Defying Magnets:  Centrist Policies in a Polarized World

Abstract of

Defying Magnets:  Centrist Policies in a Polarized World

 Many Americans are experiencing increased financial stress even though the economy has performed well in the last several years.  Student debt levels and the number of overextended borrowers continue to increase.   Health Insurance premiums in state exchange health insurance markets are unstable and many state exchange markets have few providers.   People are paying more for out-of-pocket for health care.  High debt levels and the lack of funds for basic emergencies have persuaded many Americans to delay or reduce contributions to their retirement savings plan.

The policy debates on student debt, health care, and retirement income in Washington follow a similar pattern.  Conservatives offer a free market approach – reduction of financial assistance to student borrowers, repeal of the Affordable Care Act, and private accounts inside Social Security.  Liberals offer expanded government programs – free or debt-free colleges, Medicare for all, and expansion of Social Security.   In most cases, the conservative proposals would increase household financial risk while the liberal proposals are often unaffordable and poorly designed.

This book analyzes and compares conservative and liberal approaches to student debt, health care, and retirement income.  The book also outlines a centrist economically feasible policy agenda in each area, with the goal of reducing household financial risk.

The centrist agenda on college costs and student debt targets financial assistance and debt relief to students and borrowers in greatest need.

The centrist health care agenda fixes problems with the Affordable Care Act and reduces distortions caused by high out-of-pocket costs and the most expensive health care cases.

The centrist agenda seeks to expand health insurance and retirement benefits for contractors and workers at firms without employer-based benefit plans.

The centrist agenda changes rules governing 401(k) plans and IRAs to facilitate increased savings by people with high debt levels and very little cash saved for emergencies.

The centrist agenda includes an honest discussion on Social Security, which will likely infuriate both the left and the right.

 

Get the book on Kindle or Amazon:

 

https://www.amazon.com/s?k=defying+magnets+centrist+policies+in+a+polarized+world&rh=n%3A6669702011&ref=nb_sb_noss

Overview of Retirement Issues

This post describes my work on retirement issues that was published in “Defying Magnets: Centrist Policies in a Polarized World”   The book can be found on Amazon and Kindle.

https://www.amazon.com/Defying-Magnets-Centrist-Policies-Polarized/dp/179668015X/ref=sr_1_2?keywords=defying+magnets%3A+Centrist+policies&qid=1550091821&s=amazon-devices&sr=8-2

There are two pillars of retirement income in the United States.   The first pillar involves Social Security a mandatory program covering most workers.   The second system involves voluntary defined contribution pension plans.  This section starts with a basic description of the Social Security system and private defined contribution retirement plans.

The Social Security program has been highly popular with Americans and many retirees are highly dependent on this government-run program.   However, the Social Security system is running shortfalls which will lead to automatic benefit cuts around 2035.   Defined contribution pension plans — 401(k) plans and IRAs — have over the last 40 years become the dominant vehicle for private retirement savings.

Many people forego investing in 401(k) plans and IRAs even though these plans provide generous tax benefits to savers.   The failure of many people to fully invest in tax-deferred retirement plans puzzles many financial advisors.   The analysis presented here indicates that saving for emergencies and reducing debt is and should be a higher financial priority than saving for retirement for many people.

Several changes to rules governing retirement savings accounts which would allow more people to save for retirement while aggressively reducing debt and preparing for emergencies are presented here.

  • Allow tax-free and penalty-free distributions on a portion of total contributions (perhaps 25 percent) for emergencies, student debt reduction, mortgage restructuring and long term care expenses prior to age 59 ½
  • Allow for some tax-free and penalty-free distributions for paying off the mortgage for people over age 50.
  • Eliminate all other distributions from 401(k) plans prior to the age of 59 ½.
  • Prohibit 401(k) loans.
  • Prohibit states from denying Medicaid and food stamp benefits for low-income people with 401(k) assets.

This proposal could be paid for by imposing a haircut on tax exemption for 401(k) contributions.   (Currently, 100 percent of contributions to a 401(k) plan are exempt from income tax.   The new rule would exempt 85 percent of contributions.)

People without access to an employer-sponsored retirement plan have substantially lower retirement savings than people with access to retirement plans at work.  We consider ways to expand retirement savings for people without employer-based retirement savings.   Specific proposals include:

  • Equalization of contribution limits between IRAs and 401(k) plans.
  • A rule change allowing firms without 401(k) plans to contribute to employee IRAs.
  • A rule change allowing firms to compensate contractors and employees of contractors with non-taxed fringe benefits including contributions to IRAs.

According to the trustees of the Social Security system, financial imbalances impacting Social Security stemming from the decrease in the working-age population will result in automatic cuts to Social Security benefits around 2034.   In my view, it will be difficult to implement any compromise that reduces Social Security fiscal imbalances and prevents future automatic cuts to benefits without first increasing private retirement savings and reducing the dependence on Social Security.  The final chapter of this section outlines and reviews some policy proposals related to improving the Social Security system.

On-time graduation and student debt

Issues:   One way to limit college costs for some students is to implement policies that enable students to graduate on time or even early.  This post discusses issues and presents data related to on-time graduation from college and costs incurred by delaying graduation.

The Department of Education College Score Card web site provides statistics on the percent of people at four-year undergraduate institutions that graduate within six years of first enrolling in a school after high school.  However, there is a big difference in potential debt accumulation and lost earning for a person who graduates on-time or earlier and a person who graduates two years after the expected graduation rate.

The analysis presented here provides some insight on the impact of the number of years it takes to finish undergraduate programs on debt levels at graduation?

The Department of Education Web Site providing information on different colleges stresses median federal guaranteed debt at graduation.   Less information is available on PLUS loans for parents and for private loans.

The analysis presented here provides information on whether colleges need to provide more information on other types of loans and on how these loan total vary with the number of years in school.

The increase in the number of students taking Advanced Placement Exams has allowed some students to graduate with a BA or BS Degree in three rather than in four years.   However, in response to an increase in the number of students taking AP exams many schools have scaled back or are reconsidering the amount of credit that students get from AP exams.

The analysis presented here provides some information on the costs associated with colleges impeding early graduation.

The Data:

The statistics presented here were generated from the National Postsecondary Student Aid Study NPSAS 2012 database from the Department of Education.

The logical variable to look at with the analysis of this issue is cumulative amount borrowed, which is called BORAMT1.  However, the NPSAS documentation reveals this variable does not include information on PLUS loans for parents and may also omit some information on private loans.

I present statistics on cumulative debt and cumulative PLUS loans for parents for people who graduated in 2012 with a BA or BS degree.     Statistics on the cumulative amount borrowed variable are presented for private non-profit colleges and for public institutions.

Cumulative Debt Results:

Below is a table presenting information on cumulative amount borrowed for graduates in 2012 based on when their undergraduate career began

Duration of Undergraduate Career and Cumulative Debt at Graduation
# of years from initial enrollment and graduation Public Universities Private Non- Profit

Universities
% With Debt Average Cumulative Debt for Borrowers % With Debt Average Cumulative Debt for Borrowers
3 50.5 $19,625 68.5 $27,822
4 56.9 $22,504 70.0 $29,123
5 67.0 $25,537 80.2 $34,683
6 72.4 $27,163 72.0 $29,069
7 71.1 $27,707 64.2 NA
>7 69.3 $30,043 79.5 $39,102
Total 64.1 $25,640 73.5 $32,308

Observation on cumulative debt and duration of undergraduate career.

The results presented here indicate that people who finish their undergraduate careers efficiently have less debt on average.

The increase in debt with years in school exists for increases from 3 years to 4 years and for increases from 4 to 5 for both private and public schools.

The increase in debt with years in school exists for increases from 5 to 6 years for public universities but not for private universities.

These figures don’t include PLUS loans for parents.  I proceed to look at the relationship between usage for PLUS loans for parents and duration of undergraduate career.   The PLUS loan analysis looks at all undergraduate institutions together – public universities, private non-profit universities and private for-profit universities.   I combine the three types of universities because of sample size constraints impacting the PLUS loan usage variable.

PLUS loan for Parents Results:

Duration of Undergraduate Career and PLUS loan for Parents Usage
# of Years from Initial Enrollment to Graduation % with Plus Loans for Parents Average PLUS Loan for PLUS Loan Borrower
3 12.0 $33,770
4 18.5 $30,218
5 21.2 $31,463
6 18.4 $22,120
7 14.4 $18,199
>7 5.9 $16,345
Total 15.5 $27,352

Sample includes public universities, private non-profit universities and private for-profit universities.

Observations on PLUS loan for parent usage and duration of undergraduate career:

The percent of people who rely on PLUS loans by parents is dramatically lower for people who graduate in three years compared to people who graduated in four or more years.

However, the average cumulative PLUS loan for people graduating in three years is a bit higher than for people who took longer to graduate.  (I suspect the average for three years was driven by a few outliers.

Policy Discussion:

It is apparent that the amount of time it takes for a student to finish their undergraduate career is an important determinant of debt at time of graduation.

Policies that help students finish on time can greatly reduce financial debt incurred in college.

Detailed information about the frequency distribution on the number of years it takes for students to get their degree at each college would be invaluable for students and their parents.   The College Score Card reveals information on the percent of students who graduate in six or fewer years.  This statistic is inadequate.   The Department of Education should require that schools report 3-year, four-year, five-year six-year and > 6-year graduation rates.

Statistics based exclusively on federal guaranteed debt, like the ones presented in College Score Card are inadequate.   Cumulative PLUS loans and cumulative private loans also contribute to financial risk associated with taking on too much debt in college.   Several articles have revealed that many parents who take out PLUS loans on behalf of their children are incapable of repaying these loans and there has been an increase in the number of instances where PLUS loan borrowers have had Social Security payments garnished.  One of my previous posts on this topic revealed that the proportion of PLUS loan parents with low income levels has increased over time.

The Department of Education should insist that colleges report detailed information on the usage of PLUS loans and private loans by their students.

Many colleges are now deliberately making it much more difficult for students to graduate in three years by denying college credit for AP exams.

Article on AP credits being denied to students at major colleges:

http://www.msn.com/en-us/money/careersandeducation/as-advanced-placement-tests-gain-popularity-some-colleges-push-back/ar-AAmXr6o

The results presented here indicate that there are potentially large financial costs incurred by colleges choosing to deny credits for AP exams.    Some states have enacted laws requiring that publicly funded colleges provide credits to student who pass AP exam.

I believe all colleges should be required to provide detailed information on AP credit awards and information on frequency distribution describing years it takes for student to graduate.  it would be inappropriate for the state to mandate AP credit policies at private institutions.  However, the state does have an interest in insuring that markets run efficiently and market efficiency is impossible when consumers lack basic information.

Academically trained economists generally support providing consumers with better information unless they are being paid to advocate for special interest.   You would expect that university presidents might place a higher priority on the public’s right to know than other industries.   Interestingly, as demonstrated in the post below college presidents have successfully stopped meaningful college ratings

Ranking Colleges on Value and Costs:

http://policymemos.blogspot.com/2016/04/ranking-colleges-based-on-value-and.html

On this issue colleges are behaving like tobacco firms and insurance companies.

 

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.