expenditures directly impact the budget.  How would this program be insulated from budgetary pressures?

  • The Medicare for All bill creates a universal Medicare care trust fund?  What is the purpose and what are the limitations of this trust fund?  Have there been simulations of the long-term solvency of the universal health care trust fund?
  • Would general tax revenue and funds raised from bonds be automatically used to cover health care expenditures if funds in the trust fund did not cover all benefits?
  • Won’t future Congresses consider adjustments to health care expenditures and provider compensation rates based on the annual budget?   Shouldn’t Congress be more concerned about the overall deficit and the trend of the debt to GDP limit than the status of the trust fund?
  • Could the Secretary of HHS in a fiscally conservative Administration reduce benefits and compensation rates?
  • What would happen to Medicare for All benefits when there is a government shut down or a debt limit problem?    Who gets paid first people who need health care or people who own government debt?  

The current bill exempts Medicare for All from the Hyde amendment. What would prevent a future Administration and Congress from applying the Hyde Amendment to Medicare for All; thereby eliminating all insurance payments for abortion services?

People who want to learn more about how these issues are playing out in the 2020 contest should go here.

https://medium.com/@bernstein.book1958/how-should-centrists-respond-to-senator-warren-on-health-care-e82967734384?source=friends_link&sk=26049a4353e9ac170e9ec0323cef64aa

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

https://www.accountingtoday.com/news/74-of-americans-worried-about-retirement-income

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.

Discussion:

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.

https://www.brookings.edu/wp-content/uploads/2016/07/03_increasing_saving.pdf

https://www.agingcare.com/articles/how-401k-accounts-and-iras-affect-medicaid-eligibility-208382.htm

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.

https://www.linkedin.com/pulse/investment-thats-safer-bet-than-social-security-kent-smetters/

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:

https://www.yalelawjournal.org/article/excessive-fees-and-dominated-funds-in-401k-plans

 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: Three issues — student debt, health care and retirement income — are explored in my book “Defying Magnets:  Centrist policies in a Polarized World”   The predictable responses to these problems by the right wing and the left wing are analyzed.   Progressive centrist policy alternatives that would make significant improvements in an economically efficient manner are then explored.

Go here and buy my book at Kindle or Amazon:

https://www.amazon.com/Defying-Magnets-Centrist-Policies-Polarized-ebook/dp/B07NLLWH1H/

 

Also, if you are interested in more information about student debt go here.

https://www.amazon.com/Innovative-Solutions-College-Debt-Problem/dp/1982999446

 

 

 

 

 

 

 

 

 

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.

 

https://www.amazon.com/Innovative-Solutions-College-Debt-Problem/dp/1982999446

David has also written on health care and the ACA.

 

Go here for a Centrist Health Plan:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3263159

 

 

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.