Gap years aren’t just for kids anymore

Dr. Dennis Sinar remembers when it dawned on him: He was ready for a break from work. A gastroenterologist and professor of medicine at East Carolina University in Greenville, N.C., Dr. Sinar was working on a research paper in the university library when it happened. “I just said to myself, ‘I’m really sick of doing […]

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Originally posted 2017-07-17 08:17:27.

Gap years aren’t just for kids anymore

Dr. Dennis Sinar remembers when it dawned on him: He was ready for a break from work. A gastroenterologist and professor of medicine at East Carolina University in Greenville, N.C., Dr. Sinar was working on a research paper in the university library when it happened. “I just said to myself, ‘I’m really sick of doing […]

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Originally posted 2017-07-17 08:12:10.

How Republican health reform could damage Medicare’s long-term solvency

The Republican proposals to repeal and replace the Affordable Care Act (ACA) would be a disaster for older Americans not yet on Medicare – but they also endanger Medicare itself.

The Better Care Reconciliation Act (BCRA) under consideration in the U.S. Senate would mean higher premiums and reduced cost-sharing subsidies for lower-income older people. The Congressional Budget Office (CBO) has estimated, for example, that under this bill the annual premium for a 64-year-old person who earns $56,800 would skyrocket by $13,700. And the Medicaid cuts will put the squeeze on states’ ability to fund long-term care.

Meanwhile, tax cuts for the wealthy contained in some of the Republican proposals would bring closer the projected insolvency date of the Medicare Part A trust fund, which pays for hospital, skilled nursing facility, home health and hospice benefits. Insolvency would require either a new revenue source or a reduction of healthcare services the program provides.

The trustees of Medicare and Social Security released their respective annual reports on Thursday on the health of the programs. The news about the Part A trust fund was encouraging: the Medicare report said that lower-than-expected program spending in 2016 has pushed out the predicted date of insolvency for the Hospital Insurance Trust fund by one additional year, to 2029.

But the Republican reform efforts could worsen that outlook. The American Health Care Act approved by the House of Representatives in March would repeal the Medicare payroll surtax on high-income workers, which was added under the ACA to shore up the hospital insurance trust fund. The first version of the BCRA also repealed the payroll surtax.

On Thursday, however, Senate Republicans scrambling to save their struggling proposal unveiled a new version that would keep the tax – along with the net investment income tax. That tax imposes a 3.8 percent surtax on investment income for joint filers with more than $250,000 of adjusted gross income (AGI), and single filers with more than $200,000 of AGI. (Receipts from the investment tax go into the federal government’s general revenue coffers.)

Both of these tax cuts could easily reappear as the horse trading continues. So it is worthwhile to consider how elimination of the payroll surcharge, in particular, could damage Medicare’s financial health. Learn more in my Reuters Money column.

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Originally posted 2017-07-14 02:20:23.

How Republican health reform could damage Medicare’s long-term solvency

The Republican proposals to repeal and replace the Affordable Care Act (ACA) would be a disaster for older Americans not yet on Medicare – but they also endanger Medicare itself.

The Better Care Reconciliation Act (BCRA) under consideration in the U.S. Senate would mean higher premiums and reduced cost-sharing subsidies for lower-income older people. The Congressional Budget Office (CBO) has estimated, for example, that under this bill the annual premium for a 64-year-old person who earns $56,800 would skyrocket by $13,700. And the Medicaid cuts will put the squeeze on states’ ability to fund long-term care.

Meanwhile, tax cuts for the wealthy contained in some of the Republican proposals would bring closer the projected insolvency date of the Medicare Part A trust fund, which pays for hospital, skilled nursing facility, home health and hospice benefits. Insolvency would require either a new revenue source or a reduction of healthcare services the program provides.

The trustees of Medicare and Social Security released their respective annual reports on Thursday on the health of the programs. The news about the Part A trust fund was encouraging: the Medicare report said that lower-than-expected program spending in 2016 has pushed out the predicted date of insolvency for the Hospital Insurance Trust fund by one additional year, to 2029.

But the Republican reform efforts could worsen that outlook. The American Health Care Act approved by the House of Representatives in March would repeal the Medicare payroll surtax on high-income workers, which was added under the ACA to shore up the hospital insurance trust fund. The first version of the BCRA also repealed the payroll surtax.

On Thursday, however, Senate Republicans scrambling to save their struggling proposal unveiled a new version that would keep the tax – along with the net investment income tax. That tax imposes a 3.8 percent surtax on investment income for joint filers with more than $250,000 of adjusted gross income (AGI), and single filers with more than $200,000 of AGI. (Receipts from the investment tax go into the federal government’s general revenue coffers.)

Both of these tax cuts could easily reappear as the horse trading continues. So it is worthwhile to consider how elimination of the payroll surcharge, in particular, could damage Medicare’s financial health. Learn more in my Reuters Money column.

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Originally posted 2017-07-14 00:20:22.

Should Social Security invest in stocks?

Pension funds do it. Insurance companies do it. Canada does it, and so does Japan. So, why doesn’t our Social Security system invest in the stock market–and should it?

I’m not talking about transforming Social Security into a system of private, individual IRA-style investment accounts, as proposed by former President George W. Bush and some conservative policy experts. The question here is whether Social Security should invest a portion of its reserve funds in equities to help the program’s long-term solvency.

By law, Social Security must invest its reserve funds in safe, low-return Treasury securities. Proposals to shift a portion of reserves into equities have arisen from time to time, but never moved forward due to concerns about government control of private sector assets, and worry in some quarters that the move would open the door to broader privatization of Social Security.

Advocates for the idea note that the higher returns offered by equities could be used to ease the burden on taxpayers to fund the program–and even to boost benefits. But those arguments really only apply to Social Security’s very long-range outlook. Equity investing does not offer a solution to the short-term solvency issues facing the program.

Social Security faces a financial imbalance that would force sharp benefit cuts in 2034 unless the government makes changes. The problem stems from falling fertility rates and labor force growth–which reduces collection of payroll taxes that fund the system–and also from the retirement of baby boomers, which increases benefit costs.

Absent reform, Social Security could continue to pay roughly 75% of promised benefits. The cuts would mean the typical 65-year-old worker could expect Social Security to replace 27% of pre-retirement income, down from 36% today, according to the Center for Retirement Research at Boston College.

That problem must be solved through injection of new revenue, benefit cuts or some combination of the two. I’ve argued often for the former, and not the latter. But Social Security also projects its solvency 75 years into the future. And over that longer-term horizon adding equities to the mix would be a smart move.

History of the Debate

Debate about investing some portion of Social Security assets outside of Treasuries isn’t new. Lawmakers considered asset diversification when the program was created in the 1930s–although the option considered then was corporate bonds rather than stocks, according to Nancy Altman, author of The Battle for Social Security: From FDR’s Vision to Bush’s Gamble, a history of the program.

“Lawmakers who opposed Social Security objected to asset diversification,” says Altman, president of the Social Security Works advocacy coalition. “They thought this kind of government investment in the private sector smacked of socialism.”
In the mid-1990s, President Bill Clinton asked a government-appointed advisory panel of outside experts to make recommendations to improve Social Security’s long-term solvency, and it identified three options that included equity investment. Two options involved setting up private individual accounts; the third recommended investing a portion of assets in the Social Security Trust Fund assets in stocks.

The idea surfaced again in the early 2000s when Altman co-authored a plan to balance the program’s long-range finances with the late Robert Ball, one of the most influential figures in Social Security history. Ball served as Social Security’s commissioner from 1962 to 1973 and also founded the National Academy for Social Insurance.

The Ball/Altman plan included a proposal to authorize Social Security to invest a portion of the SSTF in broadly diversified index funds. In order to safeguard against government interference in the markets, a Federal Reserve-type board with staggered terms would have been appointed to select the funds and to hire fund managers through a competitive bidding process.
Ball/Altman proposed gradual investment in equities, starting with one percent of SSTF assets in 2006, adding an additional percentage point annually with a cap of 20% of SSTF assets.

None of these ideas have advanced due to the difficult politics. Conservatives worry that equity investment could give government inappropriate control over the private sector, and that this control could be used to meet political goals.

“I do worry that people would try to politicize the investments, although it would be possible to protect against that,” says Andrew Biggs, resident scholar at the American Enterprise Institute and a former deputy commissioner of the Social Security Administration during the Bush years.

Investing in stocks also could provoke concern from segments of the public that don’t participate in the equity markets. Social Security is a near-universal program covering many workers who don’t hold stocks. That’s about half of all adults: A 2016 Bankrate.com survey found that 52% of Americans don’t invest in stocks or mutual funds; the most frequent reasons cited include a lack of knowledge about equity investing, a lack of trust in stock brokers and financial advisers, and the riskiness of investing in stocks. Just 16% of adults view the stock market as the best place to invest money they don’t need for 10 or more years.

“The history of market crashes have left a lot of Americans distrustful of the stock market–much more so today than they were even 15 years ago,” says economist Gary Burtless, a senior fellow at the Brookings Institution.

Conservative policy experts have argued that rather than invest the SSTF in the stock market, individuals should be permitted to divert part of their payroll tax contributions to private accounts. But that would undermine Social Security as a source of guaranteed lifetime annuity-style payments, and could leave account-holders exposed to much greater market risk than they would face with a massive, professionally managed SSTF equity investment.

Measuring the Boost

How much would equities help?

Burtless is the co-author of a recent research study for the Center on Retirement Research at Boston College that attempts to answer the question. The report looks at the question two ways. First, it uses historical market data to determine how the SSTF would have been impacted had it been invested partially in equities beginning in 1984; then it considers investments in equities beginning this year as part of a broader package of reforms, using Monte Carlo analysis to project a range of possible outcomes over the next 75 years.

The historical analysis follows the recommendation of the mid-1990s Social Security commission–it increases the percentage of trust fund reserves invested in equities by 2.67 percentage points each year up to a ceiling equity allocation of 40%.

The results are expressed using the trust fund ratio–the ratio of assets to benefits (a ratio of 1.0 is the Social Security trustees’ benchmark for short-term financial adequacy). If equity investment had started in 1984, the trust fund ratio in 2016 would have been 4.2 compared with an actual ratio of 3.0. If equity investment had started in 1997, the ratio would have been 3.8. (Social Security has been building large reserves since the reforms of 1983, which will be drawn down as the baby boom generation retires.) “History looks like what you’d expect,” says Burtless. “Stocks give you better returns than the goverment bond market.”

The paper also found that if Social Security had begun investing in the stock market in 1984 or 1997, the program would own less than 4% of the market today; by comparison, state and local pension plans currently hold about 6% of total equities.

The forward-looking analysis assumes that investment in equities begins only after implementation of reforms that put Social Security into actuarial balance for the coming 75-years without any extra boost from stocks.

“The analysis is only interesting if you first raise the tax rate,” explains Burtless. “Since we expect the trust fund to be depleted by 2034, between now and that date the size of the fund will be small, so the differences in what you could earn on the reserves are immaterial, especially with ups and downs of the market. If you instead build up the trust fund and add return on investment from equities, then the differences become very material.”

The key result of the Monte-Carlo analysis: at the 50th percentile of outcomes, the trust fund with equity investments finishes the 75-year period with a ratio of 3.3–far above the 1.0 benchmark.

That would leave Social Security with a permanent fix to its periodic financial shortfalls, and it would give lawmakers room to consider ways to make benefits more generous.

“If you get to that point, there could be some opportunistic ways to improve benefits for certain groups that are especially deserving–families with disabled kids or very low income beneficiaries,” says Burtless. “Or, you might be able to cut payroll taxes. Those opportunities are not going to present themselves if you’re invested only in bonds.”

Still, the SSTF is stuck with Treasuries for now–and that doesn’t seem likely to change anytime soon. Says Altman: “It would be good policy, but it is difficult for people to understand.”

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Originally posted 2017-07-13 10:20:41.

Should Social Security invest in stocks?

Pension funds do it. Insurance companies do it. Canada does it, and so does Japan. So, why doesn’t our Social Security system invest in the stock market–and should it?

I’m not talking about transforming Social Security into a system of private, individual IRA-style investment accounts, as proposed by former President George W. Bush and some conservative policy experts. The question here is whether Social Security should invest a portion of its reserve funds in equities to help the program’s long-term solvency.

By law, Social Security must invest its reserve funds in safe, low-return Treasury securities. Proposals to shift a portion of reserves into equities have arisen from time to time, but never moved forward due to concerns about government control of private sector assets, and worry in some quarters that the move would open the door to broader privatization of Social Security.

Advocates for the idea note that the higher returns offered by equities could be used to ease the burden on taxpayers to fund the program–and even to boost benefits. But those arguments really only apply to Social Security’s very long-range outlook. Equity investing does not offer a solution to the short-term solvency issues facing the program.

Social Security faces a financial imbalance that would force sharp benefit cuts in 2034 unless the government makes changes. The problem stems from falling fertility rates and labor force growth–which reduces collection of payroll taxes that fund the system–and also from the retirement of baby boomers, which increases benefit costs.

Absent reform, Social Security could continue to pay roughly 75% of promised benefits. The cuts would mean the typical 65-year-old worker could expect Social Security to replace 27% of pre-retirement income, down from 36% today, according to the Center for Retirement Research at Boston College.

That problem must be solved through injection of new revenue, benefit cuts or some combination of the two. I’ve argued often for the former, and not the latter. But Social Security also projects its solvency 75 years into the future. And over that longer-term horizon adding equities to the mix would be a smart move.

History of the Debate

Debate about investing some portion of Social Security assets outside of Treasuries isn’t new. Lawmakers considered asset diversification when the program was created in the 1930s–although the option considered then was corporate bonds rather than stocks, according to Nancy Altman, author of The Battle for Social Security: From FDR’s Vision to Bush’s Gamble, a history of the program.

“Lawmakers who opposed Social Security objected to asset diversification,” says Altman, president of the Social Security Works advocacy coalition. “They thought this kind of government investment in the private sector smacked of socialism.”
In the mid-1990s, President Bill Clinton asked a government-appointed advisory panel of outside experts to make recommendations to improve Social Security’s long-term solvency, and it identified three options that included equity investment. Two options involved setting up private individual accounts; the third recommended investing a portion of assets in the Social Security Trust Fund assets in stocks.

The idea surfaced again in the early 2000s when Altman co-authored a plan to balance the program’s long-range finances with the late Robert Ball, one of the most influential figures in Social Security history. Ball served as Social Security’s commissioner from 1962 to 1973 and also founded the National Academy for Social Insurance.

The Ball/Altman plan included a proposal to authorize Social Security to invest a portion of the SSTF in broadly diversified index funds. In order to safeguard against government interference in the markets, a Federal Reserve-type board with staggered terms would have been appointed to select the funds and to hire fund managers through a competitive bidding process.
Ball/Altman proposed gradual investment in equities, starting with one percent of SSTF assets in 2006, adding an additional percentage point annually with a cap of 20% of SSTF assets.

None of these ideas have advanced due to the difficult politics. Conservatives worry that equity investment could give government inappropriate control over the private sector, and that this control could be used to meet political goals.

“I do worry that people would try to politicize the investments, although it would be possible to protect against that,” says Andrew Biggs, resident scholar at the American Enterprise Institute and a former deputy commissioner of the Social Security Administration during the Bush years.

Investing in stocks also could provoke concern from segments of the public that don’t participate in the equity markets. Social Security is a near-universal program covering many workers who don’t hold stocks. That’s about half of all adults: A 2016 Bankrate.com survey found that 52% of Americans don’t invest in stocks or mutual funds; the most frequent reasons cited include a lack of knowledge about equity investing, a lack of trust in stock brokers and financial advisers, and the riskiness of investing in stocks. Just 16% of adults view the stock market as the best place to invest money they don’t need for 10 or more years.

“The history of market crashes have left a lot of Americans distrustful of the stock market–much more so today than they were even 15 years ago,” says economist Gary Burtless, a senior fellow at the Brookings Institution.

Conservative policy experts have argued that rather than invest the SSTF in the stock market, individuals should be permitted to divert part of their payroll tax contributions to private accounts. But that would undermine Social Security as a source of guaranteed lifetime annuity-style payments, and could leave account-holders exposed to much greater market risk than they would face with a massive, professionally managed SSTF equity investment.

Measuring the Boost

How much would equities help?

Burtless is the co-author of a recent research study for the Center on Retirement Research at Boston College that attempts to answer the question. The report looks at the question two ways. First, it uses historical market data to determine how the SSTF would have been impacted had it been invested partially in equities beginning in 1984; then it considers investments in equities beginning this year as part of a broader package of reforms, using Monte Carlo analysis to project a range of possible outcomes over the next 75 years.

The historical analysis follows the recommendation of the mid-1990s Social Security commission–it increases the percentage of trust fund reserves invested in equities by 2.67 percentage points each year up to a ceiling equity allocation of 40%.

The results are expressed using the trust fund ratio–the ratio of assets to benefits (a ratio of 1.0 is the Social Security trustees’ benchmark for short-term financial adequacy). If equity investment had started in 1984, the trust fund ratio in 2016 would have been 4.2 compared with an actual ratio of 3.0. If equity investment had started in 1997, the ratio would have been 3.8. (Social Security has been building large reserves since the reforms of 1983, which will be drawn down as the baby boom generation retires.) “History looks like what you’d expect,” says Burtless. “Stocks give you better returns than the goverment bond market.”

The paper also found that if Social Security had begun investing in the stock market in 1984 or 1997, the program would own less than 4% of the market today; by comparison, state and local pension plans currently hold about 6% of total equities.

The forward-looking analysis assumes that investment in equities begins only after implementation of reforms that put Social Security into actuarial balance for the coming 75-years without any extra boost from stocks.

“The analysis is only interesting if you first raise the tax rate,” explains Burtless. “Since we expect the trust fund to be depleted by 2034, between now and that date the size of the fund will be small, so the differences in what you could earn on the reserves are immaterial, especially with ups and downs of the market. If you instead build up the trust fund and add return on investment from equities, then the differences become very material.”

The key result of the Monte-Carlo analysis: at the 50th percentile of outcomes, the trust fund with equity investments finishes the 75-year period with a ratio of 3.3–far above the 1.0 benchmark.

That would leave Social Security with a permanent fix to its periodic financial shortfalls, and it would give lawmakers room to consider ways to make benefits more generous.

“If you get to that point, there could be some opportunistic ways to improve benefits for certain groups that are especially deserving–families with disabled kids or very low income beneficiaries,” says Burtless. “Or, you might be able to cut payroll taxes. Those opportunities are not going to present themselves if you’re invested only in bonds.”

Still, the SSTF is stuck with Treasuries for now–and that doesn’t seem likely to change anytime soon. Says Altman: “It would be good policy, but it is difficult for people to understand.”

x

Originally posted 2017-07-13 08:21:26.